0001144204-19-035715.txt : 20190905 0001144204-19-035715.hdr.sgml : 20190905 20190724123331 ACCESSION NUMBER: 0001144204-19-035715 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20190724 DATE AS OF CHANGE: 20190807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Provident Bancorp, Inc. /MD/ CENTRAL INDEX KEY: 0001778784 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-232018 FILM NUMBER: 19970020 BUSINESS ADDRESS: STREET 1: 5 MARKET STREET CITY: AMESBURY STATE: MA ZIP: 01913 BUSINESS PHONE: (978) 388-0050 MAIL ADDRESS: STREET 1: 5 MARKET STREET CITY: AMESBURY STATE: MA ZIP: 01913 S-1/A 1 tv525519_s1a.htm FORM S-1/A

 

As filed with the Securities and Exchange Commission on July 24, 2019

Registration No. 333-232018

 

 UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1/A

PRE-EFFECTIVE AMENDMENT NO. 1 TO THE

REGISTRATION STATEMENT UNDER THE

SECURITIES ACT OF 1933

 

Provident Bancorp, Inc.

SBERA 401(k) Plan as Adopted by The Provident Bank

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 6036 Applied For
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

 

5 Market Street

Amesbury, MA 01913

(978) 388-0050
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Mr. David P. Mansfield

President and Chief Executive Officer

5 Market Street

Amesbury, MA 01913

(978) 388-0050
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

Lawrence M. F. Spaccasi, Esq. Michael K. Krebs, Esq.
Ned Quint, Esq. Jason Cabral, Esq.
Luse Gorman, PC Nutter McClennen & Fish LLP
5335 Wisconsin Avenue, N.W., Suite 780 155 Seaport Boulevard
Washington, D.C. 20015 Boston, MA 02210
 (202) 274-2000  (617) 439-2000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company x
Emerging growth company x    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. x

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities
to be registered
  Amount to be
registered
    Proposed maximum
offering price per share
    Proposed maximum
aggregate offering
price (1)
    Amount of
registration fee
 
Common Stock, $0.01 par value per share   25,247,429 shares     $ 10.00     $ 252,474,290     $ 30,600 (2)
Participation interests   1,706,369 interests (3)                     (3)

 

(1) Estimated solely for purposes of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
(2) Previously paid
(3) The securities of Provident Bancorp, Inc. to be purchased by the SBERA 401(k) Plan as Adopted by The Provident Bank are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

Prospectus Supplement

 

SBERA 401(k) PLAN AS ADOPTED BY

THE PROVIDENT BANK

 

Offering of Participation Interests in up to 1,706,369 Shares of

 

PROVIDENT BANCORP, INC.

Common Stock

 

Provident Bancorp, Inc., a new Maryland corporation, is offering shares of common stock for sale at $10.00 per share in connection with the conversion of Provident Bancorp from the mutual holding company to the stock holding company form of organization. The shares being offered represent the ownership interest in Provident Bancorp, Inc., the existing Massachusetts corporation, currently owned by Provident Bancorp, Inc. In this prospectus supplement, we will refer to Provident Bancorp, Inc., the Maryland corporation, as “New Provident,” and we will refer to Provident Bancorp, Inc., the Massachusetts corporation, as “Old Provident.” Old Provident’s common stock is currently traded on the Nasdaq Capital Market under the trading symbol “PVBC,” and we expect the shares of New Provident common stock will also trade on the Nasdaq Capital Market under the symbol “PVBC.”

 

In connection with the offering, The Provident Bank is allowing participants in the SBERA 401(k) Plan as Adopted by The Provident Bank (the “401(k) Plan”) to invest all or a portion of their accounts in the common stock of New Provident (“New Provident Common Stock”). Based upon the value of the 401(k) Plan assets at March 31, 2019, the trustee of the 401(k) Plan could purchase up to 1,706,369 shares of New Provident Common Stock, at the purchase price of $10.00 per share. This prospectus supplement relates to the election of 401(k) Plan participants to direct the trustee of the 401(k) Plan to invest all or a portion of their 401(k) Plan accounts in stock units representing an indirect ownership interest in New Provident Common Stock Fund at the time of the stock offering. Your ownership interest in the New Provident Common Stock Fund will be denominated in units.

 

Before you consider investing, you should read the prospectus of New Provident dated [date], which is attached to this prospectus supplement. It contains detailed information regarding the conversion and stock offering of New Provident and the financial condition, results of operations and business of Old Provident and The Provident Bank. This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.

 

________________________________

 

For a discussion of risks that you should consider, see “Risk Factors” in this prospectus supplement. “Risk Factors” beginning on page 18 of the attached prospectus and “Notice of Your Rights Concerning Employer Securities” in this prospectus supplement.

 

 

 

The interests in the 401(k) Plan and the offering of the shares of New Provident Common Stock have not been approved or disapproved by the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission or any other federal or state agency. Any representation to the contrary is a criminal offense.

 

The securities offered by this prospectus supplement are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

 

This prospectus supplement may be used only in connection with offers and sales by New Provident, in the stock offering, of New Provident Common Stock acquired by the 401(k) Plan. No one may use this prospectus supplement to reoffer or resell interests in shares of Common Stock acquired through the 401(k) Plan.

 

You should rely only on the information contained in this prospectus supplement and the prospectus. New Provident, The Provident Bank and the 401(k) Plan have not authorized anyone to provide you with different information.

 

This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the accompanying prospectus nor any sale of New Provident Common Stock shall under any circumstances imply that there has been no change in the affairs of New Provident, The Provident Bank, or the 401(k) Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.

 

The date of this prospectus supplement is [date].

 

 

 

 

TABLE OF CONTENTS

 

RISK FACTORS 1
   
THE OFFERING 1
   
Securities Offered 1
Election to Purchase Common Stock 2
Purchase Priorities 2
Purchase in the Offering and Oversubscriptions 4
Minimum and Maximum Investment 4
Value of 401(k) Plan Assets 5
Composition of the Provident Bancorp Stock Account 5
How to Order Common Stock in the Offering 6
Order Deadline 7
Irrevocability of Transfer Direction 8
Future Direction to Purchase and Sell Common Stock 8
Voting Rights of Common Stock 8
   
DESCRIPTION OF THE 401(k) PLAN 9
   
Introduction 9
Eligibility and Participation 9
Contributions Under the 401(k) Plan 10
Limitations on Contributions 10
Benefits Under the 401(k) Plan 11
Withdrawals and Distributions from the 401(k) Plan 11
Investment of Contributions and Account Balances 12
Performance History and Description of Funds 13
Administration of the 401(k) Plan 16
Amendment and Termination 17
Merger, Consolidation or Transfer 17
Federal Income Tax Consequences 17
Notice of Your Rights Concerning Employer Securities 18
Additional Employee Retirement Income Security Act, as amended (“ERISA”) Considerations 19
Securities and Exchange Commission Reporting and Short-Swing Profit Liability 19
Financial Information Regarding 401(k) Plan Assets 20
   
LEGAL OPINION 20

 

 

 

RISK FACTORS

 

In addition to considering the material risks disclosed under “Risk Factors” beginning on page 18 of the attached prospectus, you should also consider the following:

 

If you elect to purchase New Provident Common Stock using your 401(k) Plan account balance and the stock offering is oversubscribed, you will bear the risk of price changes in the investment funds of the 401(k) Plan.

 

If you elect to purchase New Provident Common Stock using your 401(k) Plan account balance, the 401(k) Plan trustee will sell the designated percentage of your designated investment funds within your 401(k) Plan account based on your investment election. If the stock offering is oversubscribed (i.e., there are more orders for New Provident Common Stock than shares available for sale in the stock offering) and the 401(k) Plan trustee cannot use any or all of the funds you allocate to purchase New Provident Common Stock, the funds that cannot be invested in New Provident Common Stock, and any interest earned on such funds, will be reinvested in your existing investment funds of the 401(k) Plan, according to your then existing investment election (i.e., in proportion to your investment direction for future contributions). During the period from when the 401(k) Plan trustee sells a percentage of each of your investment funds until reinvestment of some or all of those funds back into your investment funds as a result of an oversubscription, you will bear the risk of price changes in the investment funds. It is possible that during this period some or all of the investment funds may have increased in value more than the amount of any interest you may have earned on the reinvested funds before reinvestment. See “The Offering – Purchases in the Stock Offering and Oversubscriptions” in this prospectus supplement.

 

THE OFFERING
 
Securities Offered The Provident Bank is offering participants of the SBERA 401(k) Plan as Adopted by The Provident Bank (the “401(k) Plan”) the opportunity to purchase common stock of New Provident (“New Provident Common Stock”). A “participation interest” represents your indirect ownership of stock units that are acquired by the 401(k) Plan pursuant to your election, and is the equivalent to one share of New Provident Common Stock.  In this prospectus supplement, “participation interests” are referred to as shares of New Provident Common Stock.  At the purchase price of $10.00 per share, the 401(k) Plan may acquire up to 1,706,369 shares of New Provident Common Stock in the stock offering, based on the fair market value of the 401(k) Plan’s assets as of March 31, 2019.    
   
  Only employees of The Provident Bank may become participants in the 401(k) Plan and only participants, including former employees of The Provident Bank who are still participants in the 401(k) Plan, may purchase participation interests in shares of New Provident Common Stock through the 401(k) Plan.  

 

 

 

 

 

Your investment in shares of New Provident Common Stock in connection with the stock offering is subject to the purchase priorities listed below.

 

Information regarding the 401(k) Plan is contained in this prospectus supplement and information with respect to the financial condition, results of operations and business of New Provident, Old Provident and The Provident Bank is contained in the accompanying prospectus. The address of the principal executive office of New Provident and The Provident Bank is 5 Market Street, Amesbury, MA 01913. The Provident Bank’s telephone number at this address is (978) 834-8555.

 

Address all questions about this prospectus supplement to Carol L. Houle at The Provident Bank; telephone number: (603) 334-1253; email: choule@theprovidentbank.com.

 

Direct all questions about the stock offering, the prospectus, or obtaining a stock order form to purchase stock in the offering outside the 401(k) Plan to the Stock Information Center at (978) 834-8505. The Stock Information Center will be open beginning August 19, 2019, between 10:00 a.m. and 4:00 p.m., Eastern Time, on Monday through Friday. The Stock Information Center will be closed on bank holidays.

 

Election to Purchase Common Stock

In connection with the stock offering, you may elect to designate a part of your account balances in the 401(k) Plan (up to 100%) to be used to purchase shares of New Provident Common Stock in the stock offering. The trustee of the 401(k) Plan will purchase New Provident Common Stock in accordance with your directions. However, such directions are subject to purchase priorities and purchase limitations, as described below.

   
Purchase Priorities All 401(k) Plan participants are eligible to elect to purchase New Provident Common Stock in the stock offering.  However, the elections are subject to the purchase priorities in the Plan of Conversion of Provident Bancorp, which provides for a subscription offering and a community offering.  In the offering, purchase priorities are as follows and apply in case more shares of New Provident Common Stock are ordered than are available for sale (an “oversubscription”):  
   
  Subscription Offering:
   
  (1)   Depositors of The Provident Bank with aggregate account balances of at least $50 as of the close of business on May 31, 2018, get first priority.

 

 2 

 

 

  (2)   The Provident Bank’s tax-qualified plans, including the employee stock ownership plan and the 401(k) Plan, get second priority.
   
  (3)   Employees, officers, directors, trustees and corporators of The Provident Bank and Provident Bancorp, get third priority.
   
  Community Offering:
   
  (4)   Shares of New Provident 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.  
   
  If you fall into subscription offering categories (1), (3) or (4), you have subscription rights to purchase New Provident Common Stock in the subscription offering and you may use funds in the 401(k) Plan to pay for the shares of New Provident Common Stock.  You may also be able to purchase shares of New Provident Common Stock in the subscription offering even though you are ineligible to purchase through subscription offering categories (1), (3) or (4) through subscription offering category (2), reserved for its tax-qualified employee plans. If your stock order cannot be filled through subscription offering category (2), your order will be treated as a community offering order.  Subscription offering orders will have preference over community offering orders in the event of oversubscription.    
   
  If you are eligible to purchase shares of New Provident Common Stock in the subscription offering, as listed above, you will separately receive an offering materials package in the mail, including a stock order form.  If you are not eligible to purchase in the subscription offering, you may request offering materials by calling our Stock Information Center.  If you wish to purchase New Provident Common Stock outside the 401(k) Plan, you must complete the stock order form and submit the stock order form and payment at $10.00 per share, using the reply envelope provided in the offering materials package.  Questions about completing stock order forms may be directed to our Stock Information Center at (978) 834-8505.  

 

 3 

 

 

 

Additionally, instead of (or in addition to) placing an order outside the 401(k) Plan using a stock order form, you may place an order for the purchase of New Provident Common Stock through the 401(k) Plan, using the enclosed Special Investment Election Form, to be completed and submitted in the manner described below under “How to Order Common Stock in the Offering.”

 

Purchase in the Offering and Oversubscriptions

The trustee of the 401(k) Plan will purchase shares of New Provident Common Stock in the stock offering in accordance with your directions set forth in the Special Election Form. Once you make your election, the amount that you elect to transfer from your existing investment options for the purchase of shares of New Provident Common Stock in connection with the stock offering will be sold from your existing investment options and the proceeds transferred to a separate account maintained by the 401(k) Plan. The proceeds transferred to the separate account will be held separately from your other 401(k) Plan assets pending the formal completion of the stock offering, expected to be several weeks later. At the end of the stock offering period, we will determine whether all, or any portion of, your order will be filled (if the offering is oversubscribed, you may not receive any, or all of, your order, depending on your purchase priority, as described above). The amount that can be used toward your order will be applied to the purchase of shares of New Provident Common Stock. Following the formal closing of the stock offering, your purchased shares of New Provident Common Stock will be transferred to your account.

 

In the event the offering is oversubscribed, i.e., there are more orders for New Provident Common Stock than shares available for sale in the offering, and the trustee is unable to use the full amount allocated by you to purchase New Provident Common Stock in the offering, the amount that cannot be invested in New Provident Common Stock, and any interest earned on such amount, will be transferred from the separate account maintained by the 401(k) Plan and reinvested in the existing investment funds of the 401(k) Plan, in accordance with your then-existing investment elections (in proportion to your investment direction for future contributions). The prospectus describes the allocation procedures in the event of an oversubscription. If you choose not to direct the investment of your 401(k) Plan account balances towards the purchase of New Provident Common Stock in the offering, your account balances will remain in the investment funds of the 401(k) Plan as previously directed by you.

 

 4 

 

 

Minimum and Maximum Investment In connection with the stock offering, the 401(k) Plan will permit you to direct the trustee to transfer part of your 401(k) Plan account balance to be used to purchase New Provident Common Stock in the offering, provided however that your investment cannot exceed 100% of your 401(k) Plan account balance (and subject to the maximum purchase limits for investors set forth in the prospectus).  The trustee of the 401(k) Plan will then subscribe for shares of the New Provident Common Stock offered for sale in the offering, in accordance with each participant’s direction.  The trustee will pay $10.00 per share, which will be the same price paid by all other persons who purchase shares in the subscription and community offerings.  In order to purchase New Provident Common Stock through the 401(k) Plan, the minimum investment is $250, which will purchase 25 shares.  The prospectus describes further the maximum purchase limits for investors in the stock offering.    
   
Value of 401(k) Plan Assets

As of March 31, 2019, the market value of the assets of the 401(k) Plan was $17,063,699, 100% of which is eligible to purchase New Provident Common Stock in the offering.

 

Composition of the Provident Bancorp Stock Account

 

Shares purchased by the 401(k) Plan in the stock offering will be held by the Provident Bancorp Stock Account. The Provident Bancorp Stock Account is neither a mutual fund nor a diversified or managed investment option. Rather, it is merely a recordkeeping mechanism established by Savings Banks Employees Retirement Association (“SBERA”), the 401(k) Plan custodian and BPAS, the recordkeeper, to track the shares purchased by the participants in the stock offering through the 401(k) Plan. The Provident Bancorp Stock Account will initially invest 100% of the amounts allocated to the fund (other than amounts returned to the other investment accounts due to an oversubscription) in New Provident Common Stock and a stock unit will be initially valued at $10.00, the offering price of the Common Stock.

 

After the closing of the stock offering, as 401(k) Plan participants begin to trade their stock units or acquire new stock units, the Provident Bancorp Stock Account will maintain a cash component for liquidity purposes. Liquidity is required in order to facilitate daily transactions, such as investment transfers or distributions from the Provident Bancorp Stock Account. Following the stock offering, each day, the stock unit value of the Provident Bancorp Stock Account will be determined by dividing the total market value of the Provident Bancorp Stock Account at the end of the day by the total number of units held in the Provident Bancorp Stock Account by all participants as of the previous day’s end. The change in stock unit value reflects the day’s change in stock price, any cash dividends accrued and the interest earned on the cash component of the Provident Bancorp Stock Account, less any investment management fees. The market value and unit holdings of your account in the Provident Bancorp Stock Account will be reported to you on your regular participant statements.

 

Investment in the Provident Bancorp Stock Account involves special risks common to investments in shares of Provident Bancorp, Inc. Common Stock. For a discussion of material risks you should consider, see the “Risk Factors” section of this prospectus supplement and the “Risk Factors” section of the accompanying prospectus and the section of this prospectus supplement called “Notice of Your Rights Concerning Employer Securities” (see below).

 

How to Order Common Stock in the Offering

Enclosed is a Special Investment Election Form on which you can elect to purchase New Provident Common Stock in the offering. This is done by following the procedures described below. Please note the following stipulations concerning this election:

 

·      You can direct to transfer a percentage of your current 401(k) Plan account on your Special Investment Election Form to purchase New Provident Common Stock.

 

·     Your election is subject to a minimum purchase of 25 shares, which equals $250.

 

·     Your election, plus any order you placed outside the 401(k) Plan, are together subject to a maximum purchase of 50,000 shares, which equals $500,000. Please see the prospectus of New Provident for additional purchase limitations.

 

·     The election period for the 401(k) Plan opens August 16, 2019 and closes 5:00 p.m., Eastern Time, on September 3, 2019 (the “401(k) Plan Offering Period”).

 

·     During the stock offering period, you will continue to have the ability to transfer amounts that are not directed to purchase New Provident Common Stock among all other investment funds. However, you will not be permitted to change the investment amounts that you designated to be used to purchase New Provident Common Stock on your Special Investment Election Form.

 

·     Upon the conclusion of the 401(k) Plan Offering Period, the percentage of your 401(k) Plan account that you designate to be used to purchase New Provident Common Stock will be liquidated from the investment choices in the 401(k) Plan you select on your Special Investment Election Form (excluding any investment in the current Provident Bancorp Stock Fund). Your liquidated assets will be held separately by the 401(k) Plan until the formal closing of the stock offering occurs, which will be several weeks after the completion of the 401(k) Plan Offering Period. Therefore, this money will not be available for distributions, loans or withdrawals until it is used to purchase New Provident Common Stock.

