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Section 1: 424B3 (424B3)

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-232018

  

 

 

Dear Fellow Stockholder:

 

Provident Bancorp, Inc. is soliciting stockholder votes regarding the mutual-to-stock conversion of Provident Bancorp. Pursuant to a Plan of Conversion, our organization will convert from a partially public company to a fully public company by selling a minimum of 9,775,000 shares of common stock of a newly formed company, named Provident Bancorp, Inc. (“New Provident”), which will become the holding company for The Provident Bank.

 

The Proxy Vote

In addition, to receiving final regulatory approval, our stockholders must approve the Plan of Conversion before we can complete the conversion. Enclosed is a proxy statement/prospectus describing the proposals being presented at our special meeting of stockholders. Please promptly vote the enclosed proxy card. Our Board of Directors urges you to vote “FOR” the approval of the Plan of Conversion and “FOR” the other matters being presented at the special meeting.

 

The Exchange

At the conclusion of the conversion, your shares of Provident Bancorp, Inc. common stock will be exchanged for shares of New Provident common stock. The number of new shares that you receive will be based on an exchange ratio that is described in the proxy statement/prospectus. Shortly after the completion of the conversion, our exchange agent will send a transmittal form to each stockholder of Provident Bancorp, Inc. who holds stock certificates. The transmittal form explains the procedure to follow to exchange your shares. Please do not deliver your certificate(s) before you receive the transmittal form. Shares of Provident Bancorp, Inc. that are held in street name (e.g., in a brokerage account) will be converted automatically at the conclusion of the conversion; no action or documentation is required of you.

 

The Stock Offering

We are offering the shares of common stock of New Provident for sale at $10.00 per share. The shares are first being offered in a subscription offering to eligible depositors of The Provident Bank. If all shares are not subscribed for in the subscription offering, shares would be available in a community offering to Provident Bancorp, Inc. public stockholders and others not eligible to place orders in the subscription offering. If you may be interested in purchasing shares of our common stock, contact our Stock Information Center at (978) 834-8505 to receive a stock order form and prospectus. The stock offering period is expected to expire on September 10, 2019.

 

If you have any questions, please refer to the Questions & Answers section herein.

 

We thank you for your support as a stockholder of Provident Bancorp, Inc.

 

Sincerely,

 

 

 

David P. Mansfield

President and Chief Executive Officer

 

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 proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

PROSPECTUS OF PROVIDENT BANCORP, INC., A MARYLAND CORPORATION
PROXY STATEMENT OF PROVIDENT BANCORP, INC.,

A MASSACHUSETTS CORPORATION

 

The Provident Bank is converting from the mutual holding company structure to a fully-public stock holding company structure. Currently, The Provident Bank is a wholly-owned subsidiary of Provident Bancorp, Inc., a Massachusetts corporation, which we sometimes refer to in this document as “Old Provident,” and Provident Bancorp owns 52.3% of Provident Bancorp, Inc.’s common stock. The remaining 47.7% of Provident Bancorp, Inc.’s common stock is owned by public stockholders. As a result of the conversion, a newly formed Maryland corporation named Provident Bancorp, Inc. (“New Provident”) will replace Provident Bancorp, Inc., the Massachusetts corporation, as the holding company of The Provident Bank. Each share of Old Provident common stock owned by the public will be exchanged for between 1.9354 and 2.6185 shares of common stock of New Provident, so that immediately after the conversion Old Provident’s existing public stockholders will own approximately the same percentage of New Provident common stock as they owned of Provident Bancorp, Inc.’s common stock immediately prior to the conversion. The actual number of shares that you will receive will depend on the percentage of Old Provident common stock held by the public at the completion of the conversion, the final independent appraisal of New Provident and the number of shares of New Provident common stock sold in the offering described in the following paragraph. It will not depend on the market price of Provident Bancorp, Inc. common stock. See “Proposal 1—Approval of the Plan of Conversion—Share Exchange Ratio for Current Stockholders” for a discussion of the exchange ratio. Based on the $26.99 per share closing price of Provident Bancorp, Inc. common stock as of the last trading day prior to the date of this proxy statement/prospectus, the initial value of the New Provident common stock you receive in the share exchange would be less than the market value of the Provident Bancorp, Inc. common stock you currently own. See “Risk Factors—The market value of New Provident common stock received in the share exchange may be less than the market value of Provident Bancorp, Inc. common stock exchanged.”

 

Concurrently with the exchange offer, we are offering for sale up to 13,225,000 shares of common stock of New Provident, representing the ownership interest of Provident Bancorp in Old Provident. We are offering the shares of common stock to eligible depositors of The Provident Bank, to The Provident Bank’s tax qualified benefit plans, to our employees, officers, trustees, directors and corporators and to the public, including Provident Bancorp, Inc. stockholders, at a price of $10.00 per share. The conversion of Provident Bancorp and the offering and exchange of common stock by New Provident is referred to herein as the “conversion and offering.” After the conversion and offering are completed, The Provident Bank will be a wholly-owned subsidiary of New Provident, and 100% of the common stock of New Provident will be owned by public stockholders. As a result of the conversion and offering, Provident Bancorp, Inc. and Provident Bancorp will cease to exist.

 

Provident Bancorp, Inc.’s common stock is currently traded on the Nasdaq Capital Market under the trading symbol “PVBC,” and we expect New Provident’s shares of common stock will also trade on the Nasdaq Capital Market under the symbol “PVBC.”

 

The conversion and offering cannot be completed unless the stockholders of Provident Bancorp, Inc. approve the Plan of Conversion of Provident Bancorp, which may be referred to herein as the “plan of conversion.” Provident Bancorp, Inc. is holding a special meeting of stockholders at the Blue Ocean Event Center, 4 Oceanfront North, Salisbury, Massachusetts, on September 25, 2019, at 3:30 p.m., Eastern Time, to consider and vote upon the plan of conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Provident Bancorp, Inc. stockholders, including shares held by Provident Bancorp, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Provident Bancorp, Inc. stockholders other than Provident Bancorp. Provident Bancorp, Inc.’s board of directors unanimously recommends that stockholders vote “FOR” the plan of conversion.

 

This document serves as the proxy statement for the special meeting of stockholders of Provident Bancorp, Inc. and the prospectus for the shares of New Provident common stock to be issued in exchange for shares of Provident Bancorp, Inc. common stock. We urge you to read this entire document carefully. You can also obtain information about us from documents that we have filed with the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System and the Massachusetts Commissioner of Banks. This document does

 

 

 

 

not serve as the prospectus relating to the offering by New Provident of its shares of common stock in the offering, which is being made pursuant to a separate prospectus. Stockholders of Provident Bancorp, Inc. are not required to participate in the stock offering.

 

This proxy statement/prospectus contains information that you should consider in evaluating the plan of conversion. In particular, you should carefully read the section captioned “Risk Factors” beginning on page 19 for a discussion of certain risk factors relating to the conversion and offering.

 

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or 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 proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

For answers to your questions, please read this proxy statement/prospectus including the Questions and Answers section, beginning on page 1. Questions about voting on the plan of conversion may be directed to EQ Proxy, at (833) 503-4125, Monday through Friday from 9:00 a.m. to 5:00 p.m., Eastern Time, and Saturdays from 10:00 a.m. to 4:00 p.m., Eastern Time.

 

The date of this proxy statement/prospectus is August 7, 2019, and it is first being mailed to stockholders of Provident Bancorp, Inc. on or about August 16, 2019.

 

 

 

 

Provident Bancorp, Inc.

5 Market Street

Amesbury, Massachusetts 01913

(617) 567-1500

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

On September 25, 2019, Provident Bancorp, Inc. will hold a special meeting of stockholders at the Blue Ocean Event Center, 4 Oceanfront North, Salisbury, Massachusetts. The meeting will begin at 3:30 p.m., Eastern Time. At the meeting, stockholders will consider and act on the following:

 

1.The approval of a plan of conversion, whereby Provident Bancorp and Provident Bancorp, Inc., a Massachusetts corporation, will convert and reorganize from the mutual holding company structure to the stock holding company structure, as more fully described in the attached proxy statement;

 

2.The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion; and

 

Such other business that may properly come before the meeting.

 

NOTE: The board of directors is not aware of any other business to come before the meeting.

 

The board of directors has fixed July 29, 2019, as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting and at any adjournment or postponement thereof.

 

Upon written request addressed to the Corporate Secretary of Provident Bancorp, Inc. at the address given above, stockholders may obtain an additional copy of this proxy statement/prospectus and/or a copy of the plan of conversion. In order to assure timely receipt of the additional copy of the proxy statement/prospectus and/or the plan of conversion, the written request should be received by Provident Bancorp, Inc. by September 11, 2019.

 

Please complete and sign the enclosed proxy card, which is solicited by the board of directors, and mail it promptly in the enclosed envelope. The proxy will not be used if you attend the meeting and vote in person.

 

  BY ORDER OF THE BOARD OF DIRECTORS
   
   
   
  Kimberly Scholtz
  Corporate Secretary
Amesbury, Massachusetts  
August 7, 2019  

 

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS FOR STOCKHOLDERS OF PROVIDENT BANCORP, INC. REGARDING THE PLAN OF CONVERSION 1
SUMMARY 5
RISK FACTORS 19
INFORMATION ABOUT THE SPECIAL MEETING 36
PROPOSAL 1 — APPROVAL OF THE PLAN OF CONVERSION 39
PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING 60
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 62
RECENT DEVELOPMENTS 64
FORWARD-LOOKING STATEMENTS 78
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 80
OUR DIVIDEND POLICY 81
MARKET FOR THE COMMON STOCK 82
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 83
CAPITALIZATION 84
PRO FORMA DATA 86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 91
BUSINESS OF NEW PROVIDENT AND OLD PROVIDENT 120
BUSINESS OF THE PROVIDENT BANK 121
SUPERVISION AND REGULATION 133
TAXATION 144
MANAGEMENT 146
BENEFICIAL OWNERSHIP OF COMMON STOCK 158
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 159
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF PROVIDENT BANCORP, INC. 160
RESTRICTIONS ON ACQUISITION OF NEW PROVIDENT 167
DESCRIPTION OF CAPITAL STOCK OF NEW PROVIDENT FOLLOWING THE CONVERSION 171
TRANSFER AGENT 172
EXPERTS 172
LEGAL MATTERS 173
WHERE YOU CAN FIND ADDITIONAL INFORMATION 173
STOCKHOLDER PROPOSALS 173
ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING 173
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING 175
OTHER MATTERS 175
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

 

 

 

QUESTIONS AND ANSWERS
FOR STOCKHOLDERS OF PROVIDENT BANCORP, INC.

REGARDING THE PLAN OF CONVERSION

 

You should read this document for more information about the conversion. We have filed an application with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) with respect to the conversion and stock offering and with respect to New Provident becoming the holding company for The Provident Bank, and the approval of the Federal Reserve Board is required before we can consummate the conversion and stock offering. We have filed an application with respect to the conversion with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks has authorized us to commence the offering. However, the final approval of the Massachusetts of Banks is required before we can consummate the conversion and issue shares of common stock. Any approval by the Massachusetts Commissioner of Banks or the Federal Reserve Board does not constitute a recommendation or endorsement of the plan of conversion.

