Amesbury-based BankProv had third quarter losses of more than $35 million and identified weaknesses in its internal controls and procedures that affected one of its cryptocurrency-related loan portfolios, according to the bank’s third quarter report.
The bank’s parent company, Provident Bancorp Inc., yesterday filed its 10-Q report for the third quarter, two months after it was due to the Securities and Exchange Commission. The company had notified the SEC in November that it would need more time before reporting its third quarter financial results after discovering that the majority of its loan portfolio for cryptocurrency mining was impaired.
The $1.77 billion-asset BankProv had a third quarter net loss of $35.3 million, or a loss per diluted share of $2.15, according to the quarterly report.
The bank’s losses were tied in part to its September decision to forgive a borrower’s $27.4 million digital asset mining loan and repossess cryptocurrency mining rigs.
The assets were written down through an $11.3 million charge-off using the allowance for loan losses on Sept. 30, the bank said in its quarterly report. With continued volatility in the Bitcoin markets, the bank said it took an additional charge-off through the allowance for loan losses of $5.6 million.
The bank in November had said that after forgiving the $27.4 million loan, it ended the third quarter with a digital-asset mining loan portfolio of $76.5 million, a majority of which was impaired. The bank said in the quarterly report that its recorded investment as of Sept. 30 in the impaired loans was $51 million, which included outstanding principal and unamortized premium. The bank said it allocated $31.7 million in specific reserves for these loans.
The bank in mid-December then entered into an agreement to sell the loans, valued at $50.1 million after payments were made in the fourth quarter. The portfolio was sold for $15 million in cash and a replacement loan relationship secured by cryptocurrency mining rigs with a principal balance of $6.2 million, the bank said.
“The Company had originally planned to hold these loans with specific reserves, but the executed sale and exchange transaction provided evidence about the value of the loans as they existed on the September 30, 2022 Consolidated Balance Sheets,” the bank said.
Even though the sale happened in the fourth quarter, BankProv said it retroactively adjusted the third quarter financial statements to reflect a $29 million charge-off involved with the sale and exchange of these loans.
BankProv added that it has stopped originating new loans secured by cryptocurrency mining rigs.
The bank also found that it had “material weaknesses” related to its internal controls and procedures for the cryptocurrency mining portfolio. While the bank said it did not believe that the weaknesses led to any material misstatements, the weaknesses did affect third quarter financial reporting.
“This material weakness in the control environment stemmed from ‘tone at the top’ issues that contributed to a control environment that was insufficiently tailored to monitoring of risks as it relates to the digital asset lending program,” the bank said.
The bank’s CEO, Dave Mansfield, resigned from his leadership and board roles in December.
The weaknesses involved risks related to internal conflicts of interest and effective avenues of communication with the board of directors related to the crypto mining portfolio, according to the third quarter report.
As part of the remedies, the bank said it will revise its three-year strategic plan and develop an onboarding process for internal conflicts of interest, including internal controls to address related risks.
“The material weakness will not be considered fully remediated until the enhanced controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively,” the bank said.