 

 5 

 

 

 

·     Following the formal closing of the stock offering, your purchased shares of New Provident Common Stock will be transferred to your account.

 

·     Following the formal closing of the stock offering, it may take several weeks for the New Provident Common Stock that you elected to purchase on your Special Investment Election Form to be transferred to your account balance. As a result, your New Provident Common Stock that you purchased in the stock offering will not be tradable (i.e., you cannot sell it) until it is transferred to your account.

 

If you wish to use a portion of your account balance in the 401(k) Plan to purchase New Provident Common Stock in the stock offering, you should indicate that decision on your Special Investment Election Form. If you do not wish to make an election, you should check the box at the bottom of the Special Investment Election Form and return the form either using the self-addressed pre-paid envelope, by faxing it to (978) 378-1225, or by delivering it in person or by email at choule@theprovidentbank.com, to Carol L. Houle at The Provident Bank, 5 Market Street, Amesbury, Massachusetts 01913, no later than 5:00 p.m., Eastern Time, on September 3, 2019.

 

Order Deadline If you wish to purchase New Provident Common Stock with a portion of your 401(k) Plan account balance, you must return your Special Investment Election Form to Carol L. Houle at The Provident Bank, 5 Market Street, Amesbury, MA 01913 or by faxing it to (978) 378-1225, to be received no later than 5:00 p.m., Eastern Time, on September 3, 2019.  You may return your Special Investment Election Form by hand delivery, mail using the self-addressed pre-paid envelope, email (sending it to choule@theprovidentbank.com or by faxing it so long as it is returned by the time specified.    

 

 6 

 

 

Irrevocability of Transfer Direction

Once you make an election to transfer amounts in your 401(k) Plan account to be used to purchase shares of New Provident Common Stock in connection with the stock offering, you may not change your election. Your election is irrevocable. You will, however, continue to have the ability to transfer amounts not directed towards the purchase of shares of New Provident Common Stock among all of the other investment funds in the 401(k) Plan on a daily basis.

 

Future Direction to Purchase and Sell Common Stock

You will be able to purchase or sell shares of New Provident Common Stock through your account after the stock offering. You may direct that your future contributions or your account balance in the 401(k) Plan be used to purchase shares of New Provident Common Stock. After the offering, to the extent that shares are available, the trustee of the 401(k) Plan will acquire shares of New Provident Common Stock at your election in open market transactions at the prevailing price, which may be less than or more than $10.00 per share. You may change your investment allocation on a daily basis. However, please be advised that your ability to buy or sell New Provident Common Stock within the 401(k) Plan largely depends upon the existence of an active market for the stock. If New Provident Common Stock is illiquid (meaning there are a low number of buyers and sellers of the stock) on the date you elect to buy or sell New Provident Common Stock within the 401(k) Plan, your election may not be immediately processed. As a result, the prevailing price for New Provident Common Stock may be less than or more than its fair market value on the date of your election.

 

Special restrictions may apply to purchasing shares of New Provident Common Stock by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to the purchase and sale of securities by officers, directors and principal stockholders of New Provident.

 

Please note that if you are an officer of The Provident Bank, you are restricted by applicable regulations from selling shares of New Provident Common Stock acquired in the stock offering for one year; the New Provident Common Stock that you purchased in the stock offering will not be tradable until the one-year trading restriction has lapsed.

 

Voting Rights of Common Stock The Provident Bancorp Stock Account is included in the SBERA Trust.  The Plan Administrator, Thomas J. Forese, Jr., President of SBERA, will vote all shares of Provident Bancorp, Inc. Common Stock in the Provident Bancorp Stock Account, except for votes involving a change in control, in which case the participants and beneficiaries will vote using a pass-through arrangement.  The Plan Administrator has a fiduciary obligation to vote the shares of Provident Bancorp, Inc. Common Stock, including the interests credited to your account, solely in the best interests of the Plan’s participants and beneficiaries.

 

 7 

 

 

DESCRIPTION OF THE 401(k) PLAN

 

Introduction

 

The Provident Bank originally adopted the 401(k) Plan effective as of February 1, 1996, and subsequently amended and restated the 401(k) Plan effective as of January 1, 2018. The 401(k) Plan is a tax-qualified plan established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Provident Bank intends that the 401(k) Plan, in form and operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. The Provident Bank will adopt any amendments to the 401(k) Plan that may be necessary to ensure the continuing qualified status of the 401(k) Plan under the Code and applicable Treasury Regulations.

 

Employee Retirement Income Security Act (ERISA). The 401(k) Plan is an “individual account plan” other than a “money purchase pension plan” within the meaning of ERISA. As such, the 401(k) Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except for the funding requirements contained in Part 3 of Title I of ERISA which by their terms do not apply to an individual account plan (other than a money purchase plan). The 401(k) Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the 401(k) Plan.

 

Reference to Full Text of 401(k) Plan. The following portions of this prospectus supplement summarize certain provisions of the 401(k) Plan. They are not complete and are qualified in their entirety by the full text of the 401(k) Plan. Copies of the 401(k) Plan are available to all employees by filing a request with the 401(k) Plan administrator at 12 Gill Street, Suite 2600, Woburn, MA 01801. You are urged to read carefully the full text of the 401(k) Plan.

 

Eligibility and Participation

 

Employees of The Provident Bank are eligible to participate in elective deferrals in the 401(k) Plan upon attainment of age 21 and without regard to having attained a specific period of service. However, an employee is only eligible to receive safe harbor matching contributions and employer discretionary contributions after attaining age 21 and completing one (1) year of service with The Provident Bank. Employees who satisfy the eligibility requirements are eligible to enter the 401(k) Plan on the first day of month after satisfying the eligibility requirements. The plan year (“Plan Year”) is January 1 to December 31.

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As of March 31, 2019, there were approximately 169 employees and former employees eligible to participate in the 401(k) Plan. The 401(k) Plan Year is January 1 to December 31.

 

Contributions Under the 401(k) Plan

 

Salary Deferrals. You are permitted to defer, on a pre-tax basis, up to 75% of your compensation, subject to certain restrictions imposed by the Code, and to have that amount contributed to the 401(k) Plan on your behalf. For purposes of the 401(k) Plan, “compensation” generally means wages that are subject to withholding under the federal income tax withholding rules. In accordance with Internal Revenue Service (the “IRS”) limitations, the annual compensation of each participant taken into account under the 401(k) Plan, for 2019, is limited to $280,000 (and as may be increased annually by the IRS). You may elect to modify the amount contributed to the 401(k) Plan by filing a new elective deferral agreement with the 401(k) Plan administrator, as of the beginning of each payroll period. In addition, participants are allowed to make deferral contributions in an amount up to 100% of any cash bonuses.

 

Safe Harbor Matching Contributions. The Provident Bank will make a safe harbor matching contribution to employees who satisfy the eligibility requirements for the 401(k) Plan. The safe harbor matching contribution is equal to 100% of each participant’s eligible compensation up to 6% of salary. The safe harbor matching contribution will be contributed by The Provident Bank. You do not have to be employed on the last day of the plan year in order to share in the safe harbor matching contribution. Each year, The Provident Bank will advise participants of its intention to make the safe-harbor matching contribution and the amount of such contribution.

 

Employer Discretionary Contributions. In its discretion, The Provident Bank may make contributions to the 401(k) Plan. The Provident Bank will advise you of the percentage of the employer discretionary contribution, if any, that will be made for a given year. You need to be employed at the end of the plan year in order to receive an allocation of the employer discretionary contribution, if made.

 

Rollover Contributions. You are permitted to make rollover contributions to the 401(k) Plan.

 

Limitations on Contributions

 

Limitations on Employee Salary Deferrals. For the 401(k) Plan Year beginning January 1, 2019, the amount of your before-tax contributions may not exceed $19,000 per calendar year. In addition, if you are at least 50 years old in 2019, you will be able to make a “catch-up” contribution of up to $6,000 in addition to the $19,000 limit. The “catch-up” contribution limit may be adjusted periodically by law, based on changes in the cost of living. Contributions in excess of these limits, as applicable to you, are known as excess deferrals. If you defer amounts in excess of these limitations, as applicable to you, your gross income for federal income tax purposes will include the excess in the year of the deferral. In addition, unless the excess deferral is distributed before April 15 of the following year, it will be taxed again in the year distributed. Income on the excess deferral distributed by April 15 of the immediately succeeding year will be treated, for federal income tax purposes, as earned and received by you in the tax year in which the contribution is made.

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Contribution Limit. Generally, the law imposes a maximum limit on the amount of contributions you may receive under the 401(k) Plan. This limit applies to all contributions to the 401(k) Plan, including your salary deferrals and all other employer contributions made on your behalf during the year, excluding earnings and any transfers/rollovers. For the 401(k) Plan Year beginning January 1, 2019, this total cannot exceed the lesser of $56,000 or 100% of your annual compensation.

 

Benefits Under the 401(k) Plan

 

Vesting. At all times, you have a fully vested, non forfeitable interest in the salary deferral contributions you have made to the 401(k) Plan. Employer safe harbor matching contributions, if made, are also 100% vested. Employer discretionary contributions, if made, are subject to a three-year cliff vesting schedule in which such amounts vest at the rate of 0% during the first two years of service and then become 100% vested upon the completion of three years of service. In the event of your death, disability, attainment of the normal retirement date (date of your 65th birthday) or attainment of the early retirement date (date you attain age 55 and complete at least 10 years of service), your employer contributions would immediately become fully vested.

 

Withdrawals and Distributions from the 401(k) Plan

 

Applicable federal law requires the 401(k) Plan to impose substantial restrictions on the right of a 401(k) Plan participant to withdraw amounts held for his or her benefit under the 401(k) Plan prior to the participant’s termination of employment with the employer.

 

Withdrawals upon Termination. You may request a distribution from your account following your termination of employment. Following your termination, you may elect to leave your account balance in the 401(k) Plan and defer commencement of receipt of your vested balance until no later than April 1 of the calendar year following the calendar year in which you attain age 70½.

 

Withdrawal upon Disability. If you are disabled in accordance with the definition of disability under the 401(k) Plan, you will be entitled to the same withdrawal rights as if you had terminated your employment.

 

Withdrawal upon Death. If you die while you are a participant in the 401(k) Plan, the value of your entire account will be payable to your beneficiary in accordance with the 401(k) Plan.

 

In-Service Distribution. While employed, you are eligible to receive an in-service distribution of your elective deferrals from your account after your attainment of age 59½. However, you may not receive an in-service withdrawal of the following contributions: safe-harbor matching contributions or vested employer discretionary contributions. You may receive an in-service withdrawal of your rollover contributions, if any, at any time.

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Hardship. In the event you incur a financial hardship, you may request an in-service withdrawal of a portion of your 401(k) Plan account, in accordance with the procedures set forth in the 401(k) Plan.

 

Loans. You are eligible to obtain a loan from the Plan, in accordance with The Provident Bank’s established loan procedures.

 

Form of Distribution. The normal form of benefit under the 401(k) Plan is a lump-sum distribution. Alternatively, when you are eligible for a distribution, you can request distributions in installment payments (not to exceed the life expectancy of you and your designated beneficiary). You can also receive a partial payment from the 401(k) Plan, in an amount not less than $1,000.

 

Investment of Contributions and Account Balances

 

All amounts credited to your accounts under the 401(k) Plan are held in the 401(k) Plan trust (the “Trust”) which is administered by SBERA. Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one of the following investment options:

 

Provident Bancorp Stock Fund

All Asset Account

Bond Account

Equity Account

International Equity Account

Large Cap Growth Account

Large Cap Value Account

Lifepath 2020

Lifepath 2025

Lifepath 2030

Lifepath 2035

Lifepath 2040

Lifepath 2045

Lifepath 2050

Lifepath 2055

Lifepath Retirement

Money Market Account

S&P 500 Index

SBERA Account

Small Cap Growth Account

Small Cap Value Account

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Performance History and Description of Funds

 

The following provides performance data with respect to the investment options available under the 401(k) Plan:

 

  

YTD

Returns

as of

March 31,

  Total Returns as of March 31, 2019 
Fund Name  2019   1 Year   3 Years   5 Years   10 Years 
Provident Bancorp Stock Fund                         
All Asset Account   7.18%   2.55%   7.20%   3.03%   7.33%
Bond Account   3.16%   5.38%   3.24%   3.31%   4.52%
Equity Account   14.07%   7.96%   13.06%   8.22%   13.90%
International Equity Account   9.84%   (0.84)%   10.20%   2.66%   7.59%
Large Cap Growth Account   16.34%   15.90%   16.85%   12.94%   16.25%
Large Cap Value Account   12.76%   5.85%   8.63%   6.27%   12.94%
Lifepath 2020   7.08%   3.92%   6.21%   4.52%   8.99%
Lifepath 2025   8.40%   4.20%   7.24%   N/A    N/A 
Lifepath 2030   9.49%   4.33%   8.13%   5.54%   10.53%
Lifepath 2035   4.50%   8.99%   N/A    N/A    N/A 
Lifepath 2040   11.49%   4.61%   9.74%   6.35%   11.78%
Lifepath 2045   12.20%   4.63%   10.19%   N/A    N/A 
Lifepath 2050   12.52%   4.61%   10.32%   6.65%   N/A 
Lifepath 2055   12.55%   4.62%   10.31%   N/A    N/A 
Lifepath Retirement   6.72%   4.01%   5.49%   4.12%   7.54%
Money Market Account   0.43%   1.45%   0.69%   0.41%   0.26%
S&P 500 Index   13.68%   9.94%   13.64%   10.95%   15.93%
SBERA Account   11.64%   5.95%   8.99%   5.66%   10.12%
Small Cap Growth Account   20.09%   11.92%   16.72%   9.48%   17.55%
Small Cap Value Account   11.61%   4.26%   11.44%   6.42%   14.65%

 

The following is a description of each of the 401(k) Plan’s investment funds and other investments:

 

All Asset Account — This account seeks to produce returns which are 500 basis points above the Consumer Price Index (CPI), which measures inflation experienced by consumers in their day-to-day living expenses. The account employs an active, multi-market strategy that fundamentally seeks to provide necessary long-term real inflation-adjusted returns, along with significant asset class diversification. The strategy is designed as a fund-of-funds that allocates among a full range of strategies.

 

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Bond Account — This account seeks to match the performance of the Barclays Capital Aggregate Bond Index. This account utilizes a fund-of-funds approach to achieve its returns. The account utilizes a passive asset allocation approach which maintains a set relative percentage across the three underlying managers. The underlying managers utilize a combination of passive and active management to active their return objectives. This account is administered by SBERA.

 

Equity Account — This account seeks long-term growth of capital and income by investing in common stocks of domestic and foreign companies. This is a fund-to-funds account managed by eight underlying investment managers. The investment managers are selected by SBERA’s Board of Trustees and are subject to change periodically. Each investment manager’s allocation is rebalanced monthly with their strategic asset allocation determined by the Board.

 

International Equity Account — This account seeks to match the performance of the MSCI EAFE index and thus provide long-term capital and income appreciate. This account utilizes a fund-of-funds approach to achieve its returns. The account utilizes a passive asset allocation approach which maintains a set relative percentage across the three underlying managers. The account utilizes a combination of passive and active underlying managers to achieve its returns. This account is administered by SBERA.

 

Large Cap Growth Account — This account seeks long-term returns in excess of the target benchmark by offering investors a highly disciplined, mathematical investment strategy while reducing the risk of significant under performance. The account’s strategies are based on a rigorous mathematical theory that seeks to demonstrate by combining securities with high relative volatility, but low covariance, a portfolio could be constructed that would outperform a benchmark over the long term.

 

Large Cap Value Account — This account seeks a superior total return with only a moderate degree of risk. The account seeks to achieve its investment objective by investing primarily in U.S. Dollar-denominated equity securities of companies with market capitalizations of at least $2 billion. The account seeks to achieve a total return greater than the S&P 500 stock price index over a full market cycle and indices comprised of value-oriented stocks over shorter periods. The account may invest in cash and cash equivalents.

 

Lifepath Accounts — The LifePath series are designed to be complete investment solutions for individuals. Each LifePath strategy is a broadly diversified portfolio, designed for both a particular risk tolerance and when the money will be needed. The LifePath series include LifePath 2055, 2050, 2045, 2040, 2035, 2030, 2025, 2020 and LifePath Retirement. The number, as in LifePath 2020, represents the approximate year when you plan to start withdrawing your money. As time goes by, the investment managers gradually adjust the portfolio’s mix to compensate for the level of risk that is appropriate for the number of years before account drawdown. LifePath Retirement is for those already in retirement and withdrawing funds.

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Money Market Account — Provides income consistent with preservation of principal. SBERA’s Investment Policy Statement requires the Money Market Account to be invested exclusively in U.S. Treasury or other obligations guaranteed by the U.S. Government or its agencies. All securities in this account must have a maturity of six months or less.

 

S&P 500 Index — This account seeks to provide long-term growth of capital and income investment results that parallel the performance of the S&P’s 500 stock price index. This is a passively managed low-cost index account which uses a “full replication” approach where the portfolio holds all of the 500 underlying securities in proportion to their weighting in the index thus minimizing the potential return variance from the index. This account is administered by State Street Global Advisors.

 

SBERA Account — This account seeks to produce the results that parallel the performance of the SBERA Defined Benefit Plan Assets which is to provide investors with long-term growth of capital and income. This account is passively managed “full replication” fund-of funds approach of holding the investments of the SBERA Defined Benefit Assets. The account is rebalanced monthly. This account is administered by SBERA.

 

Small Cap Growth Account — This account seeks to outperform the Russell 2000 Growth Index. This account uses bottoms-up, research-intensive approach to identify small cap growth stocks with the greatest potential to achieve superior price appreciation over a 12 to 18 month time horizon. In general, the portfolio manager constructs a 100-120 stock portfolio consisting of companies with market capitalizations between $50 million and $1.5 billion that have demonstrated the ability to grow earnings and sales at least 10% per year.

 

Small Cap Value Account — This account seeks to outperform the Russell 2000 Value Index. This account uses a disciplined, team-oriented approach which aims to generate consistent above-average risk-adjusted performance, focusing on valuation, fundamentals, and catalyst identification as a cornerstone to successful value investing, while maintaining the integrity of its specific investment mandates. The portfolio manager emphasizes free cash flow, balance sheets and long-term market potential.

 

In connection with the offering, you may direct the trustee, or its representative, to invest a portion of your account in shares of New Provident Common Stock, provided that such amount does not exceed 100% of your total 401(k) Plan account balance.