 

Q.WHAT ARE STOCKHOLDERS BEING ASKED TO APPROVE?

 

A.Provident Bancorp, Inc. stockholders as of July 29, 2019 are being asked to vote on the plan of conversion pursuant to which Provident Bancorp will convert from the mutual to the stock form of organization. As part of the conversion, a newly formed Maryland corporation, New Provident, is offering its common stock to eligible depositors of The Provident Bank, to The Provident Bank’s tax qualified benefit plans, to stockholders of Provident Bancorp, Inc. as of July 29, 2019 and to the public. The shares offered represent Provident Bancorp’s current ownership interest in Provident Bancorp, Inc. Voting for approval of the plan of conversion will also include approval of the exchange ratio and the articles of incorporation of New Provident (including the anti-takeover provisions and provisions limiting stockholder rights).

 

In addition, Provident Bancorp, Inc. stockholders are being asked to approve the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion.

 

Your vote is important. Without sufficient votes “FOR” adoption of the plan of conversion, we cannot implement the plan of conversion and the related stock offering.

 

Q.WHAT ARE THE REASONS FOR THE CONVERSION AND RELATED OFFERING?

 

A.The primary reasons for the conversion and offering are to:

 

·enhance our regulatory capital position;

 

·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;

 

·improve the liquidity of our shares of common stock;

 

·facilitate our stock holding company’s ability to pay dividends to our public stockholders; and

 

·facilitate future mergers and acquisitions.

 

As a fully converted stock holding company, we will have greater flexibility in structuring potential mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure limits our ability to offer shares of our common stock as consideration in a merger or acquisition since Provident Bancorp is required to own a majority of Provident Bancorp, Inc.’s outstanding shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination of stock and cash, and therefore will enhance our ability to compete with

 

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other bidders when acquisition opportunities arise. We currently have no arrangements or understandings regarding any specific acquisition.

 

Q.WHAT WILL STOCKHOLDERS RECEIVE FOR THEIR EXISTING PROVIDENT BANCORP, INC. SHARES?

 

A.As more fully described in “Proposal 1 — Approval of the Plan of Conversion — Share Exchange Ratio for Current Stockholders,” depending on the number of shares sold in the offering, each share of common stock that you own at the time of the completion of the conversion will be exchanged for between 1.9354 shares at the minimum and 2.6185 shares at the maximum of the offering range of New Provident common stock (cash will be paid in lieu of any fractional shares). For example, if you own 100 shares of Provident Bancorp, Inc. common stock, and the exchange ratio is 2.6185 (at the maximum of the offering range), after the conversion you will receive 261 shares of New Provident common stock and $8.50 in cash, the value of the fractional share based on the $10.00 per share purchase price of stock in the offering.

 

If you own shares of Provident Bancorp, Inc. common stock in a brokerage account in “street name,” your shares will be automatically exchanged within your account, and you do not need to take any action to exchange your shares of common stock or receive cash in lieu of fractional shares. If you own shares in the form of Provident Bancorp, Inc. stock certificates, after the completion of the conversion and stock offering, our exchange agent will mail to you a transmittal form with instructions to surrender your stock certificates. A statement reflecting your ownership of shares of common stock of New Provident and a check representing cash in lieu of fractional shares will be mailed to you within five business days after the transfer agent receives a properly executed transmittal form and your existing Provident Bancorp, Inc. stock certificate(s). New Provident will not issue stock certificates. You should not submit a stock certificate until you receive a transmittal form.

 

Q.WHY WILL THE SHARES THAT I RECEIVE BE BASED ON A PRICE OF $10.00 PER SHARE RATHER THAN THE TRADING PRICE OF THE COMMON STOCK PRIOR TO COMPLETION OF THE CONVERSION?

 

A.The shares will be based on a price of $10.00 per share because that is the price at which New Provident will sell shares in its stock offering. The amount of common stock New Provident will issue at $10.00 per share in the offering and the exchange is based on an independent appraisal of the estimated market value of New Provident, assuming the conversion and offering are completed. RP Financial, LC., an appraisal firm experienced in the appraisal of financial institutions, has estimated that, as of May 10, 2019, this market value was $219.5 million. Based on federal regulations, the market value forms the midpoint of a range with a minimum of $186.6 million and a maximum of $252.5 million. Based on this valuation and the valuation range, the number of shares of common stock of New Provident that existing public stockholders of Provident Bancorp, Inc. would receive in exchange for their shares of Provident Bancorp, Inc. common stock is expected to range from 8,886,143 to 12,022,429, with a midpoint of 10,454,286 (a value of approximately $88.9 million to $120.2 million, with a midpoint of $104.5 million, at $10.00 per share). The number of shares received by the existing public stockholders of Provident Bancorp, Inc. is intended to maintain their existing ownership in our organization (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), after giving effect to certain assets held by Provident Bancorp. The independent appraisal is based in part on Provident Bancorp, Inc.’s financial condition and results of operations, the pro forma impact 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. considered comparable to Provident Bancorp, Inc.

 

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Q.Does the exchange ratio depend on the TRADING price of PROVIDENT BANCORP, INC. common stock?

 

A.No, the exchange ratio will not be based on the market price of Provident Bancorp, Inc. common stock. Instead, the exchange ratio will be based on the appraised value of New Provident. The purpose of the exchange ratio is to maintain the ownership percentage of existing public stockholders of Provident Bancorp, Inc., adjusted downward to reflect certain assets held by Provident Bancorp. Therefore, changes in the price of Provident Bancorp, Inc. common stock between now and the completion of the conversion and offering will not affect the calculation of the exchange ratio.

 

Q.SHOULD I SUBMIT MY STOCK CERTIFICATES NOW?

 

A.No. If you hold stock certificate(s), instructions for exchanging the certificates will be sent to you by our exchange agent after completion of the conversion. If your shares are held in “street name” (e.g., in a brokerage account) rather than in certificate form, the share exchange will be reflected automatically in your account upon completion of the conversion.

 

Q.HOW DO I VOTE?

 

A.Mark your vote, sign each proxy card enclosed and return the card(s) to us, in the enclosed proxy reply envelope. For information on submitting your proxy, please refer to instructions on the enclosed proxy card. YOUR VOTE IS IMPORTANT. PLEASE VOTE PROMPTLY.

 

Q.IF MY SHARES ARE HELD IN STREET NAME, WILL MY BROKER, BANK OR OTHER NOMINEE AUTOMATICALLY VOTE ON THE PLAN ON MY BEHALF?

 

A.No. Your broker, bank or other nominee will not be able to vote your shares without instructions from you. You should instruct your broker, bank or other nominee to vote your shares, using the directions that they provide to you.

 

Q.WHY SHOULD I VOTE? WHAT HAPPENS IF I DON’T VOTE?

 

A.Your vote is very important. We believe the conversion and offering are in the best interests of our stockholders. Not voting all the proxy card(s) you receive will have the same effect as voting “against” the plan of conversion. Without sufficient favorable votes “for” the plan of conversion, we cannot complete the conversion and offering.

 

Q.WHAT IF I DO NOT GIVE VOTING INSTRUCTIONS TO MY BROKER, BANK OR OTHER NOMINEE?

 

A.Your vote is important. If you do not instruct your broker, bank or other nominee to vote your shares, the unvoted proxy will have the same effect as a vote “against” the plan of conversion.

 

Q.MAY I PLACE AN ORDER TO PURCHASE SHARES IN THE COMMUNITY OFFERING, IN ADDITION TO THE SHARES THAT I WILL RECEIVE IN THE EXCHANGE?

 

A.Yes. If you would like to receive a prospectus and stock order form, you must call our Stock Information Center at (978) 834-8505, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center is closed bank holidays.

 

Eligible depositors of The Provident Bank have priority subscription rights allowing them to purchase common stock in a subscription offering. Shares not purchased in the subscription offering may be available for sale to the public in a community offering, as described herein. In the event orders for New Provident common stock in a community offering exceed the number of shares available for sale, shares

 

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may be allocated (to the extent shares remain available) first to cover orders of 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 Stratha and thereafter to cover orders of the general public.

 

Stockholders of Provident Bancorp, Inc. are subject to an ownership limitation. Shares of common stock purchased in the offering by a stockholder and his or her associates or individuals acting in concert with the stockholder, plus any shares a stockholder and these individuals receive in the exchange for existing shares of Provident Bancorp, Inc. common stock, may not exceed 9.9% of the total shares of common stock of New Provident to be issued and outstanding after the completion of the conversion.

 

Please note that properly completed and signed stock order forms, with full payment, must be received (not postmarked) no later than 5:00 p.m., Eastern Time on September 10, 2019.

 

Q.WILL THE CONVERSION HAVE ANY EFFECT ON DEPOSIT AND LOAN ACCOUNTS AT THE PROVIDENT BANK?

 

A.No. The account number, amount, interest rate and withdrawal rights of deposit accounts will remain unchanged. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation up to the legal limit, with continued additional insurance from the Depositors Insurance Fund. Loans and rights of borrowers will not be affected. Corporators will no longer have voting rights in Provident Bancorp as to matters currently requiring such vote. Provident Bancorp will cease to exist after the conversion and offering. Only stockholders of New Provident will have voting rights after the conversion and offering.

 

OTHER QUESTIONS?

 

For answers to other questions, please read this proxy statement/prospectus. Questions about voting on the plan of conversion may be directed to EQ Proxy, at (833) 503-4125, Monday through Friday from 9:00 a.m. to 5:00 p.m., Eastern Time, and Saturdays from 10:00 a.m. to 4:00 p.m., Eastern Time. Questions about the stock offering may be directed to our Stock Information Center at (978) 834-8505, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center is closed on bank holidays.

 

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SUMMARY

 

This summary highlights material information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the conversion and other proposals fully, you should read this entire document carefully, including the sections entitled “Risk Factors,” “Proposal 1 — Approval of The Plan of Conversion,” “Proposal 2 — Adjournment of the Special Meeting” and the consolidated financial statements and the notes to the consolidated financial statements.

 

The Special Meeting

 

Date, Time and Place. Provident Bancorp, Inc. will hold its special meeting of stockholders at the Blue Ocean Event Center, 4 Oceanfront North, Salisbury, Massachusetts, on September 25, 2019, at 3:30 p.m., Eastern Time.

 

The Proposals. Stockholders will be voting on the following proposals at the special meeting:

 

1.The approval of a plan of conversion whereby: (a) Provident Bancorp and Provident Bancorp, Inc., a Massachusetts corporation, will convert and reorganize from the mutual holding company structure to the stock holding company structure; (b) Provident Bancorp, Inc., a Maryland corporation (“New Provident”), will become the new stock holding company of The Provident Bank; (c) the outstanding shares of Provident Bancorp, Inc., other than those held by Provident Bancorp, will be converted into shares of common stock of New Provident; and (d) New Provident will offer shares of its common stock for sale in a subscription offering, a community offering and, if necessary, a syndicated offering or firm commitment underwritten offering;

 

2.The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion; and

 

Such other business that may properly come before the meeting.

