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Section 1: 424B3 (424B3)

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-232018

 

SUBSCRIPTION AND COMMUNITY

OFFERING PROSPECTUS

 

 

(Proposed Holding Company for The Provident Bank)

Up to 13,225,000 Shares of Common Stock

 

Provident Bancorp, Inc., a newly formed Maryland corporation that we refer to as “New Provident” throughout this prospectus, is offering up to 13,225,000 shares of common stock for sale at $10.00 per share on a best efforts basis in connection with the conversion of Provident Bancorp, Inc., a Massachusetts corporation that we refer to as “Old Provident” throughout this prospectus, from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the 52.3% ownership interest in Old Provident currently owned by Provident Bancorp, our Massachusetts-chartered mutual holding company. Old Provident’s common stock is currently traded on the Nasdaq Capital Market under the trading symbol “PVBC,” and we expect the shares of New Provident common stock will also trade on the Nasdaq Capital Market under the symbol “PVBC.”

 

The shares of common stock are first being offered in a subscription offering to eligible depositors and tax-qualified employee benefit plans of The Provident Bank. Employees, officers, trustees, directors and corporators of The Provident Bank or Provident Bancorp also have rights to purchase shares in the subscription offering, subject to the priority rights of depositors and The Provident Bank’s tax-qualified employee benefit plans. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to residents of the communities served by The Provident Bank. Any shares of common stock not purchased in the subscription or community offerings may be offered to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated offering, or in a separate firm commitment underwritten public offering. The syndicated offering or the firm commitment underwritten offering may commence before the subscription and community offerings (including any extensions) have expired. However, no shares purchased in the subscription offering or the community offering will be issued until the completion of any syndicated or firm commitment underwritten offering. We must sell a minimum of 9,775,000 shares in order to complete the offering.

 

In addition to the shares we are selling in the offering, the shares of Old Provident currently held by the public will be exchanged for shares of common stock of New Provident based on an exchange ratio that will result in existing public stockholders of Old Provident owning approximately the same percentage of New Provident common stock as they owned in Old Provident common stock immediately prior to the completion of the conversion. The number of shares we expect to issue in the exchange ranges from 8,878,601 shares to 12,012,225 shares.

 

The minimum order is 25 shares. Generally, no individual may purchase more than 50,000 shares ($500,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 150,000 shares ($1.5 million) of common stock in all categories of the offering combined.

 

The subscription offering is expected to expire at 5:00 p.m., Eastern Time, on September 10, 2019. We may extend this expiration date, and the expiration date for any community offering, without notice to you until October 25, 2019. Once submitted, orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond October 25, 2019, or the number of shares of common stock to be sold is increased to more than 13,225,000 shares or decreased to less than 9,775,000 shares. If the subscription and community offerings are extended past October 25, 2019, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 13,225,000 shares or decreased to less than 9,775,000 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at The Provident Bank and will earn interest at 0.15% per annum until completion or termination of the offering.

 

Sandler O’Neill & Partners, L.P. will assist us in selling the shares on a best efforts basis in the subscription and community offerings, and will serve as sole book-running manager for any syndicated or firm commitment underwritten offering. Sandler O’Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription and community offerings.

 

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum 
Number of shares   9,775,000    11,500,000    13,225,000 
Gross offering proceeds  $97,750,000   $115,000,000   $132,250,000 
Estimated offering expenses, excluding selling agent and underwriters’ commissions  $1,295,000   $1,295,000   $1,295,000 
Selling agent and underwriters’ commissions (1)  $1,074,300   $1,233,000   $1,391,700 
Estimated net proceeds  $95,380,700   $112,472,000   $129,563,300 
Estimated net proceeds per share  $9.76   $9.78   $9.80 

 

 

(1)The amounts shown assume that 100% of the shares will be sold in the subscription offering with a fee of 1.0% payable on all such shares, excluding insider purchases and shares purchased by our employee stock ownership plan for which no selling agent fee will be paid. See “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” for information regarding compensation to be received by Sandler O’Neill & Partners, L.P. in the subscription and community offerings and the compensation to be received by Sandler O’Neill & Partners, L.P. and the other broker-dealers that may participate in the syndicated or firm commitment underwritten offering. If all shares of common stock were sold in the syndicated or firm commitment underwritten offering, excluding insider purchases and shares purchased by our employee stock ownership plan for which no selling agent fee will be paid, the selling agent and underwriters’ commissions would be approximately $4.6 million, $5.3 million and $6.1 million at the minimum, midpoint and maximum levels of the offering, respectively.

 

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 18.

 

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Depositors Insurance Fund. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

Sandler O’Neill + Partners, L.P.

 

For assistance, please contact the Stock Information Center at (978) 834-8505.

The date of this prospectus is August 7, 2019.

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
SUMMARY 1
RISK FACTORS 18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 34
RECENT DEVELOPMENTS 36
FORWARD-LOOKING STATEMENTS 50
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 52
OUR DIVIDEND POLICY 53
MARKET FOR THE COMMON STOCK 54
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 55
CAPITALIZATION 56
PRO FORMA DATA 58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 63
BUSINESS OF NEW PROVIDENT AND OLD PROVIDENT 92
BUSINESS OF THE PROVIDENT BANK 93
SUPERVISION AND REGULATION 105
TAXATION 116
MANAGEMENT 118
BENEFICIAL OWNERSHIP OF COMMON STOCK 130
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 131
THE CONVERSION AND OFFERING 132
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF PROVIDENT BANCORP, INC. 152
RESTRICTIONS ON ACQUISITION OF NEW PROVIDENT 160
DESCRIPTION OF CAPITAL STOCK OF NEW PROVIDENT FOLLOWING THE CONVERSION 164
TRANSFER AGENT 165
EXPERTS 165
LEGAL MATTERS 165
WHERE YOU CAN FIND ADDITIONAL INFORMATION 165
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

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SUMMARY

 

The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Old Provident common stock for shares of New Provident common stock. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the notes thereto, and the section entitled “Risk Factors.”

 

In this prospectus, the terms “we,” “our,” and “us” refer to New Provident and The Provident Bank unless the context indicates another meaning. 

 

Our Organizational Structure and the Proposed Conversion

 

Since 2011 we have operated in a two-tier mutual holding company structure. Old Provident is a Massachusetts corporation that is our publicly-traded stock holding company and the parent company of The Provident Bank. At March 31, 2019, Old Provident had consolidated assets of $998.5 million, deposits of $775.3 million and stockholders’ equity of $128.3 million. Old Provident’s parent company is Provident Bancorp, a Massachusetts-chartered mutual holding company. At March 31, 2019, Old Provident had 9,621,822 shares of common stock outstanding, of which 4,587,499 shares, or 47.7%, were owned by the public (including 187,174 shares owned by The Provident Community Charitable Organization, Inc.), and the remaining 5,034,323 shares were held by Provident Bancorp.

 

Pursuant to the terms of the plan of conversion, we are now converting from the mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion, Provident Bancorp and Old Provident will cease to exist, and New Provident will become the successor corporation to Old Provident. The shares of New Provident being offered in this offering represent the majority ownership interest in Old Provident currently held by Provident Bancorp. Public stockholders of Old Provident will receive shares of common stock of New Provident in exchange for their shares of Old Provident at an exchange ratio intended to preserve the same aggregate ownership interest in New Provident as they had in Old Provident, adjusted downward to reflect certain assets held by Provident Bancorp. Provident Bancorp’s shares of Old Provident will be cancelled. Shares of Old Provident currently owned by The Provident Community Charitable Organization, Inc. will be exchanged for shares of New Provident, but no additional shares will be contributed to the foundation in connection with the conversion and offering.

 

The following diagram shows our current organizational structure, reflecting ownership percentages as of March 31, 2019:

 

 

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After the conversion and offering are completed, we will be organized as a fully public stock holding company, with the stock of New Provident held as follows:

 

 

Our Business

 

Our business operations are conducted through our wholly-owned subsidiary, The Provident Bank. We have served the banking needs of our customers since 1828, making us the tenth oldest financial institution in the United States.

 

The Provident Bank is a Massachusetts-chartered stock savings bank that operates as a full-service commercial bank from its main office and two branch offices in the Northeastern Massachusetts area, three branch offices in Southeastern New Hampshire and one branch in located in Bedford, New Hampshire. We also have four loan production offices in Boston, Dedham and Hingham, Massachusetts and Portsmouth, New Hampshire. Our primary lending area for commercial real estate loans and a large portion of our commercial business loans encompasses Northeastern Massachusetts and Southern New Hampshire, with a focus on Essex County, Massachusetts, and Hillsborough and Rockingham Counties, New Hampshire. However, we offer our enterprise value loans nationwide, and our renewable energy loans primarily throughout New England and New York. A description of these loans is included in “—Business Strategy,” below.

 

Our primary deposit-gathering area is currently concentrated in Essex County, Massachusetts, Rockingham County, New Hampshire, and Hillsborough County, New Hampshire, although we also receive deposits from our business customers who are located nationwide. We attract deposits from the general public and from our business customers and use those funds to originate primarily commercial real estate and commercial business loans, and to invest in securities. In recent years, we have been successful in growing both deposits and loans. From December 31, 2014 to March 31, 2019, deposits have increased $238.6 million, or 44.5%, and net loans have increased $365.1 million, or 73.9%.

 

The Provident Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation and by the Depositors Insurance Fund for amounts in excess of the Federal Deposit Insurance Corporation insurance limits.

 

The Provident Bank is subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation.

 

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The Provident Bank’s main banking offices are located at 5 Market Street, Amesbury, Massachusetts 01913, and its telephone number is (978) 834-8555. Our website address is www.theprovidentbank.com. Information on this website is not and should not be considered a part of this prospectus.

 

Business Strategy

 

In recent years, we have transformed from a retail community bank to a full-service commercial bank. We have grown our balance sheet in large part by developing specialties in both lending and deposit services. As a result of our recent efforts, as of December 31, 2018 we were the second ranked commercial and industrial lending financial institution in the country, based on a total commercial loan portfolio, among financial institutions with less than $1 billion in assets. Our business lending, comprised of commercial loans, commercial real estate loans, multifamily loans and construction and land development loans, were $798.4 million, or 91.5% of our total loan portfolio at March 31, 2019 compared to $394.4 million, or 78.6% of our total loan portfolio at December 31, 2014. At March 31, 2019, commercial loans totaled $382.6 million, or 43.8% of our loan portfolio.

 

Our primary objective continues to be a premier business bank providing a full range of banking products and services to small and medium-sized commercial customers, located both within our regional markets and nationally. We seek to develop specialty lending and deposit services that will appeal to small and medium-sized commercial customers. We believe that the infrastructure we have created in recent years enables us to be more responsive and agile than most comparable commercial banks in responding to our customers and developing products and services to meet the financial needs in our markets and, increasingly, nationwide.

 

We have been effective in competing against both larger regional banks and smaller banks operating in our markets. We compete against the larger banks through our responsive and personalized service, providing our customers with quicker decision making, customized products where appropriate and access to our senior managers. Our larger capital base, highly experienced commercial bankers and a sophisticated product and service mix, including a suite of cash management services and technology solutions and support, enable us to compete effectively against smaller banks. Recent consolidation of financial institutions in and around our markets continues to create further opportunity for expansion in our markets.

 

To grow our franchise and enhance profitability, we intend to maintain our traditional business banking while continuing to focus on innovative lending and deposit products. To accomplish our goals, we are pursuing the following strategies:

 

·Develop innovative and highly specialized commercial lending products while maintaining our traditional commercial lending activities. We have grown our loan portfolio by developing expertise for customers who typically have not been supported by larger financial institutions but whose business needs are usually too complex for smaller institutions. When entering a new lending line, we typically seek to manage risks and costs by limiting initial activity. We then decide whether it would be profitable and consistent with our risk tolerance levels to expand the activity, and continually calibrate and adjust our actions to maintain appropriate risk limitations.

 

To date, the principal examples of our specialized commercial lending are what we characterize as “enterprise value loans” and loans to developers of commercial-scale renewable energy facilities.

 

Our enterprise value loans, which we began originating in 2015, are fully amortizing term loans (up to seven years) that are made to entities that are in the process of purchasing existing businesses. We also provide working capital and equipment lines of credit. We generally limit these loans to a loan-to-value limitation of 50%, as verified by a quality of earnings review by a certified public accounting firm, and we generally require a maximum EBITDA (earnings before interest, tax, depreciation and amortization) of less than three times, as verified by a third-party business valuation. At March 31, 2019, enterprise value loans totaled $147.5 million, or 16.9% of our total loan portfolio, with total exposure of $182.5 million, consisting of 134 loans in 18 states. This compares to a balance of $61.8 million, or 8.2% of our total loan portfolio at December 31,

 

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2017, an increase of 138.5%. The average loan balance was $1.1 million at March 31, 2019. Due to the relatively short amortization period of these loans, over time we expect more limited growth in our total portfolio of enterprise value loans even if we are successful in continuing to originate new enterprise value loans.

 

In 2015, we began originating loans to developers of commercial-scale renewable energy facilities. These loans are secured by the power purchase agreements and the underlying equipment, and the term of a loan is shorter than the life expectancy of both the power purchase agreement and the related equipment. At March 31, 2019, renewable energy loans totaled $54.0 million, or 6.2% of our loan portfolio, with total exposure of $64.4 million, consisting of 43 loans in five states (primarily New England and New York). This compares to a balance of $20.7 million, or 3.3% of our total loan portfolio at December 31, 2017, an increase of 160.9%. Of these loans, at March 31, 2019, $39.1 million, or 72.5%, were secured by solar arrays, while the remaining $14.9 million, or 27.5%, were secured by wind turbines. The average loan balance of our renewable energy loans was $1.3 million at March 31, 2019.

 

We intend to continue to develop other specialized commercial lending products, and we are currently developing international trade finance, asset-based lending and software as a service (SaaS) lending. Based upon initial experience, we may expand our investment in these opportunities or we may focus our resources on other opportunities.

 

Because of our success in growing our commercial loan portfolio, a large portion of this portfolio is unseasoned, meaning they were originated recently. Specifically, as of March 31, 2019, the average age of our commercial loan portfolio was 22 months, with a weighted average term of 8.25 years. In determining the average term, we excluded demand lines of credit with no maturity date (which totaled $39.7 million at March 31, 2019, or 10.4% of our total commercial loan portfolio at that date). Loans that have been originated recently have not been subjected to unfavorable economic conditions, and do not have a significant payment history pattern with which to judge future collectability. See “Risk Factors—Risks Related to Our Business— Our portfolio of loans with a higher risk of loss is increasing and the unseasoned nature of our commercial loan portfolio may result in errors in judging its collectability, which may lead to additional provisions for loan losses or charge-offs, which would hurt our profits.”

 

·Increase core deposits, especially low-cost demand deposits. We have grown our core deposits (which we define as all deposits except for certificates of deposit) through a variety of strategies, including investing in technology and our employees, as well as proactive interaction with our customers. Our investment in technology, described below, has enabled us to better serve commercial customers who demand faster processing times and simplified online interaction. For example, we provide deposit and cash management services for 1031 qualified intermediaries, digital currency customers, payroll providers and community association management companies. Funds we receive from digital currency customers are denominated in U.S. dollars; we do not have any digital assets or liabilities on our balance sheet and we do not take any digital currency exchange rate risk. We believe our specialized commercial activities have provided opportunities to generate business deposits from those customers, including from customers outside of our branch network, that may not be available to traditional community banks. For example, our growth in enterprise value lending has resulted in related deposits of $37.3 million as of March 31, 2019, including $12.9 million of non-interest bearing deposits. Furthermore, as a Massachusetts savings bank, we can provide full deposit insurance provided through a combination of Federal Deposit Insurance Corporation deposit insurance as well as the Depositors Insurance Fund (which insures deposits in excess of the Federal Deposit Insurance Corporation limits), which we believe gives us a competitive advantage for customers with larger deposit balances. We seek to limit risk through a robust Bank Secrecy Act (BSA) program, Know Your Customer policies and enhanced compliance procedures for non-traditional deposit customers.

 

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·Focus on technological improvement to grow our customer base. Competition in the banking industry continues to intensify, including increasing competition from non-traditional entities, such as financial technology, or “fintech,” companies. In response to these challenges, we have engaged in strategic initiatives with our core systems processor, a payment provider and a digital onboarding company in our efforts to enhance our technology platform and our user experience for online banking products and services. We are also exploring ways to partner with other fintech companies, who may want to offer their customers financial products without taking on full banking services themselves. Our strategic initiatives enable us to provide additional products and collaboration beyond those of a traditional financial institution, and strengthens our efforts to grow our deposit base. In addition, we do not merely provide our technology platform to our customers, but we also send our customer service representatives to our customers’ businesses to provide on-site training for using our products and services. We proactively identify gaps in our customer relationships and suggest to our customers ways for them to improve their utilization of our products and services, providing them with added convenience and cost savings while improving our profitability.

 

·Manage credit risk to maintain a relatively low level of non-performing assets. Although we have entered into new lending lines in recent years, and have originated loans with larger balances and, in some cases, outside of our traditional markets, we continue to focus on strong asset quality as a key to long-term financial success. We have proactively established credit management systems to support our evolving operations. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. We continually assess our lending lines, and we adjust our activity as needed, including by exiting underperforming segments. Our compensation and incentive systems are also aligned with our strategies to grow business loans and core deposits while maintaining asset quality. Our non-performing assets to total assets ratio was 1.01% at March 31, 2019. Among our specialized lending lines, at March 31, 2019, $1.4 million, or 0.9% of our enterprise value loans, were non-performing, and no renewable energy loans were non-performing.

 

·Enhance operating efficiency through continual improvement. In recent years, we have successfully maintained our efforts to control operating expenses, and, as a result, our efficiency ratio improved to 61.5% for the year ended December 31, 2018 from 71.2% for the year ended December 31, 2014. We remain disciplined in evaluating the cost and expected benefit of all expansion opportunities. To further improve operating efficiency, in 2018 we initiated a “Lean” program to enhance employee engagement and training in order to standardize work and reduce employee burden, with a goal of improving both the customer and employee experience, and encouraging innovation, agility and adaptability. This has enhanced our established corporate culture that is based on personal accountability, high ethical standards and significant commitment to training and career development. Although we expect to incur additional regulatory expense as a result of growing assets above $1 billion, as well as additional costs related to anticipated stock benefit plans, we intend to continue our efforts to control our expenses.

 

Reasons for the Conversion and Offering

 

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

·Enhance our regulatory capital position. A strong capital position is essential to achieving our long-term objectives of growing The Provident Bank and building stockholder value. Although The Provident Bank exceeds all regulatory capital requirements, the proceeds from the offering will further strengthen our capital position and enable us to support our planned growth and expansion through larger legal lending limits and reduced loan concentrations as a percentage of regulatory capital. Minimum regulatory capital requirements have also increased under recently

 

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adopted regulations. Compliance with these new requirements will be essential to the continued implementation of our business strategy.

