pvbc-20230630x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ______________________

Commission File No. 001-39090

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		84-4132422
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

5 Market Street, Amesbury, Massachusetts		01913
(Address of Principal Executive Offices)		Zip Code

(978) 834-8555

(Registrant’s telephone number)


	N/A

(Former name, former address, and former fiscal year if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	PVBC	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	o	Accelerated Filer	o
Non-accelerated Filer	x	Smaller Reporting Company	x
Emerging Growth Company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

As of August 4, 2023, there were 17,685,720 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.

‎

Provident Bancorp, Inc.

Form 10-Q


Part I.	Financial Information	Page

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	2

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	44

Part II.	Other Information	45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

Signatures		47

Part I.Financial Information

Item 1.Financial Statements

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS



	At		At
	June 30,		December 31,
	2023		2022
(Dollars in thousands)	(unaudited)
Assets
Cash and due from banks	$	32,254	$	42,923
Short-term investments		265,604		37,706
Cash and cash equivalents		297,858		80,629
Debt securities available-for-sale (at fair value)		27,656		28,600
Federal Home Loan Bank stock, at cost		3,309		4,266
Loans, net of allowance for credit losses of $23,981, and $28,069 as of
June 30, 2023 and December 31, 2022, respectively		1,333,564		1,416,047
Bank owned life insurance		44,153		43,615
Premises and equipment, net		13,400		13,580
Other repossessed assets		—		6,051
Accrued interest receivable		5,007		6,597
Right-of-use assets		3,861		3,942
Deferred tax asset, net		15,722		16,793
Other assets		17,057		16,261
Total assets	$	1,761,587	$	1,636,381

Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing	$	404,012	$	520,226
Interest-bearing		1,044,074		759,356
Total deposits		1,448,086		1,279,582
Borrowings:
Short-term borrowings		70,000		108,500
Long-term borrowings		9,763		18,329
Total borrowings		79,763		126,829
Operating lease liabilities		4,227		4,282
Other liabilities		14,439		18,146
Total liabilities		1,546,515		1,428,839
Shareholders' equity:
Preferred stock; authorized 50,000 shares:
no shares issued and outstanding		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized;
17,684,720 and 17,669,698 shares issued and outstanding
at June 30, 2023 and December 31, 2022, respectively		177		177
Additional paid-in capital		123,444		122,847
Retained earnings		100,894		94,630
Accumulated other comprehensive loss		(1,891)		(2,200)
Unearned compensation - ESOP		(7,552)		(7,912)
Total shareholders' equity		215,072		207,542
Total liabilities and shareholders' equity	$	1,761,587	$	1,636,381

The accompanying notes are an integral part of the unaudited consolidated financial statements.

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(Dollars in thousands, except per share data)	2023		2022		2023		2022
Interest and dividend income:
Interest and fees on loans	$	19,652	$	18,558	$	39,658	$	36,770
Interest and dividends on debt securities available-for-sale		246		194		484		373
Interest on short-term investments		2,978		400		3,361		459
Total interest and dividend income		22,876		19,152		43,503		37,602
Interest expense:
Interest on deposits		7,670		476		11,571		931
Interest on short-term borrowings		230		—		1,054		—
Interest on long-term borrowings		74		71		160		141
Total interest expense		7,974		547		12,785		1,072
Net interest and dividend income		14,902		18,605		30,718		36,530
Credit loss (benefit) expense - loans		(740)		1,005		2,195		1,088
Credit loss (benefit) expense - off-balance sheet credit exposures		(327)		36		(1,483)		36
Total credit loss (benefit) expense		(1,067)		1,041		712		1,124
Net interest and dividend income after credit loss (benefit) expense		15,969		17,564		30,006		35,406
Noninterest income:
Customer service fees on deposit accounts		769		619		1,748		1,200
Service charges and fees - other		527		452		978		828
Bank owned life insurance income		272		258		538		514
Gain on loans sold, net		—		187		—		284
Other income		134		36		385		46
Total noninterest income		1,702		1,552		3,649		2,872
Noninterest expense:
Salaries and employee benefits		8,109		7,322		16,653		14,511
Occupancy expense		421		398		842		837
Equipment expense		151		143		295		281
Deposit insurance		368		154		646		305
Data processing		374		344		735		679
Marketing expense		161		70		244		197
Professional fees		919		709		2,322		1,437
Directors' compensation		164		267		364		521
Software depreciation and implementation		483		327		900		621
Insurance expense		450		448		902		895
Service fees		281		225		517		433
Write down of other assets and receivables		—		—		—		395
Other		870		900		1,542		1,606
Total noninterest expense		12,751		11,307		25,962		22,718
Income before income tax expense		4,920		7,809		7,693		15,560
Income tax expense		1,459		2,190		2,129		4,416
Net income	$	3,461	$	5,619	$	5,564	$	11,144
Earnings per share:
Basic	$	0.21	$	0.34	$	0.34	$	0.68
Diluted		0.21	$	0.33	$	0.34	$	0.66
Weighted Average Shares:
Basic		16,568,664		16,460,248		16,549,751		16,488,941
Diluted		16,570,017		16,882,933		16,550,666		16,957,186

The accompanying notes are an integral part of the unaudited consolidated financial statements.

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
(In thousands)
Net income	$	3,461	$	5,619	$	5,564	$	11,144
Other comprehensive income:
Unrealized holding (losses) gains arising during the period on debt securities available-for-sale		(419)		(1,340)		400		(3,001)
Unrealized (loss) gain		(419)		(1,340)		400		(3,001)
Income tax effect		97		309		(91)		696
Total other comprehensive(loss) income		(322)		(1,031)		309		(2,305)
Comprehensive income	$	3,139	$	4,588	$	5,873	$	8,839

The accompanying notes are an integral part of the unaudited consolidated financial statements.

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)



	For the three months ended June 30, 2023 and 2022
									Accumulated
	Shares of				Additional				Other		Unearned
	Common		Common		Paid-in		Retained		Comprehensive		Compensation
(In thousands, except share data)	Stock		Stock		Capital		Earnings		Income (Loss)		ESOP		Total
Balance, March 31, 2023		17,693,818	$	177	$	123,144	$	97,432	$	(1,569)	$	(7,732)	$	211,452
Net income		—		—		—		3,461		—		—		3,461
Dividends forfeited		—		—		—		1		—		—		1
Other comprehensive loss		—		—		—		—		(322)		—		(322)
Stock-based compensation expense, net of forfeitures		—		—		332		—		—		—		332
Restricted stock award grants, net of forfeitures		(6,126)		—		—		—		—		—		—
Shares surrendered related to tax withholdings on restricted stock awards		(2,972)		—		(21)		—		—		—		(21)
ESOP shares earned		—		—		(11)		—		—		180		169
Balance, June 30, 2023		17,684,720	$	177	$	123,444	$	100,894	$	(1,891)	$	(7,552)	$	215,072

Balance, March 31, 2022		17,796,542	$	178	$	122,504	$	122,939	$	(625)	$	(8,451)	$	236,545
Net income		—		—		—		5,619		—		—		5,619
Dividends declared ($0.04 per share)		—		—		—		(668)		—		—		(668)
Other comprehensive loss		—		—		—		—		(1,031)		—		(1,031)
Stock-based compensation expense, net of forfeitures		—		—		468		—		—		—		468
Restricted stock award grants, net of forfeitures		9,500		—		—		—		—		—		—
Repurchase of common stock		(85,205)		(1)		(1,336)		—		—		—		(1,337)
Shares surrendered related to tax withholdings on restricted stock awards		(2,315)		—		(36)		—		—		—		(36)
ESOP shares earned		—		—		170		—		—		179		349
Balance, June 30, 2022		17,718,522	$	177	$	121,770	$	127,890	$	(1,656)	$	(8,272)	$	239,909

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

(Unaudited)


		For the six months ended June 30, 2023 and 2022
									Accumulated
	Shares of				Additional				Other		Unearned
	Common		Common		Paid-in		Retained		Comprehensive		Compensation
(In thousands, except share data)	Stock		Stock		Capital		Earnings		(Loss) Income		ESOP		Total
Balance, December 31, 2022		17,669,698	$	177	$	122,847	$	94,630	$	(2,200)	$	(7,912)	$	207,542
Cumulative effect of change in accounting principle (Note 4)		—		—		—		696		—		—		696
Balance at January 1, 2023 (as adjusted for change in accounting principal)		17,669,698		177		122,847		95,326		(2,200)		(7,912)		208,238
Net income		—		—		—		5,564		—		—		5,564
Dividends forfeited		—		—		—		4		—		—		4
Other comprehensive income		—		—		—		—		309		—		309
Stock-based compensation expense, net of forfeitures		—		—		651		—		—		—		651
Restricted stock award grants, net of forfeitures		10,421		—		—		—		—		—		—
Shares surrendered related to tax withholdings on restricted stock awards		(3,182)		—		(23)		—		—		—		(23)
Stock options exercised, net		7,783		—		(27)		—		—		—		(27)
ESOP shares earned		—		—		(4)		—		—		360		356
Balance, June 30, 2023		17,684,720	$	177	$	123,444	$	100,894	$	(1,891)	$	(7,552)	$	215,072

Balance, December 31, 2021		17,854,649	$	179	$	123,498	$	118,087	$	649	$	(8,631)	$	233,782
Net income		—		—		—		11,144		—		—		11,144
Dividends declared ($0.08 per share)		—		—		—		(1,341)		—		—		(1,341)
Other comprehensive loss		—		—		—		—		(2,305)		—		(2,305)
Stock-based compensation expense, net of forfeitures		—		—		913		—		—		—		913
Restricted stock award grants, net of forfeitures		29,920		—		—		—		—		—		—
Repurchase of common stock		(180,434)		(2)		(2,858)		—		—		—		(2,860)
Shares surrendered related to tax withholdings on restricted stock awards		(2,517)		—		(40)		—		—		—		(40)
Stock options exercised, net		16,904		—		(116)		—		—		—		(116)
ESOP shares earned		—		—		373		—		—		359		732
Balance, June 30, 2022		17,718,522	$	177	$	121,770	$	127,890	$	(1,656)	$	(8,272)	$	239,909

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,
(In thousands)	2023		2022
Cash flows from operating activities:
Net income	$	5,564	$	11,144
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion		79		102
ESOP expense		356		732
Change in deferred loan fees, net		(990)		(884)
Provision for credit losses		712		1,124
Depreciation and amortization		541		542
Decrease (increase) in accrued interest receivable		1,590		(62)
Deferred tax expense		731		1,247
Share-based compensation expense		651		913
Bank-owned life insurance income		(538)		(514)
Principal repayments of operating lease obligations		(55)		(52)
Gain on loans sold, net		—		(284)
Gain on sale of other repossessed assets		(166)		—
Write down of other repossessed assets		21		—
Net increase in other assets		(796)		(2,591)
Net decrease in other liabilities		(3,867)		(5,345)
Net cash provided by operating activities		3,833		6,072

Cash flows from investing activities:
Proceeds from pay downs, maturities and calls of debt securities available-for-sale		1,265		2,565
Redemption (purchase) of Federal Home Loan Bank stock		957		(2,958)
Loan principal collections net of originations		83,866		(75,927)
Proceeds from loan sales		—		15,851
Proceeds from other repossessed asset sales		6,196		—
Proceeds from principal repayments on loans held for sale		—		2,560
Additions to premises and equipment		(280)		(94)
Net cash used in (provided by) investing activities		92,004		(58,003)

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)



	Six Months Ended
	June 30,
(In thousands)	2023		2022
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing accounts		(116,214)		48,824
Net increase (decrease) in interest-bearing accounts		284,718		(68,847)
Net cash dividends forfeited (paid) on common stock		4		(1,341)
Payments from exercise of stock options, net		(27)		(116)
Net change in short-term borrowings		(38,500)		78,000
Repayments of Federal Home Loan Bank long-term advances		(8,566)		—
Shares surrendered related to tax withholdings on restricted stock awards		(23)		(40)
Repurchase of common stock		—		(2,860)
Net cash provided by financing activities		121,392		53,620
Net increase in cash and cash equivalents		217,229		1,689
Cash and cash equivalents at beginning of period		80,629		153,115
Cash and cash equivalents at end of period	$	297,858	$	154,804

Supplemental disclosures:
Interest paid	$	11,589	$	931
Income taxes paid		136		3,029
Reclassification of loans held for sale to loans held for investment		—		9,599

The accompanying notes are an integral part of the unaudited consolidated financial statements.