 

Vote Required for Approval of Proposals by the Stockholders of Provident Bancorp, Inc.

 

Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Provident Bancorp, Inc. stockholders, including shares held by Provident Bancorp, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Provident Bancorp, Inc. stockholders other than Provident Bancorp.

 

Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of at least a majority of the votes cast by Provident Bancorp, Inc. stockholders at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion.

 

Other Matters. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of common stock of Provident Bancorp, Inc. At this time, we know of no other matters that may be presented at the special meeting.

 

Revocability of Proxies

 

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Provident Bancorp, Inc. in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.

 

 

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Vote by Provident Bancorp

 

Management anticipates that Provident Bancorp, our majority stockholder, will vote all of its shares of common stock in favor of all the matters set forth above. If Provident Bancorp votes all of its shares in favor of each proposal, the approval of the adjournment of the special meeting, if necessary, would be assured.

 

As of July 29, 2019 the directors and executive officers of Provident Bancorp, Inc. beneficially owned 362,690 shares, or approximately 3.8% of the outstanding shares of Provident Bancorp, Inc. common stock, and Provident Bancorp owned 5,034,323 shares, or approximately 52.3% of the outstanding shares of Provident Bancorp, Inc. common stock.

 

Vote Recommendations

 

Your board of directors unanimously recommends that you vote “FOR” the plan of conversion and “FOR” the adjournment of the special meeting, if necessary.

 

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.

 

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 proxy statement/prospectus.

 

 

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Plan of Conversion

 

The Boards of Directors of Provident Bancorp, Inc., Provident Bancorp, The Provident Bank and New Provident have adopted a plan of conversion pursuant to which The Provident Bank will reorganize from a mutual holding company structure to a stock holding company structure. Public stockholders of Provident Bancorp, Inc. will receive shares in New Provident in exchange for their shares of Provident Bancorp, Inc. common stock based on an exchange ratio. See “—The Exchange of Existing Shares of Old Provident Common Stock.” This conversion to a stock holding company structure also includes the offering by New Provident of shares of its common stock to eligible depositors of The Provident Bank and to the public, including Provident Bancorp, Inc. stockholders, in a subscription offering and, if necessary, in a community offering and/or in a separate public offering through a syndicate of broker-dealers, referred to in this proxy statement/prospectus as the syndicated offering, or through a firm commitment offering. Following the conversion and offering, Provident Bancorp and Provident Bancorp, Inc. will no longer exist, and New Provident will be the parent company of The Provident Bank.

 

The conversion and offering cannot be completed unless the stockholders of Provident Bancorp, Inc. approve the plan of conversion. Provident Bancorp, Inc.’s stockholders will vote on the plan of conversion at Provident Bancorp, Inc.’s special meeting. This document is the proxy statement used by Provident Bancorp, Inc.’s board of directors to solicit proxies for the special meeting. It is also the prospectus of New Provident regarding the shares of New Provident common stock to be issued to Provident Bancorp, Inc.’s stockholders in the share exchange. This document does not serve as the prospectus relating to the offering by New Provident of its shares of common stock in the subscription offering and any community offering, syndicated community offering or firm commitment offering, which will be made pursuant to a separate prospectus.

 

Our Organizational Structure

 

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.

 

 

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

 

 

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:

 

 

 

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

 

 

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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, 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.

 

 

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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.

 

·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.

 

 

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·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

 

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 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.

 

 

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·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.

 

See “Proposal 1 — Approval of the Plan of Conversion” for a more complete discussion of our reasons for conducting the conversion and offering.

 

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;

 

·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.

 

 

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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 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 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

 

 

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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.

 

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.

 

 

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For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “Proposal 1—Approval of the Plan of Conversion—Stock Pricing and Number of Shares to be Issued.”

 

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.

 

Please see the section of this proxy statement/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.

 

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 and Ownership by Officers and Directors

 

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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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         
               Dilution         
           As a   Resulting   Value of Grants (In
           Percentage of   From   Thousands) (1) 
       At   Common   Issuance of   At     
   At Minimum   Maximum of   Stock to be   Shares for   Minimum of   At Maximum 
   of Offering   Offering   Sold in the   Stock-Based   Offering   of Offering 
   Range   Range   Offering   Benefit Plans   Range   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 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.

 

 

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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.

 

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.

 

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

 

 

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state income taxes to Provident Bancorp, Old Provident, The Provident Bank, New Provident, persons eligible to 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.

 

Changes in Stockholders’ Rights for Existing Stockholders of Provident Bancorp, Inc.

 

As a result of the conversion, existing stockholders of Provident Bancorp, Inc. will become stockholders of New Provident. Some rights of stockholders of New Provident will be reduced compared to the rights stockholders currently have in Provident Bancorp, Inc. The reduction in stockholder rights results from differences between the Massachusetts articles of organization and bylaws and the Maryland articles of incorporation and bylaws, and from distinctions between Massachusetts and Maryland law. Many of the differences in stockholder rights under the articles of incorporation and bylaws of New Provident are not mandated by Maryland law but have been chosen by management as being in the best interests of New Provident and all of its stockholders. The differences in stockholder rights in the articles of incorporation and bylaws of New Provident include greater lead time required for stockholders to submit proposals for certain provisions of new business or to nominate directors. See “Comparison of Stockholders’ Rights For Existing Stockholders of Provident Bancorp, Inc.” for a discussion of these differences.

 

Dissenters’ Rights

 

Stockholders of Provident Bancorp, Inc. do not have dissenters’ rights in connection with the conversion and offering.

 

Important Risks in Owning New Provident’s Common Stock

 

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 and the exchange include those related to: the market value of the common stock received in the exchange; a potential decrease in stockholders rights for existing stockholders; 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.

 

Before you vote on the conversion, you should read the “Risk Factors” section beginning on page 19 of this proxy statement/prospectus.

 

 

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RISK FACTORS

 

You should consider carefully the following risk factors when deciding how to vote on the conversion and before purchasing shares of New Provident 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.

 

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

 

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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.

 

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;

 

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·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 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

 

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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 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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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 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,

 

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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.

 

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

 

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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.

 

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

 

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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.

 

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.

 

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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 and the Exchange

 

The market value of New Provident common stock received in the share exchange may be less than the market value of Old Provident common stock exchanged.

 

The number of shares of New Provident common stock you receive will be based on an exchange ratio that will be determined as of the date of completion of the conversion and offering. The exchange ratio will be based on the percentage of Provident Bancorp, Inc. common stock held by the public prior to the completion of the conversion and offering, the final independent appraisal of New Provident common stock prepared by RP Financial, LC. and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public stockholders of Provident Bancorp, Inc. common stock will own the same percentage of New Provident common stock after the conversion and offering as they owned of Provident Bancorp, Inc. common stock immediately prior to completion of the conversion and offering (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), adjusted downward to reflect certain assets held by Provident Bancorp. The exchange ratio will not depend on the market price of Provident Bancorp, Inc. common stock.

 

The exchange ratio ranges from 1.9354 shares at the minimum and 2.6185 shares at the maximum of the offering range of New Provident common stock per share of Provident Bancorp, Inc. common stock. Shares of New Provident common stock issued in the share exchange will have an initial value of $10.00 per share. Depending on the exchange ratio and the market value of Provident Bancorp, Inc. common stock at the time of the exchange, the initial market value of the New Provident common stock that you receive in the share exchange could be less than the market value of the Provident Bancorp, Inc. common stock that you currently own. Based on the most recent closing price of Provident Bancorp, Inc. common stock prior to the date of this proxy statement/prospectus, which was $26.00, the initial value of the New Provident common stock you receive in the share exchange would be less than the market value of the Provident Bancorp, Inc. common stock you currently own.

 

There may be a decrease in stockholders’ rights for existing stockholders of Old Provident.

 

As a result of the conversion, existing stockholders of Old Provident will become stockholders of New Provident. In addition to the provisions discussed above that may discourage takeover attempts that may be favored by stockholders, some rights of stockholders of New Provident will be reduced compared to the rights stockholders currently have in Old Provident. The reduction in stockholder rights results from differences between the Massachusetts and Maryland chartering documents and bylaws, and from differences between Massachusetts and Maryland law. Many of the differences in stockholder rights under the articles of incorporation and bylaws of New Provident are not mandated by Maryland law but have been chosen by management as being in the best interests of New Provident and its stockholders. The articles of incorporation and bylaws of New Provident include greater lead time required for stockholders to submit proposals for new business or to nominate directors. See “Comparison of Stockholders’ Rights For Existing Stockholders of Provident Bancorp, Inc.” for a discussion of these differences.

 

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

 

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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 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.

 

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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 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

 

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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.”

 

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

 

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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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INFORMATION ABOUT THE SPECIAL MEETING

 

General

 

This proxy statement/prospectus is being furnished to you in connection with the solicitation by the board of directors of Provident Bancorp, Inc. of proxies to be voted at the special meeting of stockholders to be held at the Blue Ocean Event Center, 4 Oceanfront North, Salisbury, Massachusetts, on September 25, 2019, at 3:30 p.m., Eastern Time, and any adjournment or postponement thereof.

 

The purpose of the special meeting is to consider and vote upon the Plan of Conversion of Provident Bancorp (referred to herein as the “plan of conversion”).

 

In addition, stockholders will vote on a proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal.

 

Voting in favor of or against the plan of conversion includes a vote for or against the conversion of Provident Bancorp to a stock holding company as contemplated by the plan of conversion. Voting in favor of the plan of conversion will not obligate you to purchase any shares of common stock in the offering and will not affect the balance, interest rate or deposit insurance of any deposits at The Provident Bank.

 

Who Can Vote at the Meeting

 

You are entitled to vote your Provident Bancorp, Inc. common stock if our records show that you held your shares as of the close of business on July 29, 2019. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner, you have the right to direct your broker or nominee how to vote.

 

As of the close of business on July 29, 2019, there were 9,621,822 shares of Provident Bancorp, Inc. common stock outstanding. Each share of common stock has one vote.

 

Attending the Meeting

 

If you are a stockholder as of the close of business on July 29, 2019, you may attend the meeting. However, if you hold your shares in street name, you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from a bank or broker are examples of proof of ownership. If you want to vote your shares of Provident Bancorp, Inc. common stock held in street name in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.

 

Quorum; Vote Required

 

The special meeting will be held only if there is a quorum. A quorum exists if a majority of the outstanding shares of common stock entitled to vote, represented in person or by proxy, is present at the meeting. If you return valid proxy instructions or attend the meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes also will be counted for purposes of determining the existence of a quorum. A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.

 

Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the outstanding common stock of Provident Bancorp, Inc. entitled to be cast at the special meeting, including shares held by Provident Bancorp, and (ii) a majority of the outstanding shares of common stock of Provident Bancorp, Inc. entitled to be cast at the special meeting, other than shares held by Provident Bancorp.

 

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Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of at least a majority of the votes cast by Provident Bancorp, Inc. stockholders entitled to vote at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion.