 

Old Provident Common Stock Fund (Current Employer Stock Fund) The Old Provident Common Stock Fund consists primarily of common stock of Old Provident. Investments in the Old Provident Common Stock Fund involves special risks common to investments in the shares of common stock of Old Provident Common Stock. Following the offering, Old Provident will cease to exist, but will be succeeded by a new Maryland corporation, New Provident, which will be 100% owned by its public shareholders. Shares of Old Provident which were held in the Old Provident Common Stock Fund prior to the conversion and offering will be converted into new shares of common stock of New Provident, in accordance with the exchange ratio. As soon as practicable after the closing of the stock offering, the Old Provident Common Stock Fund will be merged into the New Provident Common Stock Fund.

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New Provident Common Stock Fund (New Employer Stock Fund) – In connection with the stock offering, you may, in the manner described earlier, direct the trustee to invest all or a portion of your 401(k) Plan account in the New Provident Common Stock Fund, which consists primarily of common stock of New Provident. Subsequent to the stock offering, you may elect to invest all or a portion of your contributions in the New Provident Common Stock Fund; you may also elect to transfer into the New Provident Common Stock Fund all or a portion of your accounts currently invested in other funds under the 401(k) Plan. After the offering, the trustee will, to the extent practicable, use all amounts held by it in the New Provident Common Stock Fund to purchase shares of common stock of New Provident, taking into consideration cash amounts needed to maintain liquidity in the account. It is expected that all purchases will be made at prevailing market prices, which may be more or less than $10.00 per share. Performance of the New Provident Common Stock Fund depends on a number of factors, including the financial condition and profitability of New Provident and The Provident Bank and the market conditions for shares of New Provident common stock generally. Investments in the New Provident Common Stock Fund involves special risks common to investments in the shares of common stock of New Provident.

 

For a discussion of material risks you should consider, see “Risk Factors” section of this prospectus supplement, the “Risk Factors” section of the accompanying prospectus and the section of the prospectus supplement called “Notice of Your Rights Concerning Employer Securities” (see below).

 

An investment in any of the investment options listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund or stock investment, there is always a risk that you may lose money on your investment in any of the investment options listed above.

 

Administration of the 401(k) Plan

 

The Trustee and Custodian. The trustee of the 401(k) Plan is the Savings Banks Employees Retirement Association (the “SBERA”).

 

401(k) Plan Administrator. Pursuant to the terms of the 401(k) Plan, the 401(k) Plan is administered by the Administrator, SBERA. The address of the 401(k) Plan administrator is 12 Gill Street, Suite 2600, Woburn, MA 01801, telephone number (781) 938-6559. The 401(k) Plan administrator is responsible for the administration of the 401(k) Plan, interpretation of the provisions of the 401(k) Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the 401(k) Plan, maintenance of 401(k) Plan records, books of account and all other data necessary for the proper administration of the 401(k) Plan, preparation and filing of all returns and reports relating to the 401(k) Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.

 

Reports to 401(k) Plan Participants. The 401(k) Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses (if any).

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Amendment and Termination

 

The Provident Bank intends to continue the 401(k) Plan indefinitely. Nevertheless, The Provident Bank may terminate the 401(k) Plan at any time. If the 401(k) Plan is terminated in whole or in part, then regardless of other provisions in the 401(k) Plan, you will have a fully vested interest in your accounts. The Provident Bank reserves the right to make any amendment or amendments to the 401(k) Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that The Provident Bank may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.

 

Merger, Consolidation or Transfer

 

In the event of the merger or consolidation of the 401(k) Plan with another plan, or the transfer of the trust assets to another plan, the 401(k) Plan requires that you would, if either the 401(k) Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the 401(k) Plan had then terminated.

 

Federal Income Tax Consequences

 

The following is a brief summary of the material federal income tax aspects of the 401(k) Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the 401(k) Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Consult your tax advisor with respect to any distribution from the 401(k) Plan and transactions involving the 401(k) Plan.

 

As a “tax-qualified retirement plan,” the Code affords the 401(k) Plan special tax treatment, including:

 

(1)the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the 401(k) Plan each year;

 

(2)participants pay no current income tax on amounts contributed by the employer on their behalf; and

 

(3)earnings of the 401(k) Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.

 

The Provident Bank will administer the 401(k) Plan to comply with the requirements of the Code as of the applicable effective date of any change in the law.

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Lump-Sum Distribution. A distribution from the 401(k) Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59½, and consists of the balance credited to participants under the 401(k) Plan and all other profit sharing plans, if any, maintained by The Provident Bank. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum distribution, less the amount of after-tax contributions, if any, you have made to this 401(k) Plan and any other profit sharing plans maintained by The Provident Bank, which is included in the distribution.

 

New Provident Common Stock Included in Lump-Sum Distribution. If a lump-sum distribution includes New Provident Common Stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to New Provident Common Stock; that is, the excess of the value of New Provident Common Stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of New Provident Common Stock, for purposes of computing gain or loss on its subsequent sale, equals the value of New Provident Common Stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of New Provident Common Stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of New Provident Common Stock. Any gain on a subsequent sale or other taxable disposition of New Provident Common Stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.

 

Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. You may roll over virtually all distributions from the 401(k) Plan to another qualified plan or to an individual retirement account in accordance with the terms of the other plan or account.

 

Notice of Your Rights Concerning Employer Securities

 

Federal law provides specific rights concerning investments in employer securities. Because you may in the future have investments in New Provident Common Stock under the 401(k) Plan, you should take the time to read the following information carefully.

 

Your Rights Concerning Employer Securities. The 401(k) Plan allows you to elect to move any portion of your account that is invested in New Provident Common Stock from that investment into other investment alternatives under the 401(k) Plan. You may contact the 401(k) Plan administrator shown above for specific information regarding this right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the information below that describes the importance of diversification. All of the investment options under the 401(k) Plan are available to you if you decide to diversify out of your investment in New Provident Common Stock.

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The Importance of Diversifying Your Retirement Savings. To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.

 

In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the 401(k) Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights described here and how these rights affect the amount of money that you invest in New Provident Common Stock through the 401(k) Plan.

 

It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the 401(k) Plan to help ensure that your retirement savings will meet your retirement goals.

 

Additional Employee Retirement Income Security Act, as amended (“ERISA”) Considerations

 

As noted above, the 401(k) Plan is subject to certain provisions of ERISA, including special provisions relating to control over the 401(k) Plan’s assets by participants and beneficiaries. The 401(k) Plan’s feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of Section 404(c) of ERISA relating to control over 401(k) Plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a “fiduciary” because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as The Provident Bank, the 401(k) Plan administrator, or the 401(k) Plan’s trustee is liable under the fiduciary responsibility provisions of ERISA for any loss which results from your exercise of control over the assets in your 401(k) Plan account.

 

Because you will be entitled to invest all or a portion of your account balance in the 401(k) Plan in New Provident Common Stock, the regulations under Section 404(c) of the ERISA require that the 401(k) Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to New Provident Common Stock be conducted in a way that ensures the confidentiality of your exercise of these rights.

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Securities and Exchange Commission Reporting and Short-Swing Profit Liability

 

Section 16 of the Securities Exchange Act of 1934 imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies, such as New Provident. Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of New Provident, a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within two business days after the change occurs, or annually on a Form 5 within 45 days after the close of New Provident’s fiscal year. Discretionary transactions in and beneficial ownership of New Provident Common Stock by officers, directors and persons beneficially owning more than 10% of New Provident Common Stock generally must be reported to the Securities and Exchange Commission by such individuals.

 

In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934 provides for the recovery by New Provident of profits realized by an officer, director or any person beneficially owning more than 10% of New Provident Common Stock resulting from non-exempt purchases and sales of New Provident Common Stock within any six-month period.

 

The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of Section 16(b) persons.

 

Except for distributions of New Provident Common Stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of New Provident Common Stock distributed from the 401(k) Plan for six months following such distribution and are prohibited from directing additional purchases of New Provident Common Stock for six months after receiving such a distribution.

 

Financial Information Regarding 401(k) Plan Assets

 

Financial information representing the net assets available for 401(k) Plan benefits and the change in net assets available for 401(k) Plan benefits at March 31, 2019, is available upon written request to the 401(k) Plan administrator at the address shown above.

 

LEGAL OPINION

 

The validity of the issuance of New Provident Common Stock has been passed upon by Luse Gorman, PC, Washington, D.C., which firm has acted as special counsel to The Provident Bank in connection with New Provident’s stock offering.

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SUBSCRIPTION AND COMMUNITY

OFFERING PROSPECTUS

 

PROVIDENT BANCORP, INC.

(Proposed Holding Company for The Provident Bank)

Up to 13,225,000 Shares of Common Stock

 

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

 

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

 

In addition to the shares we are selling in the offering, the shares of Old Provident currently held by the public will be exchanged for shares of common stock of New Provident based on an exchange ratio that will result in existing public stockholders of Old Provident owning approximately the same percentage of New Provident common stock as they owned in Old Provident common stock immediately prior to the completion of the conversion. The number of shares we expect to issue in the exchange ranges from 8,886,143 shares to 12,022,429 shares.

 

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

 

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

 

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

 

OFFERING SUMMARY

Price: $10.00 per Share

 

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

 

 

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

 

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

Please read “Risk Factors” beginning on page 18.

 

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

 

Sandler O’Neill + Partners, L.P.

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

The date of this prospectus is [prospectus date].

 

   

 

 

 

 

   

 

 

TABLE OF CONTENTS

 

    Page
     
SUMMARY   1
RISK FACTORS   18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA   34
RECENT DEVELOPMENTS   36
FORWARD-LOOKING STATEMENTS   50
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING   52
OUR DIVIDEND POLICY   53
MARKET FOR THE COMMON STOCK   54
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE   55
CAPITALIZATION   56
PRO FORMA DATA   58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   64
BUSINESS OF NEW PROVIDENT AND OLD PROVIDENT   93
BUSINESS OF THE PROVIDENT BANK   94
SUPERVISION AND REGULATION   106
TAXATION   117
MANAGEMENT   119
BENEFICIAL OWNERSHIP OF COMMON STOCK   131
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS   132
THE CONVERSION AND OFFERING   133
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF PROVIDENT BANCORP, INC.   153
RESTRICTIONS ON ACQUISITION OF NEW PROVIDENT   161
DESCRIPTION OF CAPITAL STOCK OF NEW PROVIDENT FOLLOWING THE CONVERSION   165
TRANSFER AGENT   166
EXPERTS   166
LEGAL MATTERS   166
WHERE YOU CAN FIND ADDITIONAL INFORMATION   166
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

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SUMMARY

 

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

 

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

 

Our Organizational Structure and the Proposed Conversion

 

Since 2011 we have operated in a two-tier mutual holding company structure. Old Provident is a Massachusetts corporation that is our publicly-traded stock holding company and the parent company of The Provident Bank. At March 31, 2019, Old Provident had consolidated assets of $998.5 million, deposits of $775.3 million and stockholders’ equity of $128.3 million. Old Provident’s parent company is Provident Bancorp, a Massachusetts-chartered mutual holding company. At March 31, 2019, Old Provident had 9,625,719 shares of common stock outstanding, of which 4,591,396 shares, or 47.7%, were owned by the public (including 187,174 shares owned by The Provident Community Charitable Organization, Inc.), and the remaining 5,034,323 shares were held by Provident Bancorp.

 

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

 

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

 

 

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

 

 

Our Business

 

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

 

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

 

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

 

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

 

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

 

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

 

Business Strategy

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Reasons for the Conversion and Offering

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Terms of the Offering

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

 

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

 

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

 

   

Price-to-earnings

multiple (1)

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

  

 

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

 

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

 

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

 

Effect of Provident Bancorp’s Assets on Minority Stock Ownership

 

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

 

The Exchange of Existing Shares of Old Provident Common Stock

 

If you are a stockholder of Old Provident immediately prior to the completion of the conversion, your shares will be exchanged for shares of common stock of New Provident. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Old Provident common stock owned by public stockholders immediately prior to the completion of the conversion. The following table shows how the exchange ratio will adjust, based on the appraised value of New Provident as of May 10, 2019, assuming public stockholders of Old Provident own 47.7% of Old Provident common stock and Provident Bancorp had net assets of $372,000 immediately prior to the completion

 

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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 %     8,886,143       47.6 %     18,661,143       1.9354     $ 19.35     $ 22.02       193  
Midpoint     11,500,000       52.4       10,454,286       47.6       21,954,286       2.2769       22.77       23.57       227  
Maximum     13,225,000       52.4       12,022,429       47.6       25,247,429       2.6185       26.18       25.14       261  

 

 

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

 

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

 

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

 

How We Intend to Use the Proceeds From the Offering

 

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

 

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

 

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

 

Persons Who May Order Shares of Common Stock in the Offering

 

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

 

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

 

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

 

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

 

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

 

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

 

Limits on How Much Common Stock You May Purchase

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Using Individual Retirement Account Funds to Purchase Shares of Common Stock

 

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

 

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

 

Market for Common Stock

 

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

 

Our Dividend Policy

 

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

 

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

 

Purchases by Directors and Executive Officers

 

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

 

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

 

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

 

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

 

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

 

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

 

You May Not Sell or Transfer Your Subscription Rights

 

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

 

Delivery of Shares of Common Stock

 

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

 

Conditions to Completion of the Conversion

 

We cannot complete the conversion and offering unless:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Possible Change in the Offering Range

 

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

 

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

 

·set a new offering range; or

 

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

 

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

 

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

 

Possible Termination of the Offering

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 15 

 

 

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

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

 

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

 

The following table presents information as of March 31, 2019 regarding our employee stock ownership plan, our 2016 Equity Incentive Plan and our proposed stock-based benefit plan. The table below assumes that 25,247,429 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       3.70 %
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       7.89 %
                             
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)          1,69,003 (5)   $ 3,888,492       4.63 %
New stock options         1,322,500       3,769,125 (6)     5.24  
Total stock options         2,491,503     $ 7,657,617       9.87 %
                             
Total of stock benefit plans         5,481,305     $ 36,117,212       21.71 %

 

 

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

 

Tax Consequences

 

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

 

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

 

Emerging Growth Company Status

 

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

 

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

 

Risk Factors

 

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

 

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

 

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

 

How You Can Obtain Additional Information—Stock Information Center

 

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

 

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RISK FACTORS

 

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

 

Risks Related to Our Business

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·demand for our products and services may decline;

 

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

 

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

 

·the value of our securities portfolio may decline; and

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are currently developing international commercial financing as a new product line. We have focused our efforts on providing financing to foreign companies purchasing U.S. capital equipment and services, and working capital lines of credit to U.S. companies with foreign accounts receivable. As of March 31, 2019, we have originated $492,000 in international working capital lines of credit with total exposure of $2.1 million. As of that date, we have not yet originated a loan to a foreign company 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

 

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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 U.S. capital equipment and services, and we have originated limited international working capital lines of credit, it is difficult for us to evaluate the risk of loss associated with lending to international customers.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Customer or employee fraud subjects us to additional operational risks.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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We are subject to environmental liability risk associated with lending activities

 

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

 

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

 

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

 

Risks Related to the Offering

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Various factors may make takeover attempts more difficult to achieve.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

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

 

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

 

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

 

 

  (1) Excludes loans held-for-sale.

  (2) Includes retained earnings and accumulated other comprehensive income/loss.

  (3) Includes gain on sales of securities, net in 2017 of $5.9 million, as we divested all of our equity securities during the fourth quarter in 2017.

  (4) Includes the expense related to the funding of the charitable foundation in 2015 of $2.2 million.

  (5) Includes the expense related to the Tax Cuts and Jobs Act in 2017 of $2.0 million.

 

 

 34 

 

 

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

 

 

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

 

 35 

 

 

RECENT DEVELOPMENTS

 

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

 

   

At

June 30,
2019

   

At

December 31,

2018

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

 

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

 

 

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

 

 36 

 

 

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

 

 

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

 

 37 

 

 

Comparison of Financial Condition

 

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

 

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

 

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

 

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

 

    At June 30, 2019    

At December 31,

2018

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

 

 

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

 

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

 

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

 

 38 

 

 

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

 

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

 

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

 

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

 

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

 

   

At or For the Three

Months Ended June 30,

   

At or For the Six

Months Ended June 30,

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

 

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

 

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

 

 39 

 

 

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

 

Asset Quality

 

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

 

   

At

June 30,

2019

   

At

December 31,
2018

 
    (Dollars in thousands)  
             
Non-accrual loans:                
Real Estate:                
Residential   $ 1,052     $ 850  
Commercial     519       519  
Construction, land and 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            
Real estate owned     1,740       1,676  
Total non-performing assets   $ 7,158     $ 7,937  
                 
Total loans (1)   $ 896,916     $ 847,208  
Total assets   $ 1,031,175     $ 974,079  
                 
Total non-performing loans to total loans (1)     0.60 %     0.74 %
Total non-performing assets to total assets     0.69 %     0.81 %

 

 

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

 

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

 

 40 

 

 

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

 

   

At

June 30, 2019

   

At

December 31, 2018

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

  

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

 

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

 

 41 

 

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

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

 

 

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

 

 42 

 

 

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

 

   

At

June 30, 2019

   

At

December 31, 2018

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

 

 43 

 

 

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.

 

 44 

 

 

   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.

 

 45 

 

 

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

 

 46 

 

 

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.

 

 47 

 

 

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

 

 48 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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FORWARD-LOOKING STATEMENTS

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

·our ability to access cost-effective funding;

 

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

 

·demand for loans and deposits in our market area;

 

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

 

·failure to implement new technologies in our operations;

 

·competition among depository and other financial institutions;

 

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

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

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

 

We intend to distribute the net proceeds as follows:

 

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

 

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

 

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

 

·to invest in securities;

 

·to pay cash dividends to stockholders;

 

·to repurchase shares of our common stock;

 

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

 

·for other general corporate purposes.

 

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

 

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

 

·to fund new loans;

 

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

 

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

 

·to invest in securities; and

 

·for other general corporate purposes.

 

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

 

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

 

OUR DIVIDEND POLICY

 

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

 

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

 

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

 

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The Provident Bank’s net income for that year to date plus its retained net income for the preceding two years, or The Provident Bank would not be at least adequately capitalized following the distribution.