‎

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., (the “Company”) were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and six-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. Certain amounts in 2022 have been reclassified to be consistent with the 2023 consolidated financial statement presentation, which had no effect on the net income reported in the consolidated statements of income. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary BankProv (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation, 5 Market Street Security Corporation, and Prov 1, LLC. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. Prov 1, LLC was established to engage in any lawful act or activity for which limited liability companies may be organized. All significant inter-company balances and transactions have been eliminated in consolidation.

(2) Corporate Structure

The Company is a Maryland corporation whose primary purpose is to act as the holding company for the Bank. The Bank, headquartered in Amesbury, Massachusetts, operates its business from seven banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Bedford, and Seabrook, New Hampshire. The Bank also has loan production offices in Boston, Massachusetts and Ponte Vedra, Florida. The Bank’s primary deposit products are checking, savings, and term certificate accounts and its primary lending products are commercial real estate, commercial, and mortgage warehouse loans. BankProv is also a commercial bank for corporate clients, specializing in offering adaptive and technology-first banking solutions to niche markets.

(3) Risks and Uncertainties

Digital Asset Lending

The Company’s digital asset loan segment includes loans to digital asset customers, which can be secured by a security interest in the digital assets, cash, a security in the purchased mining equipment or a combination of these. As of June 30, 2023, we had a total of $16.8 million in outstanding loans, all to one digital asset customer, and all of which was on non-accrual and was individually analyzed for reserves, which totaled $7.2 million. The $16.8 million loan relationship was modified to provide a term extension during the quarter ended June 30, 2023, and is currently performing in accordance with the modified terms.

The estimates and assumptions that went into the valuation of the collateral on individually analyzed loans secured by cryptocurrency mining rigs were based on market data as of June 30, 2023. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The Bitcoin markets as well as the markets for cryptocurrency mining rigs are highly volatile and speculative and subject to a variety of risks, including market and liquidity risks. Changes in market driven factors, among others, could have a material impact on the values reported at June 30, 2023.

In the event of further deterioration in the value of the collateral of individually analyzed loans to digital asset customers the Company could recognize additional increases in credit loss expense and the allowance for credit losses. In addition, the Company may also see increases in loan workout expenses related to the portfolio of loans to digital asset customers.

Current Banking Environment

Industry events have led to a greater focus by institutions, investors and regulators on liquidity positions of and funding sources for financial institutions, the composition of their deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management.

The Company believes it is well insulated from the fallout resulting from the market turmoil due to the following considerations:

The Bank’s deposit and loan portfolios were and continue to be well-diversified;

As of June 30, 2023, the Federal Deposit Insurance Fund (“FDIC”) insured 52.6% of our customers’ deposits and the remaining 47.4% were insured through the Depositors Insurance Fund (“DIF”);

We have access to multiple funding sources and sufficient capacity to borrow, if needed, as of June 30, 2023 between the Federal Home Loan Bank of Boston and the Federal Reserve Bank of Boston’s borrower-in-custody program, we had the ability to borrow an additional $239.2 million;

Our securities portfolio represented only 1.6% of total assets, as of June 30, 2023 and the accumulated other comprehensive loss on the portfolio was $1.9 million, or 0.9% of shareholders’ equity as of that date. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Based on our ability to borrow, cash position and low deposit outflows there is no expected reliance on security sales to meet operational needs.

(4) Recent Accounting Pronouncements

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit lost (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance-sheet (“OBS”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company reported a net increase to retained earnings of $696,000 as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment included a $2.6 million increase to retained earnings to adjust the allowance for credit losses on loans based on the new methodology offset by a decrease to retained earnings of $1.6 million to adjust the allowance for credit losses on OBS credit exposures based on the new methodology and a $249,000 decrease to retained earnings to account for the net tax impact of these adjustments.

The following table illustrates the impact of ASC 326.


	January 1, 2023
	As Reported				Impact of
	Under		Pre-ASC 326		ASC 326
(In thousands)	ASC 326		Adoption		Adoption
Assets:
Loans
Commercial real estate	$	4,317	$	5,062	$	(745)
Commercial		2,871		3,582		(711)
Enterprise value		7,442		7,712		(270)
Digital asset		10,336		10,493		(157)
Residential real estate		61		43		18
Construction and land development		396		909		(513)
Consumer		4		55		(51)
Mortgage warehouse		54		213		(159)
Allowance for credit loss on loans		25,481		28,069		(2,588)
Liabilities:
Allowance for credit losses on off balance sheet credit exposures		1,864		221		1,643

Also on January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and amends guidance on “vintage disclosures” to required disclosures of current-period gross write-offs by year of origination. The ASC also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrower experiencing financial difficulty.

The Company adopted ASU 2022-02, using the modified retrospective approach, with no material impact to the financial statements. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2022-02 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company selected the Secured Overnight Financing Rate (“SOFR”) as its primary alternative to LIBOR and used alternative reference rates, based on the individual needs of its customers and the type of credit being extended, when necessary. Legacy LIBOR-based loans transitioned to an alternative reference rate on or before June 30, 2023. The adoption of ASU 2020-04 did not result in a material impact the Company’s Consolidated Financial Statements.

(5) Debt Securities

Debt securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are valued at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

The following table summarizes the amortized cost, allowance for credit losses, and fair value of debt securities available-for-sale at June 30, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:



	Amortized		Gross		Gross			Allowance
	Cost		Unrealized		Unrealized			for Credit	Fair
(In thousands)	Basis		Gains		Losses			Losses	Value
June 30, 2023
State and municipal securities	$	11,840	$	2	$	646	$	—	$	11,196
Asset-backed securities		6,945		—		825		—		6,120
Government mortgage-backed securities		11,328		—		988		—		10,340
Total debt securities available-for-sale	$	30,113	$	2	$	2,459	$	—	$	27,656

The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:


	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
(In thousands)	Basis		Gains		Losses		Value
December 31, 2022
State and municipal securities	$	11,894	$	2	$	825	$	11,071
Asset-backed securities		7,197		—		923		6,274
Government mortgage-backed securities		12,366		—		1,111		11,255
Total debt securities available-for-sale	$	31,457	$	2	$	2,859	$	28,600

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.

Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

There were no realized gains or losses on sales and calls of securities during the six months ended June 30, 2023 or June 30, 2022.

Securities with carrying amounts of $8.9 million and $9.8 million were pledged to secure available borrowings with the Federal Home Loan Bank at June 30, 2023 and December 31, 2022, respectively.

The scheduled maturities of debt securities at June 30, 2023 are summarized in the table below. Actual maturities of asset and mortgage-backed securities may differ from contractual maturities because the assets and mortgages underlying the securities may be repaid without any penalties. Because asset- and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.



	Available-for-Sale
	Amortized		Fair
(In thousands)	Cost		Value
Due after one year through five years	$	863	$	844
Due after five years through ten years		1,468		1,464
Due after ten years		9,509		8,888
Government mortgage-backed securities		11,328		10,340
Asset-backed securities		6,945		6,120
	$	30,113	$	27,656

A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. There were no debt securities on non-accrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the six months ended June 30, 2023 or June 30, 2022.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at June 30, 2023 and December 31, 2022:



	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2023
Temporarily impaired securities:
State and municipal securities	$	1,978	$	14	$	7,785	$	632	$	9,763	$	646
Asset-backed securities		—		—		6,120		825		6,120		825
Government mortgage-backed securities		—		—		10,340		988		10,340		988
Total temporarily impaired debt securities	$	1,978	$	14	$	24,245	$	2,445	$	26,223	$	2,459

December 31, 2022
Temporarily impaired securities:
State and municipal	$	8,174	$	183	$	2,297	$	642	$	10,471	$	825
Asset-backed securities		2,322		182		3,951		741		6,273		923
Government mortgage-backed securities		7,428		474		3,827		637		11,255		1,111
Total temporarily impaired debt securities	$	17,924	$	839	$	10,075	$	2,020	$	27,999	$	2,859

The Company expects to recover its amortized cost basis on all debt securities. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell these securities in an unrealized loss position as of June 30, 2023, prior to this recovery.

The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position were not other-than-temporarily impaired at June 30, 2023:

State and municipal securities: At June 30, 2023, 15 of the 19 securities in the Company’s portfolio of state and municipal securities were in unrealized loss positions. Aggregate unrealized losses represented 5.5% of the amortized cost of state and municipal securities. The Company continually monitors the state and municipal securities sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the securities in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying downgrades during the quarter. All securities are performing.

Asset-backed securities: At June 30, 2023, all four of the securities in the Company’s portfolio of asset-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 11.9% of the amortized cost of asset-backed securities. The U.S. Small Business Administration (“SBA”) guarantees the contractual cash flows of all of the Company’s asset-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Government mortgage-backed securities: At June 30, 2023, all 33 of the securities in the Company’s portfolio of government mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 8.7% of the amortized cost of government mortgage-backed securities. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Allowance for Credit Losses – Available-For-Sale Securities:

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charged to earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities totaled $176,000 at June 30, 2023 and is excluded from the estimate of credit losses.

(6) Loans and Allowance for Credit Losses for Loans

Loans:

A summary of loans is as follows:


	At		At
	June 30,		December 31,
	2023		2022
(In thousands)	Amount		Amount
Commercial real estate	$	438,029	$	453,592
Commercial		187,965		216,931
Enterprise value		436,574		438,745
Digital asset (1)		16,768		40,781
Residential real estate		7,490		8,165
Construction and land development		96,757		72,267
Consumer		207		391
Mortgage warehouse		173,755		213,244
		1,357,545		1,444,116
Allowance for credit losses - loans		(23,981)		(28,069)
Net loans	$	1,333,564	$	1,416,047

(1)Includes $16.8 million and $26.5 million in loans secured by cryptocurrency mining rigs at June 30, 2023 and December 31, 2022, respectively.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the allowance for credit losses for loans. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred loan fees and costs. Accrued interest receivable totaled $4.8 million and $6.4 million at June 30, 2023 and December 31, 2022, respectively, and was reported as accrued interest receivable on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using either the level-yield or straight-line method without anticipating prepayments.

