Provident Bancorp, Inc. Reports Results  for the December 31, 2022 Quarter 

Company Release – 01/27/2023



Amesbury, Massachusetts — Provident Bancorp, Inc. (the “Company”) (NasdaqCM: PVBC), the holding company for BankProv (the “Bank”), reported net income for the quarter ended December 31,  2022 of $2.7 million, or $0.16 per diluted share, compared to  a net loss of  $35.3 million, or ($2.15) per diluted share, for the quarter ended September 30, 2022 and net income of $3.6 million, or $0.21 per diluted share, for the quarter ended December 31, 2021. Net loss for the year ended December 31, 2022 was $21.5 million, or ($1.30) per diluted share, compared to net income of  $16.1 million, or $0.93 per diluted share, for the year ended December 31, 2021.



In announcing these results, Carol Houle, Interim Co-President and Co-Chief Executive Officer and Chief Financial Officer said, “As we reflect on 2022, we are eager to take its lessons and emerge a better, stronger bank. Despite our 2022 losses, we enter 2023 well capitalized and well diversified. During the fourth quarter, we took decisive action to reduce our exposure to loans secured by cryptocurrency mining rigs. Not only are we no longer originating these types of loans, we have also reduced that portfolio to nearly half what it was at September 30, 2022. The remaining sectors of our loan portfolio continue to perform in accordance with our historical experience, and it is in large part due to our long-term strategy of portfolio diversification that we have been able to weather recent volatility and losses.” 



“The Bank will continue the tradition of providing a full suite of commercial products and banking solutions,” said Joe Reilly, Interim Co-President and Co-Chief Executive Officer. “We will continue to leverage new technology and to utilize the infrastructure we’ve developed to service new and existing Banking as a Service (“BaaS”) customers. Additionally, I am personally excited to make use of my experience in community banking to further deepen the Bank’s connection to our local markets and communities.”



Income Statement Results



Quarter Ended December 31, 2022 Compared to Quarter Ended September 30, 2022



For the quarter ended December 31, 2022,  net interest and dividend income was $18.7 million, which represents a decrease of  $1.0 million, or 5.1%, when compared to the quarter ended September 30,  2022.  Net interest and dividend income was negatively impacted by an increase in interest expense of $1.3  million, or 138.8%, to $2.3 million compared to $952,000 for the quarter ended September 30, 2022. Interest expense increased primarily due to an increase in the cost of interest-bearing deposits coupled with an increase in the average balance of interest-bearing deposits. The cost of interest-bearing deposits increased 48 basis points to 0.92% for the quarter ended December 31, 2022 compared to 0.44% for the quarter ended September 30, 2022, primarily due to rising interest rates and a larger proportion of the portfolio consisting of higher-cost certificates of deposit and money market accounts.  The average balance of interest-bearing deposits increased $18.4 million, or 2.4%, for the quarter ended December 31, 2022, primarily due to an increase in brokered certificates of deposit and money market accounts, partially offset by decreases in NOW and savings accounts.  



Net interest and dividend income for the quarter ended December 31, 2022 benefitted from an increase in interest and dividend income of $311,000, or 1.5%, to $21.0 million compared to $20.7 million for the quarter ended September 30, 2022. The increase was primarily due to an increase in the yield on interest-earning assets. The yield on interest-earning assets increased 43 basis points to 5.51% for the quarter ended December 31, 2022 compared to 5.08% for the quarter ended September 30, 2022, which was primarily driven by rising interest rates and the origination of higher-yielding loans. The increase in the yield was partially offset by a decrease in average interest-earning assets of $104.5 million, or 6.4%. This decrease was primarily due to  a decrease in the average balance of loans of $82.7 million, or 5.4%, and a decrease in average short-term investments of $20.5 million, or 29.2%.