 

Any payment of dividends by The Provident Bank to New Provident that would be deemed to be drawn from The Provident Bank’s bad debt reserves established prior to 1988, if any, would require a payment of taxes at the then-current tax rate by The Provident Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. The Provident Bank does not intend to make any distribution that would create such a federal tax liability. See “The Conversion and Offering—Liquidation Rights.” In addition, The Provident Bank’s ability to pay dividends to New Provident will be limited if The Provident Bank does not have the capital conservation buffer required by regulatory capital rules, which may limit our ability to pay dividends to stockholders. For further information concerning additional federal law and regulations regarding the ability of The Provident Bank to make capital distributions, including the payment of dividends to New Provident, see “Taxation—Federal Taxation” and “Supervision and Regulation—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—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 [market makers] 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 9,625,719 shares of common stock outstanding, including 4,591,396 publicly held shares (shares held by stockholders other than Provident Bancorp), and approximately _____________ 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 $_____________ per share, respectively. On the effective date of the conversion, all publicly held shares of Old Provident common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of New Provident common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Options to purchase shares of Old Provident common stock will be converted into options to purchase a number of shares of New Provident common stock determined pursuant to the exchange ratio, for the same aggregate exercise price. See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

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

 

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

 

 

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

 

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CAPITALIZATION

 

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

 

    Old Provident    

New Provident Pro Forma at March 31, 2019

Based upon the Sale in the Offering at

$10.00 per Share of

 
    Historical at
March 31, 2019
    9,775,000
Shares
    11,500,000
Shares
    13,225,000
Shares
 
    (Dollars in thousands)  
                         
Deposits (1)   $ 775,277     $ 775,277     $ 775,277     $ 775,277  
Borrowed funds     79,942       79,942       79,942       79,942  
Total deposits and borrowed funds   $ 855,219     $ 855,219     $ 855,219     $ 855,219  
                                 
Stockholders’ equity:                                
Preferred stock, $0.01 par value, 50,000,000 shares authorized (post-conversion) (2)                        
Common stock, $0.01 par value, 100,000,000 shares authorized (post-conversion); shares to be issued as reflected (2) (3)           187       220       252  
Additional paid-in capital (2)     46,236       140,642       157,700       174,759  
MHC capital contribution           372       372       372  
Retained earnings (4)     85,569       85,569       85,569       85,569  
Accumulated other comprehensive loss     (186 )     (186 )     (186 )     (186 )
Less:                                
Treasury stock     (788 )                  
Common stock held by employee stock ownership plan (5)     (2,559 )     (10,379 )     (11,759 )     (13,139 )
Common stock to be issued under stock-based benefit plan (6)           (3,910 )     (4,600 )     (5,290 )
Total stockholders’ equity   $ 128,272     $ 212,295     $ 227,316     $ 242,337  
                                 
Pro Forma Shares Outstanding                                
Shares offered for sale           9,775,000       11,500,000       13,225,000  
Exchange shares issued           8,886,143       10,454,286       12,022,429  
Total shares outstanding           18,661,143       21,954,286       25,247,429  
                                 
Total stockholders’ equity as a percentage of total assets     12.85 %     19.61 %     20.71 %     21.78 %
Tangible equity as a percentage of total assets     12.85 %     19.61 %     20.71 %     21.78 %

 

 

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

 

(footnotes continue on following page)

 

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(continued from previous page)

 

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

 

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PRO FORMA DATA

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For purposes of pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

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

 

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

 

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

 

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

 

The pro forma tables do not give effect to:

 

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

 

·our results of operations after the stock offering; or

 

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

 

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

 

 59 

 

 

   

At or for the Three Months Ended March 31, 2019

Based upon the Sale at $10.00 Per Share of

 
   

9,775,000

Shares

   

11,500,000

Shares

   

13,225,000

Shares

 
    (Dollars in thousands, except per share amounts)  
                   
Gross proceeds of offering   $ 97,750     $ 115,000     $ 132,250  
Market value of shares issued in the exchange     88,861       104,543       120,224  
Pro forma market capitalization   $ 186,611     $ 219,543     $ 252,474  
                         
Gross proceeds of offering   $ 97,750     $ 115,000     $ 132,250  
Expenses     2,369       2,528       2,687  
Estimated net proceeds     95,381       112,472       129,563  
Common stock purchased by employee stock ownership plan     (7,820 )     (9,200 )     (10,580 )
Common stock issued under stock-based benefit plans     (3,910 )     (4,600 )     (5,290 )
Estimated net proceeds, as adjusted   $ 83,651     $ 98,672     $ 113,693  
                         
For the Three Months Ended March 31, 2019                        
Consolidated net earnings:                        
Historical   $ 2,218     $ 2,218     $ 2,218  
Income on adjusted net proceeds     340       402       463  
Income on mutual holding company asset contribution     2       2       2  
Employee stock ownership plan (1)     (56 )     (84 )     (111 )
Stock awards (2)     (143 )     (168 )     (193 )
Stock options (3)     (130 )     (153 )     (176 )
Pro forma net income   $ 2,231     $ 2,217     $ 2,202  
                         
Earnings per share (4):                        
Historical   $ 0.13     $ 0.11     $ 0.09  
Income on adjusted net proceeds     0.02       0.02       0.02  
Income on mutual holding company asset contribution     0.00       0.00       0.00  
Employee stock ownership plan (1)     (0.00 )     (0.00 )     (0.00 )
Stock awards (2)     (0.01 )     (0.01 )     (0.01 )
Stock options (3)     (0.01 )     (0.01 )     (0.01 )
Pro forma earnings per share (4)   $ 0.13     $ 0.11     $ 0.09  
                         
Offering price to pro forma net earnings per share     19.23 x     22.73 x     27.78 x
Number of shares used in earnings per share calculations     17,405,050       20,476,530       23,548,009  
                         
At March 31, 2019                        
Stockholders’ equity:                        
Historical   $ 128,272     $ 128,272     $ 128,272  
Estimated net proceeds     95,381       112,472       129,563  
Equity increase from the mutual holding company     372       372       372  
Common stock acquired by employee stock ownership plan (1)     (7,820 )     (9,200 )     (10,580 )
Common stock issued under stock-based benefit plans (2)     (3,910 )     (4,600 )     (5,290 )
Pro forma stockholders’ equity (5)   $ 212,295     $ 227,316     $ 242,337  
Intangible assets   $     $     $  
Pro forma tangible stockholders’ equity (5)   $ 212,295     $ 227,316     $ 242,337  
                         
Stockholders’ equity per share (6):                        
Historical   $ 6.88     $ 5.84     $ 5.08  
Estimated net proceeds     5.11       5.12       5.13  
Equity increase from the mutual holding company     0.02       0.02       0.02  
Common stock acquired by employee stock ownership plan (1)     (0.42 )     (0.42 )     (0.42 )
Common stock issued under stock-based benefit plans (2)     (0.21 )     (0.21 )     (0.21 )
Pro forma stockholders’ equity per share (5) (6)   $ 11.38     $ 10.35     $ 9.60  
Intangible assets   $     $     $  
Pro forma tangible stockholders’ equity per share (5) (6)   $ 11.38     $ 10.35     $ 9.60  
                         
Offering price as percentage of pro forma stockholders’ equity per share     87.87 %     96.62 %     104.17 %
Offering price as percentage of pro forma tangible stockholders’ equity per share     87.87 %     96.62 %     104.17 %
Number of shares outstanding for pro forma book value per share calculations     18,661,143       21,954,286       25,247,429  

 

(footnotes begin on second following page)

 

 60 

 

  

   

At or for the Year Ended December 31, 2018

Based upon the Sale at $10.00 Per Share of

 
   

9,775,000

Shares

   

11,500,000

Shares

   

13,225,000

Shares

 
    (Dollars in thousands, except per share amounts)  
       
Gross proceeds of offering   $ 97,750     $ 115,000     $ 132,250  
Market value of shares issued in the exchange     88,861       104,543       120,224  
Pro forma market capitalization   $ 186,611     $ 219,543     $ 252,474  
                         
Gross proceeds of offering   $ 97,750     $ 115,000     $ 132,250  
Expenses     2,369       2,528       2,687  
Estimated net proceeds     95,381       112,472       129,563  
Common stock purchased by employee stock ownership plan     (7,820 )     (9,200 )     (10,580 )
Common stock issued under stock-based benefit plans     (3,910 )     (4,600 )     (5,290 )
Estimated net proceeds, as adjusted   $ 83,651     $ 98,672     $ 113,693  
                         
For the Year Ended December 31, 2018                        
Consolidated net earnings:                        
Historical   $ 9,325     $ 9,325     $ 9,325  
Income on adjusted net proceeds     1,362       1,606       1,851  
Income on mutual holding company asset contribution     6       6       6  
Employee stock ownership plan (1)     (180 )     (290 )     (401 )
Stock awards (2)     (571 )     (672 )     (772 )
Stock options (3)     (520 )     (611 )     (703 )
Pro forma net income   $ 9,423     $ 9,364     $ 9,305  
                         
Earnings per share (4):                        
Historical   $ 0.53     $ 0.45     $ 0.39  
Income on adjusted net proceeds     0.08       0.08       0.08  
Income on mutual holding company asset contribution     (0.00 )     (0.00 )     (0.00 )
Employee stock ownership plan (1)     (0.01 )     (0.01 )     (0.02 )
Stock awards (2)     (0.03 )     (0.03 )     (0.03 )
Stock options (3)     (0.03 )     (0.03 )     (0.03 )
Pro forma earnings per share (4)   $ 0.54     $ 0.46     $ 0.39  
                         
Offering price to pro forma net earnings per share     18.52 x     21.74 x     25.64 x
Number of shares used in earnings per share calculations     17,458,168       20,539,021       23,619,874  
                         
At December 31, 2018                        
Stockholders’ equity:                        
Historical   $ 125,584     $ 125,584     $ 125,584  
Estimated net proceeds     95,381       112,472       129,563  
Equity increase from the mutual holding company     372       372       372  
Common stock acquired by employee stock ownership plan (1)     (7,820 )     (9,200 )     (10,580 )
Common stock issued under stock-based benefit plans (2)     (3,910 )     (4,600 )     (5,290 )
Pro forma stockholders’ equity (5)   $ 209,607     $ 224,628     $ 239,649  
Intangible assets   $     $     $  
Pro forma tangible stockholders’ equity (5)   $ 209,607     $ 224,628     $ 239,649  
                         
Stockholders’ equity per share (6):                        
Historical   $ 6.73     $ 5.72     $ 4.98  
Estimated net proceeds     5.11       5.12       5.13  
Equity increase from the mutual holding company     0.02       0.02       0.01  
Common stock acquired by employee stock ownership plan (1)     (0.42 )     (0.42 )     (0.42 )
Common stock issued under stock-based benefit plans (2)     (0.21 )     (0.21 )     (0.21 )
Pro forma stockholders’ equity per share (5) (6)   $ 11.23     $ 10.23     $ 9.49  
Intangible assets   $     $     $  
Pro forma tangible stockholders’ equity per share (5) (6)   $ 11.23     $ 10.23     $ 9.49  
                         
Offering price as percentage of pro forma stockholders’ equity per share     89.05 %     97.75 %     105.37 %
Offering price as percentage of pro forma tangible stockholders’ equity per share     89.05 %     97.75 %     105.37 %
Number of shares outstanding for pro forma book value per share calculations     18,661,143       21,954,286       25,247,429  

 

(footnotes begin on following page)

 

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

 

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be sold in the offering and shares to be issued in exchange for publicly held shares. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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

 

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

 

Overview

 

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

 

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

 

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

 

Critical Accounting Policies

 

A summary of our accounting policies is included in the consolidated financial statements beginning on page F-1 of this prospectus. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the

 

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loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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

 

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

 

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

 

Residential real estate: We generally do not originate loans with a loan-to-value ratio greater than 80% and do not originate subprime loans. Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Income Taxes. We recognize income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

 

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

 

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

 

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

 

Business Strategy

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Comparison of Financial Condition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Asset Quality

 

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

 

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

 

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

 

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

 

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

 

        At December 31,  
    At March 31, 2019     2018     2017  
   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More
Past Due

   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More
Past Due

   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More
Past Due

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

 

    At December 31,  
    2016     2015     2014  
   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More
Past Due

   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More
Past Due

   

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days

or More

Past Due

 
    (In thousands)  
Real Estate:                                                                        
Residential   $     $     $     $ 130     $ 173     $ 365     $     $ 404     $ 423  
Commercial                 346                         110       132       363  
Construction and land development                                                      
Commercial     29                                     149       108       350  
Consumer                       1       1             9              
Total   $ 29     $     $ 346     $ 131     $ 174     $ 365     $ 268     $ 644     $ 1,136  

 

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including troubled debt restructurings on non-accrual status, and real estate and other loan collateral

 

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acquired through foreclosure and repossession. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, loans modified at interest rates materially less than current market rates, or the borrower is experiencing financial difficulty. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At March 31, 2019 and December 31, 2018, we did not have any accruing loans past due 90 days or greater. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the lower of cost or fair value less costs to sell at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

 

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

 

    At March     At December 31,  
    31, 2019     2018     2017     2016     2015     2014  
    (Dollars in thousands)  
       
Non-accrual loans:                                                
Real Estate:                                                
Residential   $ 822     $ 850     $ 364     $ 303     $ 1,031     $ 1,564  
Commercial     519       519       7,102       346       106       3,002  
Construction and land development     —                                 
Commercial     6,919       4,830       1,505       933       1,147       516  
Consumer     115       62       62                    
Total non-accrual loans     8,375       6,261       9,033       1,582       2,284       5,082  
                                                 
Accruing loans past due 90 days or more                                    
Other real estate owned     1,720       1,676                          
Total non-performing assets   $ 10,095     $ 7,937     $ 9,033     $ 1,582     $ 2,284       5,082  
                                                 
Total loans (1)   $ 871,126     $ 847,208     $ 751,895     $ 633,015     $ 562,834     $ 501,407  
Total assets   $ 998,519     $ 974,079     $ 902,265     $ 795,543     $ 743,397     $ 658,606  
                                                 
Total non-performing loans to total loans (1)     0.96 %     0.74 %     1.20 %     0.25 %     0.41 %     1.01 %
Total non-performing assets to total assets     1.01 %     0.81 %     1.00 %     0.20 %     0.31 %     0.77 %

 

 

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

 

The increase in non-accrual loans at March 31, 2019 compared to December 31, 2018 was primarily due to four relationships. Of the four 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. All impaired loan relationships have been evaluated and specific reserves of $886,000 were allocated. Our last BancAlliance commercial business loan origination was in February 2017, and at this time we are not anticipating originating any new loans through this network.

 

The decrease in non-accrual loans at December 31, 2018 as compared to December 31, 2017 was primarily due to a foreclosure sale we conducted and the transfer of a loan relationship that consisted of two commercial real

 

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estate loans to other real estate owned. In April 2018, we conducted a foreclosure sale of certain real and personal property which secured four non-accruing loans we originated.  The aggregate outstanding principal balance of these loans was approximately $7.5 million, of which (a) approximately $4.9 million was due and owing to us and (b) approximately $2.6 million was due and owing to another financial institution who purchased participation interests in certain of these loans (the “Participant”). We received approximately $8.3 million in proceeds from this foreclosure sale. The U.S. Small Business Administration (“SBA”), which also made a secured loan to the same obligors, has since disputed our retention of, and claimed priority to, a portion of the proceeds generated from this foreclosure sale, alleging a breach of contract and seeking monetary damages in the approximate amount of $2.0 million.  As previously disclosed, we had segregated into a separate deposit account the entire amount in dispute, including the amount that would be provided to the participating institution.  In June 2019, we settled this matter with the SBA and the participating institution for the amounts we had segregated and the settlement did not have a significant impact on our financial condition or results of operations. The increase in non-accrual commercial loans at December 31, 2018 compared to December 31, 2017 consists primarily of three commercial and industrial loan relationships. Impairment was evaluated and specific reserves of $1.1 million were allocated to impaired loans as of December 31, 2018.

 

We have cooperative relationships with the vast majority of our nonperforming loan customers. Repayment of non-performing loans largely depends on the return of such loans to performing status or the liquidation of the underlying collateral. We pursue the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, we will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

 

Interest income that would have been recorded for the three months ended March 31, 2019 had non-accruing loans been current according to their original terms amounted to $218,000. We recognized $38,000 of interest income for these loans for the three months ended March 31, 2019. Interest income that would have been recorded for the year ended December 31, 2018 had non-accruing loans been current according to their original terms amounted to $372,000. We recognized $150,000 of interest income for these loans for the year ended December 31, 2018.

 

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

 

          At December 31,  
    At March 31, 2019     2018     2017  
    Non-
Accruing
    Accruing     Non-
Accruing
    Accruing     Non-
Accruing
    Accruing  
    (In thousands)  
Troubled Debt Restructurings:                                                
Real estate:                                                
Residential   $     $ 383     $     $ 388     $     $ 404  
Commercial           1,319             1,334             1,521  
Construction and land development                                    
Commercial     2,143       410       1,089       462       67       1,698  
Consumer                                    
Total   $ 2,143     $ 2,112     $ 1,089     $ 2,184     $ 67     $ 3,623  

 

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    At December 31,  
    2016     2015     2014  
    Non-
Accruing
    Accruing     Non-
Accruing
    Accruing     Non-
Accruing
    Accruing  
    (In thousands)  
Troubled Debt Restructurings:                                                
Real estate:                                                
Residential   $     $ 422     $     $ 436     $     $ 221  
Commercial     346       1,610       106       3,167       1,490       1,385  
Construction and land development                                    
Commercial     919       727       1,147       565       202       196  
Consumer                                    
Total   $ 1,265     $ 2,759     $ 1,253     $ 4,168     $ 1,692     $ 1,802  

 

Total troubled debt restructurings increased in 2019 primarily due to our restructuring one of our BancAlliance loans. Total troubled debt restructurings decreased in 2018 primarily due to the loans paying in accordance with their modified terms. During 2018, there were no trouble debt restructures. During 2017, there was one loan totaling $249,000 that was modified under a troubled debt restructure. The loan that was modified in 2017 is paying in accordance with its modified terms.

 

Interest income that would have been recorded for the three months ended March 31, 2019 had troubled debt restructurings been current according to their original terms amounted to $75,000. We recognized $32,000 of interest income for these loans for the three months ended March 31, 2019. Interest income that would have been recorded for the year ended December 31, 2018 had troubled debt restructurings been current according to their original terms amounted to $251,000. We recognized $179,000 of interest income for these loans for the year ended December 31, 2018.

 

Potential Problem Loans. We classify certain commercial real estate, construction and land development, and commercial loans as “special mention”, “substandard”, or “doubtful”, based on criteria consistent with guidelines provided by our banking regulators. Certain potential problem loans represent loans that are currently performing, but for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in such loans becoming nonperforming at some time in the future. Potential problem loans also include non-accrual or restructured loans presented above. We expect the levels of non-performing assets and potential problem loans to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets.

 

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. At March 31, 2019, other potential problem loans totaled $2.1 million, consisting of 13 troubled debt restructured loans that were accruing interest in accordance with their modified terms. At December 31, 2018, other potential problem loans totaled $2.2 million, consisting of 14 troubled debt restructured loans that were accruing interest in accordance with their modified terms.

