Provident Bancorp(PVBC) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Presents unaudited consolidated financial statements for Q3 2023, including balance sheets, income, equity, cash flows, and detailed notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (September 30, 2023 vs. December 31, 2022) | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :----------- | :----------- | :---------------- | :--------- | | Total Assets | $1,808,440 | $1,636,381 | $172,059 | 10.5% | | Cash and cash equivalents | $366,369 | $80,629 | $285,740 | 354.4% | | Loans, net | $1,313,666 | $1,416,047 | $(102,381) | -7.2% | | Total Deposits | $1,489,725 | $1,279,582 | $210,143 | 16.4% | | Total Borrowings | $89,730 | $126,829 | $(37,099) | -29.3% | | Total Shareholders' Equity | $217,580 | $207,542 | $10,038 | 4.8% | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Three Months Ended Sep 30) | Metric (in thousands, except per share) | Sep 30, 2023 | Sep 30, 2022 | Change (Absolute) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :---------------- | :--------- | | Total interest and dividend income | $23,228 | $20,707 | $2,521 | 12.2% | | Total interest expense | $9,340 | $952 | $8,388 | 881.1% | | Net interest and dividend income | $13,888 | $19,755 | $(5,867) | -29.7% | | Total credit loss (benefit) expense | $(156) | $56,315 | $(56,471) | -100.3% | | Total noninterest income | $1,765 | $1,339 | $426 | 31.8% | | Total noninterest expense | $12,715 | $12,044 | $671 | 5.6% | | Net income (loss) | $2,466 | $(35,309) | $37,775 | 107.0% | | Basic Earnings (loss) per share | $0.15 | $(2.15) | $2.30 | 107.0% | Consolidated Statements of Operations Highlights (Nine Months Ended Sep 30) | Metric (in thousands, except per share) | Sep 30, 2023 | Sep 30, 2022 | Change (Absolute) | Change (%) | | :-------------------------------------- | :----------- | :----------- | :---------------- | :--------- | | Total interest and dividend income | $66,731 | $58,309 | $8,422 | 14.4% | | Total interest expense | $22,125 | $2,024 | $20,101 | 993.1% | | Net interest and dividend income | $44,606 | $56,285 | $(11,679) | -20.7% | | Total credit loss (benefit) expense | $556 | $57,439 | $(56,883) | -99.0% | | Total noninterest income | $5,414 | $4,211 | $1,203 | 28.6% | | Total noninterest expense | $38,677 | $34,762 | $3,915 | 11.3% | | Net income (loss) | $8,030 | $(24,165) | $32,195 | 133.2% | | Basic Earnings (loss) per share | $0.48 | $(1.47) | $1.95 | 132.7% | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Highlights (Three Months Ended Sep 30) | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :----------- | :----------- | :---------------- | :--------- | | Net income (loss) | $2,466 | $(35,309) | $37,775 | 107.0% | | Total other comprehensive loss | $(502) | $(778) | $276 | -35.5% | | Comprehensive income (loss) | $1,964 | $(36,087) | $38,051 | 105.4% | Consolidated Statements of Comprehensive Income (Loss) Highlights (Nine Months Ended Sep 30) | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :----------- | :----------- | :---------------- | :--------- | | Net income (loss) | $8,030 | $(24,165) | $32,195 | 133.2% | | Total other comprehensive loss | $(193) | $(3,083) | $2,890 | -93.7% | | Comprehensive income (loss) | $7,837 | $(27,248) | $35,085 | 128.8% | Consolidated Statements of Changes in Shareholders' Equity - Shareholders' equity increased by $10.0 million from December 31, 2022, to September 30, 2023, primarily due to net income of $8.0 million and a $696,000 increase to retained earnings from the adoption of ASC 326[16][155] - Stock-based compensation expense and ESOP shares earned also contributed to the increase in equity, partially offset by other comprehensive loss[16][155] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30) | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Change (Absolute) | | :-------------------- | :----------- | :----------- | :---------------- | | Net cash (used in) provided by operating activities | $(24) | $18,023 | $(18,047) | | Net cash provided by (used in) investing activities | $112,764 | $(88,823) | $201,587 | | Net cash provided by financing activities | $173,000 | $73,599 | $99,401 | | Net increase in cash and cash equivalents | $285,740 | $2,799 | $282,941 | | Cash and cash equivalents at end of period | $366,369 | $155,914 | $210,455 | Notes to Consolidated Financial Statements (1) Basis of