A  negative provision for loan losses of $970,000 was recognized for the quarter ended December 31, 2022 compared to a provision of $56.3 million for the quarter ended September 30, 2022, which represents a decrease of $57.3 million, or 101.7%.  The negative provision for the quarter ended December 31, 2022 was primarily the result of a decrease in loans as of December 31, 2022 when compared to September 30, 2022. The provision for the quarter ended September 30, 2022 was primarily driven by the need to replenish the allowance due to net charge-offs which totaled $46.2 million for the quarter ended September 30, 2022 compared to $7,000 for the quarter ended December 31, 2022.  The $46.2 million in net charge-offs for the quarter ended September 30, 2022 was primarily driven by our portfolio of loans secured by cryptocurrency mining rigs.



For the quarter ended December 31, 2022,  noninterest income was $1.9 million, which represents an increase of  $599,000, or 44.7%, when compared to the quarter ended September 30, 2022. The increase was  primarily due to increases in other service charges and fees and customer service fees on deposit accounts. Other service charges and fees increased $498,000, or 224.3%, primarily due to late charges and fees on commercial and commercial real estate loans.  Customer service fees on deposit accounts increased $153,000, or 19.4%, primarily due to fees generated from cash vault services for our customers who operate Bitcoin ATMs as well as implementation and activity fees charged to Banking as a Service (“BaaS”) customers. 



For the quarter ended December 31, 2022, noninterest expense was $17.2 million, which represents an increase of $5.2 million, or 42.8%, when compared to the quarter ended September 30, 2022. The increase was primarily due to an increase in salaries and employee

benefits,  professional fees, other expense and deposit insurance. Salaries and employee benefits increased $1.9 million, or 25.1%, primarily due to $1.5 million in expenses related to an agreement between the Bank and the Company and the former President and Chief Executive Officer entered into upon his separation from employment. Also contributing to the increase in salaries and employee benefits was an increase in staff to support the development and implementation of new technologies and products.  Professional fees increased $1.8 million, or 242.7%, primarily due to increased legal, audit and compliance costs resulting from a review of the Company’s digital asset lending practices following the events that caused the losses recorded in the third quarter. Other expense increased $971,000, or 70.0%, primarily due to costs related to repossessed assets and insurance premiums. The increase in deposit insurance of $396,000, or 246.0%, was due to an increase in the Federal Deposit Insurance Corporation’s (“FDIC’s”) insurance assessment rate schedules.



Quarter Ended December 31, 2022 Compared to Quarter Ended December 31, 2021



For the quarter ended December 31, 2022, net interest and dividend income was $18.7 million, which represents an increase of $2.3 million, or 14.2%, from the quarter ended December 31, 2021.  The primary reason for the increase was an increase in interest and dividend income of $4.0 million, or 23.2%. Interest and dividend income increased primarily due to rising interest rates, which resulted in an increased yield on interest-earning assets. The yield on interest-earning assets increased 124 basis points to 5.51% for the quarter ended December 31, 2022 compared to 4.27% for the quarter ended December 31, 2021. The increase interest and dividend income caused by the increase in yield was partially offset by a decrease in the average balance of interest-earning assets of $73.6 million, or 4.6%. This decrease was primarily due to a decrease in the average balance of short-term investments of $155.3 million, or 75.8%, partially offset by an increase in the average balance of loans of $86.2 million, or 6.3%.



The increase in net interest and dividend income for the quarter ended December 31, 2022 was negatively impacted by  an increase in interest expense of $1.6 million, or 251.3%, to $2.3 million compared to  $647,000 for the quarter ended December 31, 2021. Interest expense increased primarily due to rising interest rates and a larger proportion of higher-cost certificates of deposit in the portfolio, which resulted in an increase in the cost of interest-bearing deposits of 65 basis points to 0.92% for the quarter ended December 31, 2022 compared to 0.27% for the quarter ended December 31, 2021. The increase in interest expense was partially offset by a decrease in the average balance of interest-bearing deposits of $55.9 million, or 6.7%.