 

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
March 31,
    Year Ended December 31,  
    2019     2018     2018     2017     2016     2015     2014  
    (Dollars in thousands)  
                                           
Allowance at beginning of period   $ 11,680     $ 9,757     $ 9,757     $ 8,590     $ 7,905     $ 7,224     $ 6,077  
Provision for loan losses     1,462       656       3,329       2,929       703       805       1,452  
Charge offs:                                                        
Real estate:                                                        
Residential                                         30  
Commercial                 670       1,522                   243  
Construction and land development                                          
Commercial     1,033       20       190       107             96        
Consumer     281       166       699       190       44       65       91  
Total charge-offs     1,314       186       1,559       1,819       44       161       364  
                                                         
Recoveries:                                                        
Real estate:                                                        
Residential                 2             12       6       24  
Commercial                       45                   24  
Construction and land development                                          
Commercial     10       1       87             1       20       5  
Consumer     19       8       64       12       13       11       6  
Total recoveries     29       9       153       57       26       37       59  
                                                         
Net charge-offs     1,285       177       1,406       1,762       18       124       305  
                                                         
Allowance at end of period   $ 11,857     $ 10,236     $ 11,680     $ 9,757     $ 8,590     $ 7,905     $ 7,224  
                                                         
Non-performing loans at end of period   $ 8,375     $ 9,854     $ 6,261     $ 9,033     $ 1,582     $ 2,284     $ 5,082  
Total loans outstanding at end of period (1)   $ 871,126     $ 770,118     $ 847,208     $ 751,895     $ 633,015     $ 562,834     $ 501,407  
Average loans outstanding during the period (1)   $ 865,239     $ 766,968     $ 783,570     $ 698,859     $ 583,156     $ 516,405     $ 471,650  
                                                         
Allowance to non-performing loans     141.58 %     106.80 %     186.55 %     108.02 %     542.98 %     346.10 %     142.15 %
Allowance to total loans outstanding at end of the period     1.36 %     1.33 %     1.38 %     1.30 %     1.36 %     1.40 %     1.44 %
Net charge-offs to average loans outstanding during the period     0.59 %(2)     0.09 %(2)     0.18 %     0.25 %           0.02 %     0.06 %

 

 

(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 December 31,  
    At March 31, 2019     2018     2017  
    Allowance
for Loan
Losses
    % of
Loans in
Category
to Total
Loans
    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   $ 240       6.29 %   $ 251       6.76 %   $ 300       9.00 %
Commercial     4,247       42.80       4,152       43.00       4,483       49.35  
Construction and land development     734       4.86       738       5.26       965       7.42  
Commercial     5,746       43.84       5,742       42.64       3,280       31.91  
Consumer     812       2.21       710       2.34       649       2.32  
Total allocated allowance for loan losses     11,779       100.00 %     11,593       100.00 %     9,677       100.00 %
Unallocated     78               87               80          
Total   $ 11,857             $ 11,680             $ 9,757          

 

    At December 31,  
    2016     2015     2014  
    Allowance
for Loan
Losses
    % of
Loans in
Category
to Total
Loans
    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   $ 328       12.13 %   $ 412       16.40 %   $ 560       20.84 %
Commercial     4,503       53.07       3,827       50.67       3,500       49.76  
Construction and land development     882       7.60       1,236       12.70       872       9.38  
Commercial     2,513       26.23       2,138       19.90       1,751       19.45  
Consumer     279       0.97       119       0.33       184       0.57  
Total allocated allowance for loan losses     8,505       100.00 %     7,732       100.00 %     6,867       100.00 %
Unallocated     85               173               357          
Total   $ 8,590             $ 7,905             $ 7,224          

 

The allowance consists of general, specific, and unallocated components. The general component relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value, less estimated selling costs, or observable market price of the impaired loan is lower than the carrying value of that loan.

 

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent

 

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in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

We had impaired loans totaling $9.5 million, $7.5 million and $12.2 million as of March 31, 2019, December 31, 2018 and 2017, respectively. Impaired loans totaling $5.4 million had a valuation allowance of $886,000 at March 31, 2019. Impaired loans totaling $1.8 million had a valuation allowance of $1.1 million at December 31, 2018. At December 31, 2017, there were no impaired loans with a valuation allowance. Our average investment in impaired loans was $9.6 million, $13.1 million and $7.0 million for the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, respectively.

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial business, commercial real estate and construction and land development loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on payment status. Accordingly, we do not separately identify individual one- to four-family residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring. We periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

 

We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or the present value of expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral dependent as of March 31, 2019 and December 31, 2018 and considered any probable loss in determining the allowance for loan losses.

 

Loans that are partially charged off generally remain on non-accrual status until foreclosure or such time that they are performing in accordance with the terms of the loan and have a sustained payment history of at least six months. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Loan losses are charged against the allowance when we believe the uncollectability of a loan balance is confirmed; for collateral-dependent loans, generally when appraised values (as adjusted values, if applicable) less estimated costs to sell, are less than our carrying values.

 

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, our regulators, in reviewing our loan portfolio, may require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

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Securities Portfolio

 

During 2017, we sold $30.6 million of state and municipal securities and $9.8 million of equity securities. The sale of the state and municipal securities was conducted to reduce our concentration within this category. The divesture resulted in a 34% concentration of the portfolio as compared to 47% of the portfolio prior to sale. The sale of equity securities was conducted to reduce potential earnings volatility related to new accounting guidance effective in 2018, which would have required us to report the changes in fair value of equity securities in earnings.

 

During 2016, we transferred all of our investments classified as held-to-maturity to available-for-sale. The following table sets forth the amortized cost and estimated fair value of our securities portfolio at the dates indicated.

 

          At December 31,  
    At March 31, 2019     2018     2017     2016  
    Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
 
    (In thousands)  
                                                 
State and municipal   $ 11,453     $ 11,535     $ 20,118     $ 20,255     $ 20,726     $ 21,454     $ 49,367     $ 50,580  
Corporate debt                                         1,000       1,031  
Asset-backed securities     6,116       6,048       6,512       6,371       7,524       7,517       8,747       8,678  
Government mortgage-backed securities     32,353       32,079       25,135       24,777       32,421       32,458       41,818       41,914  
Trust preferred securities                                         1,368       968  
Marketable equity securities                                         11,363       14,696  
Total   $ 49,922     $ 49,662     $ 51,765     $ 51,403     $ 60,671     $ 61,429     $ 113,663     $ 117,867  

 

At March 31, 2019 and December 31, 2018, we had no investments in a single company or entity, other than government and government agency securities, that had an aggregate book value in excess of 10% of our equity.

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at March 31, 2019, are summarized in the following table. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. No tax-equivalent yield adjustments have been made, as the amount of tax-free interest-earning assets is immaterial.

 

    One Year or Less     More than
One Year to Five Years
    More than
Five Years to Ten Years
    More than
Ten Years
    Total  
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Fair Value     Weighted
Average
Yield
 
    (Dollars in thousands)  
Securities available-for-sale:                                                                                        
State and municipal   $ 95       4.05 %   $ 604       3.81 %   $ 2,028       3.92 %   $ 8,726       3.01 %   $ 11,453     $ 11,535       3.22 %
Asset-backed securities                 715       2.00 %                 5,401       2.75 %     6,116       6,048       2.66 %
Government mortgage-backed securities            —       223       1.14 %     4,075       2.14 %     28,055       3.08 %     32,353       32,079       2.95 %
Total   $ 95       4.05 %   $ 1,542       2.59 %   $ 6,103       2.73 %   $ 42,182       3.02 %   $ 49,922     $ 49,662       2.98 %

 

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Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our non-interest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the three months ended March 31, 2019 or the years ended December 31, 2018 or 2017.

 

Deposits

 

Total deposits increased $7.2 million, or 0.9%, to $775.3 million at March 31, 2019 from $768.1 million at December 31, 2018. The primary reasons for the increase in deposits were an increase of $22.7 million, or 23.3%, in time deposits, and an increase in savings deposits of $6.3 million, or 5.8%. The increases were partially offset by a decrease of $19.8 million, or 6.0%, in NOW and demand deposits. The increase in time deposits is primarily due to increases in brokered certificates of deposit of $13.3 million, or 23.9%, and an increase of $9.9 million, or 190.6%, from QwickRate deposits, 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 transferring from NOW and demand deposits to a savings account product. In addition to the municipal deposit transfer, NOW and demand deposits decreased due to the seasonality of municipal deposit balances as well as a decrease in some of our high rate relationships.

 

Total deposits increased $18.0 million, or 2.4%, to $768.1 million at December 31, 2018 from $750.1 million at December 31, 2017. Our continuing focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for certificates of deposit, resulted in net growth in these deposits during 2018 of $22.8 million, or 3.5%, to $670.7 million at December 31, 2018, or 87.3% of total deposits at that date. Core deposits totaled $655.2 million at March 31, 2019, or 84.5% of total deposits at that date.

 

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

 

          At December 31,  
    At March 31, 2019     2018     2017     2016  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
                                                 
Noninterest bearing   $ 198,733       25.64 %   $ 195,293       25.43 %   $ 186,222       24.83 %   $ 158,075       25.17 %
Negotiable order of withdrawal (NOW)     113,553       14.65       136,771       17.81       123,292       16.44       122,698       19.54  
Savings accounts     115,614       14.91       109,322       14.23       112,610       15.01       111,016       17.68  
Money market deposit accounts     227,256       29.31       229,314       29.85       225,735       30.10       145,321       23.14  
Certificates of deposit     120,121       15.49       97,396       12.68       102,198       13.62       90,872       14.47  
Total   $ 775,277       100.00 %   $ 768,096       100.00 %   $ 750,057       100.00 %   $ 627,982       100.00 %

 

As of March 31, 2019, our certificates of deposit included $69.1 million of brokered certificates of deposit and $15.1 million of QwickRate certificates of deposit, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits. As of December 31, 2018, our certificates of deposit included $55.8 million of brokered certificates of deposit and $5.2 million of QwickRate certificates of deposit.

 

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As of March 31, 2019, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $100,000, which excludes all brokered certificates, was approximately $33.5 million. The following table sets forth the maturity of these certificates as of March 31, 2019.

 

   

At

March 31, 2019

 
    (In thousands)  
Maturity Period:        
Three months or less   $ 10,663  
Over three through six months     4,230  
Over six through twelve months     3,758  
Over twelve months     14,852  
Total   $ 33,503  

  

Borrowings

 

Our borrowings at March 31, 2019 consisted of Federal Home Loan Bank advances. 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 March 31,
    At or For the Year Ended December 31,  
    2019     2018     2018     2017     2016  
    (Dollars in thousands)  
                               
Balance outstanding at end of period   $ 79,942     $ 45,211     $ 68,022     $ 26,841     $ 49,858  
Weighted average interest rate at end of period     2.55 %     1.84 %     2.58 %     1.52 %     1.36 %
Maximum amount of borrowings outstanding at any month end during the period   $ 90,774     $ 45,211     $ 68,125     $ 79,725     $ 50,025  
Average balance outstanding during the period   $ 80,483     $ 22,814     $ 30,987     $ 51,610     $ 36,672  
Weighted average interest rate during the period     2.65 %     2.00 %     2.40 %     1.52 %     1.70 %

 

We had no securities sold under agreements to repurchase during the three months ended March 31, 2019 or the years ended December 31, 2018, 2017 and 2016.

 

Borrowings at March 31, 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 $11.9 million, or 17.5%, to $79.9 million at March 31, 2019 from $68.0 million at December 31, 2018. The increase was primarily due to funding loan growth.

 

Borrowings increased $41.2 million, or 153.4%, to $68.0 million at December 31, 2018 from $26.8 million at December 31, 2017 primarily due to loan growth funding. Out of the $68.0 million in borrowed funds, $38.1 million is short-term with an original maturity of less than one year. Net loans grew $52.2 million over the three months ended December 31, 2018 and borrowings were utilized to fund the loan growth that occurred during the fourth quarter of 2018.

 

Shareholders’ Equity

 

Total shareholders’ equity increased $2.7 million, or 2.1%, to $128.3 million at March 31, 2019, from $125.6 million at December 31, 2018. The increase was primarily due to year-to-date net income of $2.2 million, stock-based compensation expense of $265,000, and employee stock ownership plan shares earned of $136,000.

 

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Total shareholders’ equity increased $9.8 million, or 8.5%, to $125.6 million at December 31, 2018, from $115.8 million at December 31, 2017. The increase was due primarily to net income of $9.3 million, stock-based compensation expense of $928,000, and employee stock ownership plan shares earned of $613,000, partially offset by a decrease of $215,000 due to stock repurchases and $844,000 in accumulated other comprehensive loss, reflecting a decrease in the fair value of available-for-sale securities.

 

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 March 31,  
    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   $ 865,239     $ 11,699       5.41 %   $ 766,968     $ 9,276       4.84 %
Short-term investments     4,356       26       2.39 %     8,680       42       1.94 %
Investment securities     50,780       373       2.94 %     59,761       408       2.73 %
Federal Home Loan Bank stock     3,533       31       3.51 %     1,670       27       6.47 %
Total interest-earning assets     923,908       12,129       5.25 %     837,079       9,753       4.66 %
Noninterest-earning assets     63,362                       48,958                  
Total assets   $ 987,270                     $ 886,037                  
                                                 
Interest-bearing liabilities:                                                
Savings accounts   $ 118,032     $ 108       0.37 %   $ 118,382     $ 70       0.24 %
Money market accounts     231,766       699       1.21 %     224,681       401       0.71 %
Now accounts     115,977       116       0.40 %     110,907       154       0.56 %
Certificates of deposit     103,862       514       1.98 %     102,325       295       1.15 %
Total interest-bearing deposits     569,637       1,437       1.01 %     556,295       920       0.66 %
Borrowings     80,483       534       2.65 %     22,814       114       2.00 %
Total interest-bearing liabilities     650,120       1,971       1.21 %     579,109       1,034       0.71 %
Noninterest-bearing liabilities:                                                
Noninterest-bearing deposits     189,544                       180,850                  
Other noninterest-bearing liabilities     16,256                       9,244                  
Total liabilities     855,920                       769,203                  
Total equity     131,350                       116,834                  
Total liabilities and equity   $ 987,270                     $ 886,037                  
                                                 
Net interest income           $ 10,158                     $ 8,719          
Interest rate spread (2)                     4.04 %                     3.95 %
Net interest-earning assets (3)   $ 273,788                     $ 257,970                  
Net interest margin (4)                     4.40 %                     4.17 %
Average interest-earning assets to interest-bearing liabilities     142.11 %                     144.55 %                

 

 

(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 Year Ended December 31,  
    2018     2017     2016  
    Average
Balance
    Interest
Earned/
Paid
    Yield/
Rate
    Average
Balance
    Interest
Earned/
Paid
    Yield/
Rate
    Average
Balance
    Interest
Earned/
Paid
    Yield/
Rate
 
    (Dollars in thousands)  
Assets:                                                                        
Interest-earning assets:                                                                        
Loans   $ 783,570     $ 40,358       5.15 %   $ 698,859     $ 32,510       4.65 %   $ 583,156     $ 25,549       4.38 %
Short-term investments     15,846       313       1.98 %     8,285       100       1.21 %     7,992       33       0.41 %
Investment securities     55,686       1,560       2.80 %     111,732       3,049       2.73 %     120,897       3,222       2.67 %
Federal Home Loan Bank stock     1,925       109       5.66 %     2,874       123       4.28 %     2,599       90       3.46 %
Total interest-earning assets     857,027       42,340       4.94 %     821,750       35,782       4.35 %     714,644       28,894       4.04 %
Non-interest earning assets     50,411                       46,576                       39,845                  
Total assets   $ 907,438                     $ 868,326                     $ 754,489                  
                                                                         
Interest-bearing liabilities:                                                                        
Savings accounts   $ 116,126     $ 281       0.24 %   $ 116,147       209       0.18 %   $ 110,528       190       0.17 %
Money market accounts     227,057       2,224       0.98 %     176,216       875       0.50 %     115,857       334       0.29 %
Now accounts     116,816       602       0.52 %     114,292       660       0.58 %     112,003       661       0.59 %
Certificates of deposit     95,987       1,361       1.42 %     120,033       1,200       1.00 %     109,175       978       0.90 %
Total interest-bearing deposits     555,986       4,468       0.80 %     526,688       2,944       0.56 %     447,563       2,163       0.48 %
Borrowings     30,987       745       2.40 %     51,610       782       1.52 %     36,672       622       1.70 %
Total interest-bearing liabilities     586,973       5,213       0.89 %     578,298       3,726       0.64 %     484,235       2,785       0.58 %
Noninterest-bearing liabilities:                                                                        
Noninterest-bearing deposits     189,369                       166,055                       156,379                  
Other noninterest-bearing liabilities     10,759                       8,332                       7,813                  
Total liabilities     787,101                       752,685                       648,427                  
Total equity     120,337                       115,641                       106,062                  
Total liabilities and equity   $ 907,438                     $ 868,326                     $ 754,489                  
                                                                         
Net interest income           $ 37,127                     $ 32,056                     $ 26,109          
Interest rate spread (1)                     4.05 %                     3.71 %                     3.46 %
Net interest-earning assets (2)   $ 270,054                     $ 243,452                     $ 230,409                  
Net interest margin (3)                     4.33 %                     3.90 %                     3.65 %
Average interest-earning assets to interest-bearing liabilities     146.01 %                     142.10 %                     147.58 %                

 

 

(1)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.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)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
March 31, 2019 vs. 2018
   

Year Ended December 31,

2018 vs. 2017

   

Year Ended December 31,

2017 vs. 2016

 
   

Increase (Decrease)

Due to

    Total
Increase
   

Increase (Decrease)

Due to

    Total
Increase
   

Increase (Decrease)

Due to

    Total
Increase
 
    Rate     Volume     (Decrease)     Rate     Volume     (Decrease)     Rate     Volume     (Decrease)  
    (In thousands)  
Interest-earning assets:                                                                        
Loans   $ 1,161     $ 1,262     $ 2,423     $ 3,683     $ 4,165     $ 7,848     $ 1,653     $ 5,308     $ 6,961  
Short-term investments     8       (24 )     (16 )     88       125       213       66       1       67  
Investment securities     29       (64 )     (35 )     79       (1,568 )     (1,489 )     76       (249 )     (173 )
Federal Home Loan Bank stock     (16 )     20       4       33       (47 )     (14 )     23       10       33  
Total interest-earning assets     1,182       1,194       2,376       3,883       2,675       6,558       1,817       5,071       6,888  
Interest-bearing liabilities:                                                                        
Savings accounts     38       (0 )     38       72        —       72       9       10       19  
Money market accounts     285       13       298       1,040       309       1,349       314       227       541  
NOW accounts     (45 )     7       (38 )     (72 )     14       (58 )     (14 )     13       (1 )
Certificates of deposit     215       4       219       434       (273 )     161       120       102       222  
Total interest-bearing deposits     493       24       517       1,474       50       1,524       429       352       781  
Borrowings     48       372       420       350       (387 )     (37 )     (72 )     232       160  
Total interest-bearing liabilities     541       396       937       1,824       (337 )     1,487       357       584       941  
Change in net interest and dividend income   $ 641     $ 798     $ 1,439     $ 2,059     $ 3,012     $ 5,071     $ 1,460     $ 4,487     $ 5,947  

  

Results of Operations for the Three Months Ended March 31, 2019 and 2018

 

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

 

Interest and Dividend Income. Interest and dividend income increased $2.4 million, or 24.4%, to $12.1 million for the three months ended March 31, 2019 from $9.8 million for the three months ended March 31, 2018. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.4 million, or 26.1%, to $11.7 million for the three months ended March 31, 2019 from $9.3 million for the three months ended March 31, 2018. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities and a decrease in interest on short-term investments. Interest and dividends on securities decreased $31,000, or 7.1%, to $404,000 for the three months ended March 31, 2019 from $435,000 for the three months ended March 31, 2018, and interest on short-term investments decreased $16,000, or 38.1%, to $26,000 for the three months ended March 31, 2019, from $42,000 for the three months ended March 31, 2018.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $98.3 million, or 12.8%, to $865.2 million for the three months ended March 31, 2019, from $767.0 million for the three months ended March 31, 2018. In addition, interest income increased due to the yield on loans increasing 57 basis

 

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points to 5.41% for the three months ended March 31, 2019 due to our continued focus on higher-yielding commercial lending.