 

·Transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure. The stock holding company structure gives us greater flexibility to access the capital markets to support our growth through possible future equity and debt offerings. We have no current plans, agreements or understandings regarding any additional equity or debt offerings.

 

·Improve the liquidity of our shares of common stock. We expect that the larger number of shares that will be outstanding after completion of the conversion and offering will result in a more liquid and active market for New Provident common stock. A more liquid and active market will make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies.

 

·Facilitate our stock holding company’s ability to pay dividends to our public stockholders. Current policy of the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” restricts the ability of mutual holding companies that are regulated as bank holding companies to waive dividends declared by their subsidiaries. Accordingly, in our current structure, because dividends paid by Old Provident would likely be required to be paid to Provident Bancorp along with all other stockholders, the amount of dividends available for all other stockholders will be less than if Provident Bancorp were to waive the receipt of dividends. The conversion will eliminate our mutual holding company structure and will facilitate our ability to pay dividends to our public stockholders, subject to the customary legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.”

 

·Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions or business lines as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit anyone from acquiring or offering to acquire more than 10% of our stock for three years following completion of the conversion without regulatory approval.

 

Terms of the Offering

 

We are offering between 9,775,000 and 13,225,000 shares of common stock to eligible depositors of The Provident Bank, to our tax-qualified employee benefit plans, to our employees, officers, trustees, directors and corporators (subject to the priority rights of eligible depositors and our tax-qualified employee benefit plans) and, to the extent shares remain available, in a community offering to the general public, with a preference given first to residents of the Massachusetts cities and towns of Amesbury, Newburyport and Salisbury, and the New Hampshire cities and towns of Bedford, Exeter, Greenland, Hampton, Hampton Falls, Manchester, Newcastle, Newington, North Hampton, Portsmouth, Rye, Seabrook and Stratham, and second to other members of the general public. If necessary, we will also offer shares to the general public in a syndicated or firm commitment underwritten offering. Unless the number of shares of common stock to be offered is increased to more than 13,225,000 shares or decreased to fewer than 9,775,000 shares, or the subscription and community offerings are extended beyond October 25, 2019, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past October 25, 2019, all subscribers will be notified in writing and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, your order will be cancelled and we will promptly return your funds with interest at 0.15% per annum or cancel your deposit

 

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account withdrawal authorization. If the number of shares to be sold is increased to more than 13,225,000 shares or decreased to less than 9,775,000 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at 0.15% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated or firm commitment underwritten offering, if necessary.

 

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or a syndicated or firm commitment underwritten offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Sandler O’Neill & Partners, L.P., our marketing agent in the subscription and community offerings, will use its best efforts to assist us in selling shares of our common stock in the subscription and community offerings but is not obligated to purchase any shares of common stock in the subscription and community offerings.

 

How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Stock Price

 

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of New Provident for shares of Old Provident are based on an independent appraisal of the estimated market value of New Provident, assuming the offering has been completed. RP Financial, LC., our independent appraiser, has estimated that, as of May 10, 2019, this market value was $219.5 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $186.6 million and a maximum of $252.5 million. Based on this valuation range, the 52.3% ownership interest of Provident Bancorp in Old Provident as of March 31, 2019 being sold in the offering and the $10.00 per share price, the number of shares of common stock being offered for sale by New Provident ranges from 9,775,000 shares to 13,225,000 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 1.9354 shares at the minimum of the offering range to 2.6185 shares at the maximum of the offering range, and will generally preserve the existing percentage ownership of public stockholders.

 

The appraisal is based in part on Old Provident’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded bank holding companies and savings and loan holding companies that RP Financial, LC. considers comparable to Old Provident. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market.

 

Company Name  Ticker
Symbol
  Headquarters  Total Assets
(1)
 
         (In millions) 
ESSA Bancorp, Inc.  ESSA  Stroudsburg, PA  $1,836 
Hingham Institution for Savings  HIFS  Hingham, MA  $2,497 
HMN Financial, Inc.  HMNF  Rochester, MN  $723 
PCSB Financial Corporation  PCSB  Yorktown Heights, NY  $1,524 
Prudential Bancorp, Inc.  PBIP  Philadelphia, PA  $1,202 
Severn Bancorp, Inc.  SVBI  Annapolis, MD  $974 
Standard AVB Financial Corp.  STND  Monroeville, PA  $990 
Waterstone Financial, Inc.  WSBF  Wauwatosa, WI  $1,929 
Wellesley Bancorp, Inc.  WEBK  Wellesley, MA  $912 
Western New England Bancorp, Inc.  WNEB  Westfield, MA  $2,116 

 

 

(1)Asset size for all companies is as of March 31, 2019, with the exception of Severn Bancorp, Inc., where asset size is as of December 31, 2018.

 

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The following table presents a summary of selected pricing ratios for New Provident (on a pro forma basis) as of and for the twelve months ended March 31, 2019, and for the peer group companies based on earnings and other information as of and for the twelve months ended March 31, 2019, with stock prices as of May 10, 2019, as reflected in the appraisal report. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 21.2% on a price-to-book value basis, a discount of 24.4% on a price-to-tangible book value basis, and a premium of 40.2% on a price-to-earnings basis.

 

  

Price-to-earnings

multiple (1)

   Price-to-book
value ratio
   Price-to-tangible
book value ratio
 
New Provident (on a pro forma basis, assuming completion of the conversion)               
Maximum   26.83x   104.17%   104.17%
Midpoint   23.19x   96.62%   96.62%
Minimum   19.59x   87.87%   87.87%
                
Valuation of peer group companies, all of which are fully converted (on an historical basis)               
Averages   16.54x   122.55%   127.83%
Medians   14.75x   121.56%   122.27%

 

 

(1)Price-to-earnings multiples calculated by RP Financial, LC. in the independent appraisal are based on an estimate of “core” or recurring earnings. These ratios are different than those presented in “Pro Forma Data.”

 

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial, LC. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Stock Pricing and Number of Shares to be Issued.”

 

Effect of Provident Bancorp’s Assets on Minority Stock Ownership

 

Public stockholders of Old Provident will receive shares of common stock of New Provident in exchange for their shares of common stock of Old Provident pursuant to an exchange ratio that is designed to provide, subject to adjustment, existing public stockholders with the same ownership percentage of the common stock of New Provident after the conversion as their ownership percentage in Old Provident immediately prior to the conversion, without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. However, the exchange ratio will be adjusted downward to reflect assets held by Provident Bancorp (other than shares of stock of Old Provident), which assets consist primarily of cash. Provident Bancorp had net assets of $372,000 as of March 31, 2019, not including Old Provident common stock. This adjustment would decrease Old Provident’s public stockholders’ ownership interest in New Provident from 47.7% to 47.6%, and would increase the ownership interest of persons who purchase stock in the offering from 52.3% (the amount of Old Provident’s outstanding common stock held by Provident Bancorp) to 52.4%.

 

The Exchange of Existing Shares of Old Provident Common Stock

 

If you are a stockholder of Old Provident immediately prior to the completion of the conversion, your shares will be exchanged for shares of common stock of New Provident. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Old Provident common stock owned by public stockholders immediately prior to the completion of the conversion. The following table shows how the exchange ratio (rounded to four decimal places) will adjust, based on the appraised value of New Provident as of May 10, 2019, assuming public stockholders of Old Provident own 4,587,499 shares of Old Provident common stock and Provident Bancorp had net

 

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assets of $372,000 immediately prior to the completion of the conversion. The table also shows the number of shares of New Provident common stock a hypothetical owner of Old Provident common stock would receive in exchange for 100 shares of Old Provident common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 

   Shares to be Sold in
This Offering
   Shares of New Provident to be
Issued for Shares of Old
Provident
   Total Shares
of Common
Stock to be
Issued in
Exchange and
   Exchange   Equivalent
Value of
Shares
Based
Upon
Offering
   Equivalent
Pro Forma
Tangible
Book Value
Per
Exchanged
   Shares to
be
Received
for 100
Existing
 
   Amount   Percent   Amount   Percent   Offering   Ratio   Price (1)   Share (2)   Shares (3) 
                                     
Minimum   9,775,000    52.4%   8,878,601    47.6%   18,653,601    1.9354   $19.35   $22.02    193 
Midpoint   11,500,000    52.4    10,445,413    47.6    21,945,413    2.2769    22.77    23.59    227 
Maximum   13,225,000    52.4    12,012,225    47.6    25,237,225    2.6185    26.18    25.14    261 

 

 

(1)Represents the value of shares of New Provident common stock to be received in the conversion by a holder of one share of Old Provident, pursuant to the exchange ratio, based upon the $10.00 per share purchase price.
(2)Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio.
(3)Cash will be paid in lieu of fractional shares.

 

No fractional shares of New Provident common stock will be issued to any public stockholder of Old Provident. For each fractional share that otherwise would be issued, New Provident will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.

 

Outstanding options to purchase shares of Old Provident common stock also will convert into and become options to purchase shares of New Provident common stock based upon the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will not be affected by the conversion. At March 31, 2019, there were 396,438 outstanding options to purchase shares of Old Provident common stock, 151,272 of which have vested. Such outstanding options will be converted into options to purchase 767,266 shares of common stock at the minimum of the offering range and 1,038,073 shares of common stock at the maximum of the offering range. Because federal regulations prohibit us from repurchasing our common stock during the first year following the conversion unless compelling business reasons exist for such repurchases, we may use authorized but unissued shares to fund option exercises that occur during the first year following the conversion. If all existing options were exercised and funded with authorized but unissued shares of common stock following the conversion, stockholders would experience ownership dilution of approximately 3.9% at the minimum of the offering range.

 

How We Intend to Use the Proceeds From the Offering

 

We intend to invest at least 50% of the net proceeds from the stock offering in The Provident Bank, fund the loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering and retain the remainder of the net proceeds from the offering at New Provident. Therefore, assuming we sell 11,500,000 shares of common stock in the stock offering at the midpoint of the offering range, and we have net proceeds of $112.5 million, we intend to invest $56.2 million in The Provident Bank, loan to our employee stock ownership plan $9.2 million to fund its purchase of shares of common stock, and retain the remaining $47.0 million of the net proceeds at New Provident, to be used as described below, subject to change as New Provident’s Board of Directors may determine from time to time.

 

New Provident may use the proceeds it retains for investment, to pay cash dividends, to repurchase shares of common stock, to acquire other financial institutions or financial services companies and for other general corporate purposes. The Provident Bank may use the proceeds it receives to support increased lending, enhance existing, or support the growth and development of, new products and services or expand its branch network by establishing or acquiring new branches or by acquiring other financial institutions or financial services companies and for other general corporate purposes. We do not currently have any agreements or understandings regarding any acquisition transactions.

 

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Please see the section of this prospectus entitled “How We Intend to Use the Proceeds from the Offering” for more information on the proposed use of the proceeds from the offering.

 

Persons Who May Order Shares of Common Stock in the Offering

 

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

(i)To depositors with accounts at The Provident Bank with aggregate balances of at least $50 at the close of business on May 31, 2018.

 

(ii)To our tax-qualified employee benefit plans (including The Provident Bank’s employee stock ownership plan and The Provident Bank’s 401(k) plan), which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the stock offering.

 

(iii)To employees, officers, directors, trustees and corporators of The Provident Bank or Provident Bancorp who do not have a higher purchase priority.

 

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons residing in the Massachusetts cities and towns of Amesbury, Newburyport and Salisbury, and the New Hampshire cities and towns of Bedford, Exeter, Greenland, Hampton, Hampton Falls, Manchester, Newcastle, Newington, North Hampton, Portsmouth, Rye, Seabrook and Stratham, and second to other members of the general public. The community offering may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering and the community offering through a syndicated or firm commitment underwritten offering. Sandler O’Neill & Partners, L.P. will act as sole book-running manager for any syndicated or firm commitment underwritten offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated or firm commitment underwritten offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated or firm commitment underwritten offering will be based on the facts and circumstances available to management at the time of the determination.

 

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. A detailed description of the subscription offering, the community offering and the syndicated or firm commitment underwritten offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

 

Limits on How Much Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25 shares.

 

Generally, no individual may purchase more than 50,000 shares ($500,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 150,000 shares ($1.5 million) of common stock:

 

·most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest; or

 

·your spouse or relatives of you or your spouse living in your house or who is a director, trustee or officer of Old Provident, Provident Bancorp, New Provident or The Provident Bank; or

 

·other persons who may be your associates or persons acting in concert with you.

 

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Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to the overall purchase limitation of 150,000 shares ($1.5 million).

 

The following relatives of directors and officers will be considered “associates” of these individuals regardless of whether they share a household with the director or officer: any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. This also includes adoptive relationships.

 

In addition to the above purchase limitations, there is an ownership limitation for current stockholders of Old Provident other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Old Provident common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering. If, based on your current ownership level, you will own more than 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering following the exchange of your shares of Old Provident common stock, you will be ineligible to purchase any new shares in the offering. You will be required to obtain regulatory approval or non-objection prior to acquiring 10% or more of New Provident’s common stock.

 

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations, including more detailed definitions of the terms “associate” and “acting in concert”, in “The Conversion and Offering—Additional Limitations on Common Stock Purchases.”

 

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

 

In the subscription offering and community offering, you may pay for your shares by:

 

(i)personal check, bank check or money order made payable directly to “Provident Bancorp, Inc.”; or

 

(ii)authorizing us to withdraw available funds (without any early withdrawal penalty) from your The Provident Bank interest-bearing deposit account(s) designated on the order form.

 

The Provident Bank is not permitted to lend funds to anyone to purchase shares of common stock in the offering. Additionally, you may not use a The Provident Bank line of credit check or any type of third-party check to pay for shares of common stock. No wire transfer will be accepted without our prior approval. You may not designate withdrawal from The Provident Bank’s accounts with check-writing privileges; instead, please submit a check. You may not authorize direct withdrawal from a The Provident Bank individual retirement account, or IRA. See “—Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

 

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Provident Bancorp, Inc. or authorization to withdraw funds from one or more of your The Provident Bank deposit accounts, provided that the stock order form is received before 5:00 p.m., Eastern Time, on September 10, 2019, which is the end of the subscription offering period. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight delivery to our Stock Information Center, which will be located at 5 Market Street, Amesbury, Massachusetts 01913. You may also hand-deliver stock order forms to the Stock Information Center. Hand-delivered stock order forms will only be accepted at this location. We will not accept stock order forms at our banking offices. Please do not mail stock order forms to The Provident Bank’s offices.

 

Please see “The Conversion and Offering— Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

 

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Using Individual Retirement Account Funds to Purchase Shares of Common Stock

 

You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. If you wish to use some or all of the funds in your The Provident Bank individual retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the September 10, 2019 offering deadline, for assistance with purchases using your individual retirement account or other retirement account you may have at The Provident Bank or elsewhere. Whether you may use such funds to purchase shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

 

See “The Conversion and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” and “—Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the stock offering.

 

Market for Common Stock

 

Existing publicly held shares of Old Provident’s common stock are listed on the Nasdaq Capital Market under the symbol “PVBC.” Upon completion of the conversion, the shares of common stock of New Provident will replace the existing shares, and we expect the shares of New Provident common stock will also trade on the Nasdaq Capital Market under the symbol “PVBC.” In order to list our stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of July 29, 2019, Old Provident had approximately 25 registered market makers in its common stock. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

 

Our Dividend Policy

 

Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future. To date, Old Provident has not paid any dividends.

 

For information regarding our proposed dividend policy, see “Our Dividend Policy.”

 

Purchases by Directors and Executive Officers

 

We expect our directors and executive officers, together with their associates, to subscribe for 288,050 shares of common stock in the offering, representing 2.9% of shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our directors and executive officers, together with their associates, are expected to beneficially own 989,994 shares of common stock (including stock options exercisable within 60 days of July 29, 2019), or 5.3% of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own that will be exchanged for shares of New Provident.

 

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

 

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Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

 

The deadline for purchasing shares of common stock in the subscription and community offerings is 5:00 p.m., Eastern Time, on September 10, 2019, unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

 

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 5:00 p.m., Eastern Time, on September 10, 2019, whether or not we have been able to locate each person entitled to subscription rights.

 

See “The Conversion and Offering— Procedure for Purchasing Shares in Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for purchasing shares in the stock offering.

 

You May Not Sell or Transfer Your Subscription Rights

 

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the order form, you cannot add the names of others for joint stock registration unless they are also named on the qualifying deposit account, and you cannot delete names of others except in the case of certain order placed through an IRA, Keogh, 401(k) or similar plan, and except in the event of the death of a named eligible depositor. Doing so may jeopardize your subscription rights. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.

 

Delivery of Shares of Common Stock

 

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in “—Conditions to Completion of the Conversion.” Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

Conditions to Completion of the Conversion

 

We cannot complete the conversion and offering unless:

 

·The plan of conversion is approved by Old Provident stockholders holding at least two-thirds of the outstanding shares of common stock of Old Provident as of July 29, 2019, including shares held by Provident Bancorp;

 

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·The plan of conversion is approved by Old Provident stockholders holding at least a majority of the outstanding shares of common stock of Old Provident as of July 29, 2019, excluding shares held by Provident Bancorp;

 

·We sell at least the minimum number of shares of common stock offered in the offering;

 

·We receive approval from the Federal Reserve Board to complete the conversion and offering; and

 

·We receive the approval of the Massachusetts Commissioner of Banks to complete the conversion and offering.

 

Provident Bancorp intends to vote its shares in favor of the plan of conversion. At July 29, 2019, Provident Bancorp owned 52.3% of the outstanding shares of common stock of Old Provident. The directors and executive officers of Old Provident and their affiliates owned 233,892 shares of Old Provident (excluding exercisable options), or 2.4% of the outstanding shares of common stock and 5.1% of the outstanding shares of common stock excluding shares held by Provident Bancorp. They intend to vote those shares in favor of the plan of conversion.

 

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 9,775,000 shares of common stock, we may take several steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

(i)increase the purchase and ownership limitations; and/or

 

(ii)seek regulatory approval to extend the offering beyond October 25, 2019, so long as we resolicit subscribers who previously submitted subscriptions in the offering; and/or

 

(iii)increase the shares purchased by the employee stock ownership plan.

 

If we extend the offering past October 25, 2019, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your stock order and promptly return your funds with interest for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their subscriptions up to the then-applicable limit.

 

Possible Change in the Offering Range

 

RP Financial, LC. will update its appraisal before we complete the offering. If our pro forma market value at that time is either below $186.6 million or above $252.5 million, then, after consulting with the Federal Reserve Board and the Massachusetts Commissioner of Banks, we may:

 

·terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

·set a new offering range; or

 

·take such other actions as may be permitted by the Federal Reserve Board, the Massachusetts Commissioner of Banks and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at 0.15% per annum for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds

 

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from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

 

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of corporators of Provident Bancorp that has been called to vote on the conversion, and at any time after corporator approval with regulatory approval. If we terminate the offering, we will promptly return your funds with interest at 0.15% per annum, and we will cancel deposit account withdrawal authorizations.

