Business Overview and History
Provident Bancorp, Inc. (PVBC) is a bank holding company that has been serving the financial needs of its communities for nearly two centuries. Headquartered in Amesbury, Massachusetts, the company's primary subsidiary, BankProv, is the 10th oldest bank in the nation, with a rich history dating back to 1828. Over the years, BankProv has evolved from a traditional community bank to a future-ready commercial bank, offering a comprehensive suite of banking products and innovative financial solutions to its corporate clients.
Provident Bancorp's roots can be traced back to 1828, when it was founded as the Provident Institution for Savings in the Town of Amesbury. Initially, the bank focused on serving the banking needs of the local community, providing deposit accounts and lending primarily to individuals. Throughout its long history, the bank has demonstrated remarkable resilience, weathering significant economic challenges such as the Great Depression and various economic downturns.
A pivotal moment in the company's history came in 2015 when Provident Bancorp completed an initial public stock offering, becoming a publicly traded entity. This was followed by a second step offering in 2019, which provided additional capital to support the bank's growth initiatives and expand its operations and product offerings.
The early 2020s brought new challenges for Provident Bancorp, as the COVID-19 pandemic significantly impacted the banking industry. Like many financial institutions, the company faced increased credit losses and a narrowing of net interest margins due to the deteriorating economic environment. However, the bank remained committed to supporting its customers and communities during this difficult period, leveraging its experience and financial strength to navigate the crisis.
In recent years, Provident Bancorp ventured into the digital asset lending space, providing loans to companies engaged in cryptocurrency mining. This strategic move, however, led to significant challenges as some borrowers experienced substantial losses. As a result, the bank faced elevated credit costs and was required to take substantial write-downs on these loans. In response to these issues, Provident Bancorp has ceased originating new digital asset loans and is actively working to wind down this portfolio in an orderly fashion.
Despite these recent challenges, Provident Bancorp remains a well-capitalized institution with a deep commitment to its local markets. The bank continues to offer a wide range of commercial banking products and services, with a particular focus on supporting small and medium-sized businesses in its communities.
On October 24, 2024, the company received a Wells Notice from the SEC staff indicating a preliminary determination to recommend an enforcement action related to the company's disclosures regarding its digital asset lending portfolio, which the company ceased originating new loans in as of October 2022. The company intends to pursue the Wells Notice process and expects to engage with the staff to explore a potential resolution. The results and costs of this process are unknown at this time.
Recent Performance and Financials
Provident Bancorp's financial performance has been marked by both challenges and resilience in recent years. For the fiscal year ended December 31, 2023, the company reported net income of $11.0 million, or $0.66 per diluted share, compared to a net loss of $21.5 million, or ($1.30) per diluted share, in the previous year. The turnaround in profitability was largely driven by the company's strategic initiatives to reduce its exposure to high-risk loan segments, such as the digital asset lending portfolio, and focus on more traditional commercial banking activities.
The company's net interest and dividend income for the year ended December 31, 2023, was $58.2 million, a decrease of 22.5% from the prior year. This decline was primarily attributed to the rising interest rate environment, which put pressure on the company's net interest margin. The cost of interest-bearing deposits increased by 266 basis points to 3.11% for the year, while the cost of borrowings rose by 101 basis points to 3.80%.
Provident Bancorp's asset quality has been a key area of focus, with the company recognizing a credit loss benefit of $678,000 for the year ended December 31, 2023, compared to a credit loss expense of $56.4 million in the previous year. This improvement was largely due to the company's efforts to reduce its exposure to higher-risk loan segments, such as the digital asset lending portfolio, which saw a significant decline in net charge-offs.
For the fiscal year 2023, Provident Bancorp reported revenue of $64.08 million, net income of $10.95 million, operating cash flow of $5.55 million, and free cash flow of $5.21 million. In the most recent quarter (Q3 2024), the company reported revenue of $24.137 million, net income of $716,000, operating cash flow of $3.167 million, and free cash flow of $3.376 million. The decrease in net income compared to the prior year quarter was primarily due to a $1.7 million provision for credit losses recognized in Q3 2024, which was driven by an additional $1.7 million reserve on a $17.6 million enterprise value relationship. This decrease was partially offset by a $1.1 million decrease in noninterest expense, driven by lower salaries and employee benefits, professional fees, and other expenses.
Liquidity and Capital Position
As of September 30, 2024, Provident Bancorp maintained a strong liquidity position, with cash and cash equivalents totaling $138.66 million. The company's total assets stood at $1.67 billion, with a loan portfolio of $1.41 billion, net of the allowance for credit losses of $21.92 million.
The company's capital ratios remained well above the regulatory requirements for "well-capitalized" status. As of December 31, 2023, the company's total risk-based capital ratio was 14.02%, the Tier 1 risk-based capital ratio was 12.77%, and the common equity Tier 1 capital ratio was 12.77%. These robust capital levels provide the company with the financial flexibility to navigate the challenges of the current operating environment and pursue strategic initiatives to enhance shareholder value.
