Provident Bancorp(PVBC) - 2023 Q2 - Quarterly Report

Part I. Financial Information Financial Statements Unaudited statements show asset growth to $1.76 billion, while net income declined due to rising interest expenses Consolidated Balance Sheets Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $297,858 | $80,629 | | Loans, net | $1,333,564 | $1,416,047 | | Total assets | $1,761,587 | $1,636,381 | | Liabilities & Equity | | | | Total deposits | $1,448,086 | $1,279,582 | | Total borrowings | $79,763 | $126,829 | | Total liabilities | $1,546,515 | $1,428,839 | | Total shareholders' equity | $215,072 | $207,542 | | Total liabilities and shareholders' equity | $1,761,587 | $1,636,381 | - Total assets increased by $125.2 million, or 7.7%, from December 31, 2022, primarily due to a $217.2 million increase in cash and cash equivalents, partially offset by an $82.5 million decrease in net loans[8][142] - Total deposits increased by $168.5 million, or 13.2%, driven by a $284.7 million increase in interest-bearing deposits, while noninterest-bearing deposits decreased by $116.2 million[8][147] Consolidated Statements of Operations Consolidated Statements of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest and dividend income | $14,902 | $18,605 | $30,718 | $36,530 | | Total credit loss (benefit) expense | ($1,067) | $1,041 | $712 | $1,124 | | Total noninterest income | $1,702 | $1,552 | $3,649 | $2,872 | | Total noninterest expense | $12,751 | $11,307 | $25,962 | $22,718 | | Net income | $3,461 | $5,619 | $5,564 | $11,144 | | Diluted EPS | $0.21 | $0.33 | $0.34 | $0.66 | - Net income for Q2 2023 decreased by 38.4% year-over-year, primarily due to a $7.4 million increase in interest expense which significantly compressed net interest income[10][162][164] - For the six months ended June 30, 2023, net income decreased by 50.1% year-over-year, as a $11.7 million increase in interest expense drove net interest income down by $5.8 million[10][175][177] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,833 | $6,072 | | Net cash used in (provided by) investing activities | $92,004 | ($58,003) | | Net cash provided by financing activities | $121,392 | $53,620 | | Net increase in cash and cash equivalents | $217,229 | $1,689 | - The significant increase in cash and cash equivalents in the first half of 2023 was driven by positive cash flows from investing activities ($92.0 million) and financing activities ($121.4 million)[17][19] Notes to Consolidated Financial Statements - The Company adopted the Current Expected Credit Loss (CECL) methodology on January 1, 2023, resulting in a net increase to retained earnings of $696,000[30][31] - As of June 30, 2023, the company had one digital asset loan relationship totaling $16.8 million, which was on non-accrual status and had an associated reserve of $7.2 million[25] - Total deposits of $1.45 billion were fully insured as of June 30, 2023, with 52.6% covered by the FDIC and the remaining 47.4% by the Depositors Insurance Fund (DIF)[33][91] - The Bank exceeded all regulatory capital requirements as of June 30, 2023, and was categorized as "well capitalized" with a Total Capital to Risk Weighted Assets ratio of 13.32%[107][111][201] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined due to margin compression from rising deposit costs, while the balance sheet grew and asset quality improved Balance Sheet Analysis - Total assets increased 7.7% to $1.76 billion at June 30, 2023, primarily from a 269.4% increase in cash and cash equivalents[142][143] - Net loans decreased to $1.33 billion from $1.42 billion, driven by declines in mortgage warehouse (-18.5%), commercial (-13.4%), and digital asset (-58.9%) loans[144] - Total deposits grew 13.2% to $1.44 billion, with a significant shift from noninterest-bearing accounts (-22.3%) to interest-bearing accounts (+37.5%)[147] - Specialty deposits (BaaS and digital asset customers) increased to $260.9 million from $102.8 million, with BaaS deposits growing by $190.4 million[149] - Shareholders' equity increased by $7.5 million (3.6%) to $215.1 million, primarily due to net income of $5.6 million and a positive CECL adoption adjustment[154] Asset