 

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

 

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all The Provident Bank employees, to purchase up to 8% of the shares of common stock we sell in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks.

 

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within 12 months following the completion of the conversion or more than 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would reserve a number of shares (i) up to 4% of the shares of common stock sold in the offering (reduced by amounts purchased by our 401(k) plan using its purchase priority in the stock offering) for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management—Benefit Plans—2016 Equity Incentive Plan.”

 

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the stock offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

   Number of Shares to be Granted or Purchased         
           As a
Percentage of
   Dilution
Resulting
From
   Value of Grants (In
Thousands) (1)
 
   At Minimum
of Offering
Range
   At
Maximum of
Offering
Range
   Common
Stock to be
Sold in the
Offering
   Issuance of
Shares for
Stock-Based
Benefit Plans
   At
Minimum of
Offering
Range
   At Maximum
of Offering
Range
 
                         
Employee stock ownership plan   782,000    1,058,000    8.0%   N/A(2)  $7,820   $10,580 
Restricted stock awards   391,000    529,000    4.0    2.05%   3,910    5,290 
Stock options   977,500    1,322,500    10.0    4.98%   2,786    3,769 
Total   2,150,500    2,909,500    22.00%   6.83%  $14,516   $19,639 

 

 

(1)The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $2.85 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price

 

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and option exercise price of $10.00; an expected option term of 10 years; no dividend yield; a risk-free rate of return of 2.41%; and expected volatility of 13.89%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

(2)No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the stock offering.

 

We may fund our stock-based benefit plans through open market purchases, as opposed to new issuances of stock; however, if any options previously granted under our existing 2016 Equity Incentive Plan are exercised during the first year following completion of the offering, they will be funded with newly issued shares as federal regulations do not permit us to repurchase our shares during the first year following the completion of the offering except to fund the grants of restricted stock under our existing stock-based benefit plan or under extraordinary circumstances.

 

The following table presents information as of March 31, 2019 regarding our employee stock ownership plan, our 2016 Equity Incentive Plan and our proposed stock-based benefit plan. The table below assumes that 25,237,225 shares are outstanding after the offering, which includes the sale of 13,225,000 shares in the offering at the maximum of the offering range and the issuance of new shares in exchange for shares of Old Provident using an exchange ratio of 2.6185. It also assumes that the value of the stock is $10.00 per share.

 

Existing and New Stock Benefit Plans  Participants  Shares at Maximum
of Offering Range
   Estimated Value of
Shares
   Percentage of
Shares Outstanding
After the
Conversion
 
                
Employee Stock Ownership Plan:  Officers and Employees               
Shares purchased in 2015 offering (1)      935,203(2)  $9,352,030    3.71%
Shares to be purchased in this offering      1,058,000    10,580,000    4.19 
Total employee stock ownership plan shares      1,993,203   $19,932,030    7.90%
                   
Restricted Stock Awards:  Directors, Officers and Employees               
2016 Equity Incentive Plan (1)      467,599(3)  $3,237,565(4)   1.85%
New shares of restricted stock      529,000    5,290,000(4)   2.10 
Total shares of restricted stock      996,599   $8,527,565    3.95%
                   
Stock Options:  Directors, Officers and Employees               
2016 Equity Incentive Plan (1)      1,169,003(5)  $2,321,488    4.63%
New stock options      1,322,500    3,769,125(6)   5.24 
Total stock options      2,491,503   $6,090,613    9.87%
                   
Total of stock benefit plans      5,481,305   $34,550,208    21.72%

 

 

(1)The number of shares indicated has been adjusted for the 2.6185 exchange ratio at the maximum of the offering range.
(2)As of March 31, 2019, 249,386 of these shares, or 95,240 shares prior to adjustment for the exchange, have been allocated to participants.
(3)As of March 31, 2019, 417,816 of these shares, or 159,563 shares prior to adjustment for the exchange, have been awarded, and 161,012 of these shares, or 61,490 shares prior to adjustment for the exchange, have vested.
(4)The value of restricted stock awards is determined based on their fair value as of the date grants are made. For purposes of this table, the fair value of awards under the new stock-based benefit plan is assumed to be the same as the offering price of $10.00 per share.
(5)As of March 31, 2019, options to purchase 1,044,449 of these shares, or 398,873 shares prior to adjustment for the exchange, have been awarded, and options to purchase 396,106 of these shares, or 151,272 shares prior to adjustment for the exchange, have vested.
(6)The weighted-average fair value of stock options to be granted has been estimated at $2.85 per option, using the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; no dividend yield; expected term, 10 years; expected volatility, 13.89%; and risk-free rate of return, 2.41%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

 

Tax Consequences

 

Provident Bancorp, Old Provident, The Provident Bank and New Provident have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, and have received an opinion of Baker Newman & Noyes LLC regarding the material Massachusetts state tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Provident Bancorp, Old Provident, The Provident Bank, New Provident, persons eligible to

 

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subscribe in the subscription offering, or existing stockholders of Old Provident (except for cash paid for fractional shares). Existing stockholders of Old Provident who receive cash in lieu of fractional shares of New Provident will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

 

Emerging Growth Company Status

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) until December 31, 2020, which is the end of the fiscal year following the fifth anniversary of Old Provident’s sale of common stock in its 2015 initial stock offering. For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors—Risks Related to Our Business—We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors” and “Supervision and Regulation—Emerging Growth Company Status.”

 

An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Old Provident elected to comply with new or revised accounting pronouncements in the same manner as a public company, and this election is binding on New Provident.

 

Risk Factors

 

An investment in New Provident’s common stock is subject to a number of risks, including risks related to our business and this offering. Specific risks with respect to our business include those related to: our commercial lending activities and the unseasoned nature of our loan portfolio; new lines of business and products; our growth plans; competition; our allowance for loan losses; economic conditions; our providing services to customers in the digital currency industry; our developing international commercial financing as a new product line; the effects of our growth on excess deposit insurance; our government banking deposits; monetary and regulatory policies, changes in laws and regulations and compliance with laws and regulations; systems breaches and customer and employee fraud; risk management; our funding sources; our securities portfolio; our dependence on key personnel; our status as an emerging growth company; our existing equity incentive plan; changes in estimates and assumptions; the performance of the Federal Home Loan Bank of Boston; the discontinuation of the LIBOR index; environmental liability; and protracted government shutdowns.

 

Specific risks with respect to this offering include those related to: the future trading price of our common stock; our use of the net proceeds; our return on equity following the stock offering; new stock-based benefit plans; anti-takeover factors; our selecting Maryland as the exclusive forum for certain legal matters; stock repurchase regulations; the irrevocability of your investment decision; and the potential adverse tax consequences related to subscription rights.

 

Please read the information in the section entitled “Risk Factors,” beginning on page 18 for a thorough description of the risks involved.

 

How You Can Obtain Additional Information—Stock Information Center

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center. The telephone number is (978) 834-8505. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on bank holidays.

 

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RISK FACTORS

 

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock.

 

Risks Related to Our Business

 

Our emphasis on commercial business lending, commercial real estate, multi-family real estate, construction and land development involves risks that could adversely affect our financial condition and results of operations.

 

In recent years, we have shifted our loan originations to focus on commercial business loans, while continuing to originate commercial real estate, multi-family real estate, construction and land development loans. We expect this focus to continue as we discontinued one- to four-family residential real estate lending in 2014. As of March 31, 2019, our commercial loan portfolio, which includes commercial business, commercial real estate, multi-family real estate and construction and land development loans, has increased to $798.4 million, or 91.5% of total loans, at March 31, 2019 from $394.4 million, or 78.6% of total loans, at December 31, 2014. Our commercial business loan portfolio totaled $382.6 million at March 31, 2019, and included $147.5 million of enterprise value loans, or 16.9% of our total loan portfolio, and $54.0 million of renewable energy loans, or 6.2% of our total loan portfolio. As a result, our credit risk profile may be higher than traditional savings institutions that have higher concentrations of one- to four-family residential loans. These types of commercial lending activities, while potentially more profitable than one- to four-family residential lending, are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. These loans also generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, any charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Collateral evaluation and financial statement analysis in these types of loans also requires a more detailed analysis at the time of loan underwriting and on an ongoing basis.

 

Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flows of the borrower’s business and are secured by non-real estate collateral that may depreciate over time, may be illiquid and may fluctuate in value based on the success of the business. We expect that our portfolio of commercial business loans will continue to increase as a percentage of our total loan portfolio.

 

The credit risk related to commercial real estate and multi-family real estate loans is considered to be greater than the risk related to one- to four-family residential or consumer loans because the repayment of commercial real estate loans and multi-family real estate loans typically is dependent on the successful operation of the borrower’s business or the income stream of the real estate securing the loan as collateral, both of which can be significantly affected by conditions in the real estate markets or in the economy. For example, if the cash flows from the borrower’s project is reduced as a result of leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. In addition, some of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. These balloon payments may require the borrower to either sell or refinance the underlying property in order to make the balloon payment, which may increase the risk of default or non-payment.

 

Further, if we foreclose on a commercial real estate or multi-family real estate loan, our holding period for the collateral may be longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral, which can result in substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability.

 

Construction and land development lending involves additional risks when compared to one- to four-family residential real estate lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively

 

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difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest.

 

A secondary market for most types of commercial business, commercial real estate, multi-family real estate, and construction and land development loans is not readily available, so we generally do not have an economically feasible opportunity to mitigate credit risk by selling part or all of our interest in these loans.

 

Our portfolio of loans with a higher risk of loss is increasing and the unseasoned nature of our commercial loan portfolio may result in errors in judging its collectability, which may lead to additional provisions for loan losses or charge-offs, which would hurt our profits.

 

A large portion of our commercial loan portfolio is unseasoned, meaning they were originated recently. Our limited experience with these borrowers does not provide us with a significant payment history pattern with which to judge future collectability. Further, these loans have not been subjected to unfavorable economic conditions. As a result, it is difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

 

New lines of business or new products and services may subject us to additional risks.

 

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to make investments in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.

 

Our business strategy includes the continuation of significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

 

We expect to continue to experience growth in the amount of our assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.

 

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Strong competition for banking services could hurt our profits and slow growth.

 

We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. In addition, we face increasing competition for investors’ funds and banking services from other financial service companies such as fintech companies, brokerage firms, money market funds, mutual funds and other corporate and government securities. We may have difficulty entering into new lines of business or new markets that are already served by existing financial institutions or other entities. Conversely, our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to effectively compete, our results of operations may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We maintain an allowance for loan losses, which is established through a provision for loan losses that represents management’s best estimate of probable losses within the existing loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the adequacy of the allowance for loan losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio. Additionally, a problem with one or more loans could require us to significantly increase the level of our provision for loan losses. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Material additions to the allowance would materially decrease our net income.

 

We may be required to increase our allowance for credit losses as a result of changes to an accounting standard.

 

In 2016, the Financial Accounting Standards Board (“FASB”) released a new standard for determining the amount of the allowance for credit losses. The new standard will be effective for us for reporting periods beginning January 1, 2020. The new credit loss model will be a significant change from the standard in place today, because it requires the allowance for loan losses to be calculated based on current expected credit losses (commonly referred to as the “CECL model”) rather than losses inherent in the portfolio as of a point in time. When adopted, the CECL model may increase our allowance for credit losses, which could materially affect our financial condition and results of operations. The extent of the increase and its impact to our financial condition is under evaluation, but will ultimately depend upon the nature and characteristics of our portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date; therefore, the potential financial impact is currently unknown.

 

A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.

 

Our real estate lending, and a large portion of our commercial business lending, depends primarily on the general economic conditions in Northeastern Massachusetts and Southern New Hampshire. Certain types of our commercial business and some of our consumer loans are originated nationally and will be impacted by national or regional economic conditions. Economic conditions have a significant impact on the ability of the borrowers to repay loans and the value of the collateral securing these loans.

 

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A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

·demand for our products and services may decline;

 

·​loan delinquencies, problem assets and foreclosures may increase;

 

·collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

·the value of our securities portfolio may decline; and

 

·the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

 

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may affect interest rates.

 

If interest rates rise, and if rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate spread, which would have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income.

 

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.

 

Our strategy includes accepting deposits from businesses involved in the digital currency industry, the development and regulation of which is difficult to evaluate.

 

Our business strategy includes providing traditional banking and other services to customers in the digital currency industry, including digital currency exchanges and other industry participants. The digital currency industry includes a diverse set of businesses that use digital currencies for different purposes and provide services to others who use digital currencies. The businesses in which these customers engage involve digital currencies such as

 

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bitcoin, other technologies underlying digital currencies such as blockchain, and services associated with digital currencies and blockchain. At March 31, 2019, we had no deposits from digital currency industry participants.

 

Digital assets constitute a new and rapidly evolving industry, and the viability and future growth of the industry is subject to various uncertainties, including widespread adoption and use of digital currencies and the underlying technology, regulation of the industry, and price volatility, among other factors. Risks associated with the use of digital currency include its use, or perception of its use, to facilitate fraud, money laundering, tax evasion and ransomware scams; increased regulatory oversight of digital currencies and exchanges, and costs associated with such regulatory oversight; vulnerability to hacking, malware attacks and other cyber-security risks, which can lead to significant losses; price volatility; and consumer perception and demand. Due to such risks, the digital currency industry could suffer losses or slow development, which could adversely affect our digital currency customers. Slow or no growth in the development or acceptance of digital currency networks and blockchain technology may adversely affect our ability to continue to gather deposits from digital currency industry customers. Further, in the future, if digital currency customer deposits decline, we may be forced to rely more heavily on other, potentially more expensive and less stable funding sources.

 

Digital currency products have been, and may in the future continue to be, exploited to facilitate illegal activity such as fraud, money laundering, tax evasion and ransomware scams. If any of our customers do so or are alleged to have done so, it could adversely affect us.

 

Digital currencies and the digital currency industry are relatively new and, in many cases, lightly regulated or largely unregulated. Some types of digital currency have characteristics, such as the speed with which digital currency transactions can be conducted, the ability to conduct transactions without the involvement of regulated intermediaries, the ability to engage in transactions across multiple jurisdictions, the irreversible nature of certain digital currency transactions and encryption technology that anonymizes these transactions, which make digital currency particularly susceptible to use in illegal activity such as fraud, money laundering, tax evasion and ransomware scams. In the past, marketplaces that accepted digital currency payments for illegal activities have been investigated and closed by U.S. law enforcement authorities. Additionally, U.S. regulators have taken legal action against persons alleged to be engaged in fraudulent schemes involving digital currencies. In addition, the Federal Bureau of Investigation has noted the increasing use of digital currency in various ransomware scams.

 

Although we believe that our risk management and compliance framework, which includes thorough reviews we conduct as part of our due diligence process, is reasonably designed to detect any such illicit activities conducted by our potential or existing customers (or, in the case of digital currency exchanges, their customers), we cannot ensure that we will be able to detect any such illegal activity in all instances. Because the speed, irreversibility and anonymity of certain digital currency transactions make them more difficult to track, fraudulent transactions may be more likely to occur. If one of our customers (or in the case of digital currency exchanges, their customers) were to engage in or be accused of engaging in illegal activities using digital currency, we could be subject to regulatory investigation, fines, sanctions, and reputational damage, all of which would adversely affect our business, financial condition and results of operations. Further, we may experience a reduction in our deposits if such an incident were to cause significant losses to one of our customers.

 

We are currently developing international commercial financing as a new product line. Such activity involves additional risk compared to national lending activity.

 

We are currently developing international commercial financing as a new product line. We have focused our efforts on providing financing to foreign companies purchasing U.S. capital equipment and services, and working capital lines of credit to U.S. companies with foreign accounts receivable. As of March 31, 2019, we have originated $492,000 in international working capital lines of credit with total exposure of $2.1 million. As of that date, we have not yet originated a loan to a foreign company purchasing U.S. capital equipment and services, but we have had a number of ongoing discussions regarding originations, which could significantly grow the size of this portfolio. Given the probability of origination for many of these loans is individually low, it is difficult to predict growth in the portfolio, if any. Because of the guarantees associated with these loans, we may originate loans with individual principal balances that are significantly larger than the loans we currently originate. The businesses of

 

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international customers may be subject to risks that do not affect customers in our primary market area or in the United States generally, such as currency fluctuations, U.S. or foreign government intervention, economic and other conditions of the country in which the borrower is located or operates, increased risks of theft or fraud, and increased risks of natural disasters. Because we have not yet made any loans to a foreign company purchasing U.S. capital equipment and services, and we have originated limited international working capital lines of credit, it is difficult for us to evaluate the risk of loss associated with lending to international customers.

 

If we grow too large, we may lose the benefits of excess deposit insurance provided by the Depositors Insurance Fund.

 

As a Massachusetts savings bank, our deposits are insured in full beyond federal deposit insurance coverage limits by the Depositors Insurance Fund, a private excess deposit insurer created under Massachusetts law. We believe offering full deposit insurance gives us a competitive advantage for individual, corporate and municipal depositors having deposit balances in excess of Federal Deposit Insurance Corporation insurance limits.  However, the Depositors Insurance Fund may require member savings banks that pose greater than normal loss exposure risk to the Depositors Insurance Fund to take certain risk-mitigating measures or withdraw from the Depositors Insurance Fund and become a Massachusetts trust company by operation of law, subject to the Commissioner of Banks’ approval.  In such an event, we may be required to reduce our level of excess deposits, pay for the reinsurance of our excess deposits, make an additional capital contribution to the Depositors Insurance Fund, provide collateral or take other risk-mitigating measures that the Depositors Insurance Fund may require, which may include entering into reciprocal deposit programs with other financial institutions or reciprocal deposit services. Reducing our excess deposits by taking any of the above risk-mitigating measures, which allows deposits to run off, reduces our overall level of deposits and increases the extent to which we may need to rely in the future on other, more expensive or less stable sources for funding, including Federal Home Loan Bank advances, which would reduce net income. Shifting excess deposits into reciprocal deposit programs may result in higher funding costs, which also would reduce net income.

 

If our government banking deposits were lost within a short period of time, this could negatively impact our liquidity and earnings.

 

As of March 31, 2019, we held $35.3 million of deposits from municipalities throughout Massachusetts and New Hampshire. These deposits may be more volatile than other deposits. If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings.

 

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

 

In addition to being affected by general economic conditions, our earnings and growth are affected by the monetary and related policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

 

The monetary and related policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond The Provident Bank’s control and the effects of such policies upon our business, financial condition and results of operations cannot be predicted.