Presentation - The unaudited financial statements are prepared in accordance with Form 10-Q instructions and Regulation S-X, and include normal and recurring adjustments necessary for fair presentation[23] - Results for the three- and nine-month periods ended September 30, 2023, are not indicative of future periods[23] - The consolidated financial statements include Provident Bancorp, Inc., its wholly-owned subsidiary BankProv, and the Bank's subsidiaries[24] (2) Corporate Structure - Provident Bancorp, Inc. acts as the holding company for BankProv, which operates seven banking offices in Massachusetts and New Hampshire, and loan production offices in Boston, MA, and Ponte Vedra, FL[25] - BankProv's primary products include checking, savings, term certificate accounts, commercial real estate, commercial, enterprise value, and mortgage warehouse loans[25] - BankProv specializes in adaptive and technology-first banking solutions for niche markets, including corporate clients[25] (3) Risks and Uncertainties - The Company's digital asset loan segment had one remaining loan of $15.2 million as of September 30, 2023, which is on non-accrual status with $7.2 million in reserves[26] - The digital asset loan is secured by cryptocurrency mining rigs, and its valuation is subject to high volatility and speculative risks in Bitcoin and crypto mining rig markets[27] - The Company believes it is well-insulated from market turmoil due to a diversified deposit and loan portfolio, 57.1% FDIC and 42.9% DIF insured deposits, access to multiple funding sources, and a small securities portfolio (1.4% of total assets) with low unrealized losses[30] (4) Recent Accounting Pronouncements - On January 1, 2023, the Company adopted ASU 2016-13 (CECL methodology), resulting in a net increase to retained earnings of $696,000[30][31] - The CECL adoption included a $2.6 million increase to retained earnings for loan credit losses, offset by a $1.6 million decrease for off-balance-sheet credit exposures and a $249,000 tax impact[31] - ASU 2022-02, eliminating troubled debt restructuring (TDR) guidance, was also adopted with no material financial statement impact[33][34] (5) Debt Securities Debt Securities Available-for-Sale (Fair Value, in thousands) | Security Type | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | State and municipal securities | $10,787 | $11,071 | | Asset-backed securities | $5,655 | $6,274 | | Government mortgage-backed securities | $9,737 | $11,255 | | Total | $26,179 | $28,600 | - Total debt securities available-for-sale decreased by $2.4 million, or 8.5%, from December 31, 2022, to September 30, 2023[38] - The Company expects to recover its amortized cost basis on all debt securities and does not intend to sell them prior to recovery, supported by strong capital and liquidity[43][44] (6) Loans and Allowance for Credit Losses for Loans Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :---------------------------- | :----------- | :----------- | :---------------- | :--------- | | Commercial real estate | $438,039 | $453,592 | $(15,553) | -3.4% | | Commercial | $176,817 | $216,931 | $(40,114) | -18.5% | | Enterprise value | $432,449 | $438,745 | $(6,296) | -1.4% | | Digital asset | $15,247 | $40,781 | $(25,534) | -62.6% | | Construction and land development | $95,327 | $72,267 | $23,060 | 31.9% | | Mortgage warehouse | $172,051 | $213,244 | $(41,193) | -19.3% | | Total Loans | $1,337,689 | $1,444,116 | $(106,427) | -7.4% | | Allowance for credit losses - loans | $(24,023) | $(28,069) | $4,046 | -14.4% | - The allowance for credit losses for loans (ACLL) decreased by $4.0 million, or 14.4%, from December 31, 2022, to September 30, 2023[49] Allowance for Credit Losses for Loans Activity (Nine Months Ended Sep 30, in thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :---------------------- | :----------- | :----------- | | Balance at beginning of period | $28,069 | $19,496 | | Impact of adopting ASC 326 | $(2,588) | — | | Credit loss expense - loans | $2,090 | $57,398 | | Total charge-offs | $3,771 | $48,091 | | Total recoveries | $223 | $243 | | Net charge-offs | $3,548 | $47,848 | | Balance at end of period | $24,023 | $29,046 | - Non-accrual loans decreased from $26.96 million at December 31, 2022, to $20.14 million at September 30, 2023, primarily due to paydowns in the digital asset portfolio[71][158] (7) Deposits Deposit Balances by Type (in