A  negative provision for loan losses of $970,000 was recognized for the quarter ended December 31, 2022 compared to a provision of  $1.2 million for the quarter ended December 31, 2021, which represents a decrease of $2.2 million, or 178.7%. The negative provision for the quarter ended December 31, 2022 was primarily the result of a decrease in loans during the fourth quarter of 2022. The $1.2 million provision for the quarter ended December 31, 2021 was primarily the result of an increase in loans during the fourth quarter of 2021. The changes in the provision were based on management’s assessment of various factors affecting the loan portfolio, including outstanding balance, portfolio composition, delinquent and non-accrual loans, national and local business and economic conditions and loss experience as well as an overall evaluation of the quality of the underlying collateral.



For the quarter ended December 31, 2022, noninterest income was $1.9 million, which represents an increase of $716,000, or 58.6%, when compared to the quarter ended December 31, 2021. The increase was primarily due to increases in customer service fees on deposit accounts and other services charges and fees. Customer service fees on deposit accounts increased $407,000, or 76.1%, which was primarily attributable to fees generated from cash vault services for our customers who operate Bitcoin ATMs as well as implementation and activity fees charged to BaaS customers.  Other service charges and fees increased  $323,000, or 81.4%, primarily due to late charges and fees on commercial and commercial real estate loans.



For the quarter ended December 31, 2022, noninterest expense was $17.2 million, which represents an increase of  $5.4 million, or 45.7%, when compared to the quarter ended December 31, 2021. The increase in noninterest expense was primarily due to an increase in professional fees, other expense, salaries and employee benefits, deposit insurance and insurance expense. Professional fees increased $1.7 million, or 226.3%, primarily due to increased legal fees and audit and compliance costs resulting primarily from a review of the Company’s digital asset lending practices following the events that caused the losses recorded in the third quarter.  Other expense increased $1.5 million, or 174.9%, primarily due to costs related to repossessed assets, insurance premiums, loan customer referral fees, and costs paid for employees to attend trainings and conferences. The increase of $1.1 million, or 13.1%, in salary and employee benefits was primarily due to $1.5 million in expenses related to an agreement between the Bank and the Company and the former President and Chief Executive Officer entered into upon his separation from employment, partially offset by a decrease in bonus expense.  The increase in deposit insurance of $416,000, or 295.0%, was due to an increase in the FDIC’s insurance assessment rate schedules. The increase in insurance expense of $406,000 was due to a renewal and reassessment that incorporates consideration of our digital asset product strategies. 



Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021



For the year ended December 31, 2022, net interest and dividend income was $75.0 million, which represents an increase of $13.6 million, or 22.1%, when compared to the year ended December 31, 2021.  The primary reason for the increase was an increase in interest and dividend income of $14.5 million, or 22.4%. Interest and dividend income increased due to an increase in the average balance of interest-earning assets of $114.1 million, or 7.5%, when compared to the year ended December 31, 2021. The increase in average interest-earnings assets was primarily due to an increase in the average balance of loans of $156.2 million, or 11.8%, partially offset by a decrease in short-term investments of $40.9 million, or 25.6%. The increase in interest and dividend income was further supported by an increase in the yield on interest-earning assets of 59 basis points to 4.87% for the year ended December 31, 2022 compared to 4.28%  for the year ended December 31, 2021 due to the rising interest rate environment and a greater percentage of the portfolio consisting of higher-yielding loans. 



The increase in net interest and dividend income for the year ended December 31, 2022 was negatively impacted by an increase in interest expense of $927,000, or 27.5%, to $4.3 million compared to $3.4 million for the year ended December 31, 2021. Interest expense increased primarily due to an increase in the cost of interest-bearing deposits which increased eight basis points to 0.45% for the year ended December 31, 2022 compared to 0.37% for the year ended December 31, 2021 due to rising interest rates and a larger proportion of higher-cost certificates of deposit in the portfolio. The increase in the cost of interest-bearing deposits was partially offset by a decrease in the average balance of interest-bearing deposits of $54.2 million, or 6.4%, for the year ended December 31, 2021.