 

Interest Expense. Interest expense increased $937,000, or 90.6%, to $2.0 million for the three months ended March 31, 2019 from $1.0 million for the three months ended March 31, 2018, caused by an increase in interest expense on deposits and borrowings. Interest expense on deposits increased $517,000, or 56.2%, to $1.4 million for the three months ended March 31, 2019 from $920,000 for the three months ended March 31, 2018, due primarily to an increase in the average rate paid on interest-bearing deposits of 35 basis points to 1.01% for the three months ended March 31, 2019 from 0.66% for the three months ended March 31, 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 $13.3 million, or 2.4%, to $569.6 million for the three months ended March 31, 2019 from $556.3 million for the three months ended March 31, 2018. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $7.1 million, or 3.2%.

 

Interest expense on borrowings increased $420,000, or 368.4%, to $534,000 for the three months ended March 31, 2019 from $114,000 for the three months ended March 31, 2018. The interest expense on borrowings increased due to the increase in average outstanding balance of $57.7 million, or 252.8% to $80.5 million for the three months ended March 31, 2019, as we borrowed funds to support loan growth.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.4 million, or 16.5%, to $10.2 million for the three months ended March 31, 2019 from $8.7 million for the three months ended March 31, 2018. The increase was due to both higher balances of interest-earning assets and expanding margins. Our net interest rate spread increased nine basis points to 4.04% for the three months ended March 31, 2019 from 3.95% for the three months ended March 31, 2018. Our net interest margin increased 23 basis points to 4.40% for the three months ended March 31, 2019 from 4.17% for the three months ended March 31, 2018.

 

Provision for Loan Losses. The provision for loan losses was $1.5 million for the three months ended March 31, 2019 compared to $656,000 for the three months ended March 31, 2018. The provision recorded resulted in an allowance for loan losses of $11.9 million, or 1.36% of total loans, at March 31, 2019, compared to $11.7 million, or 1.38% of total loans, at December 31, 2018 and $10.2 million, or 1.33% of total loans, at March 31, 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. Non-accrual loans as of March 31, 2019 were primarily comprised of four commercial and industrial relationships with a total carrying value of $6.7 million. Impairment was evaluated and specific reserves of $886,000 were allocated to impaired loans as of March 31, 2019. Our net charge-offs as a percent of average loans increased to 0.59% at March 31, 2019 as compared to 0.09% as of March 31, 2018. The primary reason for the increase in net charge-offs resulted from our charging-off a BancAlliance loan, totaling $917,000, in the first quarter of 2019.

 

As of March 31, 2019, we had ten BancAlliance relationships remaining totaling $13.9 million. Out of the ten relationships, five totaling $6.8 million are pass rated, two totaling $3.4 million are on watch and three totaling $3.7 million are substandard. During the three months ended March 31, 2019, two relationships totaling $3.2 million were put on non-accrual and deemed impaired. We have allocated specific reserves totaling $345,000 to those impaired loans. 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 increased $33,000, or 3.3%, and was $1.0 million for each of the three months ended March 31, 2019 and 2018. The increase was primarily caused by an increase in the gain on sales of securities, partially offset by decreases in customer service fees on deposit accounts and in other service charges and fees. Gain on sales of securities was $113,000 for the three months ended March 31, 2019 compared to zero for the three months ended March 31, 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. Customer service fees on deposit accounts decreased $33,000, or 9.1%, to $329,000 for the three months ended

 

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March 31, 2019 from $362,000 for the three months ended March 31, 2018 and other service charges and fees decreased $43,000, or 9.5%, to $412,000 for the three months ended March 31, 2019 from $455,000 for the three months ended March 31, 2018.

 

Noninterest Expense. Noninterest expense increased $370,000, or 5.8%, to $6.7 million for the three months ended March 31, 2019 from $6.4 million for the three months ended March 31, 2018. The largest increases were related to salaries and employee benefits expense, professional fees, and occupancy expense, partially offset by a decrease in other expense. The increase in salary and employee benefits of $130,000, or 3.1%, to $4.3 million for the three months ended March 31, 2019 from $4.2 million for the three months ended March 31, 2018 was primarily related to a higher number of sales and operations positions compared to the same period in 2018. The increase in professional fees of $174,000, or 70.2%, to $422,000 for the three months ended March 31, 2019 from $248,000 for the three months ended March 31, 2018 was primarily related to increased legal expenses related to certain subordinated lienholders that are disputing the priority of our liens and our right to retain proceeds from a foreclosure sale, discussed in Note 14 to the unaudited consolidated financial statements beginning on page F-1. The increase in occupancy expense of $194,000, or 43.1%, to $644,000 for the three months ended March 31, 2019 from $450,000 for the three months ended March 31, 2018 was primarily related to the acceleration of our leasehold improvements amortization related to the closure of our Hampton, New Hampshire branch in May 2019. The decrease in other expense of $131,000, or 13.5%, to $841,000 for the three months ended March 31, 2019 from $972,000 for the three months ended March 31, 2018 was primarily due to Federal Deposit Insurance Corporation assessment credits received and decreased loan workout expenses.

 

Income Tax Provision. We recorded a provision for income taxes of $778,000 for the three months ended March 31, 2019, reflecting an effective tax rate of 26.0%, compared to a provision of $678,000 for the three months ended March 31, 2018, reflecting an effective tax rate of 25.1%.

 

 Results of Operations for the Years Ended December 31, 2018 and 2017

 

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

 

Interest and Dividend Income. Interest and dividend income increased $6.6 million, or 18.3%, to $42.3 million for the year ended December 31, 2018 from $35.8 million for the year ended December 31, 2017. This was caused by an increase in interest and fees on loans, which increased $7.8 million, or 24.1%, offset by a decrease in interest and dividends on securities of $1.5 million, or 47.4%.

 

The increase in interest income on loans was due to an increase in average balance of $84.7 million, or 12.1%, to $783.6 million for the year ended December 31, 2018 from $698.9 million for the year ended December 31, 2017, and an increase in yield on loans of 50 basis points, to 5.15% for the year ended December 31, 2018 from 4.65% for the year ended December 31, 2017, due to our continued shift to higher-yielding commercial loans and the higher market interest rate environment.

 

Interest income on investment securities decreased $1.5 million, or 47.4%, to $1.7 million for the year ended December 31, 2018 from $3.2 million for the year ended December 31, 2017. The decrease was primarily due to divesting of all equity securities during the fourth quarter in 2017 and selling a portion of our municipal holdings. The average balances of securities decreased $57.0 million, or 49.7%, to $57.6 million as of December 31, 2018, but our yield increased 13 basis points to 2.90%.

 

Interest Expense. Interest expense increased $1.5 million, or 39.9%, to $5.2 million for the year ended December 31, 2018 from $3.7 million for the year ended December 31, 2017, primarily due to an increase in interest expense on deposits. Interest expense on deposits increased $1.5 million, or 51.8%, to $4.5 million for the year ended December 31, 2018 from $2.9 million for the year ended December 31, 2017, due to our cost of funds on

 

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interest-bearing deposits increasing 24 basis points to 0.80% for the year ended December 31, 2018 from 0.56% for the year ended December 31, 2017 and an increase in average balances. The increase in the cost of funds was primarily due to an increase in the average rate paid on money market accounts, which increased 48 basis points to 0.98%, and certificates of deposit, which increased 42 basis points to 1.42%. During the fourth quarter in 2017, we started offering a tiered rate money market product, which resulted in higher balances and higher rates offered. As of December 31, 2018, this product represented $115.5 million, or 50.4% of our total money market accounts.

 

Interest expense on borrowings, which consists of advances from the Federal Home Loan Bank of Boston and borrowings from the Federal Reserve Bank borrower-in-custody program, decreased $37,000, or 4.7%, to $745,000 for the year ended December 31, 2018 from $782,000 for the year ended December 31, 2017. The average balance of borrowings decreased $20.6 million, or 40.0%, to $31.0 million for the year ended December 31, 2018 from $51.6 million for the year ended December 31, 2017. Our cost of borrowings increased 88 basis points to 2.40% for the year ended December 31, 2018 compared to 1.52% for the year ended December 31, 2017 due to the raising rate environment.

 

Net Interest and Dividend Income. Net interest and dividend income increased $5.1 million, or 15.8%, to $37.1 million for the year ended December 31, 2018 from $32.1 million for the year ended December 31, 2017. Our net interest rate spread increased 34 basis points to 4.05% for the year ended December 31, 2018 from 3.71% for the year ended December 31, 2017, while our net interest margin increased 43 basis points to 4.33% for the year ended December 31, 2018 from 3.90% for the year ended December 31, 2017. The average yield we earned on interest-earning assets increased 59 basis points to 4.94% for the year ended December 31, 2018 from 4.35% for the year ended December 31, 2017. The increase in the yield on interest-earning assets increased more than the average rate we paid on interest-bearing liabilities, which increased 25 basis points to 0.89% for the year ended December 31, 2018 from 0.64% for the year ended December 31, 2017.

 

Provision for Loan Losses. Our provision for loan losses was $3.3 million for the year ended December 31, 2018 compared to $2.9 million for the year ended December 31, 2017. The provision recorded resulted in an allowance for loan losses of $11.7 million, or 1.38% of total loans and 186.6% of non-performing loans at December 31, 2018, compared to $9.8 million, or 1.30% of total loans and 108.2% of non-performing loans at December 31, 2017. Our provision was higher in 2018 due to an increase in the valuation allowance for impaired loans and continued growth in the total loan portfolio. The non-performing loans at December 31, 2018 consist primarily of three commercial and industrial loan relationships. The relationships were evaluated for impairment and specific reserves of $1.1 million were allocated. The increase in the allowance for loan losses was based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, levels of problem loans and other asset quality trends. We apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases. For further information related to changes in the provision and allowance for loan losses, refer to “—Asset Quality—Allowance for Loan Losses.”

 

Noninterest Income. Noninterest income information is as follows.

 

   

Years Ended

December 31,

    Change  
    2018     2017     Amount     Percent  
    (Dollars in thousands)  
       
Customer service fees on deposit accounts   $ 1,435     $ 1,392     $ 43       3.1 %
Service charges and fees-other     1,993       1,919       74       3.9 %
Gain on sales, calls and donated securities, net           5,912       (5,912 )     (100.0 )%
Bank owned life insurance income     686       645       41       6.4 %
Other income     64       87       (23 )     (26.4 )%
Total noninterest income   $ 4,178     $ 9,955     $ (5,777 )     (58.0 )%

 

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Gains on sales, calls and donated securities, net, decreased $5.9 million, or 100.0%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Effective January 2018, we adopted ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” This standard required us to measure our equity investments at fair value with changes in fair value recognized in net income. We evaluated the pronouncement and decided to divest from our equity securities portfolio in 2017 to reduce potential earnings volatility. Customer service fees on deposit accounts increased $43,000, or 3.1%, primarily due to increased volume in transactional deposit accounts. Service charges and fees increased $74,000, or 3.9%, primarily due to increased loan fees. Bank owned life insurance income increased $41,000, or 6.4%, as $5.5 million in additional bank owned life insurance was purchased during the second half of 2017. Other income decreased $23,000, or 26.4%, primarily due to rebates received due to debit card transaction volume in 2017.

 

Noninterest Expense. Noninterest expense information is as follows.

 

   

Years Ended

December 31,

    Change  
    2018     2017     Amount     Percent  
    (Dollars in thousands)  
       
Salaries and employee benefits   $ 16,801     $ 15,365     $ 1,436       9.3 %
Occupancy expense     1,733       1,839       (106 )     (5.8 )%
Equipment expense     471       587       (116 )     (19.8 )%
FDIC assessment     301       309       (8 )     (2.6 )%
Data processing     810       741       69       9.3 %
Marketing expense     245       300       (55 )     (18.3 )%
Professional fees     1,223       936       287       30.7 %
Directors’ fees     620       607       13       2.1 %
Other     3,210       3,065       145       4.7 %
Total noninterest expense   $ 25,414     $ 23,749     $ 1,665       7.0 %

 

Salaries and employee benefits expense increased $1.4 million, or 9.3%, for the year ended December 31, 2018 from the year ended December 31, 2017 due to a higher number of lenders and key management positions in operations. Professional fees increased $287,000, or 30.7%, due to increased legal expenses related to certain subordinated lienholders that are disputing the priority of our liens and our right to retain proceeds from a foreclosure sale. Other noninterest expense increased $145,000, or 4.7%, for the year ended December 31, 2018 from the year ended December 31, 2017 due to costs incurred working out nonperforming loans and an increase in software expense. Occupancy expense decreased $106,000, or 5.8%, for the year ended December 31, 2018 from the year ended December 31, 2017 due to decreased repairs and maintenance costs and the greater need for snow removal in 2017. Equipment expense decreased $116,000, or 19.8%, for the year ended December 31, 2018 from the year ended December 31, 2017 primarily due to a decrease in maintenance contract expense.

 

Income Tax Provision. We recorded a provision for income taxes of $3.2 million for the year ended December 31, 2018, reflecting an effective tax rate of 25.8%, compared to $7.4 million, or an effective tax rate of 48.4%, for the year ended December 31, 2017. In December 2017, the U.S. government approved a reduction in the federal statutory income tax rate from a maximum rate of 35% to 21%, effective in 2018. This resulted in a decrease in our net deferred tax asset by $2.0 million, which is reflected in our tax provision for the year ended December 31, 2017.

 

Management of Market Risk

 

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly,

 

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we have established a management-level Asset/Liability Management Committee, which takes initial responsibility for developing an asset/liability management process and related procedures, establishing and monitoring reporting systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee reviews asset/liability management with the Investment Asset/Liability Committee that has been established by the board of directors. This committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that have been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis as to asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management rests with our board of directors.

 

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates; promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary. In addition, we no longer originate single-family residential real estate loans, which often have longer terms and fixed rates. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.

 

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

 

The following table presents the estimated changes in net interest income of The Provident Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginning March 31, 2019, December 31, 2018 and 2017.

 

                  At December 31,  
      At March 31, 2019     2018     2017  
Changes in
Interest Rates
(Basis Points)
    Estimated Net
Interest
Income Over
Next 12
Months
    Change     Estimated Net
Interest
Income Over
Next 12
Months
    Change     Estimated 12-
Months Net
Interest
Income
    Change  
(Dollars in thousands)  
                                       
  200     $ 42,590       (1.67 )%   $ 42,086       (1.50 )%   $ 37,384       1.04 %
        43,313             42,726             37,001        
  (100 )     N/A         N/A       N/A       N/A       35,752       (3.37 )%
  (200 )     43,124       (0.44 )%     42,160       (1.32 )%     N/A       N/A  

 

Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 basis points from current market rates.

 

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The following table presents the estimated changes in EVE of The Provident Bank, calculated on a bank-only basis, that would result from changes in market interest rates as of March 31, 2019, December 31, 2018 and 2017.

 

            At December 31,  
      At March 31, 2019     2018     2017  
Changes in
Interest Rates
(Basis Points)
    Economic
Value
of Equity
    Change     Economic
Value
of Equity
    Change     Economic
Value
of Equity
    Change  
      (Dollars in thousands)  
                                       
  400     $ 146,464       (1.70 )%   $ 147,448       (3.70 )%   $ 133,578       3.40 %
  300       148,764       (0.20 )%     150,100       (1.90 )%     133,308       3.20 %
  200       150,608       1.10 %     152,408       (0.40 )%     132,555       2.60 %
  100       151,172       1.50 %     153,932       0.60 %     131,933       2.20 %
        148,999             153,061             129,138        
  (100 )     141,668       (4.90 )%     147,489       (3.60 )%     115,278       (10.70 )%
  (200 )     125,974       (15.50 )%     134,586       (12.10 )%     N/A       N/A  

  

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

 

Liquidity and Capital Resources

 

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

 

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

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2019, cash and cash equivalents totaled $23.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $49.7 million at March 31, 2019.

 

At March 31, 2019, we had the ability to borrow a total of $203.7 million from the Federal Home Loan Bank of Boston. On that date, we had $79.9 million in advances outstanding. At March 31, 2019, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $177.3 million.

 

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

 

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At March 31, 2019, December 31, 2018 and 2017, we had $23.8 million, $42.6 million and $18.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at March 31, 2019, December 31, 2018 and 2017, we had $187.8, $196.1 million and $166.3 million in unadvanced funds to borrowers, respectively. We also had $1.5, $1.5 million and $2.0 million in outstanding letters of credit at March 31, 2019, December 31, 2018 and 2017, respectively.

 

Certificates of deposit due within one year of March 31, 2019 totaled $77.6 million, or 10.0% of total certificates of deposit. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at March 31, 2019. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, we had $56.0 million, $298.4 million and $267.8 million of loan originations, respectively. The loan originations included $56.0 million, $286.6 million and $264.6 million of loans to be held in our portfolio for the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, respectively. During the three months ended March 31, 2019 we purchased $13.7 million and sold $13.5 million in securities. During the year ended December 31, 2018, we did not purchase or sell any securities. During the year ended December 31, 2017, we purchased $13.1 million of securities and received proceeds from the sales of securities totaling $51.3 million.

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $7.2 million, $18.0 million and $122.1 for the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Borrowings increased $11.9 million and $41.2 million and decreased $23.0 million during the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, respectively.

 

The Provident Bank is subject to various regulatory capital requirements administered by Massachusetts Commissioner of Banks, and the Federal Deposit Insurance Corporation. At March 31, 2019, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See “Historical and Pro Forma Regulatory Capital Compliance.”

 

The net proceeds from the stock offering will significantly increase our liquidity and capital resources.  Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans.  Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, which will increase our net interest-earning assets and net interest income.  However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity will be adversely affected following the stock offering.  See “Risk Factors—Risks Related to the Offering—Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.”