thousands) | Deposit Type | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :----------- | :----------- | :---------------- | :--------- | | Noninterest-bearing | $385,488 | $520,226 | $(134,738) | -25.9% | | Interest-bearing | $1,104,237 | $759,356 | $344,881 | 45.4% | | Total Deposits | $1,489,725 | $1,279,582 | $210,143 | 16.4% | - The increase in interest-bearing deposits was primarily driven by a $222.8 million increase in money market deposits and a $119.8 million increase in certificates of deposit[150] - Specialty deposits (BaaS and digital asset) increased by $163.6 million to $266.4 million, with BaaS deposits increasing by $168.6 million and digital asset deposits decreasing by $5.0 million[151] - Approximately 57% of total deposits were FDIC insured and 43% were DIF insured as of September 30, 2023[90] (8) Borrowings - Total borrowings decreased by $37.1 million, or 29.3%, to $89.7 million at September 30, 2023, from $126.8 million at December 31, 2022, primarily due to a decrease in overnight borrowings[154] - Borrowings from the Federal Home Loan Bank (FHLB) consisted of $80.0 million in short-term borrowings (5.57% interest rate) and $9.7 million in long-term borrowings (1.21% to 1.32% interest rate) at September 30, 2023[91] (9) Other Repossessed Assets - Other repossessed assets, consisting of cryptocurrency mining rigs, decreased by $6.1 million to zero at September 30, 2023, due to sales[93][148] - For the nine months ended September 30, 2023, the Company recognized a net gain of $166,000 on sales of other repossessed assets[93] (10) Fair Value Measurements - The Company's debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy, utilizing observable market data from independent pricing services[96] Fair Value Measurements of Assets on a Non-Recurring Basis (in thousands) | Asset Type | Sep 30, 2023 (Total) | Dec 31, 2022 (Total) | | :-------------- | :------------------- | :------------------- | | Loans: | | | | Enterprise value | $1,156 | — | | Digital asset | $8,028 | — | | Commercial | — | $16,817 | | Other repossessed assets | — | $6,051 | | Total | $9,184 | $22,868 | - Loans measured at fair value on a nonrecurring basis (Level 3) include enterprise value and digital asset loans, with valuations based on business or collateral evaluations[101] (11) Regulatory Capital - As of September 30, 2023, BankProv exceeded all applicable regulatory capital requirements and was categorized as 'well capitalized' by the FDIC[106][203] BankProv Capital Ratios (September 30, 2023) | Capital Ratio | Actual Ratio | Minimum for Adequacy | Minimum for Well Capitalized | | :---------------------------- | :----------- | :------------------- | :--------------------------- | | Total Capital (to RWA) | 14.23% | > 8.0% | > 10.0% | | Tier 1 Capital (to RWA) | 12.97% | > 6.0% | > 8.0% | | Common Equity Tier 1 Capital (to RWA) | 12.97% | > 4.5% | > 6.5% | | Tier 1 Capital (to Average Assets) | 11.07% | > 4.0% | > 5.0% | - The Bank has not opted into the Community Bank Leverage Ratio (CBLR) framework[108] (12) Employee Stock Ownership Plan - The ESOP held 1,538,868 shares at September 30, 2023, with 920,020 unallocated shares having a fair value of approximately $8.9 million[116] - Total compensation expense for the ESOP was $568,000 for the nine months ended September 30, 2023, down from $1.1 million in the prior year[117] (13) Earnings Per Common Share Earnings Per Common Share (Three and Nine Months Ended Sep 30) | Metric | Sep 30, 2023 (3 Months) | Sep 30, 2022 (3 Months) | Sep 30, 2023 (9 Months) | Sep 30, 2022 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Basic | $0.15 | $(2.15) | $0.48 | $(1.47) | | Diluted | $0.15 | $(2.15) | $0.48 | $(1.47) | - Diluted EPS for the three and nine months ended September 30, 2022, was equal to basic EPS due to the Company's net loss position[119] (14) Share-Based Compensation - The Company maintains the 2020 and 2016 Equity Incentive Plans, granting options, restricted stock, restricted units, or performance awards to directors, officers, and employees[120] - Stock option expense for the nine months ended September 30, 2023, was $483,000, down from $650,000 in the prior year[123] - Restricted stock award expense for the nine months ended September 30, 2023, was $498,000, down from $743,000 in the prior year[125] (15) Leases - The Company recognized right-of-use assets of $3.8 million and operating