Description

Overview:

Provident Bancorp ("PVBC" or "Company") is a bank holding company that operates primarily through The Provident Bank ("Bank").  On October 16, 2019, PVBC completed its second step conversion from a mutual holding company structure to a stock holding company structure.  PVBC's Form 10-Q for the quarter ended 9/30/19 does not include the proceeds raised in the transaction. Pro forma for the equity offering, PVBC's shares trade at a small discount to tangible book value.  This creates an attractive risk/reward situation (relative to other opportunities today) where you can make a mid-teens returns with limited chances of losing money over 3 years.

Loans:

Over the past 5 years, the Bank’s loan portfolio has increased 77% with all of the growth coming from “Commercial” loans.  PVBC’s annual report and shareholder presentation provide some color into these loans. Commercial lending products include term loans and revolvers, and can have fixed or floating interest rates.  These loans are generally secured by business assets, and may include junior liens on real property.

A portion of the Bank’s commercial loans are guaranteed by the SBA through the SBA 7(a) loan program.  The Bank is a Preferred Lender under the SBA’s PLP Program, which allows expedited underwriting and approval of SBA 7(a) loans.

Another portion of the Bank’s commercial loans (approx. $140mm as of 12/31/18) are senior secured M&A, recap, and shareholder buyout loans to SMBs.  The average term for these loans is approximately seven years with minimum fixed charge coverage ratios of 1.20x to 1.50x, maximum senior leverage of 3.0x and maximum total leverage of 5.0x.  The maximum senior loan-to-enterprise value must be 65% or lower.

The final disclosed bucket of the Bank’s commercial loans is its renewable energy portfolio (approx. $50mm as of 12/31/18).  These loans are secured by solar arrays and wind turbines in New England and New York. The average term and amortization for these loans can extend to 15 years or more, but are generally underwritten to a maximum term of two years less than the asset’s associated PPA. 

As of 12/31/18, the Bank’s largest commercial business loan at December 31, 2018 totaled $15.0 million, was originated in 2018 and is secured by all business assets. The next largest commercial business loan totaled $9.3 million, was originated in 2018 and is secured by all business assets. The third largest commercial totaled $8.0 million, was originated in 2018 and is secured by all business assets.

Deposits:

Headquartered in Amesbury, MA, the Bank has a 7 branch footprint with 5 branches in the Boston MSA and 2 in New Hampshire.  These are competitive markets. According to SNL, the Bank has 0.20% market share in the Boston market, 4.1% market share in Portsmouth, NH and 1.3% market share in Manchester, NH.  However, the Bank has an attractive deposit mix with low funding costs. 25% of deposits do not pay interest and only 13% are CDs (with the vast majority of those <$250k).

Returns:

PVCB’s balance sheet earns a 4%+ NIM (loans at 5.5%, a small securities portfolio at 2%, interest bearing deposits at 1%, limited borrowings and significant non-interest bearing deposits).  Although the Company earns nominal non-interest income, it is a reasonably efficient operator with a mid-60%s efficiency ratio. Altogether, this should generate a mid- to high-single digit ROE in most years.  While not compelling as standalone returns, an acquirer would likely be able to remove duplicative overhead, consolidate some of the Boston branches, and try to better leverage the Bank’s attractive deposit base.  So, paying 1x tangible book value today could generate a low-teens return over 3 years. With a 13% CET1 capital ratio before the second step offering, the Bank is overcapitalized relative to peers and the equity cushion should be able to withstand a reasonable downturn scenario.  As a result, from 1x tangible book value you probably won't lose money over multiple years.

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This is not investing advice.

Catalyst

time, M&A