 

Other Matters. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of common stock of Provident Bancorp, Inc. At this time, we know of no other matters that may be presented at the special meeting.

 

Shares Held by Provident Bancorp and Our Officers and Directors

 

As of July 29, 2019, Provident Bancorp beneficially owned 5,034,323 shares of Provident Bancorp, Inc. common stock. This equals approximately 52.3% of our outstanding shares. We expect that Provident Bancorp will vote all of its shares in favor of Proposal 1—Approval of the Plan of Conversion and Proposal 2—Approval of the adjournment of the special meeting.

 

As of July 29, 2019, our officers and directors beneficially owned 362,690 shares of Provident Bancorp, Inc. common stock. This equals 3.8% of our outstanding shares and 7.9% of shares held by persons other than Provident Bancorp.

 

Voting by Proxy

 

Our board of directors is sending you this proxy statement/prospectus to request that you allow your shares of Provident Bancorp, Inc. common stock to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of Provident Bancorp, Inc. common stock represented at the meeting by properly executed and dated proxies will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our board of directors. Our board of directors recommends that you vote “FOR” approval of the plan of conversion and “FOR” approval of the adjournment of the special meeting, if necessary.

 

If any matters not described in this proxy statement/prospectus are properly presented at the special meeting, the board of directors will use their judgment to determine how to vote your shares. We do not know of any other matters to be presented at the special meeting.

 

If your Provident Bancorp, Inc. common stock is held in street name, you will receive instructions from your broker, bank or other nominee that you must follow to have your shares voted. Your broker, bank or other nominee may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form provided by your broker, bank or other nominee that accompanies this proxy statement/prospectus.

 

Revocability of Proxies

 

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Provident Bancorp, Inc. in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.

 

Solicitation of Proxies

 

This proxy statement/prospectus and the accompanying proxy card are being furnished to you in connection with the solicitation of proxies for the special meeting by the board of directors. Provident Bancorp, Inc. will pay the costs of soliciting proxies from its stockholders. To the extent necessary to permit approval of the plan of conversion and the other proposals being considered, EQ Proxy, our proxy solicitor, and directors, officers or employees of Provident Bancorp, Inc. and The Provident Bank may solicit proxies by mail, telephone and other forms of communication. We will reimburse such persons for their reasonable out-of-pocket expenses incurred in connection with such solicitation. For its services as information agent and stockholder proxy solicitor, we will pay

 

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EQ Proxy $6,500 plus out-of-pocket expenses and charges for telephone calls made and received in connection with the solicitation.

 

We will also reimburse banks, brokers, nominees and other fiduciaries for the expenses they incur in forwarding the proxy materials to you.

 

Participants in the Employee Stock Ownership Plan and 401(k) Plan

 

If you participate in The Provident Bank Employee Stock Ownership Plan or if you hold Provident Bancorp, Inc. common stock through The Provident Bank 401(k) Plan, you will receive vote authorization form(s) that reflect all shares you may direct the trustees to vote on your behalf under the plans. Under the terms of the Employee Stock Ownership Plan, the Employee Stock Ownership Plan trustee votes all shares held by the Employee Stock Ownership Plan, but each Employee Stock Ownership Plan participant may direct the trustee how to vote the shares of common stock allocated to his or her account. The Employee Stock Ownership Plan trustee, subject to the exercise of its fiduciary duties, will vote all unallocated shares of Provident Bancorp, Inc. common stock held by the Employee Stock Ownership Plan and allocated shares for which no voting instructions are received in the same proportion as shares for which it has received timely voting instructions. The deadline for returning your voting instructions is September 18, 2019.

 

Although not required by the terms of the 401(k) Plan, The Provident Bank is providing a participant the opportunity to provide voting instructions for all shares credited to his or her 401(k) Plan account and held in the Provident Bancorp, Inc. Stock Fund. All shares held in the 401(k) Plan will be voted by the trustee in the manner in which the majority of the shares credited to participants are voted. The deadline for returning your voting instructions is September 18, 2019.

 

The board of directors recommends that you promptly sign and mark the enclosed proxy in favor of the above described proposals, including the adoption of the plan of conversion, and promptly return it in the enclosed envelope. Voting the proxy card will not prevent you from voting in person at the special meeting. For information on submitting your proxy, please refer to the instructions on the enclosed proxy card.

 

Your prompt vote is very important. Failure to vote will have the same effect as voting against the plan of conversion.

 

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PROPOSAL 1 — APPROVAL OF THE PLAN OF CONVERSION

 

The board of directors of Provident Bancorp, Inc. and the board of trustees of Provident Bancorp have approved the Plan of Conversion of Provident Bancorp, referred to herein as the “plan of conversion.” The plan of conversion has also been approved by the corporators of Provident Bancorp, and must be approved by the stockholders of Old Provident. A special meeting of stockholders has been called for this purpose. We have filed an application with the Federal Reserve Board with respect to the conversion and stock offering and with respect to New Provident becoming the holding company for The Provident Bank, and the approval of the Federal Reserve Board is required before we can consummate the conversion and stock offering. We have filed an application with respect to the conversion with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks has authorized us to commence the offering. However, the final approval of the Massachusetts of Banks is required before we can consummate the conversion and issue shares of common stock. Any approval by the Massachusetts Commissioner of Banks or the Federal Reserve Board does not constitute a recommendation or endorsement of the plan of conversion.

 

General

 

Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization to the fully stock form. Currently, The Provident Bank is a wholly-owned subsidiary of Provident Bancorp, Inc. and Provident Bancorp owns approximately 52.3% of Provident Bancorp, Inc.’s common stock. The remaining 47.7% of Provident Bancorp, Inc.’s common stock is owned by public stockholders. As a result of the conversion, a newly formed company, New Provident, will become the holding company of The Provident Bank. Each share of Provident Bancorp, Inc. common stock owned by the public will be exchanged for between 1.9354 shares at the minimum and 2.6185 shares at the maximum of the offering range of New Provident common stock, so that Provident Bancorp, Inc.’s existing public stockholders will own the same percentage of New Provident common stock as they owned of Provident Bancorp, Inc.’s common stock immediately prior to the conversion (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), after giving effect to certain assets held by Provident Bancorp. The actual number of shares that you will receive will depend on the percentage of Provident Bancorp, Inc. common stock held by the public immediately prior to the completion of the conversion, the final independent appraisal of New Provident and the number of shares of New Provident common stock sold in the offering described in the following paragraph. It will not depend on the market price of Provident Bancorp, Inc. common stock.

 

Concurrently with the exchange offer, New Provident is offering up to 13,225,000 shares of common stock for sale, representing the ownership interest of Provident Bancorp in Provident Bancorp, Inc., to eligible depositors and to the public at a price of $10.00 per share. After the conversion and offering are completed, The Provident Bank will be a wholly-owned subsidiary of New Provident, and 100% of the common stock of New Provident will be owned by public stockholders. As a result of the conversion and offering, Provident Bancorp, Inc. and Provident Bancorp will cease to exist.

 

New Provident intends to contribute between $47.7 million and $64.8 million of the net proceeds to The Provident Bank and to retain between $39.9 million and $54.2 million of the net proceeds. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion.

 

The plan of conversion provides that we will offer 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 401(k) plan), which will receive, without payment therefor, nontransferable

 

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subscription rights to purchase 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; and

 

(iii)To employees, officers, directors, trustees and corporators of The Provident Bank or Provident Bancorp.

 

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. 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 or 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 the 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. 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.

 

We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated pro forma market value of New Provident. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock in the offering. The independent valuation will be updated and the final number of shares of common stock to be issued in the offering will be determined at the completion of the offering. See “—Stock Pricing and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.

 

A copy of the plan of conversion is available for inspection at each branch office of The Provident Bank and at the Federal Reserve Bank of Boston and the Massachusetts Division of Banks. The plan of conversion is also filed an exhibit to Provident Bancorp’s applications to convert from mutual to stock form of which this proxy statement/prospectus is a part, copies of which may be obtained from the Board of Governors of the Federal Reserve System and inspected at the Massachusetts Division of Banks. The plan of conversion is also filed as an exhibit to the registration statement we have filed with the Securities and Exchange Commission, of which this proxy statement/prospectus is a part, copies of which may be obtained from the Securities and Exchange Commission or online at the Securities and Exchange Commission’s website. See “Where You Can Find Additional Information.”

 

The board of directors recommends that you vote “FOR” the Plan of Conversion of Provident Bancorp.

 

Reasons for the Conversion

 

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to: (1) enhance our regulatory capital position; (2) 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; (3) improve the liquidity of our shares of common stock; (4) facilitate our stock holding company’s ability to pay dividends to our public stockholders; and (5) facilitate future mergers and acquisitions.

 

Approvals Required

 

The affirmative vote of a majority of the total votes eligible to be cast by the corporators of Provident Bancorp, including a majority of the “independent” corporators, is required to approve the plan of conversion. By their approval of the plan of conversion, the corporators of Provident Bancorp also approved the merger of Provident Bancorp into Old Provident. These approvals were received at a special meeting of corporators held on July 25, 2019. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock

 

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of Old Provident and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Old Provident held by the public stockholders of Old Provident (stockholders other than Provident Bancorp) also are required to approve the plan of conversion.

 

We have filed an application with respect to the conversion with the Federal Reserve Board, and the approval of the Federal Reserve Board is required before we can consummate the conversion and issue shares of common stock. We have filed an application with respect to the conversion with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks has authorized us to commence the offering. However, the final approval of the Massachusetts Commissioner of Banks is required before we can consummate the conversion and issue shares of common stock.

 

Share Exchange Ratio for Current Stockholders

 

At the completion of the conversion, each publicly held share of Old Provident common stock will be converted automatically into the right to receive a number of shares of New Provident common stock. The number of shares of common stock will be determined pursuant to the exchange ratio, which ensures that the public stockholders will own the same percentage of common stock in New Provident after the conversion as they held in Old Provident immediately prior to the conversion, exclusive of their purchase of additional shares of common stock in the offering and their receipt of cash in lieu of fractional exchange shares, adjusted downward to reflect certain assets held by Provident Bancorp. The exchange ratio will not depend on the market value of Old Provident common stock. The exchange ratio will be based on the percentage of Old Provident common stock held by the public, the independent valuation of New Provident prepared by RP Financial, LC., and the number of shares of common stock issued in the offering. The exchange ratio is expected to range from approximately 1.9354 shares for each publicly held share of Old Provident at the minimum of the offering range to 2.6185 shares for each publicly held share of Old Provident at the maximum of the offering range.

 

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 has net assets of $372,000 immediately prior to the completion of the conversion. The table also shows how many shares of New Provident a hypothetical owner of Old Provident common stock would receive in the exchange for 100 shares of common stock owned at the completion of the conversion, depending on the number of shares 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 offering price.
(2)Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. Old Provident’s existing tangible book value per share would be $13.32, $13.30 and $13.30 at the minimum, midpoint and maximum of the offering range, respectively.
(3)Cash will be paid in lieu of fractional shares.