lease liabilities of $4.2 million at September 30, 2023[126] - Lease expense for operating leases totaled $236,000 for the nine months ended September 30, 2023 and 2022[127] (16) Revenue Recognition - Revenue from customer contracts is measured based on consideration specified in the contract and recognized when performance obligations are satisfied, either at a point in time or over time[130][131] - Transactional revenue, such as card interchange fees, ATM fees, wire transfer fees, and loan fees, is recognized immediately as transactions occur or services are provided[132] (17) Qualified Affordable Housing Project Investments - The Bank's investment in qualified affordable housing projects was $6.3 million at September 30, 2023[133] - For the nine months ended September 30, 2023, the Company recognized amortization expense of $1.6 million and tax credits of $1.9 million from these investments[133] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Management discusses financial condition and operational results for Q3 and 9M 2023, covering assets, liabilities, equity, income, and risk management Forward-Looking Statements - The document contains forward-looking statements regarding plans, objectives, expectations, estimates, and intentions, which are subject to change based on various important factors[135] - Key factors influencing actual results include economic conditions, interest rates, inflation, regulatory changes, liquidity, deposit flows, competition, real estate values, loan demand, and the impact of the COVID-19 pandemic[136] - The Company disclaims any obligation to update forward-looking statements after the report date, except as required by law[138] Critical Accounting Policies - Management identifies the Allowance for Credit Losses and Income Taxes as the most critical accounting policies due to significant judgments and assumptions involved[139][140] - The allowance for credit losses estimates expected losses over the life of the loan portfolio, with losses charged against the allowance when un-collectability is confirmed[139] - Income taxes are recognized under the asset and liability method, establishing deferred tax assets and liabilities for temporary differences, with a valuation allowance as needed[140] Balance Sheet Analysis Assets - Total assets increased by $172.1 million, or 10.5%, to $1.81 billion at September 30, 2023, from $1.64 billion at December 31, 2022[143] - The increase in total assets was primarily driven by a $285.8 million increase in cash and cash equivalents, partially offset by decreases in net loans and other repossessed assets[143][144] - Cash and cash equivalents increased significantly by 354.4% to $366.4 million, with $249.7 million of volatile deposits held as cash in short-term investments[144][145] Loans - Net loans decreased by $102.4 million, or 7.2%, to $1.31 billion at September 30, 2023, representing 72.6% of total assets[146] - Significant decreases were seen in mortgage warehouse loans (-$41.2 million), commercial loans (-$40.1 million), and digital asset loans (-$25.5 million, or 62.6%)[146] - The decrease in digital asset loans was due to paydowns and payoffs of loans secured by cryptocurrency mining rigs and lines of credit[146] - The construction and land development portfolio increased by $23.1 million, or 31.9%[146] Other Repossessed Assets - Other repossessed assets, primarily cryptocurrency mining rigs, decreased by $6.1 million to zero at September 30, 2023, due to sales[148] Deposits - Total deposits increased by $210.1 million, or 16.4%, to $1.49 billion at September 30, 2023[149] - Interest-bearing deposits increased by $344.9 million (45.4%), while noninterest-bearing deposits decreased by $134.7 million (25.9%), reflecting a shift due to rising interest rates[149] - Specialty deposits (BaaS and digital asset) increased by $163.6 million to $266.4 million, with $136.9 million from three relationships deemed volatile and scheduled to exit prior to year-end[151][152] Borrowings - Borrowings decreased by $37.1 million, or 29.3%, to $89.7 million at September 30, 2023, primarily due to a decrease in overnight borrowings and the use of excess cash from loan repayments[154] Shareholders' Equity - Shareholders' equity increased by $10.1 million, or 4.8%, to $217.6 million at September 30, 2023, driven by net income of $8.0 million and a $696,000 cumulative-effect adjustment