A  provision for loan losses of $56.4 million was recognized for the year ended December 31, 2022 compared to a provision of  $3.9 million for the year ended December 31, 2021, which represents an increase of $52.5 million.  The increased provision for the year ended December 31, 2022 was primarily driven by the need to replenish the allowance due to net charge-offs which totaled $47.9 million for the year ended December 31, 2022 compared to $2.9 million for the year ended December 31, 2021. The $47.9 million in net charge-offs for the year ended December 31, 2022 was primarily driven by our portfolio of loans secured by cryptocurrency mining rigs



For the year ended December 31, 2022, noninterest income was $6.1 million, which represents an increase of $983,000, or 19.0%, from the year ended December 31, 2021. The increase was primarily due to an increase in customer service fees on deposit accounts of $1.1 million, or 60.0%, and an increase of $225,000 in net gains on loans sold. The increase in customer service fees on deposit accounts was primarily attributable to fees generated from cash vault services for our customers who operate Bitcoin ATMs as well as implementation and activity fees charged to BaaS customers. The increase in net gains on loans sold was primarily due to the sale of residential mortgage loans in June 2022. The increase in noninterest income was partially offset by a decrease in other service charges and fees of $233,000, or 11.6%, which was primarily due to decreased prepayment penalty income.



For the year ended December 31, 2022, noninterest expense was $52.0 million, which represents an increase of  $11.4 million, or 28.0%, when compared to the year ended December 31, 2021. The increase in noninterest expense was primarily due to increases in salaries and employee benefits, professional fees, other expenses, insurance expense and deposit insurance. The increase of $3.0 million, or 10.3%, in salary and employee benefits includes $1.5 million in expenses related to an agreement between the Bank and the Company and the former President and Chief Executive Officer entered into upon his separation from employment. The remaining increase is primarily due to an increase in staff to support the development and implementation of new technologies and specialty lending products. The increase in professional fees of $2.6 million, or 125.4%, was primarily due to increased legal fees and audit and compliance costs resulting primarily from a review of the Company’s digital asset lending practices following the events that caused the losses recorded in the third quarter,  as well as fees paid for contracted employees and fees paid to external consultants. Other expense increased $2.9 million, or 87.9%, primarily due to costs related to repossessed assets, receivables, loan customer referrals,  recruitment, and trainings and conferences. The increase in insurance expense of $1.6 million was due to a renewal and reassessment that incorporates consideration of our digital asset product strategies. The increase in deposit insurance of $541,000, or 112.2%, was due to an increase in FDIC’s insurance assessment rate schedules.



Balance Sheet Results



December 31, 2022 Compared to September 30, 2022



Total assets decreased $137.3 million, or 7.7%, to $1.64 billion at December 31, 2022 compared to $1.77 billion at September 30, 2022 primarily due to  a decrease in cash and cash equivalents and net loans. Cash and cash equivalents decreased  $75.3 million, or 48.3%, primarily due to decreased deposit balances. Net loans decreased $62.4 million, or 4.2%, primarily due to a decrease in commercial loans of $66.0 million, or 8.6%, and a decrease in mortgage warehouse loans of $4.3 million, or 2.0%, partially offset by an increase in commercial real estate loans of $9.8 million, or 2.2%. The decrease in our commercial loan portfolio included a decrease in our digital asset portfolio of $41.4 million, or 50.1% and a decrease in our renewable energy portfolio of $10.9 million, or 16.8%, partially offset by an increase in our enterprise value portfolio of $20.6 million, or 5.1%. The decrease in our digital asset loan portfolio was primarily driven by the sale of a portion of our impaired loans secured by cryptocurrency mining rigs as well as the paydown of an outstanding line of credit. Our digital asset portfolio totaled $41.2 million as of December 31, 2022, which included $26.7 million in loans secured

by cryptocurrency mining rigs. The portfolio of loans secured by cryptocurrency mining rigs will continue to decline as the Bank is no longer originating this type of loan.