 

Options to purchase shares of Old Provident common stock that are outstanding immediately prior to the completion of the conversion will be converted into options to purchase shares of New Provident common stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the exchange ratio. The aggregate exercise price, term and vesting period of the options will remain unchanged.

 

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Effects of Conversion

 

Continuity. The conversion will not affect the normal business of The Provident Bank of accepting deposits and making loans. The Provident Bank will continue to be a Massachusetts-chartered savings bank and will continue to be regulated by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. After the conversion, The Provident Bank will continue to offer existing services to depositors, borrowers and other customers. The directors of Old Provident serving at the time of the conversion will be the directors of New Provident upon the completion of the conversion.

 

Effect on Deposit Accounts. Pursuant to the plan of conversion, each depositor of The Provident Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion, and each such account will continue to be insured in full for amounts in excess of Federal Deposit Insurance Corporation limits by the excess insurer of savings bank deposits, the Depositors Insurance Fund. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.

 

Effect on Loans. No loan outstanding from The Provident Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.

 

Tax Effects. We have received an opinion of counsel with regard to the federal income tax consequences of the conversion and an opinion of our tax advisor with regard to the state income tax consequences of the conversion to the effect that the conversion will not be a taxable transaction for federal or state income tax purposes to Provident Bancorp, Old Provident, the public stockholders of Old Provident (except for cash paid for fractional shares), Eligible Account Holders, employees, officers, trustees, directors and corporators, or The Provident Bank. See “—Material Income Tax Consequences.”

 

Effect on Liquidation Rights. Each depositor in The Provident Bank has both a deposit account in The Provident Bank and a pro rata ownership interest in the net worth of Provident Bancorp based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This ownership interest may only be realized in the event of a complete liquidation of Provident Bancorp and The Provident Bank; however, there has never been a liquidation of a solvent mutual holding company. Any depositor who opens a deposit account obtains a pro rata ownership interest in Provident Bancorp without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Provident Bancorp, which is lost to the extent that the balance in the account is reduced or closed.

 

Consequently, depositors in a stock depository institution that is a subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which would be realizable only in the unlikely event that Provident Bancorp and The Provident Bank are liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Provident Bancorp after other claims, including claims of depositors to the amounts of their deposits, are paid.

 

Under the plan of conversion, Eligible Account Holders will receive an interest in liquidation accounts maintained by New Provident and The Provident Bank in an aggregate amount equal to (i) Provident Bancorp’s ownership interest in Old Provident’s total stockholders’ equity as of the date of the latest statement of financial condition included in the prospectus plus (ii) the value of the net assets of Provident Bancorp as of the date of the latest statement of financial condition of Provident Bancorp prior to the consummation of the conversion (excluding its ownership of Old Provident). New Provident and The Provident Bank will hold the liquidation accounts for the benefit of Eligible Account Holders who continue to maintain deposits in The Provident Bank after the conversion. The liquidation accounts are designed to provide payments to depositors of their liquidation interests, if any, in the

 

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end of a liquidation of (a) New Provident and The Provident Bank or (b) The Provident Bank. See “—Liquidation Rights.”

 

Stock Pricing and Number of Shares to be Issued

 

The plan of conversion and applicable regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial, LC. to prepare an independent valuation appraisal. For its services in preparing a preliminary valuation and the initial valuation, RP Financial, LC. will receive a fee of $105,000, as well as payment for reimbursable expenses and an additional $15,000 for each updated valuation prepared. We have paid RP Financial, LC. no other fees during the previous three years. We have agreed to indemnify RP Financial, LC. and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from RP Financial, LC.’s bad faith or negligence.

 

The independent valuation was prepared by RP Financial, LC. in reliance upon the information contained in the prospectus, including the consolidated financial statements of Old Provident. RP Financial, LC. also considered the following factors, among others:

 

·the present results and financial condition of Old Provident and the projected results and financial condition of New Provident;

 

·the economic and demographic conditions in Old Provident’s existing market area;

 

·certain historical, financial and other information relating to Old Provident;

 

·a comparative evaluation of the operating and financial characteristics of Old Provident with those of other publicly traded savings institutions;

 

·the effect of the conversion and offering on New Provident’s stockholders’ equity and earnings potential;

 

·the proposed dividend policy of New Provident; and

 

·the trading market for securities of comparable institutions and general conditions in the market for such securities.

 

The independent valuation is also based on an analysis of a peer group of publicly traded bank holding companies and savings and loan holding companies that RP Financial, LC. considered comparable to New Provident under regulatory guidelines applicable to the independent valuation. Under these guidelines, a minimum of ten peer group companies are selected from the universe of all publicly-traded financial institutions with relatively comparable resources, strategies and financial and other operating characteristics. Such companies must also be traded on an exchange (such as Nasdaq or the New York Stock Exchange). The peer group companies selected for New Provident also consisted of fully-converted stock institutions that were not subject to an actual or rumored acquisition and that had been in fully-converted form for at least one year. In addition, RP Financial, LC. limited the peer group companies to the following three selection criteria: (1) New England institutions with assets between $700 million and $2.5 billion, tangible equity-to-assets ratios of greater than 7.25% and positive reported and core earnings; (2) Mid-Atlantic institutions with assets between $700 million and $2.5 billion, tangible equity-to-assets ratios of greater than 7.25% and positive reported and core earnings; and (3) Midwest institutions with assets between $700 million and $2.5 billion, tangible equity-to-assets ratios of greater than 7.25% and positive reported and core earnings.

 

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The independent valuation appraisal considered the pro forma effect of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (i) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (ii) the pro forma price-to-earnings approach applied to reported and core earnings; and (iii) the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based on the current market valuations of the peer group companies. RP Financial, LC. placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. RP Financial, LC. did not consider a pro forma price-to-assets approach to be meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive reported and core earnings.         

 

In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of New Provident with the peer group. RP Financial, LC. made slight upward adjustments for financial condition, asset growth and primary market area, and made no adjustments for profitability, growth and viability of earnings, dividends, liquidity of the shares, marketing of the issue, management and effects of government regulations and regulatory reform.

 

The slight upward adjustment for financial condition was due to New Provident’s higher yield on interest-earning assets and stronger pro forma capital position as a percent of assets. The slight upward adjustment for asset growth was due to New Provident’s stronger historical asset growth that was supported by stronger loan growth relative to the peer group. The slight upward adjustment for primary market area reflected Essex County’s relatively strong population growth rate and relatively low unemployment rate compared to the peer group’s primary market area counties.

 

Included in RP Financial, LC.’s independent valuation were certain assumptions as to the pro forma earnings of New Provident after the conversion that were used in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return of 1.63% on the net offering proceeds and purchases in the open market of 4% of the common stock issued in the offering by the stock-based benefit plan at the $10.00 per share purchase price. See “Pro Forma Data” for additional information concerning assumptions included in the independent valuation and used in preparing pro forma data. The use of different assumptions may yield different results.

 

The independent valuation states that as of May 10, 2019, the estimated pro forma market value of New Provident was $219.5 million. Based on federal regulations, this market value forms the midpoint of a range with a minimum of $186.6 million and a maximum of $252.5 million. The aggregate offering price of the shares will be equal to the valuation range multiplied by the percentage of Old Provident common stock owned by Provident Bancorp. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range, the percentage of Old Provident common stock owned by Provident Bancorp and the $10.00 price per share, the minimum of the offering range is 9,775,000 shares, the midpoint of the offering range is 11,500,000 shares and the maximum of the offering range is 13,225,000 shares.

 

The Board of Directors of New Provident reviewed the independent valuation and, in particular, considered the following:

 

·Old Provident’s financial condition and results of operations;

 

·a comparison of financial performance ratios of Old Provident to those of other financial institutions of similar size;

 

·market conditions generally and in particular for financial institutions; and

 

·the historical trading price of the publicly held shares of Old Provident common stock.

 

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All of these factors are set forth in the independent valuation. The Board of Directors also reviewed the methodology and the assumptions used by RP Financial, LC. in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks, if required, as a result of subsequent developments in the financial condition of Old Provident or The Provident Bank or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of New Provident to less than $186.6 million or more than $252.5 million, the appraisal will be filed with the Securities and Exchange Commission by a post-effective amendment to New Provident’s registration statement.

 

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. Our Board of Directors, in reviewing and approving the appraisal, considered the range of price-to-earnings multiples and the range of price-to-book value and price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. The appraisal did not consider one valuation approach to be more important than the other. The estimated appraised value and the resulting premium/discount took into consideration the potential financial effect of the conversion and offering as well as the trading price of Old Provident’s common stock. The closing price of the common stock was $23.35 per share on May 10, 2019, the effective date of the appraisal, and $23.60 per share on June 4, 2019, the last trading day immediately preceding the announcement of the conversion.

 

  

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 valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our shares of common stock. RP Financial, LC. did not independently verify our consolidated financial statements and other information that we provided to them, nor did RP Financial, LC. independently value our assets or liabilities. The independent valuation considers The Provident Bank as a going concern and should not be considered as an indication of the liquidation value of The Provident Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10.00 price per share.

 

If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $252.5 million and a corresponding increase in the offering range to more than 13,225,000 shares, or a decrease in the minimum of the valuation range to less than $186.6 million and a corresponding decrease in the offering range to fewer than 9,775,000 shares, then we will promptly return with interest at 0.15% per annum all funds previously delivered to us to purchase shares of common stock in the subscription and community offerings and cancel deposit account withdrawal authorizations and, after consulting with the Massachusetts Commissioner of Banks and the Federal Reserve Board, we may terminate the plan of conversion. Alternatively, we may establish a new offering range, extend the offering period and commence a resolicitation of purchasers or take other actions as permitted by the Massachusetts Commissioner of Banks and the

 

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Federal Reserve Board in order to complete the offering. In the event that we extend the offering and conduct a resolicitation due to a change in the independent valuation, we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. Any single offering extension will not exceed 90 days; aggregate extensions may not conclude beyond June 5, 2021, which is two years after the special meeting of trustees to approve the plan of conversion.

 

An increase in the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and New Provident’s pro forma earnings and stockholders’ equity on a per share basis while increasing stockholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber’s ownership interest and New Provident’s pro forma earnings and stockholders’ equity on a per share basis, while decreasing stockholders’ equity on an aggregate basis.

 

Copies of the independent valuation appraisal report of RP Financial, LC. and the detailed memorandum setting forth the method and assumptions used in the appraisal report are filed as exhibits to the documents specified under “Where You Can Find Additional Information.”

 

Subscription Offering and Subscription Rights

 

In accordance with the plan of conversion, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and on the purchase and ownership limitations set forth in the plan of conversion and as described below under “—Additional Limitations on Common Stock Purchases.”

 

Priority 1: Eligible Account Holders. Each depositor of The Provident Bank with aggregate deposit account balances of $50.00 or more (a “Qualifying Deposit”) at the close of business on May 31, 2018 (an “Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of $500,000 (50,000 shares) of our common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the product of the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders. See “—Additional Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, any remaining unallocated shares will be allocated to each remaining Eligible Account Holder whose subscription remains unfilled in the same proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

 

To ensure proper allocation of our shares of common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on May 31, 2018. In the event of an oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also our directors, trustees, corporators or officers, or who are associates of such persons, will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to their increased deposits in the 12 months preceding May 31, 2018.