All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Credit Losses for Loans:

The allowance for credit losses for loans (“ACLL”) is a valuation account that is deducted from the amortized cost basis of the loans to present the net amount expected to be collected. Loans are charged off against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance and do not exceed the aggregate of amounts previously charged-off.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments:

Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts and New Hampshire. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, can have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

Commercial: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, can have an effect on the credit quality in this segment.

Enterprise value: Loans in this segment are made to small- and medium-size businesses in a senior secure position and are generally secured by the enterprise value of the business. The enterprise value consists of the going concern value of the business and takes into

account the value of business assets (both tangible and intangible). Repayment is expected from the cash flows of the business. Economic and industry specific conditions can affect on the credit quality of this segment.

Digital asset: Loans in this segment are made to businesses in the digital asset space and are generally secured by digital asset mining equipment or by the United States dollar (“USD”) value of digital currency assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, resultant decreased consumer spending as well as decreases in the value of digital currency can have an effect on the credit quality in this segment.

Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets, which is typically within 15 days of the loan closure. The primary source of repayment is the cash flow upon the sale of the loans. The credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.

Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Residential real estate: All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. We no longer originate residential real estate loans, and previously we did not typically originate loans with a loan-to-value ratio greater than 80% or grant subprime loans. Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance.

Management estimates the ACLL balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, gross domestic product or other relevant factors. Incorporated in the estimate for the ACLL is consideration of qualitative factors, which include the following for all loan pools:

Changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices.

Changes in the experience, depth, and ability of lending management.

Changes in the quality of the organization's loan review system.

The existence and effect of any concentrations of credit and changes in the levels of such concentrations.

The effect of other external factors (i.e. legal and regulatory requirements) on the level of estimated credit losses.

In addition to the above, the mortgage warehouse pool includes a qualitative factor for changes in international, national, regional, and local conditions as the ACLL model for this loan pool does not apply an economic regression model in the calculation of the historical loss rate.

The allowance for unfunded commitments is maintained at a level by the Company to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit).

The Company measures the ACLL using the following methods:


Portfolio Segment	Measurement Method	Loss Driver
Commercial real estate	Discounted cash flow	National unemployment rate, national GDP
Commercial	Discounted cash flow	National unemployment rate, national GDP
Enterprise value	Discounted cash flow	National unemployment rate, national GDP
Digital asset	Discounted cash flow	National unemployment rate, national GDP
Residential real estate	Discounted cash flow	National unemployment rate, national HPI
Construction and land development	Discounted cash flow	National unemployment rate, national GDP
Consumer	Discounted cash flow	National unemployment rate, national GDP
Mortgage warehouse	Remaining life method	Not applicable

When the discounted cash flow method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

When the remaining life method is used to determine the allowance for credit losses, a calculated loss rate is applied to the pool of loans based on the remaining life expectation of the pool. The remaining life expectation is based on management’s reasonable expectation at the reporting date.

Loans that do not share risk characteristics, whether or not they are performing in accordance with their loan terms, are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. The Company will individually evaluate a loan when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in making this determination include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Insignificant payment delays and payment shortfalls generally are not considered reason enough to individually analyze a loan. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. When management determines that a loan should be individually analyzed, expected credit losses are based on either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral at the reporting date, adjusted for selling costs, as appropriate.

The following table presents the activity in the allowance for credit losses for loans by portfolio segment for the three and six months ended June 30, 2023 and 2022:



	For the three months ended June 30,
(In thousands)	Commercial Real Estate		Commercial		Enterprise value		Digital asset		Residential ‎Real ‎Estate		Construction and Land Development		Consumer		Mortgage Warehouse		Total
Balance at March 31, 2023	$	4,249	$	2,615	$	10,161	$	7,219	$	57	$	470	$	3	$	38	$	24,812
Charge-offs		—		(126)		—		—		—		—		(13)		—		(139)
Recoveries		—		—		45		—		—		—		3		—		48
Provision (credit)		(180)		(112)		(512)		—		(2)		51		9		6		(740)
Balance at June 30, 2023	$	4,069	$	2,377	$	9,694	$	7,219	$	55	$	521	$	2	$	44	$	23,981

Balance at March 31, 2022	$	4,935	$	5,380	$	6,076	$	1,868	$	14	$	565	$	123	$	335	$	19,296
Charge-offs		—		(1,338)		—		—		—		—		(7)		—		(1,345)
Recoveries		—		5		—		—		—		—		11		—		16
Provision (credit)		(133)		189		407		502		—		173		(38)		(95)		1,005
Balance at June 30, 2022	$	4,802	$	4,236	$	6,483	$	2,370	$	14	$	738	$	89	$	240	$	18,972



	For the six months ended June 30,
(In thousands)	Commercial Real Estate		Commercial		Enterprise value		Digital asset		Residential ‎Real ‎Estate		Construction and Land Development		Consumer		Mortgage Warehouse		Total
Balance at December 31, 2022	$	5,062	$	3,582	$	7,712	$	10,493	$	43	$	909	$	55	$	213	$	28,069
Impact of adopting ASC 326		(745)		(711)		(270)		(157)		18		(513)		(51)		(159)		(2,588)
Charge-offs		—		(167)		(3,560)		—		—		—		(29)		—		(3,756)
Recoveries		—		10		45		—		—		—		6		—		61
Provision (credit)		(248)		(337)		5,767		(3,117)		(6)		125		21		(10)		2,195
Balance at June 30, 2023	$	4,069	$	2,377	$	9,694	$	7,219	$	55	$	521	$	2	$	44	$	23,981

Balance at December 31, 2021	$	4,889	$	5,371	$	6,158	$	2,012	$	38	$	479	$	168	$	381	$	19,496
Charge-offs		—		(1,338)		(351)		—		—		—		(35)		—		(1,724)
Recoveries		—		6		87		—		—		—		19		—		112
Provision (credit)		(87)		197		589		358		(24)		259		(63)		(141)		1,088
Balance at June 30, 2022	$	4,802	$	4,236	$	6,483	$	2,370	$	14	$	738	$	89	$	240	$	18,972

The following table presents loan delinquencies by portfolio segment at June 30, 2023 and December 31, 2022:


					90 Days		Total
	30 - 59		60 - 89		or More		Past		Total		Total
(In thousands)	Days		Days		Past Due		Due		Current		Loans
June 30, 2023
Commercial real estate	$	—	$	—	$	1	$	1	$	438,028	$	438,029
Commercial		—		—		32		32		187,933		187,965
Enterprise value		—		—		92		92		436,482		436,574
Digital asset		—		—		—		—		16,768		16,768
Residential real estate		117		2		213		332		7,158		7,490
Construction and
land development		—		—		—		—		96,757		96,757
Consumer		—		1		—		1		206		207
Mortgage warehouse		—		—		—		—		173,755		173,755
Total	$	117	$	3	$	338	$	458	$	1,357,087	$	1,357,545

December 31, 2022
Commercial real estate	$	240	$	—	$	1	$	241	$	453,351	$	453,592
Commercial		—		—		41		41		216,890		216,931
Enterprise value		—		—		92		92		438,653		438,745
Digital asset		—		—		—		—		40,781		40,781
Residential real estate		—		—		73		73		8,092		8,165
Construction and
land development		—		—		—		—		72,267		72,267
Consumer		—		9		—		9		382		391
Mortgage warehouse		—		—		—		—		213,244		213,244
Total	$	240	$	9	$	207	$	456	$	1,443,660	$	1,444,116

The following table presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days but still accruing as of June 30, 2023 and December 31, 2022:



	Non-accrual				90 Days
	With No				or More
	Allowance		Non-accrual		Past Due
(In thousands)	for Credit Loss		Loans		and Accruing
June 30, 2023
Commercial real estate	$	160	$	160	$	—
Commercial		70		70		—
Enterprise value		92		4,310		—
Digital asset		—		16,768		—
Residential real estate		—		361		—
Construction and
land development		—		—		—
Consumer		—		—		—
Mortgage warehouse		—		—		—
Total	$	322	$	21,669	$	—

December 31, 2022
Commercial real estate	$	56	$	56	$	—
Commercial		101		101		—
Enterprise value		92		92		—
Digital asset		—		26,488		—
Residential real estate		(70)		227		—
Construction and
land development		—		—		—
Consumer		—		—		—
Mortgage warehouse		—		—		—
Total	$	179	$	26,964	$	—

The Company did not recognize interest income on non-accrual loans during the six months ended June 30, 2023.

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2023:


	Commercial				Cryptocurrency
	Real		Business		Mining Rigs
(In thousands)	Estate		Assets		and Other (1)		Cash
Commercial real estate	$	19,849	$	—	$	—	$	—
Commercial		37		1		—		—
Enterprise value		—		4,218		—		92
Digital asset		—		—		16,768		—
Residential real estate		—		—		—		—
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
	$	19,886	$	4,219	$	16,768	$	92

(1)Other collateral includes the USD value of Bitcoin held in control accounts as well as cash accounts held at the Bank.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing the following modifications: principal forgiveness, other-than-insignificant payment delays, term extensions, interest rate reductions, or a combination of modifications. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses on loans.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table presents the amortized cost basis of loans at June 30, 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.


(Dollars in thousands)	Principal Forgiveness		Other-Than-Insignificant Payment Delay		Term Extension		Interest Rate Reduction		Term Extension and Interest Rate Reduction		Total Class of Financing Receivable $		Total Class of Financing Receivable %
June 30, 2023
Commercial	$	—	$	—	$	—	$	—	$	21	$	21	0.01	%
Enterprise value		—		21,023		—		—		—		21,023	4.82
Digital asset		—		—		16,580		—		—		16,580	98.88
Total	$	—	$	21,023	$	16,580	$	—	$	21	$	37,624	2.77	%

The Company has committed to lend an additional $50,000 based on fund availability through an existing line of credit to a borrower experiencing financial difficulty whose loans had been modified during the six months ended June 30, 2023.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the six months ended June 30, 2023:


	Weighted-Average Payment Delay	Weighted-Average Term Extension	Weighted-Average Term Extension and Interest Rate Reduction
	Months	Months	Months	Percentage
June 30, 2023
Commercial	—	—	4	3.25	%
Enterprise value	5	—	—	—	%
Digital asset	—	3	—	—	%

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. As of June 30, 2023, there were no past due balances or subsequent defaults related to loans modified during the six months ended June 30, 2023.

Prior to the Company’s adoption of ASU 2022-02 on January 1, 2023 (see Note 4 for additional information), loans were considered TDRs when the Company granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions could include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt could be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan could benefit the Company by increasing the ultimate probability of collection.

There were no new TDRs entered into during the six months ended June 30, 2022. The total recorded investment in TDRs was $20.6 million at June 30, 2022 and as of that date there were no material commitments to lend additional funds to borrowers whose loans had been restructured.

Credit Quality Information

The Company utilizes a seven grade internal loan risk rating system for commercial real estate, construction and land development, and commercial loans as follows:

Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7: Loans in this category are considered uncollectible “loss” and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, and commercial loans.

On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.

For residential real estate loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.