Total liabilities decreased $140.9 million, or 9.0%, from September 30, 2022 primarily due to decreased deposits offset by an increase in short-term borrowings. Deposits were $1.28 billion as of December 31, 2022, representing a decrease of $191.9 million, or 13.0%, compared to September 30,  2022.  The decrease in deposits was driven primarily by decreases in deposits from digital asset and BaaS customers, resulting from the competitive rate environment.  The decreases in deposits were offset by an increase in certificates of deposit of $64.2 million, or 81.6%, which was primarily driven by an increase in brokered deposits, which increased $61.1 million, or 103.4%, and were $120.1 million at December 31, 2022. Short-term borrowings increased  $41.5 million, or 61.9%, due to an increase in overnight borrowings.



As of December 31, 2022, shareholders’ equity was $207.5 million compared to $204.0 million at September 30,  2022, representing an increase of $3.6 million, or 1.7%. The increase was primarily due to net income of $2.7 million, stock-based compensation expense of $461,000, other comprehensive income of $234,000, and employee stock ownership plan shares earned of $227,000.  



December 31, 2022 Compared to December 31, 2021



Total assets decreased $92.9 million, or 5.4%, to $1.64 billion at December 31, 2022 compared to $1.73 billion at December 31, 2021.  The primary reasons for the decrease were decreases in cash and cash equivalents, loans held for sale, net loans, and debt securities available-for-sale (at fair value), offset by increases in other assets, net deferred tax asset, and other repossessed assets. Cash and cash equivalents decreased $72.5 million, or 47.3%, primarily due to decreased deposit balances. Loans held for sale decreased $22.8 million, due to the sale of residential mortgage loans in June 2022 and the reclassification of the remaining unsold loans to held for investment. 



Net loans decreased $17.8 million, or 1.2%, and were $1.42 billion as of December 31, 2022 compared to $1.43 billion at December 31, 2021.  The decrease in net loans was primarily due to an increase in the allowance for loan losses of $8.6 million, or 44.0%. The increase in the allowance was primarily due to charge-offs in the third quarter related to the portfolio of loans collateralized by cryptocurrency mining rigs, which resulted in an increase to the general pool reserve based on our allowance for loan loss methodology. Also contributing to the decrease in net loans was a decrease in total loans of $7.5 million, or 0.5%. This decrease was primarily driven by decreases in mortgage warehouse loans of $40.4 million, or 15.9%, commercial loans of $24.8 million, or 3.4%, and consumer loans of $1.1 million, or 74.3%, partially offset by increases in construction and land development loans of $26.9 million, or 62.9%, commercial real estate loans of $24.5 million, or 5.7%, and residential loans of $7.4 million, or 915.5%. The decrease in our commercial loan portfolio was primarily related to decreases in our digital asset, paycheck protection program (“PPP”) and renewable energy loan portfolios, offset by an increase in our enterprise value loan portfolio. Our digital asset loan portfolio decreased $79.3 million, or $65.8%, which was primarily driven by paydowns on outstanding lines of credit, the partial charge-off and repossession of cryptocurrency mining rigs in exchange for the forgiveness of a $27.4 million loan relationship, the partial charge-off and subsequent sale of impaired loans secured by cryptocurrency mining rigs during the fourth quarter.  The portfolio of loans secured by cryptocurrency mining rigs will continue to decline as the Bank is no longer originating this type of loan. Our PPP loan portfolio decreased $12.1 million, or 97.3%, as these loans continue to paydown or be forgiven. Our renewable energy portfolio decreased $8.4 million, or 13.5%, primarily due to the payoff of one larger relationship. Our enterprise value loan portfolio increased $87.9 million, or 25.8%, primarily due to new loan originations in excess of paydowns/payoffs.