 

Priority 2: Tax-Qualified Plans. Our tax-qualified employee plans, including The Provident Bank’s employee stock ownership plan and 401(k) plan, will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering, although our employee stock ownership plan intends to purchase 8% of the shares of common stock sold in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan may

 

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instead 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. The amount of the subscription requests by the 401(k) plan will be determined by its participants, who will have the right to invest all or a portion of their 401(k) plan accounts in our common stock, subject to the maximum purchase limitations.

 

Priority 3: Employees, Officers, Directors, Trustees and Corporators. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and tax-qualified plans, each employee, officer, director, trustee and corporator of The Provident Bank or Provident Bancorp at the time of the offering who is not eligible in the first priority category will receive, without payment therefor, subject to the overall purchase limitations, non-transferable subscription rights to purchase up to $500,000 (50,000 shares) of common stock; provided, however, that the aggregate number of shares of common stock that may be purchased by employees, officers, directors, trustees and corporators in the conversion shall be limited to 25% of the total number of shares of common stock sold in the offering (including shares purchased by employees, officers, directors, trustees and corporators under this priority and under the preceding priority categories, but not including shares purchased by the employee stock ownership plan). In the event that persons in this category subscribe for more shares of stock than are available for purchase by them, shares will be allocated among such subscribing persons on an equitable basis, such as by giving weight to the period of service, compensation, position of the individual subscriber and the amount of the order.

 

Expiration Date. The subscription offering will expire at 5:00 p.m., Eastern Time, on September 10, 2019, unless extended by us for up to 45 days or such additional periods with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary. Subscription rights will expire whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised prior to the expiration date will become void.

 

We will not execute orders until at least the minimum number of shares of common stock has been sold in the offering. If at least 9,775,000 shares have not been sold in the offering by October 25, 2019 and the Massachusetts Commissioner of Banks has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly, with interest at 0.15% per annum for funds received in the subscription and community offerings, and all deposit account withdrawal authorizations will be canceled. If an extension beyond October 25, 2019 is granted by the Massachusetts Commissioner of Banks, we will resolicit purchasers in the offering as described under “—Procedure for Purchasing Shares in Subscription and Community Offerings—Expiration Date.” The offering will also comply with the requirements of Rule 10b-9 under the Securities Exchange Act of 1934.

 

Community Offering

 

To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of Eligible Account Holders, our tax-qualified employee stock benefit plans and employees, officers, directors, trustees and corporators, we may offer shares pursuant to the plan of conversion to members of the general public in a community offering. Shares will be offered in the community offering with the following preferences:

 

(i)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

 

(ii)Other members of the general public.

 

Subscribers in the community offering may purchase up to $500,000 (50,000 shares) of common stock, subject to the overall purchase limitations. See “—Additional Limitations on Common Stock Purchases.” The opportunity to purchase shares of common stock in the community offering category is subject to our right,

 

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in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering.

 

If we do not have sufficient shares of common stock available to fill the orders of 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, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among natural persons residing in those counties whose orders remain unsatisfied on an equal number of shares basis per order. If an oversubscription occurs due to the orders of members of the general public, the allocation procedures described above will apply to the stock orders of such persons. In connection with the allocation process, orders received for shares of common stock in the community offering will first be filled up to a maximum of 2% of the shares sold in the offering, and thereafter any remaining shares will be allocated on an equal number of shares basis per order until all shares have been allocated.

 

The term “residing” or “resident” as used in the prospectus with respect to the community means any person who occupies a dwelling within the local community, has a present intent to remain within the local community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the local community together with an indication that such presence within the local community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to determine whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.

 

Expiration Date. The community offering may begin concurrently with, during or promptly after the subscription offering, and must terminate no more than 45 days following the subscription offering, unless extended with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary. New Provident may decide to extend the community offering for any reason and is not required to give purchasers notice of any such extension unless such period extends beyond October 25, 2019, in which event we will resolicit purchasers.

 

Syndicated or Firm Commitment Underwritten Offering

 

If feasible, our Board of Directors may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated or firm commitment underwritten offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a wide distribution of our shares of common stock.

 

If a syndicated or firm commitment underwritten offering is held, Sandler O’Neill & Partners, L.P. will serve as sole book-running manager.  In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.5% of the aggregate amount of common stock sold in the syndicated or firm commitment underwritten offering to Sandler O’Neill & Partners, L.P. and any other broker-dealers included in the syndicated or firm commitment underwritten offering. The shares of common stock will be sold at the same price per share ($10.00 per share) that the shares are sold in the subscription offering and the community offering.

 

In the event of a syndicated offering, it is currently expected that investors would follow the same general procedures applicable to purchasing shares in the subscription and community offerings (the use of order forms and the submission of funds directly to New Provident for the payment of the purchase price of the shares ordered) except that payment must be in immediately available funds (bank checks, money orders, deposit account withdrawals from accounts at The Provident Bank or wire transfers). See “—Procedure for Purchasing Shares in Subscription and Community Offerings.” “Sweep” arrangements and delivery versus payment settlement will only be used in a syndicated offering to the extent consistent with Rules 10b-9 and 15c2-4 and then-existing guidance and interpretations thereof of the Securities and Exchange Commission regarding the conduct of “min/max” offerings.

 

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In the event of a firm commitment underwritten offering, the proposed underwriting agreement will not be entered into with Sandler O’Neill & Partners, L.P. and New Provident, The Provident Bank, Old Provident and Provident Bancorp until immediately prior to the completion of the firm commitment underwritten offering. At that time, Sandler O’Neill & Partners, L.P. and any other broker-dealers included in the firm commitment underwritten offering will represent that they have received sufficient indications of interest to complete the offering. Pursuant to the terms of the underwriting agreement, and subject to certain customary provisions and conditions to closing, upon execution of the underwriting agreement, Sandler O’Neill & Partners, L.P. and any other underwriters will be obligated to purchase all the shares subject to the firm commitment underwritten offering.

 

A syndicated or firm commitment underwritten offering must terminate no more than 45 days following the subscription offering, unless extended with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary.

 

If for any reason we cannot effect a syndicated or firm commitment underwritten offering of shares of common stock not purchased in the subscription and community offerings, or in the event that there are an insignificant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of unsubscribed shares.  The Federal Reserve Board, the Massachusetts Commissioner of Banks and the Financial Industry Regulatory Authority must approve any such arrangements.

 

Additional Limitations on Common Stock Purchases

 

The plan of conversion includes the following additional limitations on the number of shares of common stock that may be purchased in the offering:

 

(i)No individual through one or more qualifying accounts, or individuals exercising subscription rights through a single qualifying account held jointly, may purchase more than $500,000 (50,000 shares) in the offering;

 

(ii)Except for the employee stock ownership plan and the 401(k) plan, as described above, no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than $1.5 million (150,000 shares) of common stock in all categories of the offering combined;

 

(iii)Tax qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering, including shares issued in the event of an increase in the offering range of up to 15%;

 

(iv)No person may purchase fewer than 25 shares of common stock, to the extent those shares are available for purchase; and

 

(v)Current stockholders of Old Provident are subject to an ownership limitation. As previously described, current stockholders of Old Provident will receive shares of New Provident common stock in exchange for their existing shares of Old Provident common stock. The number of shares of common stock that a stockholder may purchase in the offering, together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates will receive in exchange for existing Old Provident common stock, may not exceed 9.9% of the shares of common stock of New Provident to be issued and outstanding at the completion of the conversion and offering.

 

Depending upon market or financial conditions, our Board of Directors, with regulatory approval and without further approval of corporators of Provident Bancorp, may decrease or increase the purchase limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their orders up to the then applicable limit. The effect of this type of resolicitation

 

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will be an increase in the number of shares of common stock owned by persons who choose to increase their orders. In the event that the maximum purchase limitation is increased to 5% of the shares sold in the offering, such limitation may be further increased to 9.99%, provided that orders for shares of common stock exceeding 5% of the shares sold in the offering shall not exceed in the aggregate 10% of the total shares sold in the offering.

 

The term “associate” of a person means:

 

(i)any corporation or organization (other than The Provident Bank, New Provident, Old Provident or Provident Bancorp or a majority-owned subsidiary of any of those entities) of which the person is a senior officer, partner or, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities;

 

(ii)any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; and

 

(iii)any relative or spouse of such person, or any relative of such spouse, who either has the same home as the person or who is a director, trustee or officer of The Provident Bank, New Provident, Old Provident or Provident Bancorp.

 

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.

 

The term “acting in concert” means persons seeking to combine or pool their voting or other interests in the securities of an issuer for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. When persons act together for such purpose, their group is deemed to have acquired their stock. The determination of whether a group is acting in concert shall be made solely by us and may be based on any evidence upon which we choose to rely, including, without limitation, joint account relationships or the fact that such persons have filed joint Schedules 13D with the Securities and Exchange Commission with respect to other companies; provided, however, that the determination of whether a group is acting in concert remains subject to review by the Massachusetts Commissioner of Banks. Persons living at the same address, whether or not related, will be deemed to be acting in concert unless we determine otherwise. Our directors and trustees are not treated as associates of each other solely because of their membership on the boards of directors or trustees.

 

Common stock purchased in the offering will be freely transferable except for shares purchased by directors and certain officers of New Provident or The Provident Bank and except as described below. Any purchases made by any associate of New Provident or The Provident Bank for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under Financial Industry Regulatory Authority guidelines, members of the Financial Industry Regulatory Authority and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see “—Certain Restrictions on Purchase or Transfer of Our Shares after Conversion” and “Restrictions on Acquisition of New Provident.”

 

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Plan of Distribution; Selling Agent and Underwriter Compensation

 

Subscription and Community Offerings. To assist in the marketing of our shares of common stock in the subscription and community offerings, we have retained Sandler O’Neill & Partners, L.P., which is a broker-dealer registered with the Financial Industry Regulatory Authority. Sandler O’Neill & Partners, L.P. will assist us on a best efforts basis in the subscription and community offerings by:

 

·consulting as to securities market implications of the plan of conversion;

 

·reviewing with our board of directors the financial impact of the offering on New Provident, based upon the independent appraisal of the common stock;

 

·reviewing all offering documents, including the prospectus, stock order forms and related offering materials (it being understood that the preparation and filing of such documents will be the responsibility of us and our counsel);

 

·assisting in the design and implementation of a marketing strategy for the offering;

 

·assisting us in scheduling and preparing for discussions or meetings with potential investors or other broker-dealers in connection with the offering; and

 

·providing such other general advice and assistance as may be reasonably necessary to promote the successful completion of the offering.

 

For these services, Sandler O’Neill & Partners, L.P. will receive a fee of 1.00% of the aggregate dollar amount of all shares of common stock sold in the subscription offering and 1.50% of the aggregate dollar amount of all shares of common stock sold in the community offering. No fee will be payable to Sandler O’Neill & Partners, L.P. with respect to shares purchased by directors, corporators, trustees, officers, employees or their immediate families and their personal trusts, and shares purchased by our employee benefit plans or trusts.