from CECL adoption[155] Asset Quality Non-Performing Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :---------------------------- | :----------- | :----------- | :---------------- | :--------- | | Total non-accrual loans | $20,136 | $26,964 | $(6,828) | -25.3% | | Other repossessed assets | — | $6,051 | $(6,051) | -100.0% | | Total non-performing assets | $20,136 | $33,015 | $(12,879) | -39.0% | | Total non-performing loans to total loans | 1.51% | 1.87% | -0.36% | -19.3% | | Total non-performing assets to total assets | 1.11% | 2.02% | -0.91% | -45.0% | - The decrease in non-accrual digital asset loans was due to paydowns and payoffs of loans secured by cryptocurrency mining rigs[158] - Credit loss expense for loans decreased significantly by $55.3 million, or 96.4%, to $2.1 million for the nine months ended September 30, 2023, compared to $57.4 million in the prior year[161] - Net charge-offs decreased by $44.3 million to $3.5 million for the nine months ended September 30, 2023, primarily due to digital asset portfolio charge-offs in 2022[162] Results of Operations for the Quarter Ended September 30, 2023 and 2022 Interest and Dividend Income - Interest and dividend income increased by $2.5 million, or 12.2%, to $23.2 million for the quarter ended September 30, 2023, driven by rising interest rates and increased short-term investments[164] - Interest on short-term investments rose to $3.2 million from $357,000, while interest on loans decreased by $336,000 due to a reduction in average loan balances, partially offset by a 69 basis point increase in loan yield[164] Interest Expense - Interest expense increased significantly by $8.4 million to $9.3 million for the quarter ended September 30, 2023, primarily due to rising interest rates and a higher proportion of costly deposits[165] - The cost of interest-bearing deposits increased by 297 basis points to 3.41%, and the average balance of interest-bearing deposits increased by $305.0 million, or 39.8%[165] Net Interest and Dividend Income - Net interest and dividend income decreased by $5.9 million, or 29.7%, to $13.9 million for the quarter ended September 30, 2023[166] - This decrease was due to a $310.6 million increase in average interest-bearing liabilities and a 141 basis point decrease in net interest margin to 3.44%[166] Credit loss benefit/expense - A credit loss benefit of $156,000 was recognized for the quarter ended September 30, 2023, a significant improvement from a $56.3 million expense in the prior year[167] - The benefit was driven by reduced loan balances in commercial and enterprise value portfolios and improved economic forecasts, partially offset by an increased reserve for individually analyzed loans[167] Noninterest Income - Noninterest income increased by $426,000, or 31.8%, to $1.8 million for the quarter ended September 30, 2023[168] - This increase was primarily due to higher service charges and fees (up $289,000, or 130.2%) and customer service fees on deposit accounts (up $114,000, or 14.4%), particularly from BaaS implementation and activity fees[168] Noninterest Expense - Noninterest expense increased by $671,000, or 5.6%, to $12.7 million for the quarter ended September 30, 2023[169] - Key increases were in deposit insurance expense (up $339,000), professional fees (up $298,000), marketing expense (up $137,000), and salaries and employee benefits (up $123,000)[169] - Other expenses decreased by $291,000 due to lower loan servicing expenses related to cryptocurrency mining rigs[170] Income Tax Benefit - The Company recorded income tax expense of $628,000 (20.3% effective rate) for the quarter ended September 30, 2023, compared to an income tax benefit of $12.0 million (25.3% effective rate) in the prior year[171] Average Balance Sheet and Related Yields and Rates Key Yields and Rates (Three Months Ended Sep 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | Change (bps) | | :---------------------- | :----------- | :----------- | :----------- | | Yield on Loans | 5.97% | 5.28% | 69 | | Yield on Short-term investments | 4.94% | 2.03% | 291 | | Cost of Interest-bearing deposits | 3.41% | 0.44% | 297 | | Cost of Borrowings | 3.69% | 2.22% | 147 | | Net interest rate spread | 2.35% | 4.59% | -224 | | Net interest margin | 3.44% | 4.85% | -141 | Rate/Volume Analysis - The decrease in net interest income for the quarter was primarily driven by a $3.3 million