 

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Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

 

The Provident Bank is and New Provident will be subject to extensive regulation, supervision and examination by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of The Provident Bank rather than for holders of our common stock.

 

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, insurance, monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes.

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. We also provide services to non-traditional deposit customers, such as digital currency customers, which require an enhanced Bank Secrecy Act program and enhanced Know Your Customer and compliance policies and procedures. We may become subject to additional regulatory scrutiny as a result of providing products and services to digital currency industry customers. Our primary banking regulators may be less familiar with the digital currency industry, or may consider the industry to involve greater risks than more established industries.

 

Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations. We have not been subject to fines or other penalties, or suffered business or reputational harm with respect to potential money laundering activities or related laws and regulations, in the past.

 

We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.

 

The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.

 

The Provident Bank’s CRA compliance is currently evaluated under the Intermediate Small Bank CRA criteria.  However, given our anticipated growth and strategic focus, we will, in the future, need to prepare for the Large Bank CRA criteria or develop and apply for a CRA strategic plan.  In lieu of one of the primary evaluation methods, CRA regulations permit financial institutions to develop a strategic plan with the input of the community. Strategic plans, which must be approved by the financial institution’s banking regulators, allow banks to tailor their performance goals to the needs of their community by working directly with the community to develop the goals. Strategic plans, however, are very uncommon and, as noted above, would be subject to the approval of our banking regulators.

 

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A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.

 

System failure or breaches of our network security could materially and adversely affect our business, as well as subject us to increased operating costs as well as litigation and other liabilities.

 

The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to various problems, both foreseeable and unforeseeable. Our ability to provide reliable service to customers and other network participants, as well as our internal operations, depend on the efficient and uninterrupted operation of our computer network systems and data centers as well as those of our retail distributors, network acceptance members and third-party processors, including our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Our business involves the movement of large sums of money, processing large numbers of transactions and managing the data necessary to do both. Interruptions in our service may result for a number of reasons. For example, the data center hosting facilities that we use could be closed without adequate notice or suffer unanticipated problems resulting in lengthy interruptions in our service. Any damage or failure that causes an interruption in our operations could cause customers, retail distributors and other partners to become dissatisfied with our products and services or obligate us to issue credits or pay fines or other penalties to them, and could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

 

Although we believe that we have not experienced a security breach or hack, it is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack. Our general liability insurance and business interruption insurance have limitations on coverage and may not be adequate to cover the losses or damages that we incur. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require customer reporting and/or reimbursement of customer loss.

 

Customer or employee fraud subjects us to additional operational risks.

 

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Our loans to businesses and individuals and our deposit relationships and related transactions are also subject to exposure to the risk of loss due to fraud and other financial crimes. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We have not experienced any material financial losses from employee errors, misconduct or fraud. However, if our internal controls fail to prevent or promptly detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our financial condition and results of operations.

 

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If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.

 

Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected.

 

Our continued development of innovative and highly specialized commercial lending products, which is central to our strategic plan, will require us to devote management time and financial resources to make corresponding refinements to our enterprise risk management framework. We may not be successful in designing or implementing adjustments to our enterprise risk management to address changes in one or more of our businesses.

 

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

 

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit, including deposits obtained through the Certificate of Deposit Registry Service, also known as CDARS. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability in accessing these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Our business model may be more highly susceptible than comparably sized banks to fluctuations in our liquidity levels, due to cash needs of customers such as payroll providers, or a decrease in the number of smaller businesses that we service. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and results of operations would be adversely affected.

 

The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.

 

Regulators have promulgated guidance that provides that a financial institution that, like us, that is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (1) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (2) total reported loans secured by multi-family and non-owner occupied, non-farm, non-residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these factors we have a concentration in loans of the type described in (2), above, which represent 161.5% of total bank capital as of March 31, 2019. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flows from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Although we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, our regulators could require us to implement additional policies and procedures that may result in additional costs to us, may result in a curtailment of our multi-family and commercial real estate lending and/or require that we maintain

 

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higher levels of regulatory capital, any of which would adversely affect our loan originations and results of operations.

 

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

 

Effective January 1, 2015, we became subject to more stringent capital requirements as a result of the implementation of Basel Committee on Banking Supervision (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Act. The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and/or result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares.

 

Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels.

 

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

 

The Federal Reserve Board may require us to commit capital resources to support The Provident Bank.

 

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by New Provident to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

 

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Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.

 

We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings. Most of the proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry or we may not prevail in any proceeding or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

 

Our success depends on hiring, retaining and motivating certain key personnel.

 

Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

 

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) until December 31, 2020, which is the end of the fiscal year following the fifth anniversary of Old Provident’s sale of common stock in its 2015 initial stock offering. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As an emerging growth company, we are also not subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires that our independent auditors attest as to the effectiveness of our internal control over financial reporting. If some investors find our common stock less attractive as a result of any choices to reduce our disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

Our 2016 Equity Incentive Plan has increased our expenses and reduced our income, and may dilute your ownership interests.

 

Our stockholders approved the Provident Bancorp Inc. 2016 Equity Incentive Plan, under which 178,575 shares of restricted stock may be issued and 446,440 shares of common stock may be issued pursuant to stock options that were granted. During the years ended December 31, 2018 and 2017, we recognized $928,000 and $926,000, respectively, in noninterest expense relating to this stock benefit plan, and we may recognize additional expenses in the future as additional grants are made.

 

We may fund the 2016 Equity Incentive Plan either through open market purchases or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund this plan will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. Our intention is to fund the plan through open market purchases. However, stockholders would experience a reduction in ownership interest in the event newly issued shares of our common stock are used to fund stock issuances under the plan.

 

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Managing reputational risk is important to attracting and maintaining customers, investors and employees.

 

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, all of which could adversely affect our operating results.

 

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

 

In preparing our periodic reports that we file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is required to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of our stock-based compensation plans, our determination of our income tax provision, and our evaluation of the adequacy of our allowance for loan losses.

 

Deterioration in the performance or financial position of the Federal Home Loan Bank of Boston might restrict the Federal Home Loan Bank of Boston’s ability to meet the funding needs of its members, cause a suspension of its dividend, and cause its stock to be determined to be impaired.

 

Significant components of The Provident Bank’s liquidity needs are met through its access to funding pursuant to its membership in the Federal Home Loan Bank of Boston. The Federal Home Loan Bank of Boston is a cooperative that provides services to its member banking institutions. The primary reason for joining the Federal Home Loan Bank of Boston is to obtain funding. The purchase of stock in the Federal Home Loan Bank of Boston is a requirement for a member to gain access to funding. Any deterioration in the Federal Home Loan Bank of Boston’s performance or financial condition may affect our ability to access funding and/or require us to deem the required investment in Federal Home Loan Bank of Boston stock to be impaired. If we are not able to access funding, we may not be able to meet our liquidity needs, which could have an adverse effect on the results of operations or financial condition. Similarly, if we deem all or part of our investment in Federal Home Loan Bank of Boston stock impaired, such action could have a material adverse effect on our results of operations or financial condition.

 

We may be required to transition from the use of the LIBOR interest rate index in the future. 

 

We have certain loans and investment securities indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

 

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We are subject to environmental liability risk associated with lending activities

 

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If so, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

 

A protracted government shutdown could negatively affect our financial condition and results of operations.

 

A protracted federal government shutdown result in reduced income for government employees or employees of companies that engage in business with the federal government, which could result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services.

 

Risks Related to the Offering

 

The future price of the shares of common stock may be less than the $10.00 purchase price per share in the offering.

 

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of New Provident and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

 

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

 

We intend to invest between $39.9 million and $54.2 million of the net proceeds of the offering in The Provident Bank. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including, subject to regulatory limitations, the repurchase shares of common stock and the payment of dividends. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering. The Provident Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, with the exception of funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility and broad discretion in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation or the Federal Reserve Board. We have not established a timetable for reinvesting the net proceeds, and

 

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we cannot predict how long we will require to reinvest the net proceeds. Our failure to utilize these funds effectively would reduce our profitability and may adversely affect the value of our common stock. Furthermore, we may utilize the funds in a manner that stockholders disagree with.

 

Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.

 

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be low until we are able to leverage the additional capital we receive from the stock offering. Our return on equity will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Our annualized return on average equity was 6.75% for the three months ended March 31, 2019, with consolidated equity of $128.3 million at March 31, 2019. Our pro forma consolidated equity as of March 31, 2019, assuming completion of the offering, is estimated to be between $212.3 million at the minimum of the offering range and $242.3 million at the maximum of the offering range. Until we can increase our net interest income and non-interest income and leverage the capital raised in the stock offering, we expect our return on equity to be low, which may reduce the market price of our shares of common stock.

 

Our stock-based benefit plans will increase our expenses and reduce our income.

 

We intend to adopt one or more new stock-based benefit plans after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under the new stock-based benefit plans. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards actually granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. In the event we adopt stock-based benefit plans within 12 months following the conversion, the total shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the total shares of our common stock sold in the stock offering. If we award restricted shares of common stock or grant options in excess of these amounts under stock-based benefit plans adopted more than 12 months after the completion of the conversion, our costs would increase further.

 

In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for shares purchased in the offering and for our new stock-based benefit plans has been estimated to be approximately $2.5 million ($1.9 million after tax) at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management—Benefits to be Considered Following Completion of the Conversion.”

 

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

 

We intend to adopt one or more new stock-based benefit plans following the stock offering. These plans may be funded either through open market purchases or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. Although our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 6.83% dilution in ownership interest at the maximum of the offering range in the event newly issued shares of our common stock are used to fund stock options and shares of restricted common stock in amounts equal to 10% and 4%, respectively, of the shares sold in the offering. In the event we adopt the plans more than 12

 

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months following the conversion, new stock-based benefit plans would not be subject to these limitations and stockholders could experience greater dilution.

 

Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

 

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of common stock or stock options under our existing and proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the stock offering. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our Board of Directors.

 

Various factors may make takeover attempts more difficult to achieve.

 

Certain provisions of our articles of incorporation and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of New Provident without our Board of Directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company, including shares of our common stock or shares of our preferred stock were those shares to become entitled to vote upon the election of two directors because of missed dividends, creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including The Provident Bank.

 

There also are provisions in our articles of incorporation that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors, employment agreements that we have entered into with our executive officers and other factors may make it more difficult for companies or persons to acquire control of New Provident without the consent of our Board of Directors. Taken as a whole, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.

 

For additional information, see “Restrictions on Acquisition of New Provident,” “Management—Employment Agreements” and “—Benefits to be Considered Following Completion of the Conversion.”

 

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New Provident’s articles of incorporation provide that state and federal courts located in the State of Maryland will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

New Provident’s articles of incorporation generally provide that, unless we consent in writing to the selection of an alternative forum, Maryland is the sole and exclusive forum for any derivative action or proceeding brought on behalf of New Provident, any action asserting a claim of breach of a fiduciary duty, any action asserting a claim arising pursuant to any provision of Maryland corporate law, or any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors and officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our articles of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

 

Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.

 

Applicable regulations restrict us from repurchasing our shares of common stock during the first year following the stock offering unless extraordinary circumstances exist, and limit us from repurchasing our shares of common stock during the first three years following the stock offering. Stock repurchases are a capital management tool that can enhance the value of a company’s stock, and our inability to repurchase our shares of common stock during the first year following the stock offering and limitations on our ability to repurchase our shares of common stock during the first three years following the stock offering may negatively affect our stock price.

 

You may not revoke your decision to purchase New Provident common stock in the subscription or community offerings after you send us your order.

 

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated or firm commitment underwritten offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond October 25, 2019, or the number of shares to be sold in the offering is increased to more than 13,225,000 shares or decreased to fewer than 9,775,000 shares.

 

The distribution of subscription rights could have adverse income tax consequences.

 

If the subscription rights granted to certain current or former depositors of The Provident Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables set forth selected consolidated historical financial and other data of Old Provident and its subsidiaries for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Old Provident contained elsewhere in this prospectus, including the consolidated financial statements beginning on page F-1 of this prospectus. The information at and for the years ended December 31, 2018 and 2017 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at and for the years ended December 31, 2016, 2015 and 2014 is derived in part from audited consolidated financial statements that do not appear in this prospectus. The information at March 31, 2019 and for the three months ended March 31, 2019 and 2018 is unaudited and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be achieved for the full fiscal year ending December 31, 2019.

 

   At March 31,   At December 31, 
   2019   2018   2017   2016   2015   2014 
   (In thousands) 
Financial Condition Data:                              
Total assets  $998,519   $974,079   $902,265   $795,543   $743,397   $658,606 
Cash and cash equivalents   23,726    28,613    47,689    10,705    20,464    9,558 
Securities available-for-sale   49,662    51,403    61,429    117,867    80,984    76,032 
Securities held-to-maturity                   44,623    45,559 
Federal Home Loan Bank stock, at cost   3,515    2,650    1,854    2,787    3,310    3,642 
Loans receivable, net (1)   859,269    835,528    742,138    624,425    554,929    494,183 
Bank-owned life insurance   26,403    26,226    25,540    19,395    18,793    12,144 
Deferred tax asset, net   6,589    6,437    4,920    4,913    5,056    3,632 
Deposits   775,277    768,096    750,057    627,982    577,235    536,684 
Borrowings   79,942    68,022    26,841    49,858    57,423    39,237 
Total shareholders' equity (2)   128,272    125,584    115,777    109,149    101,406    75,791 

 

   For the Three Months
Ended March 31,
   For the Year Ended December 31, 
   2019   2018   2018   2017   2016   2015   2014 
   (In thousands) 
Operating Data:                                   
Interest and dividend income  $12,129   $9,753   $42,340   $35,782   $28,894   $25,452   $23,266 
Interest expense   1,971    1,034    5,213    3,726    2,785    2,174    2,291 
Net interest and dividend income   10,158    8,719    37,127    32,056    26,109    23,278    20,975 
Provision for loan losses   1,462    656    3,329    2,929    703    805    1,452 
Net interest and dividend income after provision for loan losses   8,696    8,063    33,798    29,127    25,406    22,473    19,523 
Noninterest income (3)   1,046    1,013    4,178    9,955    4,435    3,806    3,913 
Noninterest expense (4)   6,746    6,376    25,414    23,749    20,477    21,093    17,421 
Income before income taxes   2,996    2,700    12,562    15,333    9,364    5,186    6,015 
Income tax expense (5)   778    678    3,237    7,418    3,025    1,363    1,453 
Net income  $2,218   $2,022   $9,325   $7,915   $6,339   $3,823   $4,562 

 

 

(1)Excludes loans held-for-sale.
(2)Includes retained earnings and accumulated other comprehensive income/loss.
(3)Includes gain on sales of securities, net in 2017 of $5.9 million, as we divested all of our equity securities during the fourth quarter in 2017.
(4)Includes the expense related to the funding of the charitable foundation in 2015 of $2.2 million.
(5)Includes the expense related to the Tax Cuts and Jobs Act in 2017 of $2.0 million.

 

34

 

 

   At or For the Three
Months Ended March 31,
   At or For the Year Ended December 31, 
   2019 (1)   2018 (1)   2018   2017   2016   2015   2014 
                             
Performance Ratios:                                   
Return on average assets   0.90%   0.91%   1.03%   0.91%   0.84%   0.56%   0.71%
Return on average equity   6.75%   6.92%   7.75%   6.84%   5.98%   4.07%   6.24%
Interest rate spread (2)   4.04%   3.95%   4.05%   3.71%   3.46%   3.41%   3.32%
Net interest margin (3)   4.40%   4.17%   4.33%   3.90%   3.65%   3.58%   3.46%
Efficiency ratio (4)   60.82%   65.52%   61.53%   65.79%   68.59%   78.80%   71.22%
Average interest-earning assets to average interest-bearing liabilities   142.11%   144.55%   146.01%   142.10%   147.58%   148.35%   137.39%
Average equity to average assets   13.30%   13.19%   13.26%   13.32%   14.06%   13.71%   11.43%
Average common equity to average assets   13.30%   13.19%   13.26%   13.32%   14.06%   11.29%   8.75%
Earnings per share – basic  $0.24   $0.22   $1.01   $0.86   $0.69    N/A    N/A 
Earnings per share – diluted  $0.24   $0.22   $1.00   $0.86   $0.69    N/A    N/A 
                                    
Regulatory Capital Ratios:                                   
Total capital to risk weighted assets (bank only)   14.45%   15.00%   14.55%   14.96%   15.88%   17.06%   15.37%
Tier 1 capital to risk weighted assets (bank only)   13.20%   13.75%   13.30%   13.71%   14.41%   15.64%   13.87%
Tier 1 capital to average assets (bank only)   12.20%   12.36%   12.69%   11.80%   12.59%   13.42%   11.30%
Common equity tier 1 capital (bank only)   13.20%   13.75%   13.30%   13.71%   14.41%   15.64%   N/A 
                                    
Asset Quality Ratios:                                   
Allowance for loan losses as a percentage of total loans (5)   1.36%   1.33%   1.38%   1.30%   1.36%   1.40%   1.44%
Allowance for loan losses as a percentage of non-performing loans   141.58%   106.80%   186.55%   108.02%   542.98%   346.10%   142.15%
Net charge-offs to average outstanding loans during the period   0.59%   0.09%   0.18%   0.25%       0.02%   0.06%
Non-performing loans as a percentage of total loans (5)   0.96%   1.24%   0.74%   1.20%   0.25%   0.41%   1.01%
Non-performing loans as a percentage of total assets   0.84%   1.08%   0.64%   1.00%   0.20%   0.31%   0.77%
Total non-performing assets as a percentage of total assets   1.01%   1.08%   0.81%   1.00%   0.20%   0.31%   0.77%
                                    
Other:                                   
Number of offices   8    8    8    8    7    7    7 
Number of full-time equivalent employees   125    129    123    126    121    108    111 

 

 

(1)Annualized where appropriate.
(2)Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Represents net interest income as a percent of average interest-earning assets.
(4)Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains on securities available for sale, net.
(5)Loans are presented before the allowance but include deferred costs/fees.

 

35

 

 

RECENT DEVELOPMENTS

 

The following tables set forth selected consolidated historical financial and other data of Old Provident and its subsidiaries for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Old Provident contained elsewhere in this prospectus, including the consolidated financial statements beginning on page F-1 of this prospectus. The information at December 31, 2018 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 is unaudited and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be achieved for the full fiscal year ending December 31, 2019.