Provident Bancorp's debt-to-equity ratio stood at 0.55 as of September 30, 2024, indicating a balanced capital structure. The company's current ratio and quick ratio were both 1.25 as of the same date, suggesting a solid short-term liquidity position.
The company has maintained strong borrowing capacity, with $136.8 million available from the Federal Home Loan Bank of Boston, of which $69.6 million was outstanding as of September 30, 2024. Additionally, Provident Bancorp has an available line of credit with the Federal Reserve Bank of Boston's borrower-in-custody program of $263.6 million, with $55 million outstanding as of the same date.
Product Segments and Loan Portfolio
Provident Bancorp's loan portfolio is diversified across several key segments, reflecting the company's strategic focus on commercial and real estate lending. As of September 30, 2024, the loan portfolio composition was as follows:
- Commercial real estate: 38.98% of total loans - Mortgage warehouse: 20.79% of total loans - Enterprise value: 24.72% of total loans - Commercial: 12.10% of total loans - Construction and land development: 2.94% of total loans - Residential real estate: 0.46% of total loans - Consumer: 0.01% of total loans
The commercial real estate portfolio includes loans for various property types, such as industrial/manufacturing/warehouse, multifamily, self-storage, office, residential, hotel/motel, mobile home parks, retail, campground/RV parks, and other commercial real estate.
Mortgage warehouse loans represent facility lines to non-bank mortgage origination companies, where the underlying collateral is residential real estate loans. Enterprise value loans are made to small and medium-sized businesses in a senior secured position, generally secured by the enterprise value of the business.
Notably, Provident Bancorp has phased out its digital asset loan portfolio, which comprised only 0.92% of total loans as of December 31, 2023, down from 4.72% a year earlier.
Deposit Base and Funding Sources
As of September 30, 2024, Provident Bancorp's deposit base totaled $1.29 billion. This included $318.48 million in noninterest-bearing demand deposits and $970.02 million in interest-bearing deposits, primarily in money market, savings, NOW, and certificate of deposit accounts.
To supplement its funding sources, the company utilizes borrowings, primarily from the Federal Home Loan Bank and Federal Reserve Bank. Total borrowings were $124.60 million as of September 30, 2024, consisting of $115.00 million in short-term borrowings and $9.60 million in long-term borrowings.
Navigating the Challenges of the Banking Industry
Provident Bancorp, like many other banks, has faced a multitude of challenges in recent years, including the persistent low-interest-rate environment, intense competition for deposits, and the ongoing impact of the COVID-19 pandemic. The company's management team has demonstrated its ability to adapt and respond to these industry-wide pressures, implementing strategic initiatives to strengthen the bank's core operations and diversify its revenue streams.
One of the key focus areas for the company has been the reduction of its exposure to higher-risk loan segments, such as the digital asset lending portfolio. The company has made significant progress in this area, with the digital asset loan portfolio accounting for only 0.92% of total loans as of December 31, 2023, down from 4.72% a year earlier. This strategic shift has helped to improve the company's overall asset quality and reduce the risk profile of its loan portfolio.
Provident Bancorp has also made concerted efforts to enhance its commercial banking capabilities, with a focus on serving niche, technology-driven industries. The company's BaaS offerings, which provide customized banking solutions to corporate clients, have become an increasingly important part of its business model. This strategic pivot has enabled the company to diversify its revenue sources and capitalize on emerging trends in the financial services industry.
Outlook and Challenges Ahead
As Provident Bancorp looks to the future, the company faces a mix of challenges and opportunities. The ongoing interest rate environment, characterized by the Federal Reserve's efforts to combat inflation, will likely continue to exert pressure on the company's net interest margin. However, the company's management team has demonstrated its ability to adapt to these market conditions, with initiatives aimed at optimizing its funding sources and managing its asset-liability mix.
Additionally, the company's commitment to enhancing its technology infrastructure and delivering innovative financial solutions to its clients positions it well to capitalize on the evolving needs of the banking industry. The company's strategic focus on serving niche, technology-driven industries, such as renewable energy and fintech, could provide opportunities for sustainable growth and diversification.
Despite the challenges, Provident Bancorp remains well-capitalized and has a solid liquidity position, which should enable the company to weather the current market environment and continue to invest in its long-term growth strategies. As the company navigates the changing tides of the banking industry, its experienced management team, robust risk management practices, and dedication to serving its communities will be key to its continued success.
The ongoing SEC investigation related to the company's digital asset lending portfolio disclosures presents a potential regulatory challenge. The outcome of this process and its financial impact remain uncertain, and the company will need to manage this situation carefully while continuing to focus on its core business operations and strategic initiatives.