 

Syndicated or Firm Commitment Underwritten Offering. In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.5% of the aggregate dollar amount of common stock sold in the syndicated or firm commitment underwritten offering to Sandler O’Neill & Partners, L.P. and any other broker-dealers included in the syndicated or firm commitment underwritten offering.

 

Expenses. Sandler O’Neill & Partners, L.P. also will be reimbursed for reasonable out-of-pocket expenses, including legal fees, in an amount not to exceed $165,000 without our prior approval. We have separately agreed to pay Sandler O’Neill & Partners, L.P. up to $40,000 in fees for serving as records agent, as described below.

 

Records Management

 

We have also engaged Sandler O’Neill & Partners, L.P. as records agent in connection with the conversion and the subscription and community offerings. In its role as records agent, Sandler O’Neill & Partners, L.P., will assist us in the offering by:

 

·consolidating deposit accounts for voting and subscription rights;

 

·organizing and supervising our stock information center; and

 

·subscription processing services.

 

Sandler O’Neill & Partners, L.P. will receive fees of $40,000 for these services. Such fees may be increased in the event of unusual or additional items or duplication of service required as a result of material changes

 

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in regulations or the plan of conversion or a material delay or other similar events. Of the fees for serving as records agent, $20,000 has been paid as of the date of this proxy statement/prospectus.

 

Indemnity

 

We will indemnify Sandler O’Neill & Partners, L.P. against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as amended, as well as certain other claims and litigation arising out of Sandler O’Neill & Partners, L.P.’s engagement with respect to the conversion.

 

Solicitation of Offers by Officers and Directors

 

Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock in the subscription and community offerings. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular employees of The Provident Bank may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of Sandler O’Neill & Partners, L.P. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering.

 

Procedure for Purchasing Shares in Subscription and Community Offerings

 

Expiration Date. The subscription and community offerings will expire at 5:00 p.m., Eastern Time, on September 10, 2019, unless we extend one or both for up to 45 days, with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if required. This extension may be approved by us, in our sole discretion, without notice to purchasers in the offering. Any extension of the subscription and/or community offering beyond October 25, 2019 would require the Massachusetts Commissioner of Banks’ approval, and may require Federal Reserve Board approval. If the offering is so extended, 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 at 0.15% per annum or cancel your deposit account withdrawal authorization. If the offering range is decreased below the minimum of the offering range or is increased above the maximum of the offering range, all subscribers’ stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled, and funds submitted to us will be returned promptly, with interest at 0.15% per annum for funds received in the subscription and community offerings. We will then resolicit the subscribers, giving them an opportunity to place a new stock order for a period of time. The offering will also comply with the requirements of Rule 10b-9 under the Securities Exchange Act of 1934.

 

We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal authorizations and promptly return all funds submitted, with interest at 0.15% per annum from the date of receipt as described above.

 

Use of Order Forms in the Subscription and Community Offerings. In order to purchase shares of common stock in the subscription and community offerings, you must properly complete an original stock order form and remit full payment. We are not required to accept orders submitted on photocopied or facsimiled order forms. All order forms must be received (not postmarked) prior to 5:00 p.m., Eastern Time, on September 10, 2019. We are not required to accept order forms that are not received by that time, are not signed or are otherwise executed defectively or are received without full payment or without appropriate deposit account withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms, and we have the right to waive or permit the correction of incomplete or improperly executed order forms. We do not represent, however,

 

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that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment by mail using the stock order return 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.

 

Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares in the subscription offering, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final.

 

By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by The Provident Bank, the Federal Deposit Insurance Corporation, the federal government or the Depositors Insurance Fund, and that you received a copy of the prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

Payment for Shares. Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares in the subscription and community offerings may be made by:

 

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

 

(ii)authorization of withdrawal of available funds from your The Provident Bank interest-bearing deposit accounts.

 

Appropriate means for designating withdrawals from interest-bearing deposit accounts at The Provident Bank are provided on the order form. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contractual rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current passbook rate subsequent to the withdrawal. In the case of payments made by personal check, these funds must be available in the account(s). Checks and money orders received in the subscription and community offerings will be immediately cashed and placed in a segregated account at The Provident Bank and will earn interest at 0.15% per annum from the date payment is processed until the offering is completed or terminated.

 

You may not remit The Provident Bank line of credit checks or any type of third-party checks (including those payable to you and endorsed over to New Provident). You may not designate on your stock order form direct withdrawal from a The Provident Bank retirement account. See “—Using Individual Retirement Account Funds.” If permitted by the Massachusetts Commissioner of Banks and the Federal Reserve Board, in the event we resolicit large purchasers, as described above in “—Additional Limitations on Common Stock Purchases,” such purchasers who wish to increase their purchases will not be able to use personal checks to pay for the additional shares, but instead must pay for the additional shares using immediately available funds. No wire transfer will be accepted without our prior approval.

 

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Once we receive your executed stock order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by October 25, 2019. 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 at 0.15% per annum or cancel your deposit account withdrawal authorization. We may resolicit purchasers for a specified period of time.

 

Regulations prohibit The Provident Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering.

 

We shall have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time prior to 48 hours before the completion of the conversion. This payment may be made by wire transfer.

 

If our employee stock ownership plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering, provided that there is a loan commitment from an unrelated financial institution or New Provident to lend to the employee stock ownership plan the necessary amount to fund the purchase. In addition, if our 401(k) plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering.

 

Using Individual Retirement Account Funds. If you are interested in using funds in your individual retirement account or other retirement account to purchase shares of common stock, you must do so through a self-directed retirement account. By regulation, The Provident Bank’s retirement accounts are not self-directed, so they cannot be invested in our shares of common stock. Therefore, if you wish to use funds that are currently in a The Provident Bank retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will instead have to be transferred to an independent trustee or custodian, such as a brokerage firm, offering self-directed retirement accounts. The purchase must be made through that account. If you do not have such an account, you will need to establish one before placing a stock order. An annual administrative fee may be payable to the independent trustee or custodian. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Individuals interested in using funds in an individual retirement account or any other retirement account, whether held at The Provident Bank or elsewhere, to purchase shares of common stock should contact our Stock Information Center for guidance as soon as possible, preferably at least two weeks prior to the September 10, 2019 offering deadline. Processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.

 

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 stock offering or the next business day. 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 ordered, even though the shares of common stock will have begun trading. Your ability to sell the shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

Other Restrictions. Notwithstanding any other provision of the plan of conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order

 

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if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country, or in a State of the United States with respect to which any of the following apply:

 

(i)a small number of persons otherwise eligible to subscribe for shares under the plan of conversion reside in such state;

 

(ii)the offer or sale of shares of common stock to such persons would require us or our employees to register, under the securities laws of such state, to register as a broker or dealer or to register or otherwise qualify our securities for sale in such state; or

 

(iii)such registration or qualification would be impracticable for reasons of cost or otherwise.

 

Restrictions on Transfer of Subscription Rights and Shares

 

Applicable banking regulations prohibit any person with subscription rights, including the Eligible Account Holders and employees, officers, directors, trustees and corporators, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. When registering your stock purchase on the order form, you cannot add the name(s) 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. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering.

 

We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

 

Stock Information Center

 

Our banking office 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.

 

Exchange of Existing Stockholders’ Stock Certificates

 

The conversion of existing outstanding shares of Old Provident common stock into the right to receive shares of New Provident common stock will occur automatically at the completion of the conversion. As soon as practicable after the completion of the conversion, our exchange agent will send a transmittal form to each public stockholder of Old Provident who holds physical stock certificates. The transmittal form will contain instructions on how to surrender certificates evidencing Old Provident common stock in exchange for shares of New Provident common stock in book entry form, to be held electronically on the books of our transfer agent. New Provident will not issue stock certificates. We expect that a statement reflecting your ownership of shares of common stock of New Provident common stock will be distributed within five business days after the exchange agent receives properly executed transmittal forms, Old Provident stock certificates and other required documents. Shares held by public stockholders in street name (such as in a brokerage account) will be exchanged automatically upon the completion of the conversion; no transmittal forms will be mailed relating to these shares.

 

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No fractional shares of New Provident common stock will be issued to any public stockholder of Old Provident when the conversion is completed. For each fractional share that would otherwise be issued to a stockholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the exchange agent of the transmittal forms and the surrendered Old Provident stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of fractional shares in your account.

 

You should not forward your stock certificates until you have received transmittal forms, which will include forwarding instructions. After the conversion, stockholders will not receive shares of New Provident common stock and will not be paid dividends on the shares of New Provident common stock until existing certificates representing shares of Old Provident common stock are surrendered for exchange in compliance with the terms of the transmittal form. When stockholders surrender their certificates, any unpaid dividends will be paid without interest. For all other purposes, however, each certificate that represents shares of Old Provident common stock outstanding at the effective date of the conversion will be considered to evidence ownership of shares of New Provident common stock into which those shares have been converted by virtue of the conversion.

 

If a certificate for Old Provident common stock has been lost, stolen or destroyed, our exchange agent will issue a new stock certificate upon receipt of appropriate evidence as to the loss, theft or destruction of the certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the stockholder’s expense.

 

All shares of New Provident common stock that we issue in exchange for existing shares of Old Provident common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion that may have been declared by us on or prior to the effective date, and which remain unpaid at the effective date.

 

Liquidation Rights

 

Liquidation prior to the conversion. In the unlikely event that Provident Bancorp is liquidated prior to the conversion, all claims of creditors of Provident Bancorp would be paid first. Thereafter, if there were any assets of Provident Bancorp remaining, these assets would first be distributed to certain depositors of The Provident Bank based on such depositors’ liquidation rights. The amount received by such depositors would be equal to their pro rata interest in the remaining value of Provident Bancorp after claims of creditors, based on the relative size of their deposit accounts.

 

Liquidation following the conversion. The plan of conversion provides for the establishment, upon the completion of the conversion, of a liquidation account by New Provident for the benefit of Eligible Account Holders in an amount equal to (i) Provident Bancorp’s ownership interest in Old Provident’s total stockholders’ equity as of the date of the latest statement of financial condition contained in the prospectus plus (ii) the value of the net assets of Provident Bancorp as of the date of the latest statement of financial condition of Provident Bancorp prior to the consummation of the conversion (excluding its ownership of Old Provident). The plan of conversion also provides for the establishment of a parallel liquidation account in The Provident Bank to support the New Provident liquidation account in the event New Provident does not have sufficient assets to fund its obligations under the New Provident liquidation account.

 

In the unlikely event that The Provident Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first. However, except with respect to the liquidation account to be established in Old Provident, a depositor’s claim would be solely for the principal amount of his or her deposit accounts plus accrued interest. Depositors generally would not have an interest in the value of the assets of The Provident Bank or New Provident above that amount.