 

  

At

     June 30,     
2019

  

At

December 31,
2018

 
   (In thousands) 
Financial Condition Data:          
Total assets  $1,031,175   $974,079 
Cash and cash equivalents   28,281    28,613 
Securities available-for-sale   48,590    51,403 
Federal Home Loan Bank stock, at cost   3,836    2,650 
Loans receivable, net (1)   885,126    835,528 
Bank-owned life insurance   26,576    26,226 
Deferred tax asset, net   6,398    6,437 
Deposits   803,402    768,096 
Borrowings   81,963    68,022 
Total shareholders' equity (2)   131,763    125,584 

 

   For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
 
   2019   2018   2019   2018 
   (In thousands) 
Operating Data:                    
Interest and dividend income  $12,731   $10,377   $24,860   $20,130 
Interest expense   2,130    1,213    4,101    2,247 
Net interest and dividend income   10,601    9,164    20,759    17,883 
Provision for loan losses   1,354    638    2,816    1,294 
Net interest and dividend income after provision for loan losses   9,247    8,526    17,943    16,589 
Noninterest income   1,056    1,118    2,102    2,131 
Noninterest expense   6,883    6,411    13,629    12,787 
Income before income taxes   3,420    3,233    6,416    5,933 
Income tax expense   889    843    1,667    1,521 
Net income  $2,531   $2,390   $4,749   $4,412 

 

 

(1)Excludes loans held-for-sale.
(2)Includes retained earnings and accumulated other comprehensive income/loss.

 

36

 

 

   At or For the Three
Months Ended June 30,
   At or For the Six Months
Ended June 30,
 
   2019 (1)   2018 (1)   2019 (1)   2018 (1) 
                 
Performance Ratios:                    
Return on average assets   1.01%   1.07%   0.95%   0.99%
Return on average equity   7.77%   8.04%   7.26%   7.49%
Interest rate spread (2)   4.10%   4.09%   4.07%   4.01%
Net interest margin (3)   4.50%   4.35%   4.45%   4.26%
Efficiency ratio (4)   59.05%   62.35%   59.91%   63.89%
Average interest-earning assets to average interest-bearing liabilities   143.91%   146.29%   143.02%   145.42%
Average equity to average assets   12.98%   13.32%   13.14%   13.25%
Average common equity to average assets   12.98%   13.32%   13.14%   13.25%
Earnings per share – basic  $0.27   $0.26   $0.51   $0.48 
Earnings per share – diluted  $0.27   $0.26   $0.51   $0.47 
                     
Regulatory Capital Ratios:                    
Total capital to risk weighted assets (bank only)   14.20%   15.02%   14.20%   15.02%
Tier 1 capital to risk weighted assets (bank only)   12.96%   13.77%   12.96%   13.77%
Tier 1 capital to average assets (bank only)   12.30%   12.58%   12.30%   12.58%
Common equity tier 1 capital (bank only)   12.96%   13.77%   12.96%   13.77%
                     
Asset Quality Ratios:                    
Allowance for loan losses as a percentage of total loans (5)   1.31%   1.36%   1.31%   1.36%
Allowance for loan losses as a percentage of non-performing loans   217.61%   149.13%   217.61%   149.13%
Net charge-offs to average outstanding loans during the period   0.65%   0.13%   0.62%   0.11%
Non-performing loans as a percentage of total loans (5)   0.60%   0.91%   0.60%   0.91%
Non-performing loans as a percentage of total assets   0.53%   0.77%   0.53%   0.77%
Total non-performing assets as a percentage of total assets   0.69%   0.77%   0.69%   0.77%
                     
Other:                    
Number of offices   7    8    7    8 
Number of full-time equivalent employees   127    129    127    129 

 

 

(1)Annualized where appropriate.
(2)Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Represents net interest income as a percent of average interest-earning assets.
(4)Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains on securities available for sale, net.
(5)Loans are presented before the allowance but include deferred costs/fees.

 

37

 

 

Comparison of Financial Condition

 

Assets. Total assets were $1.0 billion at June 30, 2019, representing an increase of $57.1 million, or 5.9%, from $974.1 million at December 31, 2018. The increase resulted primarily from increases in net loans of $49.6 million, premises and equipment of $6.7 million, and other assets of $1.8 million. The increases were partially offset by decreases in available-for-sale investment securities of $2.8 million.

 

Securities. Investments in available-for-sale securities decreased $2.8 million, or 5.5%, to $48.6 million at June 30, 2019 from $51.4 million at December 31, 2018. The decrease is primarily due to principal paydowns on government mortgage-backed securities partially, offset by an increase in the fair value of the securities.

 

Loans. At June 30, 2019, net loans were $885.1 million, or 85.8% of total assets, compared to $835.5 million, or 85.8% of total assets, at December 31, 2018. Increases in commercial loans of $36.5 million, or 10.1%, and in commercial real estate loans of $24.2 million, or 6.6%, were partially offset by decreases in residential real estate loans of $4.9 million, or 8.6%, construction and land development loans of $4.1 million, or 9.2%, and consumer loans of $1.6 million, or 8.1%. Our commercial loan growth is attributed to a continued focus on our specialized renewable energy loans and enterprise value loans. Renewable energy loans increased $4.3 million, or 8.5%, to $54.7 million at June 30, 2019 from $50.4 million at December 31, 2018. Enterprise value loans increased $15.0 million, or 10.8%, to $153.8 million at June 30, 2019 from $138.8 million at December 31, 2018.

 

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.

 

   At June 30, 2019  

At December 31,

2018

 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
         
Real estate:                    
Residential (1)  $52,445    5.84%  $57,361    6.76%
Commercial (2)   389,068    43.30    364,867    43.00 
Construction and land development   40,491    4.51    44,606    5.26 
Commercial (3)   398,277    44.32    361,782    42.64 
Consumer   18,215    2.03    19,815    2.34 
Total loans   898,496    100.00%   848,431    100.00%
Deferred loan fees, net   (1,580)        (1,223)     
Allowance for loan losses   (11,790)        (11,680)     
Loans, net  $885,126        $835,528      

 

 

(1)Includes home equity loans and lines of credit.
(2)Includes multi-family real estate loans.
(3)At June 30, 2019, included $153.8 million of enterprise value loans and $54.7 million of renewable energy loans.

 

Premises and Equipment. Premises and equipment increased $6.7 million, or 41.6%, to $22.8 million at June 30, 2019, from $16.1 million at December 31, 2018. The increase was primarily due to increases in construction in progress costs and the adoption of FASB Accounting Standards Update No. 2016-02, Leases (Topic 842). In January 2017, we purchased a building in Portsmouth, New Hampshire with the intention of using a majority of the space for banking operations. The construction in progress costs increased $3.1 million, or 55.4%, to $8.6 million at June 30, 2019 from $5.6 million at December 31, 2018. ASU No. 2016-02 became effective January 1, 2019 and required us to recognize on our balance sheet right-of-use assets, which approximate the present value of the remaining lease payments. As of June 30, 2019, the balance of the right-of-use assets was $3.8 million.

 

Other Assets. Other assets increased $1.8 million, or 63.9%, to $4.6 million at June 30, 2019 from $2.8 million at December 31, 2018. The increase is primarily due to an increase in receivables and deferred expenses from our second-step conversion and related stock offering.

 

38

 

 

Deposits. The following table sets forth the distribution of total deposits by account type at the dates indicated.

 

   At June 30, 2019   At December 31, 2018 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
                 
Noninterest bearing  $219,497    27.32%  $195,293    25.43%
Negotiable order of withdrawal (NOW)   107,297    13.36    136,771    17.81 
Savings accounts   119,433    14.87    109,322    14.23 
Money market deposit accounts   219,683    27.34    229,314    29.85 
Certificates of deposit   137,492    17.11    97,396    12.68 
Total  $803,402    100.00%  $768,096    100.00%

 

Total deposits increased $35.3 million, or 4.6%, to $803.4 million at June 30, 2019 from $768.1 million at December 31, 2018. The primary reason for the increase in deposits was due to an increase of $40.1 million, or 41.2%, in time deposits and an increase of $10.1 million, or 9.2%, in savings accounts, partially offset by a decrease in NOW and demand deposits of $5.3 million, or 1.6%, and a decrease of $9.6 million, or 4.2% in money market accounts. The increase in time deposits is primarily due to increases in brokered certificates of deposit of $24.7 million, or 44.4%, and an increase of $15.3 million, or 294.7%, from Qwickrate, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits. The increase in savings accounts is primarily due to municipal deposits. NOW and demand deposits and money market accounts decreased due to the decrease in some of our high rate relationships.

 

Borrowings. Borrowings at June 30, 2019 consisted of Federal Home Loan Bank advances and at December 31, 2018 consisted of Federal Home Loan Bank advances and Federal Reserve Bank borrowings from the borrower-in-custody program. Borrowings increased $13.9 million, or 20.5%, to $82.0 million at June 30, 2019 from $68.0 million at December 31, 2018. The increase was primarily due to funding loan growth.

 

The following table sets forth information concerning balances and interest rates on Federal Home Loan Bank advances and Federal Reserve Bank borrower-in-custody borrowings at the dates and for the periods indicated.

 

  

At or For the Three

Months Ended June 30,

  

At or For the Six

Months Ended June 30,

 
   2019   2018   2019   2018 
   (Dollars in thousands) 
                 
Balance outstanding at end of period  $81,963   $39,881   $81,963   $39,881 
Weighted average interest rate at end of period   2.40%   2.29%   2.40%   2.29%
Maximum amount of borrowings outstanding at any month end during the period  $100,266   $46,275   $100,266   $46,275 
Average balance outstanding during the period  $90,710   $36,947   $85,625   $29,920 
Weighted average interest rate during the period   2.64%   2.21%   2.65%   2.13%

 

Other Liabilities. Other liabilities decreased $2.2 million, or 18.0%, to $10.1 million at June 30, 2019 from $12.4 million at December 31, 2018. The decrease was primarily due to the settlement of a lawsuit involving certain subordinated lienholders that disputed the priority of our liens and our right to retain proceeds from a foreclosure sale.

 

Shareholders’ Equity. Total shareholders’ equity increased $6.2 million, or 4.9%, to $131.8 million at June 30, 2019, from $125.6 million at December 31, 2018. The increase was due to year-to-date net income of $4.7 million, other comprehensive income of $639,000, stock-based compensation expense of $510,000 and employee

 

39

 

 

stock ownership plan shares earned of $281,000. Book value per share increased to $13.69 at June 30, 2019 from $13.05 at December 31, 2018.

 

Asset Quality

 

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

 

  

At

June 30,

2019

  

At

December 31,
2018

 
   (Dollars in thousands) 
         
Non-accrual loans:          
Real Estate:          
Residential  $1,052   $850 
Commercial   519    519 
Construction and land development        
Commercial   3,760    4,830 
Consumer   87    62 
Total non-accrual loans   5,418    6,261 
           
Accruing loans past due 90
days or more
        
Other real estate owned   1,740    1,676 
Total non-performing assets  $7,158   $7,937 
           
Total loans (1)  $896,916   $847,208 
Total assets  $1,031,175   $974,079 
           
Total non-performing loans to total loans (1)   0.60%   0.74%
Total non-performing assets to total assets   0.69%   0.81%

 

 

(1)Loans are presented before allowance for loan losses, but include deferred loan costs/fees.

 

The decrease in non-performing commercial loans at June 30, 2019 compared to December 31, 2018 was primarily due to workouts of the portfolio. Non-accrual loans as of June 30, 2019 consist primarily of three commercial relationships. Of the three relationships, two were originated through the BancAlliance network. BancAlliance has a membership of approximately 200 community banks that together participate in middle market commercial and industrial loans as a way to diversify their commercial portfolio. Our last BancAlliance loan origination was in February 2017 and at this time we are not anticipating originating any new loans through this network. All impaired loan relationships have been evaluated and specific reserves of $163,000 were allocated as of June 30, 2019.

 

40

 

 

The following table sets forth the accruing and non-accruing status of troubled debt restructurings at the dates indicated.

 

  

At

June 30, 2019

  

At

December 31, 2018

 
   Non-
Accruing
   Accruing   Non-
Accruing
   Accruing 
   (In thousands) 
Troubled Debt Restructurings:                    
Real estate:                    
Residential  $   $379   $   $388 
Commercial       1,304        1,334 
Construction and land development                
Commercial   2,081    396    1,089    462 
Consumer                
Total  $2,081   $2,079   $1,089   $2,184 

 

Total troubled debt restructurings increased in 2019 primarily due to our restructuring one of our BancAlliance loans.

 

Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

 

41

 

 

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2019   2018   2019   2018 
   (Dollars in thousands) 
                 
Allowance at beginning of period  $11,857   $10,236   $11,680   $9,757 
Provision for loan losses   1,354    638    2,816    1,294 
Charge offs:                    
Real estate:                    
Residential                
Commercial                
Construction and land development                
Commercial   1,190    31    2,223    51 
Consumer   266    232    547    398 
Total charge-offs   1,456    263    2,770    449 
                     
Recoveries:                    
Real estate:                    
Residential   4        4     
Commercial                
Construction and land development                
Commercial   5        15    1 
Consumer   26    19    45    27 
Total recoveries   35    19    64    28 
                     
Net charge-offs   1,421    244    2,706    421 
                     
Allowance at end of period  $11,790   $10,630   $11,790   $10,630 
                     
Non-performing loans at end of period  $5,418   $7,128   $5,418   $7,128 
Total loans outstanding at end of period (1)  $896,916   $780,735   $896,916   $780,735 
Average loans outstanding during the period (1)  $880,501   $772,775   $872,912   $769,887 
                     
Allowance to non-performing loans   217.61%   149.13%   217.61%   149.13%
Allowance to total loans outstanding at end of the period   1.31%   1.36%   1.31%   1.36%
Net charge-offs to average loans outstanding during the period (2)   0.65%   0.13%   0.62%   0.11%

 

 

(1)Loans are presented before the allowance for loan losses but include deferred fees/costs.
(2)Annualized.

 

42

 

 

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

   At
June 30, 2019
   At
December 31, 2018
 
   Allowance
for Loan
Losses
   % of
Loans in
Category
to Total
Loans
   Allowance
for Loan
Losses
   % of
Loans in
Category
to Total
Loans
 
   (Dollars in thousands) 
Real estate:                    
Residential  $231    5.84%  $251    6.76%
Commercial   4,579    43.30    4,152    43.00 
Construction and land development   649    4.51    738    5.26 
Commercial   5,289    44.32    5,742    42.64 
Consumer   928    2.03    710    2.34 
Total allocated allowance for loan losses   11,676    100.00%   11,593    100.00%
Unallocated   114         87      
Total  $11,790        $11,680      

 

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Average Balance Sheets and Related Yields and Rates

 

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as we consider the amount of tax-free interest-earning assets to be 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, 
   2019   2018 
   Average
Balance
   Interest
Earned/
Paid
   Yield/ Rate
(1)
   Average
Balance
   Interest
Earned/
Paid
   Yield/ Rate
(1)
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $880,501   $12,270    5.57%  $772,775   $9,925    5.14%
Short-term investments   8,859    41    1.85%   10,722    42    1.57%
Investment securities   49,188    366    2.98%   56,872    388    2.73%
Federal Home Loan Bank stock   3,986    54    5.42%   2,058    22    4.28%
Total interest-earning assets   942,534    12,731    5.40%   842,427    10,377    4.93%
Noninterest-earning assets   60,743              49,966           
Total assets  $1,003,277             $892,393           
                               
Interest-bearing liabilities:                              
Savings accounts  $109,052   $78    0.29%  $110,986   $56    0.20%
Money market accounts   223,318    667    1.19%   218,775    507    0.93%
Now accounts   108,963    113    0.41%   114,174    146    0.51%
Certificates of deposit   122,896    673    2.19%   94,998    300    1.26%
Total interest-bearing deposits   564,229    1,531    1.09%   538,933    1,009    0.75%
Borrowings   90,710    599    2.64%   36,947    204    2.21%
Total interest-bearing liabilities   654,939    2,130    1.30%   575,880    1,213    0.84%
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   203,706              186,719           
Other noninterest-bearing liabilities   14,362              10,913           
Total liabilities   873,006              773,512           
Total equity   130,271              118,881           
Total liabilities and equity  $1,003,277             $892,393           
                               
Net interest income       $10,601             $9,164      
Interest rate spread (2)             4.10%             4.09%
Net interest-earning assets (3)  $287,595             $266,547           
Net interest margin (4)             4.50%             4.35%
Average interest-earning assets to interest-bearing liabilities   143.91%             146.29%          

 

 

(1)Annualized.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average rate of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.

 

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   For the Six Months Ended June 30, 
   2019   2018 
   Average
Balance
   Interest
Earned/
Paid
   Yield/ Rate
(1)
   Average
Balance
   Interest
Earned/
Paid
   Yield/ Rate
(1)
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $872,912   $23,969    5.49%  $769,887   $19,201    4.99%
Short-term investments   6,620    67    2.02%   9,707    84    1.73%
Investment securities   49,980    738    2.95%   58,309    795    2.73%
Federal Home Loan Bank stock   3,761    86    4.57%   1,865    50    5.36%
Total interest-earning assets   933,273    24,860    5.33%   839,768    20,130    4.79%
Noninterest-earning assets   62,044              49,465           
Total assets  $995,317             $889,233           
                               
Interest-bearing liabilities:                              
Savings accounts  $113,518   $186    0.33%  $114,664   $126    0.22%
Money market accounts   227,518    1,366    1.20%   221,712    908    0.82%
Now accounts   112,451    229    0.41%   112,549    300    0.53%
Certificates of deposit   113,431    1,187    2.09%   98,641    595    1.21%
Total interest-bearing deposits   566,918    2,968    1.05%   547,566    1,929    0.70%
Borrowings   85,625    1,133    2.65%   29,920    318    2.13%
Total interest-bearing liabilities   652,543    4,101    1.26%   577,486    2,247    0.78%
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   196,664              183,801           
Other noninterest-bearing liabilities   15,303              10,083           
Total liabilities   864,510              771,370           
Total equity   130,807              117,863           
Total liabilities and equity  $995,317             $889,233           
                               
Net interest income       $20,759             $17,883      
Interest rate spread (2)             4.07%             4.01%
Net interest-earning assets (3)  $280,730             $262,282           
Net interest margin (4)             4.45%             4.26%
Average interest-earning assets to interest-bearing liabilities   143.02%             145.42%          

 

 

(1)Annualized.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average rate of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.

 

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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 effects attributable to changes in volume (changes in volume multiplied by prior rate). The net 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 proportionally based on the changes due to rate and the changes due to volume.