Consumer loans are not formally rated.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	Term Loans at Amortized Cost by Origination Year
(In thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term Loans		Total
Commercial Real Estate
Pass	$	18,014	$	54,463	$	73,090	$	31,353	$	62,710	$	138,942	$	19,420	$	—	$	397,992
Special mention		—		—		—		—		3,133		9,764		—		—		12,897
Substandard		—		—		—		1,048		4,518		21,573		—		—		27,139
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		1		—		—		—		—		—		1
Total commercial real estate		18,014		54,463		73,091		32,401		70,361		170,279		19,420		—		438,029
Commercial real estate
Current period gross write offs		—		—		—		—		—		—		—		—		—
Commercial
Pass		3,173		12,389		54,060		15,151		17,563		29,048		42,689		—		174,073
Special mention		—		—		—		—		11		9,955		1,295		—		11,261
Substandard		—		—		205		—		1,959		239		225		—		2,628
Doubtful		—		—		—		—		1		—		—		—		1
Loss		—		—		—		—		—		2		—		—		2
Total commercial		3,173		12,389		54,265		15,151		19,534		39,244		44,209		—		187,965
Commercial
Current period gross write offs		—		—		—		—		101		66		—		—		167

Enterprise Value
Pass	35,659	118,822	132,858	54,563	29,175	7,716	15,886	—	394,679
Special mention	—	12,658	6,473	4,827	2,763	1,662	9,201	—	37,584
Substandard	—	—	—	—	—	3,438	780	—	4,218
Doubtful	—	—	—	—	—	92	—	—	92
Loss	—	—	—	2	1	(2)	—	—	1
Total enterprise value	35,659	131,480	139,331	59,392	31,939	12,906	25,867	—	436,574
Enterprise value
Current period gross write offs	—	3,560	—	—	—	—	—	—	3,560
Digital Asset
Pass	—	—	—	—	—	—	—	—	—
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	16,580	188	—	—	—	—	—	16,768
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total digital asset	—	16,580	188	—	—	—	—	—	16,768
Digital asset
Current period gross write offs	—	—	—	—	—	—	—	—	—
Residential Real Estate
Pass	—	—	—	—	193	3,868	2,716	347	7,124
Substandard	—	—	—	5	—	291	70	—	366
Total residential real estate	—	—	—	5	193	4,159	2,786	347	7,490
Residential real estate
Current period gross write offs	—	—	—	—	—	—	—	—	—
Construction and Land Development
Pass	12	44,761	49,394	—	—	1,539	1,051	—	96,757
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total construction and land development	12	44,761	49,394	—	—	1,539	1,051	—	96,757
Construction and land development
Current period gross write offs	—	—	—	—	—	—	—	—	—
Consumer
Not formally rated	—	—	—	—	119	—	88	—	207
Total consumer	—	—	—	—	119	—	88	—	207
Consumer
Current period gross write offs	—	—	—	—	12	17	—	—	29
Mortgage Warehouse
Pass	—	—	—	—	—	—	173,755	—	173,755
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total mortgage warehouse	—	—	—	—	—	—	173,755	—	173,755

Mortgage warehouse

Current period gross write offs

—

The following table presents the Company’s loans by risk rating and portfolio segment at December 31, 2022:



(In thousands)	Commercial Real Estate		Commercial		Enterprise Value		Digital Asset		Residential Real Estate			Construction ‎and Land ‎Development	Consumer		Mortgage Warehouse		Total
December 31, 2022
Grade:
Pass	$	399,455	$	202,895	$	408,616	$	4,724	$	7,938	$	72,267	$	—	$	213,244	$	1,309,139
Special mention		26,995		11,015		20,091		9,569		—		—		—		—		67,670
Substandard		27,141		2,854		9,946		26,488		227		—		—		—		66,656
Doubtful		—		165		92		—		—		—		—		—		257
Loss		1		2		—		—		—		—		—		—		3
Not formally rated		—		—		—		—		—		—		391		—		391
Total	$	453,592	$	216,931	$	438,745	$	40,781	$	8,165	$	72,267	$	391	$	213,244	$	1,444,116

(7) Deposits

A summary of deposit balances, by type is as follows:



	At		At
	June 30,		December 31,
(In thousands)	2023		2022
Noninterest-bearing:
Demand (1)	$	404,012	$	520,226
Interest-bearing:
NOW		111,701		145,533
Regular savings		159,940		141,802
Money market deposits		530,964		318,417
Certificates of deposit:
Certificate accounts of $250,000 or more		20,869		11,449
Certificate accounts less than $250,000		220,600		142,155
Total interest-bearing (2)		1,044,074		759,356
Total deposits (3)	$	1,448,086	$	1,279,582

(1)Noninterest-bearing deposits included $37.8 million and $20.8 million in Banking as a Service (“BaaS”) and digital assets deposits, respectively, as of June 30, 2023. Noninterest-bearing deposits included $25.3 million and $55.2 million in BaaS and digital assets deposits, respectively, as of December 31, 2022.

(2)Interest-bearing deposits included $197.9 million and $4.4 million in BaaS and digital assets deposits, respectively, as of June 30, 2023. As of December 31, 2022, there were no interest-bearing BaaS deposits, and $22.2 million interest-bearing digital assets deposits.

(3)Of total deposits as of June 30, 2023 and December 31, 2022, the Federal Deposit Insurance Corporation (“FDIC”) insured approximately 53% and 55%, respectively, and the remaining 47% and 45%, respectively, were insured through the Depositors Insurance Fund (“DIF”). The DIF is a private, industry-sponsored insurance fund that insures all deposits above FDIC limits at member banks.

(8) Borrowings

Advances consist of funds borrowed from the Federal Home Loan Bank (the “FHLB”). Maturities of advances from the FHLB as of June 30, 2023 are summarized as follows:



(In thousands)
Fiscal Year-End
2023	$	70,066
2024		134
2025		5,136
2026		138
2027		139
Thereafter		4,150
Total	$	79,763

Borrowings from the FHLB are secured by qualified collateral, consisting primarily of certain commercial real estate loans, qualified mortgage-backed government securities and certain loans with mortgages secured by one- to four-family properties. At June 30, 2023, borrowings from the FHLB consisted of short-term borrowings, with original maturities of less than one year, totaling $70.0 million and long-term borrowings, with original maturities more than one year, totaling $9.8 million. The interest rate on FHLB short-term borrowings was 5.27% at June 30, 2023. The interest rates on FHLB long-term advances ranged from 1.21% to 1.32%, with a weighted average interest rate of 1.28% at June 30, 2023.

(9) Other Repossessed Assets

During 2022, the Company repossessed cryptocurrency mining rigs in exchange for the forgiveness of a loan relationship. The repossessed cryptocurrency mining rigs were reported as other repossessed assets at their fair value less costs to sell. These other repossessed assets were subsequently accounted for at lower of cost or fair value less estimated costs to sell. The estimates and assumptions that went into the valuation of the repossessed cryptocurrency mining rigs held as repossessed assets, were based on market data and sales reported by the company.

Activity related to other repossessed assets, which consists of cryptocurrency mining rigs, was as follows:


(In thousands)	Amount
Net balance of other repossessed assets at December 31, 2022	$	6,051
Direct write-downs		(21)
Sales of other repossessed assets		(6,030)
Net balance of other repossessed assets at June 30, 2023	$	—

Activity in the valuation allowance was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2023		2022		2023		2022
Beginning balance	$	—	$	—	$	597	$	—
Reductions from sales of other repossessed assets		—		—		(597)		—
Ending balance	$	—	$	—	$	—	$	—

There were no other repossessed assets outstanding for the three months ended June 30, 2023 and June 30, 2022, and therefore there were no related gains or expenses recognized during those periods. For the six months ended June 30, 2023 the Company recognized $166,000 in net gain on sales of other repossessed assets and $115,000 in operating expenses. There were no other repossessed assets outstanding during the six months ended June 30, 2022 and therefore there were no related gains or expenses recognized during that period.

(10) Fair Value Measurements

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in

an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Basis of Fair Value Measurements

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Values of Assets Measured on a Recurring Basis

The Company’s investments in state and municipal, asset-backed and government mortgage-backed debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The following summarizes financial instruments measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022:



	Fair Value Measurements at Reporting Date Using
					Significant		Significant
					Other Observable		Unobservable
					Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2023
State and municipal securities	$	11,196	$	—	$	11,196	$	—
Asset-backed securities		6,120		—		6,120		—
Government mortgage-backed securities		10,340		—		10,340		—
Totals	$	27,656	$	—	$	27,656	$	—

December 31, 2022
State and municipal securities	$	11,071	$	—	$	11,071	$	—
Asset-backed securities		6,274		—		6,274		—
Government mortgage-backed securities		11,255		—		11,255		—
Totals	$	28,600	$	—	$	28,600	$	—

Fair Values of Assets Measured on a Non-Recurring Basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

Certain loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Other repossessed assets, which consists of repossessed cryptocurrency mining rigs, were accounted for at fair value. Future adjustments, if any, will be recorded directly as an adjustment to current earnings. Fair value was measured using the appraised values of the cryptocurrency mining rigs and adjusted as necessary by management based on unobservable inputs.

The following summarizes assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:



	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2023
Loans
Enterprise value	$	1,835	$	—	$	—	$	1,835
Digital asset		9,549		—		—		9,549
Totals	$	11,384	$	—	$	—	$	11,384

December 31, 2022
Loans
Commercial	$	16,817	$	—	$	—	$	16,817
Other repossessed assets		6,051		—		—		6,051
Totals	$	22,868	$	—	$	—	$	22,868

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022:



(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
June 30, 2023
Loans
Enterprise value	$	1,835	Business or collateral valuation	Comparable company or collateral evaluations	0% - 7%
Digital asset		9,549	Asset valuation	Comparable asset evaluations	0% - 1%

December 31, 2022
Loans
Commercial	$	16,817	Business or collateral valuation	Comparable company or collateral evaluations	0% - 10%
Other repossessed assets		6,051	Asset valuation	Comparable asset evaluations	0% - 3%

At June 30, 2023, the contractual balance of loans measured at fair value on a nonrecurring basis was $6.2 million, net of reserves of $2.5 million and charge-offs of $1.7 million for the enterprise value segment, and $18.1 million, net of reserves of $7.2 million and interest paid to principal of $1.3 million for the digital asset segment. At December 31, 2022, the contractual balance of commercial loans measured at fair value on a nonrecurring basis was $28.7 million, net of reserves of $10.1 million and charge-offs of $1.8 million.

During 2022, the Company repossessed cryptocurrency mining rigs in exchange for the forgiveness of a loan relationship. The repossessed cryptocurrency mining rigs were reported as other repossessed assets and are accounted for at the lower of cost or fair value less estimated costs to sell. At December 31, 2022, other repossessed assets were $6.1 million.