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities, agreements with respect to investments and employment agreements with certain of our executive officers.

 

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Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

 

For further information, see the consolidated financial statements beginning on page F-1.

 

Recent Accounting Pronouncements

 

For information with respect to recent accounting pronouncements that are applicable to Old Provident, see the consolidated financial statements beginning on page F-1.

 

Effect of Inflation and Changing Prices

 

The consolidated financial statements and related financial data included in this prospectus have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

BUSINESS OF NEW PROVIDENT AND OLD PROVIDENT

 

New Provident

 

New Provident is a Maryland corporation that was organized in June 2019. Upon completion of the conversion, New Provident will become the holding company of The Provident Bank and will succeed to all of the business and operations of Old Provident and each of Old Provident and Provident Bancorp will cease to exist.

 

Initially following the completion of the conversion, New Provident will have a total of $5.6 million in cash and securities held by Old Provident and Provident Bancorp as of March 31, 2019, and the net proceeds it retains from the offering, part of which will be used to fund a loan to the Employee Stock Ownership Plan. New Provident will have no significant liabilities. New Provident intends to use the support staff and offices of The Provident Bank and will pay The Provident Bank for these services. If New Provident expands or changes its business in the future, it may hire its own employees.

 

New Provident intends to invest the net proceeds of the offering as discussed under “How We Intend to Use the Proceeds From the Offering.” In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.

 

Old Provident

 

Old Provident is a Massachusetts corporation that owns all of the outstanding shares of common stock 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.

 

The Provident Bank became the wholly-owned subsidiary of Old Provident in 2011, when The Provident Bank reorganized into the two-tier mutual holding company structure. In 2015, Old Provident sold 4,274,425 shares

 

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of its common stock to the public, representing 45.0% of its then-outstanding shares, at $10.00 per share. An additional 5,034,323 shares, or 53.0% of the outstanding shares, were issued to Provident Bancorp, and 189,974 shares, or 2.0% of the outstanding shares were issued to The Provident Community Charitable Organization, Inc.

 

BUSINESS OF THE PROVIDENT BANK

 

The Provident Bank has served the banking needs of its customers since 1828. The Provident Bank is 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.

 

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 use those funds to originate primarily commercial real estate and commercial business loans, and to invest in securities.

 

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 prospectus.

 

Market Area

 

Our primary lending area for commercial real estate loans and a large portion of our commercial business loans encompasses a broad market that includes Northeastern Massachusetts and Southern New Hampshire, with a focus on Essex County, Massachusetts, and Hillsborough and Rockingham Counties, New Hampshire, which are part of, and bedroom communities to, the technology corridor between Boston, Massachusetts and Concord, New Hampshire. In 2018, we started offering our enterprise value loan product nationally, and we offer our renewable energy loans primarily in New England and New York. Our primary deposit-gathering area is currently concentrated in Essex County, Massachusetts, and Rockingham County and Hillsborough County, New Hampshire, although we also receive deposits from our business customers who are located nationwide.

 

The greater Boston metropolitan area is the 10th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale and retail trade, to finance, technology and medical care. The largest employment sectors are, however, education, healthcare and social services, accounting for 28.0% of jobs in Massachusetts as of December 31, 2018. Based on data from the U.S. Department of Labor, the unemployment rate for Massachusetts was 3.2% in February 2019 compared to 4.0% in February 2018, and 4.1% for the United States as a whole for February 2019.  The population in Massachusetts grew 3.2% from 2014 to 2019, while the national population and the population in Essex County, Massachusetts

 

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grew 3.8% and 3.9%, respectively, over the same time period. Median household income in Massachusetts was $82,084 for 2019, compared to $63,174 and $80,645 for the nation and Essex County, respectively. 

 

New Hampshire also provides a highly diversified economic base, with major employment sectors ranging from services and manufacturing to finance/insurance/real estate, but the largest employment sector is education, healthcare and social services at 24.5%. Based on data from the U.S. Department of Labor, the unemployment rate for New Hampshire was 2.9% in February 2019 compared to 3.2% in February 2018. The population in New Hampshire grew 2.0% from 2014 to 2019, while the population in Hillsborough and Rockingham Counties, New Hampshire grew 2.1% and 3.3%, respectively, over the same time period. Median household income in New Hampshire was $77,568 for 2019, compared to $82,724 and $91,891 for Hillsborough and Rockingham Counties, respectively.

 

Competition

 

We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area. Several large holding companies operate banks in our market area. Many of these institutions, such as TD Bank, Bank of America and Citizens Bank, are significantly larger than us and, therefore, have greater resources. Additionally, some of our competitors offer products and services that we do not offer, such as insurance services, trust services, and wealth management. We also face competition for investors’ funds from other financial service companies such as fintech companies, brokerage firms, money market funds, mutual funds and other corporate and government securities. Based on data from the Federal Deposit Insurance Corporation as of June 30, 2018 (the latest date for which information is available), The Provident Bank had 1.76% of the deposit market share within Essex County, Massachusetts, giving us the 14th largest market share out of 35 financial institutions with offices in that county as of that date and had 3.45% of the deposit market share within Rockingham County, New Hampshire, giving us the 8th largest market share out of 26 financial institutions with offices in that county as of that date. This data excludes deposits held by credit unions.

 

Our competition for loans comes primarily from financial institutions in our market area, although we face competition nationwide for our commercial lending activities. Our experience in recent years is that many financial institutions in our market area, especially community banks that are seeking to significantly expand their commercial loan portfolios and banks located in lower growth regions in New Hampshire and Maine, have been willing to price commercial loans aggressively in order to gain market share.

 

Lending Activities

 

Commercial Business Loans. We make commercial business loans primarily in our market area to a variety of small and medium sized businesses, including professional and nonprofit organizations, and, to a lesser extent, sole proprietorships. We also originate our enterprise value loans nationwide, and we originate our renewable energy loans primarily in New England and New York. Our commercial business loans are generally secured by business assets, and we may support this collateral with junior liens on real property. At March 31, 2019, commercial business loans were $382.6 million, or 43.8% of our total loan portfolio, and we intend to increase the amount of commercial business loans that we originate. As part of our relationship driven focus, we encourage our commercial business borrowers to maintain their primary deposit accounts with us, which enhances our interest rate spread and overall profitability.

 

Commercial lending products include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either variable or fixed rates of interest. Variable rates and rates on Small Business Administration (“SBA”) loans are based on the prime rate as published in The Wall Street Journal, plus a margin. Initial rates on non-SBA fixed-rate business loans are generally based on a corresponding Federal Home Loan Bank rate, plus a margin. Commercial business loans typically have shorter maturity terms and higher interest rates than commercial real estate loans, but may involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on originating such loans to experienced, growing small- to medium-sized, privately-held companies with local or regional businesses and non-profit entities that operate in our market area.

 

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When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and equipment. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 80% of the value of the collateral securing the loan. All of these loans are secured by assets of the respective borrowers.

 

In 2015, we started originating enterprise value loans, which we also refer to as merger and acquisition, re-capitalization, and shareholder/partner buyout loans. We began originating these loans nationwide in 2018, and as of March 31, 2019 we had a total of $147.5 million in enterprise value loans, with relationships in 18 states. We originate these loans to small- and medium-size businesses in a senior secured position; relying largely on the enterprise value of the business and ongoing cash flow to support operational and debt service requirements.  These are fully amortizing term loans (up to seven years) with material levels of equity and/or combination of seller financing behind our senior secured lending. In underwriting these loans, we generally require minimum fixed charge coverage ratios of 1.20x to 1.50x. The maximum senior loan-to-enterprise value must be 65% or lower, although 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. The largest loan was $15.0 million and is secured by all business assets. At March 31, 2019, the loan was performing in accordance with its original repayment terms.

 

The following table provides information with respect to our enterprise value loans by type at March 31, 2019.

 

Type of Industry   Balance  
    (In thousands)  
Consulting services   $ 36,900  
Information technology and software     37,059  
Manufacturing     19,543  
Landscaping     12,772  
Repair services     5,991  
Real estate     8,228  
Other     26,998  
Total   $ 147,491  

 

In 2015, we started originating loans to developers of commercial-scale renewable energy facilities, primarily in New England and New York, and at March 31, 2019, we had a total of $54.0 million in renewable energy loans. Our renewable energy loans primarily include loans secured by solar arrays and wind turbines. The average term and amortization for these loans can extend to 15 years or more, given the asset life, and are generally underwritten to a maximum term of two years less than the associated power purchase agreement (“PPA”) supporting the repayment of each loan. The term of the loan is also shorter than the life expectancy of the related equipment. Generally, the underwriting criteria includes: a report supporting the power generation capacity and ultimately the ability to generate sufficient cash flows, assignment of the associated PPA, analysis on the quality of the power off-taker, an overall business valuation, and appropriate loan covenants, which may include maximum loan-to-value and minimum debt service coverage requirements. At March 31, 2019, $39.1 million, or 72.5%, of our renewable energy loans was secured by solar arrays, and $14.9 million, or 27.5%, was secured by wind turbines. The largest loan was $7.9 million and is secured by all business assets of the company, including the solar array and an assignment of the PPA. At March 31, 2019, the loan was performing in accordance with its original repayment terms. At March 31, 2019, the weighted average age of our renewable energy loans was 13 months.

 

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 foreign 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

 

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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. Our financing to foreign companies generally is medium term (five to seven years), with a 100% payment, performance and political risk guarantee from the U.S. Export Import Bank; we believe the risk associated with these loans is similar to the risk associated with a U.S. Treasury note. Our foreign capital lines of credit are supported by a 90% guarantee from either the U.S. Export Import Bank or the SBA.

 

A portion of our commercial business loans are guaranteed by the SBA through the SBA 7(a) loan program. The SBA 7(a) loan program supports, through a U.S. Government guarantee, some portion of the traditional commercial loan underwriting that might not be fully covered absent the guarantee. A typical example would be a business acquiring another business, where the value purchased is an enterprise value (as opposed to tangible assets), which results in a collateral shortfall under traditional loan underwriting requirements. In addition, SBA 7(a) loans, through term loans, can provide a good source of permanent working capital for growing companies. The Provident Bank is a Preferred Lender under the SBA’s PLP Program, which allows expedited underwriting and approval of SBA 7(a) loans.

 

We joined the BancAlliance network in May 2011. 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. As of March 31, 2019, we had $13.9 million of outstanding commercial business loans that were originated through this network. All of these loans are participations in larger facilities agented by capital finance companies. We fully underwrite these loans in accordance with our policies prior to approval. At March 31, 2019, loans totaling $3.2 million were on non-accrual status. The remaining loans totaling $10.7 million were performing in accordance with their original repayment terms. Our last BancAlliance loan origination was in February 2017, and at this time we are not anticipating originating any new loans through this network.

 

Our largest commercial business loan at March 31, 2019 totaled $15.0 million, was originated in 2018 and is an enterprise value loan. Our next largest commercial business loan totaled $9.1 million, was originated in 2018 and is an enterprise value loan. The third largest commercial totaled $8.4 million, was originated in 2019 and is a term loan. As of March 31, 2019, the loans were performing in accordance with the original repayment terms.

 

Commercial Real Estate Loans. At March 31, 2019, commercial real estate loans were $373.4 million, or 42.8%, of our total loan portfolio. This amount includes $31.8 million of multi-family residential real estate loans, which we consider a subset of commercial real estate loans, and which are described below. Our commercial real estate loans are generally secured by properties used for business purposes such as office buildings, industrial facilities and retail facilities; however, we also originate loans secured by investment real estate in the form of residential rental units. At March 31, 2019, $163.0 million of our commercial real estate portfolio was secured by owner occupied commercial real estate, and $210.4 million was secured by income producing, or non-owner occupied commercial real estate. We currently target new commercial real estate loan originations to experienced, growing small- and mid-size owners and investors in our market area. The average outstanding loan in our commercial real estate portfolio was $504,000 as of March 31, 2019, although we originate commercial real estate loans with balances significantly larger than this average. At March 31, 2019, our ten largest commercial real estate loans had an average balance of $5.8 million.

 

We focus our commercial real estate lending on properties within our primary market areas, but we will originate commercial real estate loans on properties located outside this area based on an established relationship with a strong borrower. We intend to continue to grow our commercial real estate loan portfolio while maintaining prudent underwriting standards. In addition to originating these loans, we occasionally will participate in commercial real estate loans with other financial institutions. Such participations are underwritten in accordance with our policies before we will participate in such loans.

 

We originate a variety of fixed- and adjustable-rate commercial real estate loans with terms and amortization periods generally up to 20 years, which may include balloon loans. Interest rates and payments on our

 

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adjustable-rate loans adjust every three, five or seven years and generally are indexed to the corresponding Federal Home Loan Bank borrowing rate plus a margin. Most of our adjustable-rate commercial real estate loans adjust every five years and amortize over terms of 20 years. We generally include pre-payment penalties on commercial real estate loans we originate. Commercial real estate loan amounts do not exceed 75% to 80% of the property’s appraised value at the time the loan is originated. In addition, debt service ratios, by policy, are required to have a minimum net operating income to debt service coverage ratio ranging from of 1.10x to 1.25x based on loan type and the defined and approved term/amortization. For commercial real estate loans in excess of $500,000, we require independent appraisals from an approved appraisers list. For such loans below $500,000, we require real estate evaluations but do not require an independent appraisal. We require commercial real estate loan borrowers with loan relationships in excess of $1.0 million to submit annual financial statements and/or rent rolls on the subject property, although we may request such information for smaller loans on a case-by-case basis. Loans below the $1.0 million threshold are reviewed annually using business and consumer credit reports, payment history, and confirmation of real estate tax payments. Commercial real estate properties may also be subject to annual inspections to support that appropriate maintenance is being performed by the owner/borrower. The loan and its borrowers and/or guarantors are subject to an annual risk certification verifying that the loan is properly risk rated based upon covenant compliance (as applicable) and other terms as provided for in the loan agreements. While this process does not prevent loans from becoming delinquent, it provides us with the opportunity to better identify problem loans in a timely manner and to work with the borrower prior to the loan becoming delinquent.

 

The following table provides information with respect to our commercial real estate loans by type at March 31, 2019. The table excludes multi-family residential real estate loans, discussed below.

 

Type of Loan   Number of Loans     Balance  
          (In thousands)  
Residential one- to four-family non-owner occupied     173     $ 37,513  
Mixed use     70       41,554  
Office     85       46,021  
Retail     62       30,349  
Industrial/manufacturing/warehouse     103       57,360  
Gas stations     30       16,468  
Restaurant/fast food     36       17,261  
Hotel/motel/inn     20       27,861  
Self-storage facility     15       26,199  
Other commercial real estate     74       41,046  
Total     668     $ 341,632  

 

If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with 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. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.

 

Our largest single commercial real estate loan at March 31, 2019 totaled $7.2 million, was originated in November 2014 and is secured by non-owner occupied commercial use property. Our next largest commercial real estate loan at March 31, 2019 was for $6.7 million, was originated in September 2017 and is secured by non-owner occupied commercial use property. The third largest commercial real estate loan was for $6.6 million, was originated in May 2017 and is secured by non-owner occupied commercial use property. All of the collateral securing these loans is located in our primary lending area. At March 31, 2019, all of these loans were performing in accordance with their original repayment terms.

 

Multi-Family Residential Real Estate Loans. At March 31, 2019, multi-family real estate loans were $31.8 million, or 3.6% of our total loan portfolio. We do not focus on the origination of multi-family real estate lending,

 

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but we will originate these loans to well-qualified borrowers when opportunities exist that meet our underwriting standards. We currently originate new individual multi-family real estate loans to experienced, growing small- and mid-size owners and investors in our market area. Our multi-family real estate loans are generally secured by properties consisting of five to 15 rental units. The average outstanding loan size in our multi-family real estate portfolio was $436,000 as of March 31, 2019. We generally do not make multi-family real estate loans outside our primary market areas. In addition to originating these loans, we also participate in multi-family residential real estate loans with other financial institutions. Such participations are underwritten in accordance with our policies before we will participate in such loans.

 

We originate a variety of fixed- and adjustable-rate multi-family real estate loans for terms up to 30 years. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are indexed to the corresponding Federal Home Loan Bank borrowing rate plus a margin. Most of our adjustable-rate multi-family real estate loans adjust every five years and amortize over terms of 20 to 25 years. We also include pre-payment penalties on loans we originate. Multi-family real estate loan amounts do not exceed 80% of the property’s appraised value at the time the loan is originated. Debt service ratios, by policy, are required to have a minimum net operating income to debt service coverage ratio of 1.20x. We require multi-family real estate loan borrowers with loan relationships in excess of $1.0 million to submit annual financial statements and/or rent rolls on the subject property, although we may request such information for smaller loans on a case-by-case basis. Loans below the $1.0 million threshold are reviewed annually using business and consumer credit reports, payment history, and confirmation of real estate tax payments. These properties may also be subject to annual inspections to support that appropriate maintenance is being performed by the owner/borrower.

 

If we foreclose on a multi-family real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with 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. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.

 

Our largest multi-family real estate loan at March 31, 2019 totaled $4.6 million, was originated in September 2016 and is secured by a multi-family property. At March 31, 2019, this loan was performing in accordance with its original repayment terms.

 

Construction and Land Development Loans. At March 31, 2019, construction and land development loans were $42.4 million, or 4.9% of our total loan portfolio, consisting of $22.6 million of one- to four-family residential and condominium construction loans, $732,000 of residential land or development loans, and $19.1 million of commercial and multi-family real estate construction loans. At March 31, 2019, $21.3 million of our commercial and multi-family real estate construction loans are expected to convert to permanent loans upon completion of the construction phase. The majority of the balance of these loans is secured by properties located in our primary lending area.

 

We primarily make construction loans for commercial development projects, including hotels, condominiums and single family residences, small industrial buildings, retail and office buildings and apartment buildings. Most of our construction loans are interest-only loans that provide for the payment of interest during the construction phase, which is usually up to 12 to 24 months, although some construction loans are renewed, generally for one or two additional years. At the end of the construction phase, the loan may convert to a permanent mortgage loan or the loan may be paid in full. Loans generally can be made with a maximum loan-to-value ratio of 80% of the appraised market value upon completion of the project. As appropriate to the underwriting, a discounted cash flow analysis is utilized. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser for construction and land development loans in excess of $500,000. We also will generally require an inspection of the property before disbursement of funds during the term of the construction loan.

 

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We also originate construction and site development loans to contractors and builders to finance the construction of single-family homes and subdivisions. While we may originate these loans whether or not the collateral property underlying the loan is under contract for sale, we consider each project carefully in light of current residential real estate market conditions. We actively monitor the number of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan originations. We generally will limit the maximum number of speculative units (units that are not pre-sold) approved for each builder to two units. We have attempted to diversify the risk associated with speculative construction lending by doing business with experienced small and mid-sized builders within our market area.