 

   Three Months Ended
June 30, 2019 vs. 2018
   Six Months Ended
June 30, 2019 vs. 2018
 
  

Increase (Decrease)

Due to

   Total
Increase
  

Increase (Decrease)

Due to

   Total
Increase
 
   Rate   Volume   (Decrease)   Rate   Volume   (Decrease) 
   (In thousands) 
Interest-earning assets:                              
Loans  $888   $1,457   $2,345   $2,051   $2,717   $4,768 
Short-term investments   7    (8)   (1)   13    (30)   (17)
Investment securities   33    (55)   (22)   63    (120)   (57)
Federal Home Loan Bank stock   7    25    32    (8)   44    36 
Total interest-earning assets   936    1,418    2,354    2,118    2,612    4,730 
Interest-bearing liabilities:                              
Savings accounts   23    (1)   22    61    (1)   60 
Money market accounts   149    11    160    434    24    458 
NOW accounts   (27)   (6)   (33)   (71)       (71)
Certificates of deposit   266    107    373    492    100    592 
Total interest-bearing deposits   412    110    522    916    123    1,039 
Borrowings   47    348    395    95    720    815 
Total interest-bearing liabilities   459    458    917    1,011    843    1,854 
Change in net interest and dividend income  $477   $960   $1,437   $1,107   $1,769   $2,876 

 

Results of Operations for the Three Months Ended June 30, 2019 and 2018

 

General. Net income increased $141,000 to $2.5 million for the three months ended June 30, 2019 from $2.4 million for the three months ended June 30, 2018. The increase was primarily related to an increase of $1.4 million in net interest and dividend income, partially offset by an increase in provision for loan losses of $716,000, and an increase in noninterest expense of $472,000.

 

Interest and Dividend Income. Interest and dividend income increased $2.4 million, or 22.7%, to $12.7 million for the three months ended June 30, 2019 from $10.4 million for the three months ended June 30, 2018. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.3 million, or 23.6%, to $12.3 million for the three months ended June 30, 2019 from $9.9 million for the three months ended June 30, 2018.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $107.7 million, or 13.9%, to $880.5 million for the three months ended June 30, 2019, from $772.8 million for the three months ended June 30, 2018. In addition, interest income increased due to the yield on loans increasing 43 basis points to 5.57% for the three months ended June 30, 2019 due to our continued focus on higher-yielding commercial lending.

 

Interest Expense. Interest expense increased $917,000, or 75.6%, to $2.1 million for the three months ended June 30, 2019 from $1.2 million for the three months ended June 30, 2018, caused by an increase in interest expense on deposits and borrowings. Interest expense on deposits increased $522,000, or 51.7%, to $1.5 million for

 

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the three months ended June 30, 2019 from $1.0 million for the three months ended June 30, 2018, due primarily to an increase in the average rate paid on interest-bearing deposits of 34 basis points to 1.09% for the three months ended June 30, 2019 from 0.75% for the three months ended June 30, 2018. The increase in the average rate was primarily the result of increases in the average rates paid on money market accounts and certificates of deposit. The average rates paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $25.3 million, or 4.7%, to $564.2 million for the three months ended June 30, 2019 from $538.9 million for the three months ended June 30, 2018. The increase resulted primarily from an increase in the average balance of certificates of deposit, which increased $27.9 million, or 29.4%.

 

Interest expense on borrowings increased $395,000, or 193.6%, to $599,000 for the three months ended June 30, 2019 from $204,000 for the three months ended June 30, 2018. The interest expense on borrowings increased due to the increase in average outstanding balance of $53.8 million, or 145.5%, to $90.7 million for the three months ended June 30, 2019, as we borrowed funds to support loan growth.

 

Net Interest and Dividend Income. Net interest and dividend income increased by $1.4 million, or 15.7%, to $10.6 million for the three months ended June 30, 2019 from $9.2 million for the three months ended June 30, 2018. The increase was due to both higher balances of interest-earning assets and expanding margins. Our net interest rate spread increased one basis point to 4.10% for the three months ended June 30, 2019 from 4.09% for the three months ended June 30, 2018. Our net interest margin increased 15 basis points to 4.50% for the three months ended June 30, 2019 from 4.35% for the three months ended June 30, 2018.

 

Provision for Loan Losses. The provision for loan losses was $1.4 million for the three months ended June 30, 2019 compared to $638,000 for the three months ended June 30, 2018. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. During the second quarter, we had $1.4 million in loan net charge-offs, for which we had allocated $786,000 in specific reserves as of the first quarter in 2019. The charge-offs resulted in provision expense of $636,000.

 

The provision recorded resulted in an allowance for loan losses of $11.8 million, or 1.31% of total loans, at June 30, 2019, compared to $11.7 million, or 1.38% of total loans, at December 31, 2018 and $10.6 million, or 1.36% of total loans, at June 30, 2018. Non-accrual loans as of June 30, 2019 were primarily comprised of three commercial and industrial relationships with a total carrying value of $3.6 million. Impairment was evaluated and specific reserves of $163,000 were allocated to impaired loans as of June 30, 2019.

 

As of June 30, 2019, we had nine BancAlliance relationships remaining totaling $12.4 million. Out of the nine relationships, five totaling $6.6 million are pass rated, two totaling $3.4 million are on watch and two totaling $2.4 million are substandard. During the six months ended June 30, 2019, one of the nine relationships totaling $1.9 million was placed on non-accrual status and deemed impaired. We have allocated specific reserves totaling $136,000 for this relationship. Our last BancAlliance loan origination was in February 2017 and at this time we are not anticipating originating any new loans through this network.

 

Noninterest Income. Noninterest income decreased $62,000, or 5.5%, and was $1.1 million for each of the three months ended June 30, 2019 and 2018. The decrease was primarily caused by a decrease in other service charges and fees. The decrease was partially offset by the increase in customer service fees on deposit accounts. Other service charges and fees decreased $88,000, or 14.8%, to $506,000 for the three months ended June 30, 2019 from $594,000 for the three months ended June 30, 2018. Customer service fees increased $17,000, or 5.0%, to $356,000 for the three months ended June 30, 2019 from $339,000 for the three months ended June 30, 2018. The decrease in other service charges was primarily due to a decrease in loan prepayments compared to the same period in 2018.

 

Noninterest Expense. Noninterest expense increased $472,000, or 7.4%, to $6.9 million for the three months ended June 30, 2019 compared to $6.4 million for the three months ended June 30, 2018. The primary increases for the three months ended June 30, 2019 were occupancy expense, professional fees, and other expense.

 

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The increase of $133,000, or 31.9%, in occupancy expense for the three months ended June 30, 2019 was primarily due to the acceleration of our leasehold improvements amortization related to the closure of our Hampton, New Hampshire branch in May 2019. The increase of $167,000, or 50.8%, for the three months ended June 30, 2019 in professional fees was due to increased consulting services to aid in our efforts to implement a continuous improvement culture and our development of deposit products and services. The increase of $189,000, or 22.0%, in other expense was primarily due to other real estate owned expenses and increased telecommunication expenses.

 

Income Tax Provision. We recorded a provision for income taxes of $889,000 for the three months ended June 30, 2019, reflecting an effective tax rate of 26.0%, compared to a provision of $843,000 for the three months ended June 30, 2018, reflecting an effective tax rate of 26.1%.

 

Results of Operations for the Six Months Ended June 30, 2019 and 2018

 

General. Net income increased $337,000 to $4.7 million for the six months ended June 30, 2019 from $4.4 million for the six months ended June 30, 2018. The increase was primarily related to an increase of $2.9 million in net interest and dividend income, partially offset by an increase in provision for loan losses of $1.5 million, an increase in noninterest expense of $842,000, and an increase in income tax expense of $146,000.

 

Interest and Dividend Income. Interest and dividend income increased $4.7 million, or 23.5%, to $24.9 million for the six months ended June 30, 2019 from $20.1 million for the six months ended June 30, 2018. This increase was primarily attributable to an increase in interest and fees on loans, which increased $4.8 million, or 24.8%, to $23.9 million for the six months ended June 30, 2019 from $19.2 million for the six months ended June 30, 2018. The increase in interest and fees on loans was partially offset by a decrease in interest on short-term investments of $17,000, or 20.2%, to $67,000 for the six months ended June 30, 2019 from $84,000 for the six months ended June 30, 2018, and a decrease on interest and dividends on securities of $21,000, or 2.5% to $824,000 for the six months ended June 30, 2019.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $103.0 million, or 13.4%, to $872.9 million for the six months ended June 30, 2019 from $769.9 million for the six months ended June 30, 2018. In addition, interest income increased due to the yield on loans increasing 50 basis points to 5.49% for the six months ended June 30, 2019 due to our continued focus on higher-yielding commercial lending.

 

Interest Expense. Interest expense increased $1.9 million, or 82.5%, to $4.1 million for the six months ended June 30, 2019 from $2.2 million for the six months ended June 30, 2018, caused by an increase in interest expense on deposits and borrowings. Interest expense on deposits increased $1.0 million, or 53.9%, to $3.0 million for the six months ended June 30, 2019 from $1.9 million for the six months ended June 30, 2018, due to an increase in the average rate paid on interest-bearing deposits of 35 basis points to 1.05% for the six months ended June 30, 2019 from 0.70% for the six months ended June 30, 2018. The increase in the average rate was primarily the result of increases in the average rates paid on money market accounts and certificates of deposit. The average rates paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $19.3 million, or 3.5%, to $566.9 million for the six months ended June 30, 2019 from $547.6 million for the six months ended June 30, 2018. The increase resulted primarily from an increase in the average balance of certificates of deposits, which increased $14.8 million, or 15.0%.

 

Interest expense on borrowings increased $815,000, or 256.3%, to $1.1 million for the six months ended June 30, 2019 from $318,000 for the six months ended June 30, 2018. The interest expense on borrowings increased primarily due to the increase in average outstanding balance of $55.7 million, or 186.2% to $85.6 million for the six months ended June 30, 2019, as we borrowed funds to support loan growth.

 

Net Interest and Dividend Income. Net interest and dividend income increased $2.9 million, or 16.1%, to $20.8 million for the six months ended June 30, 2019 from $17.9 million for the six months ended June 30, 2018. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased six basis points to 4.07% for the six months ended June 30, 2019 from 4.01% for the six months ended

 

48

 

 

June 30, 2018. Our net interest margin increased 19 basis points to 4.45% for the six months ended June 30, 2019 from 4.26% for the six months ended June 30, 2018.

 

Provision for Loan Losses. The provision for loan losses was $2.8 million for the six months ended June 30, 2019 compared to $1.3 million for the six months ended June 30, 2018. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. During the six months ended June 30, 2019, we had $2.7 million in loan net charge-offs, for which we had allocated $1.1 million in specific reserves as of December 31, 2018. The charge-offs resulted in provision expense of $1.6 million.

 

The provision recorded resulted in an allowance for loan losses of $11.8 million, or 1.31% of total loans at June 30, 2019, compared to $11.7 million, or 1.38% of total loans, at December 31, 2018 and $10.6 million, or 1.36% of total loans, at June 30, 2018. Non-accrual loans as of June 30, 2019 were primarily comprised of three commercial and industrial relationships with a total carrying value of $3.6 million. Impairment was evaluated and specific reserves of $163,000 were allocated to impaired loans as of June 30, 2019.

 

Our net charge-offs as a percent of average loans increased to 0.62% for the six months ended June 30, 2019 as compared to 0.11% for the same period in 2018. The primary reason for the increase in net charge-offs resulted from our charging-off three commercial loan relationships, totaling $2.1 million, in the first two quarters of 2019. Two of those relationships that were charged-off totaling $1.5 million were originated through the BancAlliance network.

 

As of June 30, 2019, we had nine BancAlliance relationships remaining totaling $12.4 million. Out of the nine relationships, five totaling $6.6 million are pass rated, two totaling $3.4 million are on watch and two totaling $2.4 million are substandard. During the six months ended June 30, 2019, one of these nine relationships totaling $1.9 million was placed on non-accrual status and deemed impaired. We have allocated specific reserves totaling $136,000 for this relationship. Our last BancAlliance loan origination was in February 2017 and at this time we are not anticipating originating any new loans through this network.

 

Noninterest Income. Noninterest income decreased $29,000, or 1.4%, and was $2.1 million for each of the six months ended June 30, 2019 and June 30, 2018. The decrease was primarily caused by a decrease in other service charges and fees of $147,000 partially offset by the gain on sales of securities. The decrease in other service charges was primarily due to a decrease in loan prepayments compared to the same period in 2018. Gain on sales of securities was $113,000 for the six months ended June 30, 2019 compared to zero for the six months ended June 30, 2018. We repositioned some of our securities by selling some municipal and mortgage-backed securities that were close to maturity and reinvested into longer-term mortgage-backed securities.

 

Noninterest Expense. Noninterest expense increased $842,000, or 6.6%, to $13.6 million for the six months ended June 30, 2019 from $12.8 million for the six months ended June 30, 2018. The primary increases for the six months ended June 30, 2019 were salary and employee benefits expense, occupancy expense, and professional fees. The increase of $135,000, or 1.6%, to $8.6 million for the six months ended June 30, 2019, compared to $8.4 million for the six months ended June 30, 2018 in salary and employee benefits was primarily due to a higher number of sales and operations positions compared to the same period in 2018. The increase of $327,000, or 37.7%, to $1.2 million for the six months ended June 30, 2019 compared to $867,000 in occupancy expense for the six months ended June 30, 2018 was primarily due to the acceleration of our leasehold improvements amortization related to the closure of our Hampton, New Hampshire branch in May 2019. The increase of $341,000, or 59.1%, to $918,000 for the six months ended June 30, 2019 compared to $577,000 in professional fees for the six months ended June 30, 2018 was due to increased consulting services to aid in our efforts to implement a continuous improvement culture and our development of deposit products and services.

 

Income Tax Provision. We recorded a provision for income taxes of $1.7 million for the six months ended June 30, 2019, reflecting an effective tax rate of 26.0%, compared to a provision of $1.5 million for the six months ended June 30, 2018, reflecting an effective tax rate of 25.6%.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

·statements regarding our business plans, prospects, growth and operating strategies;

 

·statements regarding the quality of our loan and investment portfolios; and

 

·estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·developments in the financial services industry and U.S. and global credit markets;

 

·changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

·our ability to access cost-effective funding;

 

·fluctuations in real estate values and both residential and commercial real estate market conditions;

 

·demand for loans and deposits in our market area;

 

·our ability to implement and changes in our business strategies;

 

·failure to implement new technologies in our operations;

 

·competition among depository and other financial institutions;

 

·inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments or our levels of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

 

·adverse changes in the securities or secondary mortgage markets;

 

50

 

 

·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·changes in the quality or composition of our loan or investment portfolios;

 

·technological changes that may be more difficult or expensive than expected, or the failure or breaches of information technology security systems;

 

·the inability of customers to repay their obligations;

 

·the inability of third-party providers to perform as expected;

 

·our ability to manage reputational risk, market risk, credit risk, operational risk and strategic risk in the current economic conditions;

 

·our ability to enter new markets successfully and capitalize on growth opportunities;

 

·our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

·changes in consumer spending, borrowing and savings habits;

 

·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

·our ability to attract, retain and motivate key employees;

 

·our compensation expense associated with equity allocated or awarded to our employees; and

 

·changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Please see “Risk Factors” beginning on page 18.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $95.4 million and $129.6 million.

 

We intend to distribute the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of 
   9,775,000 Shares   11,500,000 Shares   13,225,000 Shares 
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
 
   (Dollars in thousands) 
                         
Offering proceeds  $97,750        $115,000        $132,250      
Less offering expenses   2,369         2,528         2,687      
Net offering proceeds  $95,381    100.0%  $112,472    100.0%  $129,563    100.0%
                               
Distribution of net proceeds:                              
To The Provident Bank  $47,690    50.0%  $56,236    50.0%  $64,782    50.0%
To fund loan to employee stock ownership plan  $7,820    8.2%  $9,200    8.2%  $10,580    8.2%
Retained by New Provident  $39,871    41.8%  $47,036    41.8%  $54,201    41.8%

 

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of The Provident Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if fewer shares were sold in the subscription and community offerings and more in the syndicated or firm commitment underwritten offering than we have assumed.

 

New Provident may use the proceeds it retains from the offering:

 

·to invest in securities;

 

·to pay cash dividends to stockholders;

 

·to repurchase shares of our common stock;

 

·to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings to make any acquisitions; and

 

·for other general corporate purposes.

 

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund management recognition plans (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans. In addition, under state regulations, we may not repurchase shares of our common stock during the first three years following the completion of the conversion except to fund tax-qualified or nontax-qualified employee stock benefit plans, or except in amounts not greater than 5% of our outstanding shares of common stock where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks.

 

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The Provident Bank may use the net proceeds it receives from the offering:

 

·to fund new loans;

 

·to enhance existing, or support the growth and development of, new products and services;

 

·to expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to make any acquisitions;

 

·to invest in securities; and

 

·for other general corporate purposes.

 

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

 

Our return on equity may be low until we are able to reinvest effectively the additional capital raised in the offering, which may negatively affect the value of our common stock. See “Risk Factors—Risks Related to the Offering—Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.”

 

OUR DIVIDEND POLICY

 

Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

 

New Provident will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by New Provident in connection with the conversion. The source of dividends will depend on the net proceeds retained by New Provident and earnings thereon, and dividends from The Provident Bank. In addition, New Provident will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

 

After the completion of the conversion, The Provident Bank will not be permitted to pay dividends on its capital stock to New Provident, its sole stockholder, if The Provident Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion. In addition, The Provident Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. The Provident Bank must file an application with the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of The Provident Bank’s net income for that year to date plus its

 

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retained net income for the preceding two years, or The Provident Bank would not be at least adequately capitalized following the distribution.

 

Any payment of dividends by The Provident Bank to New Provident that would be deemed to be drawn from The Provident Bank’s bad debt reserves established prior to 1988, if any, would require a payment of taxes at the then-current tax rate by The Provident Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. The Provident Bank does not intend to make any distribution that would create such a federal tax liability. See “The Conversion and Offering—Liquidation Rights.” In addition, The Provident Bank’s ability to pay dividends to New Provident will be limited if The Provident Bank does not have the capital conservation buffer required by regulatory capital rules, which may limit our ability to pay dividends to stockholders. For further information concerning additional federal law and regulations regarding the ability of The Provident Bank to make capital distributions, including the payment of dividends to New Provident, see “Taxation—Federal Taxation” and “Supervision and Regulation—Massachusetts Banking Laws and Supervision—Dividends.”

 

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of New Provident Following the Conversion—Common Stock.”

 

We will file a consolidated federal tax return with The Provident Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

MARKET FOR THE COMMON STOCK

 

Old Provident’s common stock is currently listed on the Nasdaq Capital Market under the symbol “PVBC.” Upon completion of the conversion, we expect the shares of common stock of New Provident will replace the existing shares of Old Provident and trade on the Nasdaq Capital Market under the symbol “PVBC.” In order to list our stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of July 29, 2019, Old Provident had approximately 25 registered market makers in its common stock. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

 

As of the close of business on July 29, 2019, there were 9,621,822 shares of common stock outstanding, including 4,587,499 publicly held shares (shares held by stockholders other than Provident Bancorp), and approximately 452 stockholders of record.