Fair Values of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying amounts and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows at June 30, 2023 and December 31, 2022:



	Carrying		Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
June 30, 2023
Financial assets:
Cash and cash equivalents	$	297,858	$	297,858	$	—	$	—	$	297,858
Available-for-sale debt securities		27,656		—		27,656		—		27,656
Federal Home Loan Bank of Boston stock		3,309		N/A		N/A		N/A		N/A
Loans, net		1,333,564		—		—		1,232,255		1,232,255
Accrued interest receivable		5,007		—		5,007		—		5,007
Financial liabilities:
Deposits		1,448,086		—		1,448,873		—		1,448,873
Borrowings		79,763		—		79,513		—		79,513

December 31, 2022
Financial assets:
Cash and cash equivalents	$	80,629	$	80,629	$	—	$	—	$	80,629
Available-for-sale debt securities		28,600		—		28,600		—		28,600
Federal Home Loan Bank of Boston stock		4,266		N/A		N/A		N/A		N/A
Loans, net		1,416,047		—		—		1,341,633		1,341,633
Accrued interest receivable		6,597		—		6,597		—		6,597
Other repossessed assets		6,051		—		—		6,051		6,051
Financial liabilities:
Deposits		1,279,582		—		1,279,665		—		1,279,665
Borrowings		126,829		—		124,590		—		124,590

(11) Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of June 30, 2023 and December 31, 2022, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At June 30, 2023, the Bank exceeded the regulatory requirement for the capital conservation buffer.

Federal banking agencies regulations establish a community bank leverage ratio (“CBLR”) framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that qualifies for and elects to use the CBLR framework and that maintains a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for federal law. As of June 30, 2023, the Bank has not opted into the CBLR framework.

The Bank’s actual capital amounts and ratios are presented in the following table.



										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio			Amount		Ratio
June 30, 2023
Total Capital (to Risk Weighted Assets)	$	207,287	13.32	%	$	124,452	>	8.0	%	$	155,565	>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)		187,781	12.07			93,339	>	6.0			124,452	>	8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		187,781	12.07			70,004	>	4.5			101,117	>	6.5
Tier 1 Capital (to Average Assets)		187,781	10.95			68,622	>	4.0			85,777	>	5.0
December 31, 2022
Total Capital (to Risk Weighted Assets)	$	204,354	12.62	%	$	129,492	>	8.0	%	$	161,865	>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)		184,025	11.37			97,119	>	6.0			129,492	>	8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		184,025	11.37			72,839	>	4.5			105,212	>	6.5
Tier 1 Capital (to Average Assets)		184,025	11.17			65,916	>	4.0			82,395	>	5.0

Liquidation Accounts

Upon the completion of the Company’s initial stock offering in 2015 and the second step offering in 2019, liquidation accounts were established for the benefit of certain depositors of the Bank in amounts equal to:

1.The product of (i) the percentage of the stock issued in the initial stock offering in 2015 to persons other than Provident Bancorp, the top tier mutual holding company (“MHC”) of the Company and (ii) the net worth of the mid-tier holding company as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering; and

2.The MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company).

The Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the shareholder’s equity of the Bank, would be reduced below the amount of the respective liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.

Other Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking regulations restrict the amount of dividends that may be paid by the Bank in a year, without prior approval of regulatory agencies, to the amount by which net income of the Bank for the year plus the retained net income of the previous two years exceeds any net loss reported in those respective periods. For the six months ended June 30, 2023, the Bank reported net income of $5.5 million. For the years ended December 31, 2022 and 2021, the Bank reported a net loss of $21.5 million and net income of $16.1 million, respectively.

No dividends were paid during the six months ended June 30, 2023.

The Company may, at times, repurchase its own shares in the open market. Such transactions are subject to the Federal Reserve Board’s notice provisions for stock repurchases. In March 2021, the Company announced its plan to repurchase 1,400,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in compliance with applicable state and federal regulations. As of June 30, 2023, the Company had repurchased 1,145,479 shares of its outstanding common stock under this program, however, the Company did not repurchase any shares of its outstanding common stock under this program during the six months ended June 30, 2023.

(12) Employee Stock Ownership Plan

The Bank established an employee stock ownership plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified plan for the benefit of all Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired 1,538,868 shares between the initial and second-step stock offerings with the proceeds of a loan totaling $11.8 million. The loan is payable over 15 years at a rate per annum equal to 5.00%. Shares

used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,758.

Shares held by the ESOP include the following:



	June 30, 2023		December 31, 2022
Allocated		551,530		461,772
Committed to be released		44,879		89,758
Unallocated		942,459		987,338
Total		1,538,868		1,538,868

The fair value of unallocated shares was approximately $7.8 million at June 30, 2023.

Total compensation expense recognized in connection with the ESOP for the three months ended June 30, 2023 and 2022 was $169,000 and $349,000, respectively. Total compensation expense recognized for the six months ended June 30, 2023 and 2022 was $356,000 and $732,000, respectively.

(13) Earnings Per Common Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated ESOP shares, treasury stock and unvested restricted stock is not deemed outstanding for earnings per share calculations.



	Three Months Ended				Six Months Ended
(Dollars in thousands, except per share	June 30,		June 30,		June 30,		June 30,
dollar amounts)	2023		2022		2023		2022
Net Income attributable to common shareholders	$	3,461	$	5,619	$	5,564	$	11,144

Average number of common shares issued		17,688,826		17,765,817		17,687,448		17,810,916
Less:
average unallocated ESOP shares		(949,941)		(1,039,698)		(961,098)		(1,050,855)
average unvested restricted stock		(170,221)		(265,871)		(176,599)		(271,120)
Average number of common shares outstanding
to calculate basic earnings per common share		16,568,664		16,460,248		16,549,751		16,488,941

Effect of dilutive unvested restricted stock and stock option awards		1,353		422,685		915		468,245
Average number of common shares outstanding
to calculate diluted earnings per common share		16,570,017		16,882,933		16,550,666		16,957,186

Earnings per common share:
Basic	$	0.21	$	0.34	$	0.34	$	0.68
Diluted	$	0.21	$	0.33	$	0.34	$	0.66

Stock options for 1,235,342 and 198,627 shares of common stock were not considered in computing diluted earnings per common share for the three months ended June 30, 2023 and 2022, respectively, because they were anti-dilutive, meaning the exercise price for such options were higher than the average price for the Company for such period. For the six months ended June 30, 2023 and 2022, 1,360,013, and 185,022 shares, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.

(14) Share-Based Compensation

The shareholders of the Company approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on November 23, 2020, which is in addition to the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”, and collectively with the 2020 Equity Plan, the “Equity Plans”). Under the Equity Plans, the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plans, with 902,344 and 1,021,239 shares reserved for options under the 2016 Equity Plan and 2020 Equity Plan, respectively. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 360,935 and 408,495 under the 2016 Equity Plan and 2020 Equity Plan, respectively. The value of restricted stock grants is based on the market price of the stock on grant date. Options and awards vest ratably over three to five years. The Company has elected to recognize forfeitures of awards as they occur.

Expense related to options and restricted stock granted to directors is recognized in directors’ compensation within non-interest expense.

Stock Options

The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

Expected volatility is based on historical volatility of the Company’s common stock price.

Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.

The dividend yield assumption is based on the Company’s expectation of dividend payouts.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date:



	2023
Vesting period (years)		5
Expiration date (years)		10
Expected volatility		36.56%
Expected life (years)		7.5
Expected dividend yield		1.67%
Risk free interest rate		3.45%
Fair value per option	$	3.58

A summary of the status of the Company’s stock option grants for the three months ended June 30, 2023 is presented below:



	Stock Option Awards		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2022		1,467,876	$	11.00
Granted		158,100		9.55
Forfeited		(47,700)		14.56
Expired		(150,448)		11.67
Exercised		(225,565)		8.61
Outstanding at June 30, 2023		1,202,263	$	10.37		6.55	$	—
Outstanding and expected to vest at June 30, 2023		1,202,263	$	10.37		6.55	$	—
Vested and Exercisable at June 30, 2023		637,027	$	11.03		5.02	$	—
Unrecognized compensation cost	$	1,977,000
Weighted average remaining recognition period (years)		3.33

For the three months ended June 30, 2023 and 2022, expense for the stock options was $164,000 and $218,000, respectively. For the six months ended June 30, 2023 and 2022, total expense for the stock options was $320,000 and $426,000, respectively. No stock options were exercised during the three months ended June 30, 2023 or 2022. The intrinsic value of options exercised was $97,000 and $425,000 for the six months ended June 30, 2023 and 2022, respectively. The tax benefit from option exercises was $27,000 and $101,000 for the six months ended June 30, 2023 and 2022, respectively.

Restricted Stock

Shares issued upon the granting of restricted stock may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plans. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.

The following table presents the activity in restricted stock awards under the Equity Plans for the three months ended June 30, 2023:



	Unvested Restricted Stock Awards		Weighted Average Grant Date Price
Unvested restricted stock awards at December 31, 2022		192,748	$	13.16
Granted		29,515		9.55
Forfeited		(19,094)		14.56
Vested		(15,594)		15.59
Unvested restricted stock awards at June 30, 2023		187,575	$	12.25
Unrecognized compensation cost	$	1,956,000
Weighted average remaining recognition period (years)		3.15

For the three months ended June 30, 2023 and 2022, expense for the restricted stock awards was $168,000 and $250,000, respectively. For the six months ended June 30, 2023 and 2022, total expense for the restricted stock awards was $331,000 and $487,000, respectively. The tax benefit from restricted awards was $50,000 and $69,000 for the three months ended June 30, 2023 and 2022, respectively. The tax benefit from restricted awards was $101,000 and $135,000 for the six months ended June 30, 2023 and 2022, respectively. The total fair value of shares vested during the three months ended June 30, 2023 and 2022 was $77,000 and $168,000, respectively. The total fair value of shares vested during the six months ended June 30, 2023 and 2022 was $121,000 and $183,000, respectively.

(15) Leases

The Company recognized right-of-use assets (“ROU”) totaling $3.9 million at June 30, 2023 and December 31, 2022, and operating lease liabilities totaling $4.2 million and $4.3 million at June 30, 2023 and December 31, 2022, respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan production office.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and are not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for the leases on a straight-line basis over the lease term. For the six months ended June 30, 2023 and 2022, rent expense for the operating leases totaled $157,000.

The following table presents information regarding the Company’s operating leases:



	June 30,		December 31,
	2023		2022
Weighted-average discount rate		3.61%		3.59%
Range of lease expiration dates		1 - 12 years		1 - 13 years
Range of lease renewal options		0 - 20 years		5 - 20 years
Weighted-average remaining lease term		26.1 years		26.4 years

The following table presents the undiscounted annual lease payments under the terms of the Company’s operating leases at June 30, 2023 and December 31, 2022, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets:



	June 30,		December 31,
Fiscal Year-End	2023		2022
(In thousands)
2023	$	132	$	264
2024		270		270
2025		280		280
2026		291		291
2027		294		293
Thereafter		5,740		5,740
Total lease payments		7,007		7,138
Less imputed interest		(2,780)		(2,856)
Total lease liabilities	$	4,227	$	4,282

The lease liabilities recognized include certain lease extensions as it is expected that the Company will use substantially all lease renewal options.

(16) Revenue Recognition

Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC Topic 606”) is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.