Quality Non-Performing Assets (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total non-accrual loans | $21,669 | $26,964 | | Other repossessed assets | $0 | $6,051 | | Total non-performing assets | $21,669 | $33,015 | | Total non-performing assets to total assets | 1.23% | 2.02% | - The decrease in non-accrual loans was primarily due to paydowns in the portfolio of loans secured by cryptocurrency mining rigs and a payoff of a $4.8 million loan[156] - The allowance for credit losses decreased to $24.0 million at June 30, 2023, from $28.1 million at year-end 2022, representing 1.77% of total loans[159] Results of Operations - For the three months ended June 30, 2023 vs 2022: - Net income decreased 38.4% to $3.5 million - Net interest income decreased 19.9% to $14.9 million due to a 280 basis point increase in the cost of interest-bearing deposits - A credit loss benefit of $1.1 million was recognized, compared to a $1.0 million expense in Q2 2022 - Noninterest expense increased 12.8%, driven by higher salaries, deposit insurance, and professional fees[162][164][166][168] - For the six months ended June 30, 2023 vs 2022: - Net income decreased 50.1% to $5.6 million - Net interest income decreased 15.9% to $30.7 million - Credit loss expense was $712,000, down from $1.1 million in the prior year period - Noninterest income increased 27.1%, driven by higher customer service fees from BaaS customers[175][178][180][181] Liquidity and Capital Resources - Primary liquidity sources include deposit inflows, borrowings, and loan repayments, with cash and cash equivalents at $297.9 million as of June 30, 2023[193][195] - As of June 30, 2023, the Company had available borrowing capacity of $139.7 million from the FHLB and $181.3 million from the Federal Reserve Bank of Boston[196] - The Bank exceeded all regulatory capital requirements and was considered "well capitalized" as of June 30, 2023[201] Quantitative and Qualitative Disclosures about Market Risk Interest rate sensitivity analysis shows a relatively neutral short-term NII position and a liability-sensitive EVE Net Interest Income (NII) Sensitivity Analysis (as of June 30, 2023) | Change in Interest Rates (Basis Points) | Estimated Change in NII (Next 12 Months) | | :--- | :--- | | +300 | -1.60% | | +200 | -1.00% | | +100 | -0.40% | | 0 | 0.00% | | -100 | -0.20% | | -200 | -1.60% | | -300 | -4.20% | Economic Value of Equity (EVE) Sensitivity Analysis (as of June 30, 2023) | Change in Interest Rates (Basis Points) | Estimated Change in EVE | | :--- | :--- | | +300 | -6.98% | | +200 | -5.21% | | +100 | -2.31% | | 0 | 0.00% | | -100 | +0.60% | | -200 | -0.62% | | -300 | -5.36% | Controls and Procedures Disclosure controls were deemed ineffective as of June 30, 2023, due to a previously identified material weakness - Management, including the Co-CEOs and CFO, concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2023[203] - The ineffectiveness is due to a material weakness in internal control over financial reporting previously disclosed in the 2022 Form 10-K[203] - The Company has started implementing remediation measures, but the material weakness will not be considered fully remediated until the enhanced controls operate effectively for a sufficient period[205] Part II. Other Information Legal Proceedings The company reports no material legal proceedings - Not applicable[207] Risk Factors No material changes to previously disclosed risk factors have been reported - No material changes in risk factors from those disclosed in the 2022 Form 10-K and Q1 2023 Form 10-Q[208] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in Q2 2023, with 254,521 shares remaining available under the existing program - The Company did not repurchase any shares of its common stock during the second quarter of 2023[213] - As of June 30, 2023, 254,521 shares were still available for repurchase under the stock repurchase program announced in March 2021[213] Exhibits This section lists filed exhibits, including Sarbanes-Oxley certifications and iXBRL financial statements - Lists filed exhibits, including Sarbanes-Oxley Act certifications (Sections 302 and 906) and financial statements in iXBRL format[215]