 

On June 4, 2019, the business day immediately preceding the public announcement of the conversion, and on July 29, 2019, the closing prices of Old Provident common stock as reported on the Nasdaq Capital Market were $23.60 per share and $27.51 per share, respectively. On the effective date of the conversion, all publicly held shares of Old Provident common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of New Provident common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Options to purchase shares of Old Provident common stock will be converted into options to purchase a number of shares of New Provident common stock determined pursuant to the exchange ratio, for the same aggregate exercise price. See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At March 31, 2019, The Provident Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of The Provident Bank at March 31, 2019, and the pro forma equity capital and regulatory capital of The Provident Bank, after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by The Provident Bank of 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

   The Provident Bank
Historical at
   Pro Forma at March 31, 2019, Based Upon the Sale in the Offering of 
   March 31, 2019   9,775,000 Shares   11,500,000 Shares   13,225,000 Shares 
   Amount   Percent of
Assets (1)
   Amount   Percent of
Assets (1)
   Amount   Percent of
Assets (1)
   Amount   Percent of
Assets (1)
 
   (Dollars in thousands)     
                                 
Equity  $120,299    12.05%  $156,259    14.94%  $162,735    15.43%  $169,211    15.92%
                                         
Tier 1 leverage capital  $120,471    12.20%  $156,431    15.11%  $162,907    15.60%  $169,383    16.09%
Leverage requirement   49,391    5.00    51,774    5.00    52,202    5.00    52,629    5.00 
Excess  $71,080    7.20%  $104,657    10.11%  $110,705    10.60%  $116,754    11.09%
                                         
Tier 1 risk-based capital (2)  $120,471    13.20%  $156,431    16.96%  $162,907    17.63%  $169,383    18.30%
Risk-based requirement   73,014    8.00    73,777    8.00    73,913    8.00    74,050    8.00 
Excess  $47,457    5.20%  $82,654    8.96%  $88,994    9.63%  $95,333    10.30%
                                         
Total risk-based capital (2)  $131,884    14.45%  $167,844    18.20%  $174,320    18.87%  $180,796    19.53%
Risk-based requirement   91,267    10.00    92,221    10.00    92,392    10.00    92,563    10.00 
Excess  $40,617    4.45%  $75,623    8.20%  $81,928    8.87%  $88,233    9.53%
                                         
Common equity tier 1 risk-based capital (2)  $120,471    13.20%  $156,431    16.96%  $162,907    17.63%  $169,383    18.30%
Common equity tier 1 risk-based requirement   59,324    6.50    59,944    6.50    60,055    6.50    60,166    6.50 
Excess  $61,147    6.70%  $96,487    10.46%  $102,852    11.13%  $109,217    11.80%
                                         
Reconciliation of capital infused into The Provident Bank:                               
Net proceeds   $47,690        $56,236        $64,782      
Less:  Common stock issued under stock-based benefit plan    (3,910)        (4,600)        (5,290)     
Less:  Common stock acquired by employee stock ownership plan    (7,820)        (9,200)        (10,580)     
Pro forma increase   $35,960        $42,436        $48,912      

_______________________

(1)Equity is shown as a percentage of total assets, while Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(2)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

 

The following table presents the historical consolidated capitalization of Old Provident at March 31, 2019 and the pro forma consolidated capitalization of New Provident after giving effect to the conversion and offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

   Old Provident   

New Provident Pro Forma at March 31, 2019

Based upon the Sale in the Offering at

$10.00 per Share of

 
   Historical at
March 31, 2019
   9,775,000
Shares
   11,500,000
Shares
   13,225,000
Shares
 
   (Dollars in thousands) 
                 
Deposits (1)  $775,277   $775,277   $775,277   $775,277 
Borrowed funds   79,942    79,942    79,942    79,942 
Total deposits and borrowed funds  $855,219   $855,219   $855,219   $855,219 
                     
Stockholders’ equity:                    
Preferred stock, $0.01 par value, 50,000,000 shares authorized (post-conversion) (2)                
Common stock, $0.01 par value, 100,000,000 shares authorized (post-conversion); shares to be issued as reflected (2) (3)       187    220    252 
Additional paid-in capital (2)   46,236    140,642    157,700    174,759 
MHC capital contribution       372    372    372 
Retained earnings (4)   85,569    85,569    85,569    85,569 
Accumulated other comprehensive loss   (186)   (186)   (186)   (186)
Less:                    
Treasury stock   (788)            
Common stock held by employee stock ownership plan (5)   (2,559)   (10,379)   (11,759)   (13,139)
Common stock to be issued under stock-based benefit plan (6)       (3,910)   (4,600)   (5,290)
Total stockholders’ equity  $128,272   $212,295   $227,316   $242,337 
                     
Pro Forma Shares Outstanding                    
Shares offered for sale       9,775,000    11,500,000    13,225,000 
Exchange shares issued       8,878,601    10,445,413    12,012,225 
Total shares outstanding       18,653,601    21,945,413    25,237,225 
                     
Total stockholders’ equity as a percentage of total assets   12.85%   19.61%   20.71%   21.78%
Tangible equity as a percentage of total assets   12.85%   19.61%   20.71%   21.78%

 

 

(1)Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(2)Old Provident currently has 30,000,000 authorized shares of common stock, no par value per share, and no authorized shares of preferred stock. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of New Provident common stock to be outstanding.
(3)No effect has been given to the issuance of additional shares of New Provident common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of New Provident common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.”
(4)The retained earnings of The Provident Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Massachusetts Banking Laws and Supervision—Dividends.”

 

(footnotes continue on following page)

 

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(continued from previous page)

 

(5)Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from New Provident. The loan will be repaid principally from The Provident Bank’s contributions to the employee stock ownership plan. Since New Provident will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on New Provident’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(6)Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be issued under one or more stock-based benefit plans. Any funds to be used to purchase the shares in the open market will be provided by New Provident. The dollar amount of common stock to be issued is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. New Provident will record compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval.

 

57

 

 

PRO FORMA DATA

 

The following tables summarize historical data of Old Provident and pro forma data of New Provident at and for the three months ended March 31, 2019 and at and for the year ended December 31, 2018. This information is based on assumptions set forth below and in the tables, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

 

The net proceeds in the tables are based upon the following assumptions:

 

(i)All of the shares of common stock will be sold in the subscription and community offerings;

 

(ii)our employees, directors, trustees, corporators and their associates, will purchase 300,000 shares of common stock;

 

(iii)our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering with a loan from New Provident. The existing loan obligation of our employee stock ownership plan, equal to $2.6 million at March 31, 2019, will be combined with the new loan. The combined loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, calculated as of the date of the origination of the loan) over a period of 15 years. Interest income that we earn on the loan will offset the interest paid by The Provident Bank. The net employee stock ownership plan effect on earnings is the cost of amortizing the combined loan over 15 years, net of historical expense for the period;

 

(iv)we will pay Sandler O’Neill & Partners, L.P. a fee equal to 1.00% of the aggregate amount of common stock sold in the subscription offering (net of insider purchases and shares purchased by our employee stock ownership plan);

 

(v)no fee will be paid with respect to shares of common stock purchased by our tax-qualified and non-qualified employee stock benefit plans, or stock purchased by our officers, directors, trustees, corporators and employees, and their immediate families, and no fee will be paid with respect to exchange shares; and

 

(vi)total expenses of the offering, other than the fees and commissions to be paid to Sandler O’Neill & Partners, L.P. and other broker-dealers, will be $1.3 million.

 

We calculated pro forma consolidated net income for each period as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 2.23% (1.63% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note as of March 31, 2019, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by federal regulations.

 

We further believe that the reinvestment rate is factually supportable because:

 

·the yield on the U.S Treasury Note can be determined and/or estimated from third-party sources; and

 

·we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For purposes of pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common

 

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stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

The pro forma tables give effect to the implementation of one or more stock-based benefit plans. We have assumed that under stock-based benefit plans we will issue as restricted stock awards a number of shares of common stock equal to 4% of the shares of common stock sold in the stock offering based on the same price for which they were sold in the stock offering. We have assumed that awards of common stock granted under such plans vest over a five-year period.

 

We have also assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the stock offering. We assumed that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.85 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 13.89% for the shares of common stock, no dividend yield, an expected option term of 10 years and a risk-free rate of return of 2.41%.

 

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.

 

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net proceeds from the stock offering to The Provident Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain for the purpose of funding a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

 

The pro forma tables do not give effect to:

 

·withdrawals from deposit accounts to purchase shares of common stock in the stock offering;

 

·our results of operations after the stock offering; or

 

·changes in the market price of the shares of common stock after the stock offering.

 

The following pro forma information may not be representative of the financial effects of the offering at the dates on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of The Provident Bank, to the tax effect of the recapture of any bad debt reserve. See “The Conversion and Offering—Liquidation Rights.”

 

59

 

 

  

At or for the Three Months Ended March 31, 2019

Based upon the Sale at $10.00 Per Share of

 
  

9,775,000

Shares

  

11,500,000

Shares

  

13,225,000

Shares

 
   (Dollars in thousands, except per share amounts) 
             
Gross proceeds of offering  $97,750   $115,000   $132,250 
Market value of shares issued in the exchange   88,861    104,543    120,224 
Pro forma market capitalization  $186,611   $219,543   $252,474 
                
Gross proceeds of offering  $97,750   $115,000   $132,250 
Expenses   2,369    2,528    2,687 
Estimated net proceeds   95,381    112,472    129,563 
Common stock purchased by employee stock ownership plan   (7,820)   (9,200)   (10,580)
Common stock issued under stock-based benefit plans   (3,910)   (4,600)   (5,290)
Estimated net proceeds, as adjusted  $83,651   $98,672   $113,693 
                
For the Three Months Ended March 31, 2019               
Consolidated net earnings:               
Historical  $2,218   $2,218   $2,218 
Income on adjusted net proceeds   340    402    463 
Income on mutual holding company asset contribution   2    2    2 
Employee stock ownership plan (1)   (56)   (84)   (111)
Stock awards (2)   (143)   (168)   (193)
Stock options (3)   (130)   (153)   (176)
Pro forma net income  $2,231   $2,217   $2,202 
                
Earnings per share (4):               
Historical  $0.13   $0.11   $0.09 
Income on adjusted net proceeds   0.02    0.02    0.02 
Income on mutual holding company asset contribution   0.00    0.00    0.00 
Employee stock ownership plan (1)   (0.00)   (0.00)   (0.00)
Stock awards (2)   (0.01)   (0.01)   (0.01)
Stock options (3)   (0.01)   (0.01)   (0.01)
Pro forma earnings per share (4)  $0.13   $0.11   $0.09 
                
Offering price to pro forma net earnings per share   19.23x   22.73x   27.78x
Number of shares used in earnings per share calculations   17,405,050    20,476,530    23,548,009 
                
At March 31, 2019               
Stockholders’ equity:               
Historical  $128,272   $128,272   $128,272 
Estimated net proceeds   95,381    112,472    129,563 
Equity increase from the mutual holding company   372    372    372 
Common stock acquired by employee stock ownership plan (1)   (7,820)   (9,200)   (10,580)
Common stock issued under stock-based benefit plans (2)   (3,910)   (4,600)   (5,290)
Pro forma stockholders’ equity (5)  $212,295   $227,316   $242,337 
Intangible assets  $   $   $ 
Pro forma tangible stockholders’ equity (5)  $212,295   $227,316   $242,337 
                
Stockholders’ equity per share (6):               
Historical  $6.88   $5.84   $5.08 
Estimated net proceeds   5.11    5.13    5.13 
Equity increase from the mutual holding company   0.02    0.02    0.02 
Common stock acquired by employee stock ownership plan (1)   (0.42)   (0.42)   (0.42)
Common stock issued under stock-based benefit plans (2)   (0.21)   (0.21)   (0.21)
Pro forma stockholders’ equity per share (5) (6)  $11.38   $10.36   $9.60 
Intangible assets  $   $   $ 
Pro forma tangible stockholders’ equity per share (5) (6)  $11.38   $10.36   $9.60 
                
Offering price as percentage of pro forma stockholders’ equity per share   87.87%   96.53%   104.17%
Offering price as percentage of pro forma tangible stockholders’ equity per share   87.87%   96.53%   104.17%
Number of shares outstanding for pro forma book value per share calculations   18,653,601    21,945,413    25,237,225 

 

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At or for the Year Ended December 31, 2018

Based upon the Sale at $10.00 Per Share of

 
  

9,775,000

Shares

  

11,500,000

Shares

  

13,225,000

Shares

 
   (Dollars in thousands, except per share amounts) 
             
Gross proceeds of offering  $97,750   $115,000   $132,250 
Market value of shares issued in the exchange   88,861    104,543    120,224 
Pro forma market capitalization  $186,611   $219,543   $252,474 
                
Gross proceeds of offering  $97,750   $115,000   $132,250 
Expenses   2,369    2,528    2,687 
Estimated net proceeds   95,381    112,472    129,563 
Common stock purchased by employee stock ownership plan   (7,820)   (9,200)   (10,580)
Common stock issued under stock-based benefit plans   (3,910)   (4,600)   (5,290)
Estimated net proceeds, as adjusted  $83,651   $98,672   $113,693 
                
For the Year Ended December 31, 2018               
Consolidated net earnings:               
Historical  $9,325   $9,325   $9,325 
Income on adjusted net proceeds   1,362    1,606    1,851 
Income on mutual holding company asset contribution   6    6    6 
Employee stock ownership plan (1)   (180)   (290)   (401)
Stock awards (2)   (571)   (672)   (772)
Stock options (3)   (520)   (611)   (703)
Pro forma net income  $9,423   $9,364   $9,305 
                
Earnings per share (4):               
Historical  $0.53   $0.45   $0.39 
Income on adjusted net proceeds   0.08    0.08    0.08 
Income on mutual holding company asset contribution   (0.00)   (0.00)   (0.00)
Employee stock ownership plan (1)   (0.01)   (0.01)   (0.02)
Stock awards (2)   (0.03)   (0.03)   (0.03)
Stock options (3)   (0.03)   (0.03)   (0.03)
Pro forma earnings per share (4)  $0.54   $0.46   $0.39 
                
Offering price to pro forma net earnings per share   18.52x   21.74x   25.64x
Number of shares used in earnings per share calculations   17,458,168    20,539,021    23,619,874 
                
At December 31, 2018               
Stockholders’ equity:               
Historical  $125,584   $125,584   $125,584 
Estimated net proceeds   95,381    112,472    129,563 
Equity increase from the mutual holding company   372    372    372 
Common stock acquired by employee stock ownership plan (1)   (7,820)   (9,200)   (10,580)
Common stock issued under stock-based benefit plans (2)   (3,910)   (4,600)   (5,290)
Pro forma stockholders’ equity (5)  $209,607   $224,628   $239,649 
Intangible assets  $   $   $ 
Pro forma tangible stockholders’ equity (5)  $209,607   $224,628   $239,649 
                
Stockholders’ equity per share (6):               
Historical  $6.74   $5.72   $4.99 
Estimated net proceeds   5.11    5.13    5.13 
Equity increase from the mutual holding company   0.02    0.02    0.01 
Common stock acquired by employee stock ownership plan (1)   (0.42)   (0.42)   (0.42)
Common stock issued under stock-based benefit plans (2)   (0.21)   (0.21)   (0.21)
Pro forma stockholders’ equity per share (5) (6)  $11.24   $10.24   $9.50 
Intangible assets  $   $   $ 
Pro forma tangible stockholders’ equity per share (5) (6)  $11.24   $10.24   $9.50 
                
Offering price as percentage of pro forma stockholders’ equity per share   88.97%   97.66%   105.26%
Offering price as percentage of pro forma tangible stockholders’ equity per share   88.97%   97.66%   105.26%
Number of shares outstanding for pro forma book value per share calculations   18,653,601    21,945,413    25,237,225 

 

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(1)Assumes that 8% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Provident, and the outstanding loan with respect to existing shares of Old Provident held by the employee stock ownership plan will be refinanced and consolidated with the new loan. The Provident Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. The Provident Bank’s total annual payments on the employee stock ownership plan debt are based upon 15 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation—Stock Compensation—Employee Stock Ownership Plans” requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by The Provident Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 27.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 21,290, 25,047 and 28,804 shares were committed to be released during the three months ended March 31, 2019 at the minimum, midpoint and maximum of the offering range, respectively, that 85,927, 101,090 and 116,254 shares were committed to be released during the year ended December 31, 2018 at the minimum, midpoint and maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net earnings per share calculations.
(2)Assumes that we issue, under one or more stock-based benefit plans, an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering. The shares may be issued directly from New Provident or funded through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. Any funds to be used to purchase the shares in the open market will be provided by New Provident. The table assumes that (i) shares issued under the stock-based benefit plan are acquired through open market purchases at $10.00 per share, (ii) 5% of the fair value of shares issued under the plan is amortized as expense during the three months ended March 31, 2019, (iii) 20% of the fair value of shares issued under the plan is amortized as an expense during the year ended December 31, 2018, and (iv) the plan expense reflects an effective combined federal and state tax rate of 27.0%. The issuance of authorized but unissued shares of common stock under such plan would decrease our net income per share and stockholders’ equity per share, and would dilute stockholders’ ownership and voting interests by up to approximately 2.1%.
(3)Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering. It is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.85 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 27.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. The actual exercise price of the stock options may not equal $10.00 price per share. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would decrease our net income per share and stockholders’ equity per share, and would dilute stockholders’ ownership and voting interests by up to approximately 5.0%.
(4)Per share figures include publicly held shares of Old Provident common stock that will be exchanged for shares of New Provident common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the year. See note 1, above. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.
(5)The retained earnings of The Provident Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Massachusetts Banking Laws and Supervision—Dividends.”
(6)Per share figures include publicly held shares of Old Provident common stock that will be exchanged for shares of New Provident common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Stockholders’ equity per share calculations are based upon the sum of the number of shares assumed to be sold in the offering and shares to be issued in exchange for publicly held shares. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited financial statements that appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Old Provident and the financial statements provided in this prospectus.

 

Overview

 

Total assets were $998.5 million at March 31, 2019, representing an increase of $24.4 million, or 2.5%, from $974.1 million at December 31, 2018. The increase resulted primarily from increases in net loans of $23.7 million and premises and equipment of $5.4 million. The increases were partially offset by decreases in cash and cash equivalents of $4.9 million and available-for-sale investment securities of $1.7 million. Total assets increased $71.8 million, or 8.0%, to $974.1 million at December 31, 2018 from $902.3 million at December 31, 2017. The increase resulted primarily from an increase in loans, partially offset by decreases in cash and cash equivalents and securities.

 

Net income increased $196,000 to $2.2 million for the three months ended March 31, 2019 from $2.0 million for the three months ended March 31, 2018. The increase was primarily related to an increase of $1.4 million in net interest and dividend income, partially offset by an increase in provision for loan losses of $806,000, an increase in noninterest expense of $370,000, and an increase in income tax expense of $100,000.