(17) Qualified Affordable Housing Project Investments

The Bank invests in qualified affordable housing projects. At June 30, 2023 and December 31, 2022, the balance of the investment for qualified affordable housing projects was $6.5 million and $7.3 million, respectively. These balances are reflected in the other assets line on the Consolidated Balance Sheets. Under the proportional amortization method, the Company recognized amortization expense of $179,000 and tax credits of $219,000 for the three months ended June 30, 2023, respectively. The Company did not recognize any amortization expense or tax credits for the three months ended June 30, 2022. The Company recognized amortization expense of $1.4 million and tax credits of $1.7 million for the six months ended June 30, 2023, respectively. The Company did not recognize any amortization expense or tax credits for the six months ended June 30, 2022.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations at June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022 is intended to assist in understanding our financial condition and results of operations. Operating results for the three- and six- month periods ended June 30, 2023 may not be indicative of results for all of 2023 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This document 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,” “believes,” “will,” “intends,” “may,” “will be,” “would” or similar expressions. 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 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 any 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 a 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 FRB; deposit flows; our ability to access cost-effective funding; changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio; changes in consumer spending, borrowing and saving habits; a default by the U.S. government on its debt obligations; competition; real estate values in the market area; loan demand; the adequacy of our allowance for credit 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 cyber attacks; 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 factors described in other documents 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.

Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to update any forward-looking statements after the date of this quarterly report.

Critical Accounting Policies

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of expected losses over the life of the loan portfolio. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. See Note 4 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

Income Taxes. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of our assets and liabilities at

enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.

The Company examines its significant income tax positions quarterly to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

Balance Sheet Analysis

Recent Developments. Results for the quarter ended June 30, 2023 reflect the Bank’s restructured management team and revised focus on its business plan, operations and risk tolerance in light of the events and the losses that occurred in late 2022. Concerted efforts have been made to revise the Bank’s business practices and strategies so as to better monitor and manage the risk position, capital position, liquidity, growth of the Bank’s BaaS operations and overall asset growth. In this regard, the Bank has re-established internal metrics and limitations in these areas to better manage and monitor the Bank’s overall risk position, including generally managing overall asset growth to 5% per year, and adopting more comprehensive capital management policies and procedures.

Assets. Total assets were $1.76 billion at June 30, 2023, representing an increase of $125.2 million, or 7.7%, from $1.64 billion at December 31, 2022. The increase resulted primarily from an increase in cash and cash equivalents partially offset by decreases in net loans and other repossessed assets.

Cash and Cash Equivalents. Cash and cash equivalents increased $217.3 million, or 269.4%, to $297.9 million at June 30, 2023 from $80.6 million at December 31, 2022 due to increased deposit balances and a decrease in net loans. The Bank deems select specialty deposits that are expected to be short-term as volatile. The Bank held $171.3 million of these deposits as of June 30, 2023 as cash in short-term investments. No volatile deposits were held as of December 31, 2022.

Loans. At June 30, 2023, net loans were $1.33 billion, or 75.7% of total assets, compared to $1.42 billion, or 86.5% of total assets, at December 31, 2022. The decrease was primarily driven by decreases in mortgage warehouse loans of $39.5 million, or 18.5%, commercial loans of $29.0 million, or 13.4%, and digital asset loans of $24.0 million, or 58.9%. The decrease in our mortgage warehouse loan portfolio was primarily due to decreased usage of the mortgage warehouse lines. The decrease in our commercial loan portfolio was primarily related to payoffs in our traditional in-market loan portfolio. The Bank’s continued efforts to reduce its digital asset portfolio resulted in a decrease of $24.0 million, or 58.9%. The decrease in the digital asset loan portfolio was driven by paydowns on outstanding lines of credit as well as the payoff of a $4.8 million loan secured by cryptocurrency mining rigs during the first quarter of 2023 and the payoff of a $5.7 million line of credit during the second quarter of 2023. The decrease in net loans was partially offset by an increase in the construction and land development portfolio of $25.0 million, or 33.9%.

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:



	At			At
	June 30,			December 31,
	2023			2022
(In thousands)	Amount		Percent	Amount		Percent
Commercial real estate	$	438,029	32.26%	$	453,592	31.41%
Commercial		187,965	13.85%		216,931	15.02%
Enterprise value		436,574	32.15%		438,745	30.38%
Digital asset (1)		16,768	1.24%		40,781	2.82%
Residential real estate		7,490	0.55%		8,165	0.57%
Construction and land development		96,757	7.13%		72,267	5.00%
Consumer		207	0.02%		391	0.03%
Mortgage warehouse		173,755	12.80%		213,244	14.77%
		1,357,545	100.00%		1,444,116	100.00%
Allowance for credit losses - loans		(23,981)			(28,069)
Net loans	$	1,333,564		$	1,416,047

(1)Includes $16.8 million and $26.5 million in loans secured by cryptocurrency mining rigs at June 30, 2023 and December 31, 2022, respectively. The remaining balances consist of digital asset lines of credit.

Other Repossessed Assets. Other repossessed assets decreased $6.1 million due to the sale of repossessed cryptocurrency mining rigs. There were no other repossessed assets at June 30, 2023.

Deposits. Total deposits increased $168.5 million, or 13.2%, to $1.44 billion at June 30, 2023 from $1.28 billion at December 31, 2022. This increase included an increase in interest-bearing deposits of $284.7 million, or 37.5%, offset by a decrease in noninterest-bearing deposits of $116.0 million, or 22.3%. The increase in interest-bearing deposits and the decrease in noninterest-bearing deposits is primarily driven by the rising rate environment and customers seeking returns on their deposits. To retain customers, the Bank has increased deposit rates on certain products and seen a shift between noninterest-bearing and interest-bearing deposit accounts as a result.

Interest-bearing deposits increased primarily due to an increase in money market deposits, which increased $212.5million, or 66.8%, an increase in certificates of deposit of $87.9 million, or 57.2%, and an increase in regular savings deposits of $181.1 million, or 12.8%. The increase in money market deposits was primarily driven by an increase in deposits from BaaS customers. The increase in certificates of deposit was primarily driven by increased utilization of brokered certificates of deposit, which increased $70.3 million, or 58.6%, and were $190.4 million at June 30, 2023, compared to $120.1 million at December 31, 2022. Regular savings deposits increased, primarily due to the Bank obtaining deposits on a national exchange.

Included in the increase in total deposits was an increase of $158.1 million in specialty deposits, which were $260.9 million as of June 30, 2023 compared to $102.8 million as of December 31, 2022. Specialty deposits span various product types, including demand, money market and savings deposits, and consist of deposits from BaaS and digital asset customers. BaaS deposits totaled $235.6 million as of June 30, 2023 which represents a $190.4 million increase from December 31, 2022. Of the balance as of June 30, 2023, the Bank has deemed $171.3 million as volatile, which the Bank defines as deposits that are expected to be short-term. These deposits are held as cash in short-term investments. BaaS deposits included $106.6 million as of June 30, 2023 related to BaaS customers whose business model focuses on digital assets, which represents an increase of $86.0 million from $20.6 million as of December 31, 2022. Non-BaaS digital asset deposits totaled $25.3 million as of June 30, 2023, which represented a $32.2 million decrease from $57.5 million as of December 31, 2022.

The following table is a summary of deposit balances by account type at the dates indicated:



	At		At
	June 30,		December 31,
(In thousands)	2023		2022
Noninterest-bearing:
Demand (1)	$	404,012	$	520,226
Interest-bearing:
NOW		111,701		145,533
Regular savings		159,940		141,802
Money market deposits		530,964		318,417
Certificates of deposit:
Certificate accounts of $250,000 or more		20,869		11,449
Certificate accounts less than $250,000		220,600		142,155
Total interest-bearing (2)		1,044,074		759,356
Total deposits (3)	$	1,448,086	$	1,279,582

Borrowings. Borrowings decreased $47.0 million, or 37.1%, to $79.8 million at June 30, 2023, from $126.8 million at December 31, 2022. The decrease was primarily driven by a decrease in overnight borrowings.

Shareholders’ Equity. As of June 30, 2023, shareholders’ equity was $215.1 million compared to $207.5 million at December 31, 2022, which represented an increase of $7.5 million, or 3.6%. The increase was primarily due to net income of $5.6 million. Also contributing to the increase was a one-time, cumulative-effect adjustment for the adoption of CECL which increased retained earnings by $696,000. Shareholders’ equity also increased due to stock-based compensation expense of $651,000, employee stock ownership plan shares earned of $356,000, and other comprehensive income of $309,000.

Asset Quality.

The following table sets forth information regarding our non-performing assets at the dates indicated:



	At		At
	June 30,		December 31,
(Dollars in thousands)	2023		2022
Non-accrual loans:
Commercial real estate	$	160	$	56
Commercial		70		101
Enterprise value		4,310		92
Digital asset		16,768		26,488
Residential real estate		361		227
Construction and land development		—		—
Consumer		—		—
Mortgage warehouse		—		—
Total non-accrual loans		21,669		26,964
Accruing loans past due 90 days or more		—		—
Other repossessed assets		—		6,051
Total non-performing assets	$	21,669	$	33,015

Total loans (1)	$	1,357,545	$	1,444,116
Total assets	$	1,761,587	$	1,636,381
Total non-performing loans to total loans (1)		1.60%		1.87%
Total non-performing assets to total assets		1.23%		2.02%

(1)Loans are presented at amortized cost.

The increase in the non-accrual enterprise value loan balances for the six-month period ended June 30, 2023 was primarily related to the downgrade of one $4.3 million enterprise value loan relationship during the quarter ended March 31, 2023. The decrease in the non-accrual digital asset balance at June 30, 2023, was primarily related to paydowns in our portfolio of loans secured by cryptocurrency mining rigs, as well as a payoff of a $4.8 million loan relationship.

Repayment of non-performing loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying collateral. The Company pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, the Company will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

The following table sets forth activity in our allowance for credit losses for the periods indicated:



	Six Months Ended
	June 30,
(Dollars in thousands)	2023		2022
Allowance at beginning of period	$	28,069	$	19,496
Impact of adopting ASC 326		(2,588)		—
Credit loss expense - loans		2,195		1,088
Charge-offs:
Commercial real estate		—		—
Commercial		167		1,338
Enterprise value		3,560		351
Digital asset		—		—
Residential real estate		—		—
Construction and land development		—		—
Consumer		29		35
Mortgage warehouse		—		—
Total charge-offs		3,756		1,724

Recoveries:
Commercial real estate		—		—
Commercial		10		6
Enterprise value		45		87
Digital asset		—		—
Residential real estate		—		—
Construction and land development		—		—
Consumer		6		19
Mortgage warehouse		—		—
Total recoveries		61		112

Net charge-offs		3,695		1,612

Allowance at end of period	$	23,981	$	18,972

Non-performing loans at end of period	$	21,669	$	608
Total loans outstanding at end of period (1)		1,357,545		1,533,217
Average loans outstanding during the period (1)		1,369,172		1,467,122

Allowance to non-performing loans		110.67%		3,120.39%
Allowance to total loans outstanding at end of period		1.77%		1.24%
Net charge-offs to average loans outstanding during the period (annualized)		0.54%		0.22%

(1) Loans are presented at amortized cost.

A credit loss expense of $712,000 was recognized for the six months ended June 30, 2023, compared to a credit loss expense of $1.1 million for the six months ended June 30, 2022. The credit loss expense for the six months ended June 30, 2023 was primarily driven by the need to replenish the allowance due net charge-offs that occurred during the quarter ended March 31, 2023 in the enterprise value portfolio. The expense was partially offset by improvements in the near-term Gross Domestic Product (“GDP”) and unemployment rate forecasts, as well as a reduction of the loan balances in the commercial real estate, commercial, and enterprise value loan portfolios, which have a higher credit risk compared to the Bank’s other loan portfolios.