negative impact from rate changes and a $2.6 million negative impact from volume changes[175] - Interest income from loans was negatively impacted by volume changes (-$2.8 million) despite positive rate changes (+$2.5 million)[175] - Interest expense on deposits saw significant increases due to both rate (+$6.7 million) and volume (+$1.5 million) changes[175] Results of Operations for the Nine Months Ended September 30, 2023 and 2022 Interest and Dividend Income - Interest and dividend income increased by $8.4 million, or 14.4%, to $66.7 million for the nine months ended September 30, 2023[177] - This increase was primarily due to a $5.7 million increase in interest on short-term investments (yield up 410 bps to 4.87%) and a $2.6 million increase in interest and fees on loans (yield up 75 bps to 5.85%)[177] Interest Expense - Interest expense increased by $20.1 million to $22.1 million for the nine months ended September 30, 2023, driven by rising interest rates and increased costs of interest-bearing deposits and borrowings[178] - The cost of interest-bearing deposits increased by 260 basis points to 2.90%, and the average balance of interest-bearing deposits increased by $159.4 million, or 20.2%[178] Net Interest and Dividend Income - Net interest and dividend income decreased by $11.7 million, or 20.7%, to $44.6 million for the nine months ended September 30, 2023[179] - This decrease was due to a $192.6 million increase in average interest-bearing liabilities and a $99.2 million decrease in average interest-earning assets, coupled with a 71 basis point decrease in net interest margin to 3.80%[179] Credit loss expense - Credit loss expense decreased by $56.8 million, or 99.0%, to $556,000 for the nine months ended September 30, 2023, compared to $57.4 million in the prior year[180] - The 2023 expense was based on the CECL model and driven by charge-offs in the enterprise value portfolio, followed by reduced loan balances and improving economic forecasts[180] Noninterest Income - Noninterest income increased by $1.2 million, or 28.6%, to $5.4 million for the nine months ended September 30, 2023[181] - This increase was due to higher customer service fees on deposit accounts (up $662,000, primarily from BaaS fees) and service charges and fees (up $439,000 from loan payoff charges)[181] Noninterest Expense - Noninterest expense increased by $3.9 million, or 11.3%, to $38.7 million for the nine months ended September 30, 2023[182] - Increases were seen in salaries and employee benefits (up $2.3 million), professional fees (up $1.2 million), deposit insurance (up $680,000), and software depreciation and implementation (up $390,000)[182] - Decreases in write-downs of other assets and receivables and other expenses partially offset these increases[182] Income Tax Benefit - The Company recorded income tax expense of $2.8 million (25.6% effective rate) for the nine months ended September 30, 2023, compared to an income tax benefit of $7.5 million (23.8% effective rate) in the prior year[183] Average Balance Sheet and Related Yields and Rates Key Yields and Rates (Nine Months Ended Sep 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | Change (bps) | | :---------------------- | :----------- | :----------- | :----------- | | Yield on Loans | 5.85% | 5.10% | 75 | | Yield on Short-term investments | 4.87% | 0.77% | 410 | | Cost of Interest-bearing deposits | 2.90% | 0.30% | 260 | | Cost of Borrowings | 3.94% | 2.10% | 184 | | Net interest rate spread | 2.74% | 4.34% | -160 | | Net interest margin | 3.80% | 4.51% | -71 | Rate/Volume Analysis - The decrease in net interest income for the nine months was primarily due to a $3.1 million negative impact from rate changes and an $8.6 million negative impact from volume changes[188] - Interest income from loans saw a positive rate effect (+$7.9 million) but a larger negative volume effect (-$5.3 million)[188] - Interest expense on deposits increased significantly due to both rate (+$16.6 million) and volume (+$2.3 million) changes[188] Management of Market Risk Net Interest Income Simulation - The Company analyzes interest rate sensitivity through a net interest income simulation model, estimating changes over a 12-month period under various interest rate shift scenarios[189] Estimated Changes in Net Interest Income (12 Months from Sep 30, 2023) | Changes in Interest Rates (Basis Points) | Estimated Net