 

Net income increased $1.4 million, or 17.8%, to $9.3 million for the year ended December 31, 2018 from $7.9 million for the year ended December 31, 2017. The increase was primarily due to an increase of $5.1 million, or 15.8%, in net interest and dividend income and a decrease in income tax expense of $4.2 million, or 56.4%, offset by an increase in provision for loan losses of $400,000, or 13.7%, an increase in salaries and employee benefits expense of $1.4 million, or 9.3%, and a decrease in noninterest income of $5.8 million, or 58.0%.

 

Critical Accounting Policies

 

A summary of our accounting policies is included in the consolidated financial statements beginning on page F-1 of this prospectus. 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 Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

A loan is considered impaired when, based on current information and events, it is probable that we 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 determining impairment include payment status, collateral

 

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value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of 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. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.

 

The allowance consists of a general component, a specific component for impaired loans, and in some cases an unallocated component. The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during 2018 or the first quarter of 2019.

 

To determine the general component of the allowance for loan losses, our loan portfolio is segregated into various risk categories. These risk categories and the relevant risk characteristics are as follows:

 

Residential real estate: We generally do not originate loans with a loan-to-value ratio greater than 80% and do not originate subprime loans. Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance. 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.

 

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 are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of the assets securing these loans.

 

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 construction to permanent loans for which payment is derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

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, will have an effect on the credit quality in this segment.

 

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

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated

 

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selling costs, if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.

 

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

 

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

Stock-based Compensation Plans. We measure and recognize compensation cost relating to stock-based payment transactions based on the grant-date fair value of the equity instruments issued. Stock-based compensation is recognized over the period the employee is required to provide services for the award. We use the Black-Scholes option-pricing model to determine the fair value of stock options granted. The fair value of restricted stock is recorded based on the grant date fair value of the equity instrument issued.

 

Income Taxes. We recognize 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.

 

We reduce the deferred tax asset by a valuation allowance if, based on the weight of the available evidence, it is not “more likely than not” that some portion or all of the deferred tax assets will be realized. We assess the realizability of our deferred tax assets by assessing the likelihood of our generating federal and state income tax, as applicable, in future periods in amounts sufficient to offset the deferred tax charges in the periods they are expected to reverse. Based on this assessment, management concluded that a valuation allowance was not required as of March 31, 2019, December 31, 2018 and 2017.

 

On December 22, 2017, the President signed into law H.R. 1, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a reduction of the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, we were required to re-measure, through income tax expense, our deferred tax assets and liabilities as of December 31, 2017 using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax asset resulted in additional income tax expense during the fiscal year ended December 31, 2017 of $2.0 million.

 

We examine our significant income tax positions annually to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

 

Business Strategy

 

In recent years, we have transformed from a retail community bank to a full-service commercial bank. We have grown our balance sheet in large part by developing specialties in both lending and deposit services. As a result of our recent efforts, as of December 31, 2018 we were the second ranked commercial and industrial lending financial institution in the country, based on a total commercial loan portfolio, among financial institutions with less than $1 billion in assets. Our business lending, comprised of commercial loans, commercial real estate loans, multifamily loans and construction and land development loans, were $798.4 million, or 91.5% of our total loan portfolio at March 31, 2019 compared to $394.4 million, or 78.6% of our total loan portfolio at December 31, 2014.

 

Our primary objective continues to be a premier business bank providing a full range of banking products and services to small and medium-sized commercial customers, located both within our regional markets and nationally. We seek to develop specialty lending and deposit services that will appeal to small and medium-sized

 

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commercial customers. We believe that the infrastructure we have created in recent years enables us to be more responsive and agile than most comparable commercial banks in responding to our customers and developing products and services to meet the financial needs in our markets and, increasingly, nationwide.

 

We have been effective in competing against both larger regional banks and smaller banks operating in our markets. We compete against the larger banks through our responsive and personalized service, providing our customers with quicker decision making, customized products where appropriate and access to our senior managers. Our larger capital base, highly experienced commercial bankers and a sophisticated product and service mix, including a suite of cash management services and technology solutions and support, enable us to compete effectively against smaller banks. Recent consolidation of financial institutions in and around our markets continues to create further opportunity for expansion in our markets.

 

To grow our franchise and enhance profitability, we intend to maintain our traditional business banking while continuing to focus on innovative lending and deposit products. To accomplish our goals, we are pursuing the following strategies:

 

·Develop innovative and highly specialized commercial lending products while maintaining our traditional commercial lending activities. We have grown our loan portfolio by developing expertise for customers who typically have not been supported by larger financial institutions but whose business needs are usually too complex for smaller institutions. When entering a new lending line, we typically seek to manage risks and costs by limiting initial activity. We then decide whether it would be profitable and consistent with our risk tolerance levels to expand the activity, and continually calibrate and adjust our actions to maintain appropriate risk limitations.

 

To date, the principal examples of our specialized commercial lending are what we characterize as “enterprise value loans” and loans to developers of commercial-scale renewable energy facilities.

 

Our enterprise value loans, which we began originating in 2015, are fully amortizing term loans (up to seven years) that are made to entities that are in the process of purchasing existing businesses. We also provide working capital and equipment lines of credit. We generally limit these loans to a loan-to-value limitation of 50%, as verified by a quality of earnings review by a certified public accounting firm, and we generally require a maximum EBITDA (earnings before interest, tax, depreciation and amortization) of less than three times, as verified by a third-party business valuation. At March 31, 2019, enterprise value loans totaled $147.5 million, or 16.9% of our total loan portfolio, with total exposure of $182.5 million, consisting of 134 loans in 18 states. This compares to a balance of $61.8 million, or 8.2% of our total loan portfolio at December 31, 2017, an increase of 138.5%. The average loan balance was $1.1 million at March 31, 2019. Due to the relatively short amortization period of these loans, over time we expect more limited growth in our total portfolio of enterprise value loans even if we are successful in continuing to originate new enterprise value loans.

 

In 2015, we began originating loans to developers of commercial-scale renewable energy facilities. These loans are secured by the power purchase agreements and the underlying equipment, and the term of a loan is shorter than the life expectancy of both the power purchase agreement and the related equipment. At March 31, 2019, renewable energy loans totaled $54.0 million, or 6.2% of our loan portfolio, with total exposure of $64.4 million, consisting of 43 loans in five states (primarily New England and New York). This compares to a balance of $20.7 million, or 3.3% of our total loan portfolio at December 31, 2017, an increase of 160.9%. Of these loans, at March 31, 2019, $39.1 million, or 72.5%, were secured by solar arrays, while the remaining $14.9 million, or 27.5%, were secured by wind turbines. The average loan balance of our renewable energy loans was $1.3 million at March 31, 2019.

 

We intend to continue to develop other specialized commercial lending products, and we are currently developing international trade finance, asset-based lending and software as a service

 

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(SaaS) lending. Based upon initial experience, we may expand our investment in these opportunities or we may focus our resources on other opportunities.

 

·Increase core deposits, especially low-cost demand deposits. We have grown our core deposits (which we define as all deposits except for certificates of deposit) through a variety of strategies, including investing in technology and our employees, as well as proactive interaction with our customers. Our investment in technology, described below, has enabled us to better serve commercial customers who demand faster processing times and simplified online interaction. For example, we provide deposit and cash management services for 1031 qualified intermediaries, digital currency customers, payroll providers and community association management companies. Funds we receive from digital currency customers are denominated in U.S. dollars; we do not have any digital assets or liabilities on our balance sheet and we do not take any digital currency exchange rate risk. We believe our specialized commercial activities have provided opportunities to generate business deposits from those customers, including from customers outside of our branch network, that may not be available to traditional community banks. For example, our growth in enterprise value lending has resulted in related deposits of $37.3 million as of March 31, 2019, including $12.9 million of non-interest bearing deposits. Furthermore, as a Massachusetts savings bank, we can provide full deposit insurance provided through a combination of Federal Deposit Insurance Corporation deposit insurance as well as the Depositors Insurance Fund (which insures deposits in excess of the Federal Deposit Insurance Corporation limits), which we believe gives us a competitive advantage for customers with larger deposit balances. We seek to limit risk through a robust Bank Secrecy Act (BSA) program, Know Your Customer policies and enhanced compliance procedures for non-traditional deposit customers.

 

·Focus on technological improvement to grow our customer base. Competition in the banking industry continues to intensify, including increasing competition from non-traditional entities, such as financial technology, or “fintech,” companies. In response to these challenges, we have engaged in strategic initiatives with our core systems processor, a payment provider and a digital onboarding company in our efforts to enhance our technology platform and our user experience for online banking products and services. We are also exploring ways to partner with other fintech companies, who may want to offer their customers financial products without taking on full banking services themselves. Our strategic initiatives enable us to provide additional products and collaboration beyond those of a traditional financial institution, and strengthens our efforts to grow our deposit base. In addition, we do not merely provide our technology platform to our customers, but we also send our customer service representatives to our customers’ businesses to provide on-site training for using our products and services. We proactively identify gaps in our customer relationships and suggest to our customers ways for them to improve their utilization of our products and services, providing them with added convenience and cost savings while improving our profitability.

 

·Manage credit risk to maintain a relatively low level of non-performing assets. Although we have entered into new lending lines in recent years, and have originated loans with larger balances and, in some cases, outside of our traditional markets, we continue to focus on strong asset quality as a key to long-term financial success. We have proactively established credit management systems to support our evolving operations. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. We continually assess our lending lines, and we adjust our activity as needed, including by exiting underperforming segments. Our compensation and incentive systems are also aligned with our strategies to grow business loans and core deposits while maintaining asset quality. Our non-performing assets to total assets ratio was 1.01% at March 31, 2019. Among our specialized lending lines, at March 31, 2019, $1.4 million, or 0.9% of our enterprise value loans, were non-performing, and no renewable energy loans were non-performing.

 

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·Enhance operating efficiency through continual improvement. In recent years, we have successfully maintained our efforts to control operating expenses, and, as a result, our efficiency ratio improved to 61.5% for the year ended December 31, 2018 from 71.2% for the year ended December 31, 2014. We remain disciplined in evaluating the cost and expected benefit of all expansion opportunities. To further improve operating efficiency, in 2018 we initiated a “Lean” program to enhance employee engagement and training in order to standardize work and reduce employee burden, with a goal of improving both the customer and employee experience, and encouraging innovation, agility and adaptability. This has enhanced our established corporate culture that is based on personal accountability, high ethical standards and significant commitment to training and career development. Although we expect to incur additional regulatory expense as a result of growing assets above $1 billion, as well as additional costs related to anticipated stock benefit plans, we intend to continue our efforts to control our expenses.

 

Comparison of Financial Condition

 

Assets. Total assets were $998.5 million at March 31, 2019, representing an increase of $24.4 million, or 2.5%, from $974.1 million at December 31, 2018. The increase resulted primarily from increases in net loans of $23.7 million and premises and equipment of $5.4 million. The increases were partially offset by decreases in cash and cash equivalents of $4.9 million and available-for-sale investment securities of $1.7 million.

 

Total assets increased $71.8 million, or 8.0%, to $974.1 million at December 31, 2018 from $902.3 million at December 31, 2017. The increase resulted primarily from an increase in loans, partially offset by decreases in cash and cash equivalents and securities.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $4.9 million, or 17.1%, to $23.7 million at March 31, 2019 from $28.6 million at December 31, 2018. The decrease is primarily due to utilizing funds for loan growth.

 

Cash and cash equivalents decreased $19.1 million, or 40.0%, to $28.6 million at December 31, 2018 from $47.7 million at December 31, 2017. The decrease resulted from utilizing funds for loan growth.

 

 Loan Portfolio Analysis. At March 31, 2019, net loans were $859.3 million, or 86.1% of total assets, compared to $835.5 million, or 85.8% of total assets, at December 31, 2018. Increases in commercial loans of $20.8 million, or 5.7%, and in commercial real estate loans of $8.6 million, or 2.3%, were partially offset by decreases in residential real estate loans of $2.5 million, or 4.3%, construction and land development loans of $2.2 million, or 4.9%, and consumer loans of $505,000, or 2.5%. Our commercial loan growth is attributed to a continued focus on our specialty lending of renewable energy loans and merger and acquisition, re-capitalization, and shareholder/partner buyout loans. Renewable energy loans increased $3.6 million, or 7.2%, to $54.0 million at March 31, 2019 from $50.4 million at December 31, 2018. Merger and acquisition, re-capitalization, and shareholder/partner buyout loans increased $8.7 million, or 6.3%, to $147.5 million at March 31, 2019 from $138.8 million at December 31, 2018.

 

At December 31, 2018, net loans were $835.5 million, or 85.8% of total assets, compared to $742.1 million, or 82.3% of total assets at December 31, 2017. The increase in loans during the year was caused in large part by an increase in commercial business loans and, to a lesser extent, an increase in consumer loans. The increase in commercial business loans was primarily due to the offering of our enterprise value loans nationally. The increase in consumer loans was primarily due to purchases of pools of unsecured consumer loans through the BancAlliance Lending Club Program. The increases were partially offset by decreases in commercial real estate loans, residential real estate loans, and construction and land development loans. During the year ended December 31, 2014, we discontinued single-family residential real estate lending, with the exception of home equity lines of credit. We believe that federal regulations governing the origination of single-family residential real estate loans would increase our costs and expand the risks associated with this type of lending beyond the benefits that we could realize from originating these loans. We have instead focused our lending activities on commercial loans.

 

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The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.

 

       At December 31, 
   At March 31, 2019   2018   2017 
   Amount   Percent   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
     
Real estate:                              
Residential (1)  $54,898    6.29%  $57,361    6.76%  $67,724    9.00%
Commercial (2)   373,435    42.80    364,867    43.00    371,510    49.35 
Construction and land development   42,441    4.86    44,606    5.26    55,828    7.42 
Commercial (3)   382,550    43.84    361,782    42.64    240,223    31.91 
Consumer   19,310    2.21    19,815    2.34    17,455    2.32 
Total loans   872,634    100.00%   848,431    100.00%   752,740    100.00%
Deferred loan fees, net   (1,508)        (1,223)        (845)     
Allowance for loan losses   (11,857)        (11,680)        (9,757)     
Loans, net  $859,269        $835,528        $742,138      

 

   At December 31, 
   2016   2015   2014 
   Amount   Percent   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
     
Real estate:                              
Residential (1)  $76,850    12.13%  $92,392    16.40%  $104,568    20.84%
Commercial (2)   336,102    53.07    285,356    50.67    249,691    49.76 
Construction and land development   48,161    7.60    71,535    12.70    47,079    9.38 
Commercial   166,157    26.23    112,073    19.90    97,589    19.45 
Consumer   6,172    0.97    1,855    0.33    2,863    0.57 
Total loans   633,442    100.00%   563,211    100.00%   501,790    100.00%
Deferred loan fees, net   (427)        (377)        (383)     
Allowance for loan losses   (8,590)        (7,905)        (7,224)     
Loans, net  $624,425        $554,929        $494,183      

 

 

(1)Includes home equity loans and lines of credit.
(2)Includes multi-family real estate loans.
(3)At March 31, 2019, included $147.5 million of enterprise value loans and $54.0 million of renewable energy loans.

 

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Loan Maturity. The following table sets forth certain information at December 31, 2018 regarding the contractual maturity of our loan portfolio. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table does not include any estimate of prepayments that could significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.

 

   Residential
Real Estate
   Commercial
Real Estate
   Construction
and Land
Development
   Commercial   Consumer   Total Loans 
   (In thousands) 
Amounts due in:                              
One year or less  $139   $16,187   $19,244   $49,533   $937   $86,040 
More than one year to five years   3,547    13,948    1,110    95,095    18,878    132,578 
More than five years through ten years   12,109    49,063    549    175,823        237,544 
More than ten years   41,566    285,669    23,703    41,331        392,269 
Total  $57,361   $364,867   $44,606   $361,782   $19,815   $848,431 

 

The following table sets forth our fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.

 

   Fixed
Rates
   Floating or
Adjustable
Rates
   Total 
   (In thousands) 
Real estate:               
Residential  $36,067   $21,155   $57,222 
Commercial   4,301    344,379    348,680 
Construction and land development       25,362    25,362 
Commercial   119,521    192,728    312,249 
Consumer   18,878        18,878 
Total loans  $178,767   $583,624   $762,391 

 

Premises and Equipment. Premises and equipment increased $5.4 million, or 33.5%, to $21.5 million at March 31, 2019, from $16.1 million at December 31, 2018. The increase was primarily due to increases in construction in progress costs and the adoption of FASB Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). In January 2017, we purchased a building in Portsmouth, New Hampshire with the intention of using a majority of the space for banking operations. The construction in progress costs increased $1.6 million, or 28.1% to $7.1 million at March 31, 2019 from $5.6 million at December 31, 2018. ASU No. 2016-02 became effective January 1, 2019 and required us to recognize on our balance sheet right-of-use assets, which approximate the present value of the remaining lease payments. As of March 31, 2019, the balance of the right-of-use assets was $3.8 million.

 

Asset Quality

 

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate, construction and land development and commercial business loans are assigned a risk rating based on pre-determined criteria and levels of risk. The risk rating is monitored annually for most loans; however, it may change during the life of the loan as appropriate.

 

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When entering a new lending line, we typically seek to manage risks and costs by limiting initial activity. We then decide whether it would be profitable and consistent with our risk tolerance levels to expand the activity, and continually calibrate and adjust our actions to maintain appropriate risk limitations. We typically enter a new lending line based upon the experience of our existing employees, or we may hire an experienced individual or group of individuals to manage new activities.

 

Internal and independent third-party loan reviews vary by loan type. Depending on the size and complexity of the loan, some loans may warrant detailed individual review, while other loans may have less risk based upon size, or be of a homogeneous nature reducing the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and loans secured by residential real estate, may be reviewed on the basis of risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan. Some loans may be re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general loan loss reserves.

 

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the board of directors quarterly on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

 

Delinquent Loans. The following tables set forth our loan delinquencies by type and amount at the dates indicated.

 

<
       At December 31, 
   At March 31, 2019   2018   2017 
  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More
Past Due

  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More
Past Due

  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More
Past Due

 
   (In thousands) 
Real Estate:                                             
Residential  $227   $358   $29   $321   $223   $30   $699   $178   $81 
Commercial           519    742        519        3,669     
Construction and land development                                    
Commercial   131        1,861    40        3,167    12         
Consumer   30    85    114    62    46    59    63    45    60 
Total  $388   $443   $2,523   $1,165   $269   $3,775   $774   $3,892   $141 
     
   At December 31, 
   2016   2015   2014 
  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More
Past Due

  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More
Past Due

  

30-59

Days

Past Due

  

60-89

Days

Past Due

  

90 Days

or More

Past Due

 
   (In thousands) 
Real Estate:                                             
Residential  $   $   $   $130   $173   $365   $   $404   $423 
Commercial           346                110    132    363 
Construction and land development                                    
Commercial   29                        149    108    350 
Consumer               1    1        9         
Total  $29   $   $