Net charge-offs increased $2.1 million, to $3.7 million for the six months ended June 30, 2023 from $1.6 million for the six months ended June 30, 2022, due primarily to the $3.6 million in charge-offs related to the enterprise value loan portfolio.

Results of Operations for the Three Months Ended June 30, 2023 and 2022

General. Net income for the quarter ended June 30, 2023 was $3.5 million compared to $5.6 million for the quarter ended June 30, 2022, which represented a decrease of $2.1 million, or 38.4%. The decrease in net income was primarily driven by an increase in interest expense and noninterest expense, partially offset by an increase in interest and dividend income and a decrease in the credit loss expense.

Interest and Dividend Income. Interest and dividend income increased $3.7 million, or 19.4%, to $22.9 million for the quarter ended June 30, 2023 from $19.2 million for the quarter ended June 30, 2022 primarily due to rising interest rates. The rising interest rates resulted in interest earned on short-term investments of $3.0 million for the quarter ended June 30, 2023, compared to $400,000 for the quarter ended June 30, 2022 and interest earned on loans of $19.7 million for the quarter ended June 30, 2023, compared to $18.6 million for the quarter ended June 30, 2022. The increase was partially offset by the $118.3 million, or 8.1%, reduction in the average balance of loans to $1.35 billion for the quarter ended June 30, 2023 from $1.47 billion for the quarter ended June 30, 2022.

Interest Expense. Interest expense increased $7.4 million to $8.0 million for the quarter ended June 30, 2023 from $547,000 for the quarter ended June 30, 2022. The increase was 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 280 basis points to 3.04% for the quarter ended June 30, 2023 compared to 0.24% for the quarter ended June 30, 2022. The increase in interest expense was also driven by an increase in the average balance of interest-bearing deposits of $201.1 million, or 24.9%, to $1.01 billion for the quarter ended June 30, 2023, compared to $807.7 million for the quarter ended June 30, 2022.

Net Interest and Dividend Income. Net interest and dividend income decreased by $3.7 million, or 19.9%, to $14.9 million for the quarter ended June 30, 2023 from $18.6 million for the quarter ended June 30, 2022. The decrease in net interest and dividend income was primarily the result of an increase in the average balance of interest-bearing liabilities of $221.3 million, or 26.9% and a decrease in the average balance of interest-earning assets of $105.1 million, or 6.1%, coupled with a decrease in net interest margin of 64 basis points to 3.69%.

Credit loss benefit/expense. A credit loss benefit of $1.1 million was recognized for the quarter ended June 30, 2023, compared to a credit loss expense of $1.0 million for the quarter ended June 30, 2022. The credit loss benefit derived from loans is primarily due to improvements in the near-term GDP and unemployment rate forecasts. Reduced balances in the commercial real estate, commercial, and enterprise value loan portfolios, which have higher credit risks compared to the Bank’s other loan portfolios such as mortgage warehouse and construction and land development also contributed to the benefit. In addition, updated valuations increased collateral values for individually analyzed loans in the enterprise value portfolio, causing a decrease in the reserve for the quarter ended June 30, 2023. The credit loss benefit derived from off-balance sheet credit exposure is primarily due to the funding of construction and land development loans as well as the closure of unutilized lines of credit.

Noninterest Income. Noninterest income was $1.7 million for the quarter ended June 30, 2023, which represents an increase of $150,000, or 9.7%, compared to the quarter ended June 30, 2022. The increase was primarily due to increases in customer service fees on deposit accounts and other income, partially offset by a decrease in the gain on loans sold. Customer service fees on deposit accounts increased $150,000, or 24.2%, which was primarily attributable to implementation and activity fees charged to BaaS customers of $238,000 for the quarter ended June 30, 2023, compared to $46,000 for the quarter ended June 30, 2022. Other income increased $98,000, or 272.2%, primarily due to insurance proceeds from replacement of damaged equipment. Gain on loans sold decreased $187,000, or 100%, primarily due to the sale of residential mortgage loans in June 2022.

Noninterest Expense. Noninterest expense was $12.8 million for the quarter ended June 30, 2023, which represents an increase of $1.4 million, or 12.8%, compared to the quarter ended June 30, 2022. The increase in noninterest expense was primarily due to increases in salaries and employee benefits, deposit insurance expense, professional fees, and software depreciation and implementation expenses. The increase of $787,000, or 10.7%, in salary and employee benefits compared to the quarter ended June 30, 2022 was primarily due to an increase in staff to support strategic initiatives within our deposit products and services. Deposit insurance expense increased $214,000, or 139.0%, primarily due to an increase in the FDIC’s insurance assessment rate schedules. Professional fees increased $210,000, or 29.6%, primarily due to increased audit and compliance costs. Software depreciation and implementation expenses increased $156,000, or 47.7%, primarily due to software licenses needed for the increased number of staff.

Income Tax Benefit. We recorded income tax expense of $1.5 million for the quarter ended June 30, 2023, reflecting an effective tax rate of 29.7%, compared to $2.2 million for the quarter ended June 30, 2022, reflecting an effective tax rate of 28.0%.

Average Balance Sheet and Related Yields and Rates

The following table sets forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.



	For the Three Months Ended June 30,
	2023					2022
			Interest					Interest
	Average		Earned/		Yield/	Average		Earned/		Yield/
(Dollars in thousands)	Balance		Paid		Rate (6)	Balance		Paid		Rate (6)
Assets:
Interest-earning assets:
Loans (1)(2)	$	1,346,654	$	19,652	5.84%	$	1,465,000	$	18,558	5.07%
Short-term investments		236,367		2,978	5.04%		219,555		400	0.73%
Debt securities available-for-sale		28,278		197	2.79%		32,687		190	2.33%
Federal Home Loan Bank stock		2,254		49	8.70%		1,388		4	1.15%
Total interest-earning assets		1,613,553		22,876	5.67%		1,718,630		19,152	4.46%
Non-interest earning assets		99,685					88,932
Total assets	$	1,713,238				$	1,807,562
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts	$	149,625	$	408	1.09%	$	152,932	$	51	0.13%
Money market accounts		513,348		4,550	3.55%		331,998		211	0.25%
NOW accounts		115,869		202	0.70%		264,038		135	0.20%
Certificates of deposit		230,023		2,510	4.36%		58,781		79	0.54%
Total interest-bearing deposits		1,008,865		7,670	3.04%		807,749		476	0.24%
Borrowings
Short-term borrowings		18,352		230	5.01%		857		—	—%
Long-term borrowings		16,148		74	1.83%		13,500		71	2.10%
Total borrowings		34,500		304	3.52%		14,357		71	1.98%
Total interest-bearing liabilities		1,043,365		7,974	3.06%		822,106		547	0.27%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		437,167					726,623
Other noninterest-bearing liabilities		19,380					19,568
Total liabilities		1,499,912					1,568,297
Total equity		213,326					239,265
Total liabilities and
equity	$	1,713,238				$	1,807,562
Net interest income			$	14,902				$	18,605
Interest rate spread (3)					2.61%					4.19%
Net interest-earning assets (4)	$	570,188				$	896,524
Net interest margin (5)					3.69%					4.33%
Average interest-earning assets to interest-bearing liabilities		154.65%					209.05%

(1)Interest earned/paid on loans includes mortgage warehouse loan origination fee income of $213,000 and $239,000 for the quarters ended June 30, 2023 and June 30, 2022, respectively.

(2)Includes loans held for sale.

(3)Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average of interest-bearing liabilities.

(4)Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities.

(5)Net interest margin represents net interest income divided by average total interest-earning assets.

(6)Annualized.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effect attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.



	For the Three Months Ended June 30, 2023
	Compared to the Three Months Ended June 30, 2022
	Increase (Decrease) Due to				Total
(In thousands)	Rate		Volume		Increase ‎(Decrease)
Interest-earning assets:
Loans	$	2,672	$	(1,578)	$	1,094
Short-term investments		2,545		33		2,578
Debt securities available-for-sale		35		(28)		7
Federal Home Loan Bank stock		41		4		45
Total interest-earning assets		5,293		(1,569)		3,724
Interest-bearing liabilities:
Savings accounts		358		(1)		357
Money market accounts		4,163		176		4,339
NOW accounts		177		(110)		67
Certificates of deposit		1,725		706		2,431
Total interest-bearing deposits		6,423		771		7,194
Borrowings
Short-term borrowings		—		230		230
Long-term borrowings		(10)		13		3
Total borrowings		(10)		243		233
Total interest-bearing liabilities		6,413		1,014		7,427
Change in net interest income	$	(1,120)	$	(2,583)	$	(3,703)

Results of Operations for the Six Months Ended June 30, 2023 and 2022

General. Net income for the six months ended June 30, 2023 was $5.6 million compared to $11.1 million for the six months ended June 30, 2022, which represented a decrease of $5.5 million, or 50.1%. The decrease in net income was primarily driven by an increase in interest expense and noninterest expense, partially offset by an increase in interest and dividend income.

Interest and Dividend Income. Interest and dividend income increased $5.9 million, or 15.7%, to $43.5 million for the six months ended June 30, 2023, from $37.6 million for the six months ended June 30, 2022. This increase was due to an increase in interest on short-term investments and an increase in interest income on loans. Interest on short-term investments increased $2.9 million to $3.4 million for the six months ended June 30, 2023, from $500,000 for the six months ended June 30, 2022. The increase in interest on short-term investments was due to an increase in the average yield to 4.83% from 0.51% for the six months ended June 30, 2023 and 2022, respectively. Interest and fees on loans increased $2.9 million to $39.7 million for the six months ended June 30, 2023, from $36.8 million for the six months ended June 30, 2022. Interest and fees on loans increased due to an increase in the average yield on loans to 5.79% for the six months ended June 30, 2023 from 5.01% for the six months ended June 30, 2022.

Interest Expense. Interest expense increased $11.7 million to $12.8 million for the six months ended June 30, 2023, from $1.1 million for the six months ended June 30, 2022. The increase was 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 237 basis points to 2.60% for the six months ended June 30, 2023, compared to 0.23% for the six months ended June 30, 2022. The increase in interest expense was also driven by an increase in the average balance of interest-bearing deposits of $85.5 million, or 10.6%, to $889.2 million for the six months ended June 30, 2023, compared to $803.7 million for the six ended June 30, 2022.

Net Interest and Dividend Income. Net interest and dividend income decreased by $5.8 million, or 15.9%, to $30.7 million for the six months ended June 30, 2023 from $36.5 million for the quarter ended June 30, 2022. The decrease in net interest and dividend income

was primarily the result of an increase in the average balance of interest-bearing liabilities of $132.6 million, or 16.2% and a decrease in the average balance of interest-earning assets of $141.6 million, or 8.4%, coupled with a decrease in net interest margin of 36 basis points to 3.99%.