 

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The liquidation account established by New Provident is designed to provide qualifying depositors a liquidation interest (exchanged for the liquidation interests such persons had in Provident Bancorp) after the conversion in the event of a complete liquidation of New Provident and The Provident Bank or a liquidation solely of The Provident Bank. Specifically, in the unlikely event that either (i) The Provident Bank or (ii) New Provident and The Provident Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by a distribution to depositors as of May 31, 2018 of their interests in the liquidation account maintained by New Provident. Also, in a complete liquidation of both entities, or of The Provident Bank only, when New Provident has insufficient assets (other than the stock of The Provident Bank) to fund the liquidation account distribution owed to Eligible Account Holders, and The Provident Bank has positive net worth, then The Provident Bank shall immediately make a distribution to fund New Provident’s remaining obligations under the liquidation account. In no event will any Eligible Account Holder be entitled to a distribution that exceeds such holder’s interest in the liquidation account maintained by New Provident as adjusted from time to time pursuant to the plan of conversion and federal regulations. If New Provident is completely liquidated or sold apart from a sale or liquidation of The Provident Bank, then the New Provident liquidation account will cease to exist and Eligible Account Holders will receive an equivalent interest in the liquidation account of The Provident Bank, subject to the same rights and terms as the New Provident liquidation account.

 

Pursuant to the plan of conversion, after two years from the date of conversion and upon the written request of the Federal Reserve Board, New Provident will transfer the liquidation account and the depositors’ interests in such account to The Provident Bank and the liquidation account shall thereupon be subsumed into the liquidation account of The Provident Bank.

 

Under the rules and regulations of the Federal Reserve Board, a post-conversion merger, consolidation, or similar combination or transaction with another depository institution or depository institution holding company in which New Provident or The Provident Bank is not the surviving institution, would not be considered a liquidation. In such a transaction, the liquidation account would be assumed by the surviving institution or company.

 

Each Eligible Account Holder would have an initial pro-rata interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 or more held in The Provident Bank on May 31, 2018 equal to the proportion that the balance of each Eligible Account Holder’s deposit account on May 31, 2018 bears to the balance of all deposit accounts of Eligible Account Holders in The Provident Bank on such date.

 

If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on May 31, 2018, or any other annual closing date, then the liquidation account as well as the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders are satisfied would be available for distribution to stockholders.

 

Material Income Tax Consequences

 

Completion of the conversion is subject to the prior receipt of an opinion of counsel or tax advisor with respect to the federal and state income tax consequences of the conversion to Provident Bancorp, Old Provident, The Provident Bank, Eligible Account Holders and employees, officers, directors, trustees and corporators. Unlike private letter rulings, an opinion of counsel or tax advisor is not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that New Provident or The Provident Bank would prevail in a judicial proceeding.

 

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Provident Bancorp, Old Provident, The Provident Bank and New Provident have received an opinion of counsel, Luse Gorman, PC, regarding all of the material federal income tax consequences of the conversion, which includes the following:

 

1.The merger of Provident Bancorp with and into Old Provident will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code.

 

2.The constructive exchange of Eligible Account Holders’ liquidation interests in Provident Bancorp for liquidation interests in Old Provident will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations.

 

3.None of Provident Bancorp, Old Provident nor Eligible Account Holders will recognize any gain or loss on the transfer of the assets of Provident Bancorp to Old Provident in constructive exchange for liquidation interests in Old Provident.

 

4.The basis of the assets of Provident Bancorp and the holding period of such assets to be received by Old Provident will be the same as the basis and holding period of such assets in Provident Bancorp immediately before the exchange.

 

5.The merger of Old Provident with and into New Provident will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code and, therefore, will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. Neither Old Provident nor New Provident will recognize gain or loss as a result of such merger.

 

6.The basis of the assets of Old Provident and the holding period of such assets to be received by New Provident will be the same as the basis and holding period of such assets in Old Provident immediately before the exchange.

 

7.Current stockholders of Old Provident will not recognize any gain or loss upon their exchange of Old Provident common stock for New Provident common stock.

 

8.Eligible Account Holders will not recognize any gain or loss upon the constructive exchange of their liquidation interests in Old Provident for interests in the liquidation account in New Provident.

 

9.The exchange by the Eligible Account Holders of the liquidation interests that they constructively received in Old Provident for interests in the liquidation account established in New Provident will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations.

 

10.Each stockholder’s aggregate basis in shares of New Provident common stock (including fractional share interests) received in the exchange will be the same as the aggregate basis of Old Provident common stock surrendered in the exchange.

 

11.Each stockholder’s holding period in his or her New Provident common stock received in the exchange will include the period during which the Old Provident common stock surrendered was held, provided that the Old Provident common stock surrendered is a capital asset in the hands of the stockholder on the date of the exchange.

 

12.Cash received by any current stockholder of Old Provident in lieu of a fractional share interest in shares of New Provident common stock will be treated as having been received as a distribution in full payment in exchange for a fractional share interest of New Provident common stock, which such stockholder would otherwise be entitled to receive. Accordingly, a stockholder will recognize

 

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gain or loss equal to the difference between the cash received and the basis of the fractional share. If the common stock is held by the stockholder as a capital asset, the gain or loss will be capital gain or loss.

 

13.It is more likely than not that the fair market value of the nontransferable subscription rights to purchase New Provident common stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders, officers, directors, trustees or corporators upon distribution to them of nontransferable subscription rights to purchase shares of New Provident common stock. Eligible Account Holders and officers, directors, trustees or corporators will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights.

 

14.It is more likely than not that the fair market value of the benefit provided by the liquidation account of The Provident Bank supporting the payment of the New Provident liquidation account in the event New Provident lacks sufficient net assets is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders upon the constructive distribution to them of such rights in the liquidation account of The Provident Bank as of the effective date of the merger of Old Provident with and into New Provident.

 

15.It is more likely than not that the basis of the shares of New Provident common stock purchased in the offering by the exercise of nontransferable subscription rights will be the purchase price. The holding period of the New Provident common stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date the right to acquire such stock was exercised.

 

16.No gain or loss will be recognized by New Provident on the receipt of money in exchange for New Provident common stock sold in the offering.

 

We believe that the tax opinions summarized above address all material federal income tax consequences that are generally applicable to Provident Bancorp, Old Provident, The Provident Bank, New Provident and persons receiving subscription rights and stockholders of Old Provident. With respect to items 13 and 15 above, Luse Gorman, PC noted that the subscription rights will be granted at no cost to the recipients, are legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. The firm further noted that RP Financial, LC. has issued a letter that the subscription rights have no ascertainable fair market value. The firm also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Luse Gorman, PC believes that it is more likely than not that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the subscription rights granted to Eligible Account Holders, officers, directors, trustees and corporators are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those Eligible Account Holders, officers, directors, trustees and corporators who exercise the subscription rights in an amount equal to the ascertainable value, and we could recognize gain on a distribution. Eligible Account Holders, officers, directors, trustees and corporators are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.

 

The opinion as to item 14 above is based on the position that: (i) no holder of an interest in a liquidation account has ever received any payment attributable to a liquidation account; (ii) the interests in the liquidation accounts are not transferable; (iii) the amounts due under the liquidation account with respect to each Eligible Account Holder will be reduced as their deposits in The Provident Bank are reduced; and (iv) the liquidation account payment obligation of The Provident Bank arises only if New Provident lacks sufficient assets to fund the liquidation account.

 

In addition, we have received a letter from RP Financial, LC. stating its belief that the benefit provided by the liquidation account of The Provident Bank supporting the payment of the liquidation account in the event New Provident lacks sufficient net assets does not have any economic value at the time of the conversion. Based on the foregoing, Luse Gorman, PC believes it is more likely than not that such rights in the liquidation account of The

 

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Provident Bank have no value. If such rights are subsequently found to have an economic value, income may be recognized by each Eligible Account Holder in the amount of such fair market value as of the date of the conversion.

 

The opinion of Luse Gorman, PC, unlike a letter ruling issued by the Internal Revenue Service, is not binding on the Internal Revenue Service and the conclusions expressed therein may be challenged at a future date. The Internal Revenue Service has issued favorable rulings for transactions substantially similar to the proposed conversion and stock offering, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. We do not plan to apply for a letter ruling concerning the transactions described herein.

 

We have also received an opinion from Baker Newman & Noyes LLC that the Massachusetts state income tax consequences are consistent with the federal income tax consequences.

 

The federal and state tax opinions have been filed with the Securities and Exchange Commission as exhibits to New Provident’s registration statement.

 

Certain Restrictions on Purchase or Transfer of Our Shares after Conversion

 

All shares of common stock purchased in the offering by a director, trustee, corporator or certain officers of The Provident Bank, Old Provident, New Provident or Provident Bancorp generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death or substantial disability of the individual. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be similarly restricted. The directors and executive officers of New Provident also will be restricted by the insider trading rules under the Securities Exchange Act of 1934.

 

Purchases of shares of our common stock by any of our directors, certain officers and their associates, during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock by our stock option plan or any of our tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any restricted stock plans.

 

Federal regulations prohibit New Provident from repurchasing its shares of common stock during the first year following conversion unless compelling business reasons exist for such repurchases, or to fund management recognition plans that have been ratified by stockholders (with regulatory approval) or tax-qualified employee stock benefit plans. In addition, the repurchase of shares of common stock is subject to Federal Reserve Board policy related to repurchases of shares by financial institution holding companies. Massachusetts regulations prohibit New Provident from repurchasing its 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.

 

PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING

 

If there are not sufficient votes to constitute a quorum or to approve the plan of conversion at the time of the special meeting, the proposals may not be approved unless the special meeting is adjourned to a later date or dates in order to permit further solicitation of proxies. In order to allow proxies that have been received by Provident Bancorp, Inc. at the time of the special meeting to be voted for an adjournment, if necessary, Provident Bancorp, Inc. has submitted the question of adjournment to its stockholders as a separate matter for their consideration. The board of directors of Provident Bancorp, Inc. recommends that stockholders vote “FOR” the

 

60

 

 

adjournment proposal. If it is necessary to adjourn the special meeting, no notice of the adjourned special meeting is required to be given to stockholders (unless a new record date is fixed), other than an announcement at the special meeting before adjournment of the date, time and place to which the special meeting is adjourned.

 

The board of directors recommends that you vote “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion.

 

61

 

 

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 proxy statement/prospectus, including the consolidated financial statements beginning on page F-1 of this proxy statement/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 proxy statement/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 proxy statement/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.

 

62

 

 

   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.

 

63

 

 

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 proxy statement/prospectus, including the consolidated financial statements beginning on page F-1 of this proxy statement/prospectus. The information at December 31, 2018 is derived in part from the audited consolidated financial statements that appear in this proxy statement/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.

 

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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.

 

65

 

 

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.

 

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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

 

67

 

 

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.

 

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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.

 

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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.

 

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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. The increase of $133,000, or 31.9%, in occupancy expense for the three months ended June 30, 2019 was primarily

 

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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 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.

 

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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 proxy statement/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;

 

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·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 proxy statement/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 19.

 

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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 “Proposal 1—Approval of the Plan of Conversion—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 “Proposal 1—Approval of the Plan of Conversion—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