Interest Income (in thousands) | Change (%) | | :--------------------------------------- | :------------------------------------------- | :--------- | | 300 | $56,289 | 1.30% | | 200 | $56,045 | 0.90% | | 100 | $55,800 | 0.50% | | 0 | $55,540 | — | | (100) | $55,158 | (0.70)% | | (200) | $54,276 | (2.30)% | | (300) | $52,892 | (4.80)% | Economic Value of Equity Simulation - The Company also uses an Economic Value of Equity (EVE) model to assess financial condition sensitivity to interest rate changes, representing the present value of expected cash flows from assets less liabilities[191] Estimated Changes in Economic Value of Equity (as of Sep 30, 2023) | Changes in Interest Rates (Basis Points) | Economic Value of Equity (in thousands) | Change (%) | | :--------------------------------------- | :-------------------------------------- | :--------- | | 300 | $254,573 | (4.36)% | | 200 | $257,138 | (3.39)% | | 100 | $262,394 | (1.42)% | | 0 | $266,175 | — | | (100) | $266,357 | 0.07% | | (200) | $262,283 | (1.46)% | | (300) | $250,899 | (5.74)% | Liquidity and Capital Resources - Primary sources of funds include deposit inflows, borrowings, loan repayments, and securities sales[193] - Cash and cash equivalents totaled $366.4 million at September 30, 2023, including $249.7 million in volatile deposits held as cash in short-term investments[195] - The Company had $128.9 million available from the FHLB and a $158.0 million line of credit with the Federal Reserve Bank of Boston's borrower-in-custody program at September 30, 2023[198] - Loan commitments outstanding were $18.1 million, and unadvanced funds to borrowers totaled $190.5 million at September 30, 2023[200] Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk disclosures are incorporated by reference from the 'Management Market Risk' subsection within Item 2 - Market risk disclosures are incorporated by reference from Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Management Market Risk'[204] Item 4. Controls and Procedures Disclosure controls were ineffective due to a material weakness in digital asset lending, with remediation efforts underway - Disclosure controls and procedures were not effective as of September 30, 2023, due to a material weakness in internal control over financial reporting related to digital asset lending practices[205] - Remediation efforts include ceasing new loans secured by cryptocurrency mining rigs, developing an onboarding process for internal conflicts of interest, and implementing enhanced review and disclosure procedures for officer-related conflicts[207] - The material weakness will be fully remediated once enhanced controls operate for a sufficient period and are tested as designed and operating effectively[207] Part II. Other Information Item 1. Legal Proceedings No applicable legal proceedings for the Company - No applicable legal proceedings[209] Item 1A. Risk Factors No material changes to risk factors since prior SEC filings (Form 10-K for FY2022 and Form 10-Q for Q1 2023) - No material changes in risk factors from previous SEC filings (Form 10-K for FY2022 and Form 10-Q for Q1 2023)[210] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock repurchases occurred in Q3 2023, with 254,521 shares remaining available under the program - The Company did not repurchase common stock under its program during the third quarter of 2023[213] - As of September 30, 2023, 254,521 shares remained available for purchase under the stock repurchase program, which has no expiration date[213] Item 3. Defaults upon Senior Securities No defaults upon senior securities - No defaults upon senior securities[214] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[215] Item 5. Other Information No other information to report - No other information to report[216] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including certifications, iXBRL financial statements, and corporate governance documents - Exhibits include certifications (Sarbanes-Oxley Act), financial statements in Inline Extensible Business Reporting Language (iXBRL), and corporate documents like Articles of Incorporation and Bylaws[219] Signatures Report signed by Joseph B. Reilly and Carol L. Houle (Co-Presidents, Co-CEOs, and CFO) on November 13, 2023 - The report was signed by Joseph B. Reilly (Co-President and Co-CEO) and Carol L. Houle (Co-President, Co-CEO, and CFO) on November 13, 2023[221]