Credit loss expense. A credit loss expense of $712,000 was recognized for the six months ended June 30, 2023, compared to a credit loss expense of $1.1 million for the six months ended June 30, 2022, which represents a decrease of $412,000, or 36.7%. The credit loss expense derived from loans for the six months ended June 30, 2023 was driven by the need to replenish the allowance due to $3.6 million of net charge-offs that occurred during the quarter ended March 31, 2023 in the enterprise value portfolio. The expense was partially offset by improvements in the near-term GDP and unemployment rate forecasts, as well as a reduction of the loan balances in the commercial real estate, commercial, and enterprise value loan portfolios, which have a higher credit risk compared to the Bank’s other loan portfolios. Also, updated valuations during the quarter ended June 30, 2023 increased collateral values for individually analyzed loans in the enterprise value portfolio partially offset the credit loss expense for the six months ended June 30, 2023. The credit loss benefit derived from off-balance sheet credit exposure was due to a decrease in the balance of unfunded commitments during the first quarter of 2023 primarily resulting from the closure of two digital asset lines totaling $71.0 million. The $1.1 million provision for the six months ended June 30, 2022 was based on the incurred loss model, and was primarily the result of loan portfolio growth.

Noninterest Income. Noninterest income increased $777,000, or 27.1%, to $3.6 million for the six months ended June 30, 2023, from $2.9 million for the six months ended June 30, 2022. The increase was due to increases in customer service fees on deposit accounts and other income, partially offset by a decrease in gain on loans sold. Customer service fees increased $548,000 due to fees generated from cash vault services for our customers who operate Bitcoin ATMs and implementation and activity fees charges to BaaS customers. During the quarter ended June 30, 2023, management suspended Bitcoin ATM deposit services while they continue to evaluate the services offered. Implementation and activity fees charged to BaaS customers for the six months ended June 30, 2023 were $483,000, compared to $79,000 for the six months ended June 30, 2022. Other income increased $339,000 due to insurance proceeds from the replacement of damaged equipment. Gain on loans sold decreased $284,000 primarily due to the sale of residential mortgage loans in June 2022.

Noninterest Expense. Noninterest expense was $26.0 million for the six months ended June 30, 2023, which represents an increase of $3.3 million, or 14.3%, from 22.7 million for the six months ended June 30, 2022. The increase was due to salaries and employee benefits, professional fees, deposit insurance expense, software depreciation and implementation expense, partially offset by a decrease in write downs of other assets and receivables. Salaries and employee benefits increased $2.1 million, or 14.8%, primarily due to an increase in staff to support strategic initiatives within our deposit products and services. Professional fees increased $885,000, or 61.6%, due to increased legal, audit, and compliance costs which were elevated for the first quarter of 2023 due to services pertaining to the events that led to losses recorded during 2022. Deposit insurance increased $341,000, or 111.8%, primarily due to an increase in the FDIC’s insurance assessment rate schedules. Software depreciation and implementation expenses increased $279,000, or 44.9%, primarily due to software licenses needed for the increased staff. In 2022, there was a write down of an SBA receivable in the first quarter after the Company evaluated the collectability and determined that $395,000 was uncollectible.

Income Tax Benefit. We recorded income tax expense of $2.1 million for the six months ended June 30, 2023, reflecting an effective tax rate of 27.7%, compared to $4.4 million for the six months ended June 30, 2022, reflecting an effective tax rate of 28.4%.

‎

Average Balance Sheet and Related Yields and Rates



	For the Six Months Ended June 30,
		2023					2022
				Interest					Interest
		Average		Earned/	Yield/		Average		Earned/	Yield/
(Dollars in thousands)		Balance		Paid	Rate (6)		Balance		Paid	Rate (6)
Assets:
Interest-earning assets:
Loans (1)(2)	$	1,369,172	$	39,658	5.79%	$	1,467,122	$	36,770	5.01%
Short-term investments		139,189		3,361	4.83%		178,483		459	0.51%
Debt securities available-for-sale		28,501		389	2.73%		34,245		365	2.13%
Federal Home Loan Bank stock		2,445		95	7.77%		1,088		8	1.47%
Total interest-earning assets		1,539,307		43,503	5.65%		1,680,938		37,602	4.47%
Non-interest earning assets		108,385					87,247
Total assets	$	1,647,692				$	1,768,185
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts	$	146,061	$	519	0.71%	$	153,205	$	91	0.12%
Money market accounts		413,765		6,463	3.12%		362,268		460	0.25%
NOW accounts		121,466		348	0.57%		228,498		218	0.19%
Certificates of deposit		207,870		4,241	4.08%		59,699		162	0.54%
Total interest-bearing deposits		889,162		11,571	2.60%		803,670		931	0.23%
Borrowings
Short-term borrowings		43,857		1,054	4.81%		431		—	—%
Long-term borrowings		17,222		160	1.86%		13,500		141	2.09%
Total borrowings		61,079		1,214	3.98%		13,931		141	2.02%
Total interest-bearing liabilities		950,241		12,785	2.69%		817,601		1,072	0.26%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		465,958					692,394
Other noninterest-bearing liabilities		19,921					20,312
Total liabilities		1,436,120					1,530,307
Total equity		211,572					237,878
Total liabilities and
equity	$	1,647,692				$	1,768,185
Net interest income			$	30,718				$	36,530
Interest rate spread (3)					2.96%					4.21%
Net interest-earning assets (4)	$	589,066				$	863,337
Net interest margin (5)					3.99%					4.35%
Average interest-earning assets to
interest-bearing liabilities		161.99%					205.59%

‎

Rate/Volume Analysis



	For the Six Months Ended June 30, 2023
	Compared to the Six Months Ended June 30, 2022
	Increase (Decrease) Due to				Total
(In thousands)	Rate		Volume		Increase ‎(Decrease)
Interest-earning assets:
Loans	$	5,458	$	(2,570)	$	2,888
Short-term investments		3,025		(123)		2,902
Investment securities		92		(68)		24
Federal Home Loan Bank stock		67		20		87
Total interest-earning assets		8,642		(2,741)		5,901
Interest-bearing liabilities:
Savings accounts		432		(4)		428
Money Market accounts		5,928		75		6,003
NOW accounts		271		(141)		130
Certificates of deposit		2,954		1,125		4,079
Total interest-bearing deposits		9,585		1,055		10,640
Borrowings
Short-term borrowings		—		1,054		1,054
Long-term borrowings		(17)		36		19
Total borrowings		(17)		1,090		1,073
Total interest-bearing liabilities		9,568		2,145		11,713
Change in net interest income	$	(926)	$	(4,886)	$	(5,812)

Management of Market Risk

Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period in the current interest rate environment. We then calculate what the net interest income would be for the same period under the assumption that interest rates increase 100, 200, and 300 basis points from current market rates and under the assumption that interest rates decrease 100, 200 and 300 basis points from current market rates, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The following table presents the estimated changes in net interest income of the Company that would result from changes in market interest rates over twelve-month periods beginning June 30, 2023:



	At
	June 30,
	2023
(Dollars in thousands)	Estimated ‎Net Interest Income ‎Over Next 12 Months		Change
Changes in Interest Rates (Basis Points)
300	$	47,586	(1.60)%
200		47,885	(1.00)%
100		48,163	(0.40)%
0		48,376	—
(100)		48,274	(0.20)%
(200)		47,598	(1.60)%
(300)		46,357	(4.20)%

Economic Value of Equity Simulation. We also analyze the sensitivity of our financial condition to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, and 300 basis points from current market rates, and under the assumption that interest rates decrease 100, 200 and 300 basis points from current market rates.

The following table presents the estimated changes in EVE of the Company that would result from changes in market interest rates as of June 30, 2023:



	At
	June 30,
	2023
(Dollars in thousands)	Economic ‎Value of ‎Equity		Change
Changes in Interest Rates (Basis Points)
300	$	237,226	(6.98)%
200		241,743	(5.21)%
100		249,129	(2.31)%
0		255,022	—
(100)		256,541	0.60%
(200)		253,447	(0.62)%
(300)		241,344	(5.36)%

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, borrowings, loan repayments and maturities, and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and sales of securities are greatly influenced by general interest rates, economic conditions and competition.

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earnings deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2023, cash and cash equivalents totaled $297.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.7 million at June 30, 2023. Mortgage warehouse loans that have a short-term duration also provide additional sources of liquidity. The balance of mortgage warehouse loans that meets the definition of liquid assets totaled $139.7 million as of June 30, 2023.

At June 30, 2023, we had the ability to borrow $139.7 million from the Federal Home Loan Bank of Boston. On that date, we had $79.8 million in advances outstanding. At June 30, 2023, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $181.3 million, none of which was outstanding as of that date.

We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At June 30, 2023 and December 31, 2022, we had $215,000 and $6.1 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at June 30, 2023 and December 31, 2022, we had $210.5 million and $347.7 million in unadvanced funds to borrowers, respectively. We also had $1.2 million and $1.7 million in outstanding letters of credit at June 30, 2023 and December 31, 2022, respectively.

A significant decrease in deposits could result in the Company having to seek other sources of funds, including brokered certificates of deposit, deposits obtained from national exchanges, and Federal Home Loan Bank of Boston advances, and borrowings through the borrower-in-custody program with the Federal Reserve Bank of Boston. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay. We believe, however, based on past experience that a significant portion of our deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Company maintains access to multiple sources of liquidity. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

The Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the FDIC. At June 30, 2023, BankProv exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 11 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management Market Risk”.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including (i) the Co-President and Co-Chief Executive Officer and (ii) the Co-President and Co-Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2023. Based on that evaluation, the Company’s management, including (i) the Co-President and Co-Chief Executive Officer and (ii) the Co-President and Co-Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting as described in Management’s Report Regarding Internal Control Over Financial Reporting in “Item 9A. Controls and Procedures” in its Annual Report on Form 10-K for the year ended December 31, 2022.

In addition, other than the measures described below taken in response to the material weakness, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation

The Company has commenced the implementation of the remediation measures with respect to the material weakness outlined in its Annual Report on Form 10-K for the year ended December 31, 2022. As part of its remediation efforts, the Company has begun the planning process as well as obtaining board approval. Although Management feels the remediation plan is sufficiently designed to address the material weakness, it cannot determine when all of its remediation plans will be fully completed or provide assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. The material weakness will be considered fully remediated once the enhanced controls operate for a sufficient period of time and Management has concluded, through testing, that these controls are designed and operating effectively.

Changes in Internal Control over Financial Reporting

Other than the remediation efforts with respect to the material weakness as described above, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and Item 1A of the Company’s Quarterly Report on form 10-Q for the three months ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

(a)Not applicable.

(b)Not applicable.

(c)On March 12, 2021, the Company announced that its Board of Directors had adopted a stock repurchase program under which it would repurchase up to 1,400,000 shares of its common stock, or approximately 7.5% of the then-current outstanding shares. The repurchase program has no expiration date. The Company did not repurchase common stock under the repurchase program during the second quarter of 2023. At June 30, 2023, the Company had 254,521 shares of its common stock available for purchase under this program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


3.1	Articles of Incorporation of Provident Bancorp, Inc. (1)
3.2	Bylaws of Provident Bancorp, Inc. (1)
3.3	Amendment to Bylaws (2)
31.1	Certification of Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Co-Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as iXBRL and contained in exhibit 101).

_________________

(1)Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019.

(2)Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on March 29, 2021.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PROVIDENT BANCORP, INC.

Date: August 10, 2023		/s/ Joseph B. Reilly
		Joseph B. Reilly
		Co-President and Co-Chief Executive Officer

Date: August 10, 2023		/s/ Carol L. Houle
		Carol L. Houle
		Co-President and Co-Chief Executive Officer, and Chief Financial Officer

Provident Bancorp, Inc. /MD/ - Quarter Report: 2023 June (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549