Debt securities available-for-sale (at fair value) decreased $8.2 million, or 22.4%, primarily due to principal payments and market depreciation. Other assets increased $11.0 million, primarily due to a tax credit incentivized investment in  a low-income housing project in Portsmouth, New Hampshire, and an increase in accrued taxes. The net deferred tax asset increased $6.8 million, or 68.7%, primarily due to the net loss recorded for the year ended December 31, 2022. Other repossessed assets increased $6.1 million due to the repossession of cryptocurrency mining rigs during 2022.  



Total liabilities decreased $66.7 million, or 4.5%, to $1.43 billion at December 31, 2022 compared to $1.50 billion at December 31, 2021 primarily due to a decrease in deposits offset by an increase in short-term borrowings.  Deposits were $1.28 billion as of December 31, 2022, representing a decrease of $180.3 million, or 12.4%, compared to December 31, 2021. The decrease in deposits was primarily related to a $96.4 million, or 8.5%, decrease in retail deposits, a $34.6 million, or 57.7%, decrease in deposits from BaaS customers, a $22.2 million, or 22.3%, decrease in deposits from digital asset customers, a $13.4 million, or 31.1%, decrease in mortgage warehouse deposits, a $9.6 million, or 8.5%, decrease in enterprise value deposits, and a $4.2 million, or 51.4%, decrease in renewable energy deposits. The decrease in deposits was partially offset by an increase in borrowings of $113.3 million primarily driven by an increase in overnight borrowings. 



As of December 31, 2022, shareholders’ equity was $207.5 million compared to $233.8 million at December 31, 2021, representing a decrease of $26.2 million, or 11.2%. The decrease was primarily due to net loss of $21.5 million, other comprehensive loss of $2.8 million, the repurchase of 180,434 shares of common stock for $2.9 million, and $2.0 million from dividends paid, partially offset by stock-based compensation expense of $1.9 million and employee stock ownership plan shares earned of $1.3 million.  



About Provident Bancorp, Inc.



BankProv, a subsidiary of Provident Bancorp, Inc. (NASDAQ: PVBC),  is a future-ready commercial bank for corporate clients, specializing in offering adaptive and technology-first banking solutions to niche markets. We are committed to offering state-of-the-art APIs (application programming interfaces) for all business clients and BaaS partners. Through our offerings, BankProv insures 100% of deposits through a combination of insurance provided by the Federal Deposit Insurance Corporation (FDIC) and the Depositors Insurance Fund (DIF). For more information about BankProv please visit our website www.bankprov.com or call 877-487-2977.



Forward-looking statements



This news release may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as, “expects,” “subject,” “believe,” “will,” “intends,” “may,” “will be” or “would.” These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements (which reflect management’s analysis of factors only as of the date of which they are given). These factors include: general economic conditions; the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers; global and national war and terrorism; trends in interest rates; inflation; potential recessionary conditions; levels of unemployment; legislative, regulatory and accounting changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve Bank; deposit flows; changes in consumer spending, borrowing and savings habits; competition; real estate values in the market area; loan demand; the adequacy of our allowance for loan losses, changes in the quality of our loan and securities portfolios; the ability of our borrowers to repay their loans; an unexpected adverse financial, regulatory or bankruptcy event experienced by our cryptocurrency, digital asset or financial technology (“fintech”) customers; our ability to retain key employees; failures or breaches of our IT systems, including cyberattacks; the failure to maintain current technologies; and the ability of the Company or the Bank to effectively manage its growth and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents of the Company files from time to time with the Securities and Exchange Commission, including Annual and Quarterly Reports on Forms 10-K and 10-Q, and Current Reports on Form 8-K.



Provident Bancorp, Inc.

Carol Houle, 603-334-1253

Interim Co-President and Co-Chief Executive Officer,

and Chief Financial Officer

choule@bankprov.com













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