 

Residential real estate construction loans include single-family tract construction loans for the construction of entry level residential homes. The maximum loan-to-value limit applicable to these loans is generally 75% to 80% of the appraised market value upon completion of the project. Development plans are required from builders prior to making the loan. Our loan officers are required to personally visit the proposed site of the development and the sites of competing developments. We require that builders maintain adequate insurance coverage. While maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally do not exceed one year, land development loans generally are for 18 to 24 months. Substantially all of our residential construction loans have adjustable rates of interest based on The Wall Street Journal prime rate plus a margin. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant.

 

Our largest construction and land development loan at March 31, 2019 totaled $5.8 million, was originated in 2016 and is secured by non-owner occupied commercial use property. At March 31, 2019, this loan was performing in accordance with its original repayment terms.

 

One- to Four-Family Residential Loans. Our one- to four-family residential loan portfolio consists of mortgage loans that enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. At March 31, 2019, one- to four-family residential real estate loans were $54.9 million, or 6.3% of our total loan portfolio, consisting of $35.0 million of fixed-rate loans and $19.9 million of adjustable-rate loans, respectively. This amount includes $19.6 million of home equity loans and lines of credit, which we consider a subset of one- to four-family residential real estate loans, and which are described below.

 

We discontinued this type of lending in 2014 to focus on commercial loan originations. Accordingly, we expect our portfolio of one- to four-family residential real estate loans to continue to decrease over time due to normal amortization and repayments. Our one- to four-family residential real estate loans generally do not have prepayment penalties.

 

Home Equity Loans and Lines of Credit. At March 31, 2019, the outstanding balance owed on home equity loans was $610,000, or 0.1% of our total loan portfolio, and the outstanding balance owed on home equity lines of credit amounted to $19.0 million, or 2.1% of our total loan portfolio. We discontinued home equity loan originations in 2014 to focus on commercial loan originations, but we continue to offer home equity lines of credit. Home equity lines of credit have adjustable rates of interest with ten-year draws and terms of 15 years that are indexed to the prime rate as published by The Wall Street Journal on the last business day of the month. We offer home equity lines of credit with cumulative loan-to-value ratios generally up to 80%, when taking into account both the balance of the home equity line of credit and first mortgage loan.

 

Consumer Loans. We offer loans secured by certificate accounts and overdraft lines of credit. At March 31, 2019, consumer loans were $19.3 million, or 2.2% of total loans. The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan.

 

In 2016, we entered into an agreement to purchase pools of unsecured consumer loans through the BancAlliance Lending Club Program. This program encompasses loans risk graded by Lending Club as A through C with a 680 minimum credit score, out of a possible risk grade of A through G. The Lending Club retains the servicing of these loans. As of March 31, 2019, we had $18.7 million in outstanding consumer loans that were

 

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purchased through this program, all but $113,000 of which were performing in accordance with the original repayment terms. We expect limited originations of this loan type going forward.

 

Loan Underwriting Risks

 

Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment, the value of which may depreciate over time, may be more difficult to appraise and may be more susceptible to fluctuation in value. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself.

 

Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. In addition, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income producing properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income producing properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial and multi-family real estate loans. In reaching a decision on whether to make a commercial or multi-family real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. An environmental phase one report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

 

Construction and Land Development Loans. Our construction loans are based upon estimates of costs and values associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations. All construction loans for which the builder does not have a binding purchase agreement must be approved by senior loan officers.

 

Construction lending involves additional risks when compared with permanent residential 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 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. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. A

 

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discounted cash flow analysis is utilized for determining the value of any construction project of five or more units. Our ability to continue to originate a significant amount of construction loans is dependent on the strength of the housing market in our market areas.

 

Land loans secured by improved lots generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property the value of which is insufficient to assure full payment.

 

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits on residential loans.

 

Consumer Loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Loan Originations, Purchases and Sales

 

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. Loan originations come from a variety of sources. The primary sources of loan originations are current customers, business development by our relationship managers, walk-in traffic, our website, networking events and referrals from customers as well as our directors, trustees and corporators, business owners, investors, entrepreneurs, builders, realtors, and other professional third parties, including brokers. Loan originations are further supported by lending services offered through cross-selling and employees’ community service.

 

Historically, we generally originated loans for our portfolio. We occasionally sell participation interests in commercial real estate loans and commercial business loans to local financial institutions, primarily on the portion of loans exceeding our borrowing limits. At March 31, 2019, we were servicing $20.2 million of commercial real estate and commercial business loans where we had sold an interest to local financial institutions. For the three months ended March 31, 2019, we did not sell any loan participations, and for the years ended December 31, 2018 and 2017, we sold loan participations of $11.8 million and $3.0 million, respectively.

 

While we generally do not purchase whole loans, we will occasionally purchase loan participations from other financial institutions or through the BancAlliance program. We will also purchase pools of unsecured consumer loans through the BancAlliance Lending Club Program, described above. As of March 31, 2019, we had $13.9 million of outstanding commercial business loans and $18.7 million of outstanding unsecured consumer loans that were originated through the BancAlliance program and BancAlliance Lending Club program, respectively. During the three months ended March 31, 2019 and the year ended December 31, 2018, we did not purchase any loan participations, and during the year ended December 31, 2017, we purchased $4.2 million of loan participations. We discontinued originating commercial business loans through the BancAlliance program in February 2017, and we expect limited originations through the BancAlliance Lending Club program going forward.

 

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Loan Approval Procedures and Authority

 

Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by The Provident Bank’s board of directors and management. The Provident Bank’s board of directors has granted loan approval authority to certain officers up to prescribed limits, depending on the officer’s experience, the type of loan and whether the loan is secured or unsecured. All loans require the approval of a minimum of two lending officers, one of which must be a Senior Vice President or above (the exception is borrowing relationships of $25,000 and below, which can be approved by one officer with sufficient authority for that loan type, as well as, loans of any amount which are 100% cash secured). For loan relationships below $2.0 million, approval is required by designated individuals with delegated loan authority as identified within Loan Policy. Our loan policy dictates that for loan relationships of between $2.0 million and $3.0 million approval is required by two of the following members of Credit Committee: Chief Executive Officer, Chief Financial Officer and/or President/Chief Lending Officer. While our loan policy dictates that loan relationships greater than $3.0 million be presented to and approved by Credit Committee; our practice has been to present loan relationships greater than $2.0 million to Credit Committee for review and formal approval. Loans that involve exceptions to policy, including loans in excess of our internal loans-to-one borrower limitation, must be authorized by The Provident Bank’s Risk Committee of the board of directors. Exceptions are fully disclosed to the approving authority, either an individual officer or the appropriate management or board committee prior to commitment. Exceptions are reported to the board of directors quarterly.

 

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.

 

Loans-to-One Borrower Limit and Loan Category Concentration

 

The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20% of our capital, which is defined under Massachusetts law as the sum of our capital stock, surplus account and undivided profits. At March 31, 2019, our regulatory limit on loans-to-one borrower was $26.4 million. We generally establish our internal loans-to-one borrower limit as 90% of our regulatory limit. As of March 31, 2019, this amount was $23.7 million, with loans greater than this amount requiring approval by The Provident Bank’s Risk Committee of the board of directors. Our regulatory and internal loans-to-one borrower limits would increase as a result of the capital raised in the offering.

 

At March 31, 2019, our largest lending relationship consisted of a total of nine commercial real estate loans, commercial business loans, and construction and land development loans with a total exposure of $21.1 million, secured by non-owner occupied investment real estate. This relationship was performing in accordance with its original repayment terms at March 31, 2019. Our second largest lending relationship consisted of 16 commercial business loans with a total exposure of $20.8 million, secured by business assets. This relationship was performing in accordance with its original repayment terms at March 31, 2019. Our third largest lending relationship consisted of eight commercial business loans with a total exposure of $20.4 million, secured by all business assets. This relationship was performing in accordance with its original repayment terms at March 31, 2019. Our fourth largest lending relationship consisted of 22 commercial business loans with a total exposure of $18.6 million, secured by all business assets. This relationship was performing in accordance with its original repayment terms at March 31, 2019. Our fifth largest lending relationship consisted of a total of eight commercial real estate and commercial business loans with a total exposure of $17.4 million, secured by a non-owner occupied commercial use property. This relationship was performing in accordance with its original repayment terms at March 31, 2019.

 

Investment Activities

 

We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal government bonds, deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity securities,

 

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including common stock and money market mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock, which investment is based on the level of our Federal Home Loan Bank borrowings. While we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at March 31, 2019.

 

At March 31, 2019, our investment portfolio had a fair value of $49.7 million, and consisted primarily of U.S. Government Agency mortgage-backed securities, and state and municipal bonds. Effective January 2018,we adopted ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” This standard required us to measure our equity investments at fair value with changes in fair value recognized in net income. We evaluated the pronouncement and decided to divest from our equity securities portfolio in 2017 to reduce potential volatility within our earnings performance.

 

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide a use of funds when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy. The Risk Committee of the board of directors and management are responsible for implementation of the investment policy and monitoring our investment performance. Our Risk Committee reviews the status of our investment portfolio quarterly.

 

Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporarily impaired (“OTTI”). OTTI is required to be recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI resulting in a realized loss that is a charged to earnings through a reduction in our noninterest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the three months ended March 31, 2019 or the years ended December 31, 2018 or 2017.

 

Sources of Funds

 

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Boston advances, brokered deposits and certificates of deposit obtained from a national exchange, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, funds are derived from scheduled loan payments, investment securities maturities and sales, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

 

Deposit Accounts. The majority of our deposits (other than certificates of deposit) are from depositors who reside in our primary market areas. However, a significant portion of our brokered certificates of deposits and QwickRate deposits, described below, are from depositors located outside our primary market areas. We also receive deposits from our nationwide business customers. Deposits are attracted through the offering of a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. In addition to accounts for individuals, we also offer several commercial checking accounts designed for the businesses operating in our market area, and we encourage our commercial borrowing customers to maintain their deposit relationships with us.

 

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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 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. In addition, we believe that 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.

 

At March 31, 2019, our deposits totaled $775.3 million. As of that date, our certificates of deposit included $69.1 million of brokered certificates of deposit and $15.1 million of QwickRate certificates of deposit, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits. At March 31, 2019, all of our QwickRate certificates of deposit were in amounts greater than $100,000.

 

Deposit account terms vary according to the minimum balance required, the time period that funds must remain on deposit, and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability, and customer preferences and concerns. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates and services and to periodically offer special rates in order to attract deposits of a specific type or term, although we have not done so in recent periods. We do not price our deposit products to be among the highest rate paying institution in our market area, but instead focus on services to gather deposits.

 

Borrowings. We primarily utilize advances from the Federal Home Loan Bank of Boston to supplement our supply of investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. As of March 31, 2019, we had $203.7 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including an available line of credit of $2.0 million at an interest rate that adjusts daily. On that date, we had $79.9 million in advances outstanding from the Federal Home Loan Bank of Boston. All of our borrowings from the Federal Home Loan Bank are secured by investment securities and qualified collateral, including one- to four-family loans and multi-family and commercial real estate loans held in our portfolio. As of March 31, 2019, we had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $177.3 million, none of which was outstanding as of that date. All of our borrowings from the Federal Reserve Bank borrower-in-custody program are secured by investment securities and qualified collateral, including commercial and commercial real estate loans held in our portfolio.

 

Personnel

 

As of March 31, 2019, we had 112 full-time and 13 part-time employees, none of whom is represented by a collective bargaining unit. We believe we have a good working relationship with our employees.

 

Subsidiaries

 

The Provident Bank’s subsidiaries include Provident Security Corporation and 5 Market Street Security Corporation, which were established to buy, sell, and hold investments for their own account.

 

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Legal Proceedings

 

We are not involved in any legal proceedings as a defendant that we believe would be material to our financial condition or results of operations.

 

Properties

 

We conduct business through our main office and six branch offices located in Amesbury and Newburyport, Massachusetts and Bedford, Exeter, Portsmouth and Seabrook, New Hampshire, as well as four loan production offices located in Boston, Dedham and Hingham, Massachusetts and Portsmouth, New Hampshire. We own four of our offices, including our main office, and lease three of our offices. All of our loan production offices are leased. At March 31, 2019, the total net book value of our land, buildings, right-of-use assets, furniture, fixtures and equipment was $21.5 million.

 

SUPERVISION AND REGULATION

 

General

 

The Provident Bank is a Massachusetts-charted stock savings bank. 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 extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency, and by the Federal Deposit Insurance Corporation, as its primary deposit insurer. The Provident Bank is required to file reports with, and is periodically examined by, the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. The Provident Bank is a member of the Federal Home Loan Bank of Boston.

 

The regulation and supervision of The Provident Bank establish a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and borrowers and, for purposes of the Federal Deposit Insurance Corporation, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

 

As a bank holding company following the conversion, New Provident will be required to comply with the rules and regulations of the Federal Reserve Board. It will be required to file certain reports with the Federal Reserve Board and will be subject to examination by and the enforcement authority of the Federal Reserve Board. New Provident will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

 

Any change in applicable laws or regulations, whether by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Commonwealth of Massachusetts or Congress, could have a material adverse impact on the operations and financial performance of New Provident and The Provident Bank. In addition, New Provident and The Provident Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve Board. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the New Provident and The Provident Bank.

 

Set forth below is a brief description of material regulatory requirements that are or will be applicable to The Provident Bank and New Provident. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on The Provident Bank and New Provident.

 

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Massachusetts Banking Laws and Supervision

 

The Provident Bank, as a Massachusetts-chartered stock savings bank, is regulated and supervised by the Massachusetts Commissioner of Banks. The Massachusetts Commissioner of Banks is required to regularly examine each state-chartered bank. The approval of the Massachusetts Commissioner of Banks is required to establish or close branches, to merge with another bank, to issue stock and to undertake many other activities. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks may suspend or remove directors or officers of a savings bank who have violated the law, conducted a bank’s business in a manner that is unsafe, unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, the Massachusetts Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that the bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.

 

The powers that Massachusetts-chartered savings banks can exercise under these laws include, but are not limited to, the following.

 

Lending Activities. A Massachusetts-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and personal loans may also be made with or without security.

 

Insurance Sales. Massachusetts savings banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance. A savings bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. Although The Provident Bank has received approval for insurance sales activities, it does not offer insurance products.

 

Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the Commonwealth which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the Commonwealth. At the present time, The Provident Bank has the authority to invest in equity securities. However, such investment authority is constrained by federal law. See “—Federal Bank Regulation—Investment Activities” for such federal restrictions.

 

Dividends. A Massachusetts stock bank may declare from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. A Massachusetts savings bank with outstanding preferred stock may not, without the prior approval of the Commissioner of Banks, declare dividends to the common stock without also declaring dividends to the preferred stock. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes.

 

Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. The requirements are similar to existing federal laws such as the Gramm-Leach-Bliley

 

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Act, discussed below under “—Federal Bank Regulation—Privacy Regulations.” They require organizations to establish written information security programs to prevent identity theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.

 

Parity Approval. A Massachusetts bank may, in accordance with Massachusetts law, exercise any power and engage in any activity that has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts, provided that the activity is permissible under applicable federal law and not specifically prohibited by Massachusetts law. Such powers and activities must be subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power or activity. A Massachusetts bank may exercise such powers, and engage in such activities by providing 30 days’ advanced written notice to the Massachusetts Commissioner of Banks.

 

Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations of one borrower to a bank may not exceed 20.0% of the total of the bank’s capital, which is defined under Massachusetts law as the sum of the bank’s capital stock, surplus account and undivided profits.

 

Loans to a Bank’s Insiders. Massachusetts law provides that a Massachusetts financial institution shall comply with Regulation O of the Federal Reserve Board, which generally requires that extensions of credit to insiders:

 

·be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

·not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Massachusetts financial institution’s capital.

 

Regulatory Enforcement Authority. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including seizure of the property and business of the bank and suspension or revocation of its charter. The Massachusetts Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in a manner which is unsafe, unsound or contrary to the depositors’ interests or been negligent in the performance of their duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. Massachusetts consumer protection and civil rights statutes applicable to The Provident Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.

 

Depositors Insurance Fund. All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The Depositors Insurance Fund is authorized to charge savings banks a risk-based assessment on deposit balances in excess of the amounts insured by the Federal Deposit Insurance Corporation.

 

Massachusetts has other statutes and regulations that are similar to the federal provisions discussed below.

 

Federal Bank Regulation

 

Capital Requirements. Federal regulations require Federal Deposit Insurance Corporation-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based

 

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assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a Tier 1 capital to average assets leverage ratio of 4%.

 

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Provident Bancorp, Inc. has exercised the opt-out and therefore does not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

 

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began being phased in starting on January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019. At March 31, 2019, The Provident Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

 

Legislation enacted in May 2018 requires the federal banking agencies, including the Federal Deposit Insurance Corporation, to establish for qualifying institutions with assets of less than $10 billion of assets a “community bank leverage ratio” of between 8% to 10% tangible equity/consolidated assets. Institutions with capital levels meeting or exceeding the specified requirement will be considered to comply with the applicable regulatory capital requirements, including all risk-based requirements. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators. A proposed rule issued by the federal regulators in December 2018 would specify a 9% community bank leverage ratio minimum for institutions to opt into the alternative framework.

 

The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

 

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Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

 

Investment Activities. All state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, are generally limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, state-chartered banks may, with Federal Deposit Insurance Corporation approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ Global Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s regulations, or the maximum amount permitted by Massachusetts law, whichever is less.

 

In addition, the Federal Deposit Insurance Corporation is authorized to permit such a state bank to engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The Federal Deposit Insurance Corporation has adopted procedures for institutions seeking approval to engage in such activities or investments. In addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

 

Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis to the extent that branching is authorized by the law of the host state for the banks chartered by that state.

 

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

 

The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As of March 31, 2019, The Provident Bank was a “well capitalized” institution under the Federal Deposit Insurance Corporation regulations.

 

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At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Deposit Insurance Corporation to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 

The previously referenced proposed rulemaking to establish a “community bank leverage ratio” would adjust the referenced categories for qualifying institutions that opt into the alternative framework for regulatory capital requirements. Institutions that exceed the community bank leverage ratio would be considered to have met the capital ratio requirements to be “well capitalized” for the agencies’ prompt corrective rules.

 

Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.

 

Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% shareholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal shareholders be made on terms and conditions substantially the same as offered in comparable transactions to persons who are not insiders and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.

 

Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks, including The Provident Bank. The enforcement authority includes, among other things,

 

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the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The Federal Deposit Insurance Corporation is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The Federal Deposit Insurance Corporation may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

 

Federal Insurance of Deposit Accounts. The Provident Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in The Provident Bank are insured up to a maximum of $250,000 for each separately insured depositor.

 

The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) for most banks with less than $10 billion of assets currently range from 1 1/2 to 30 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

 

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more were supposed to fund the increase. The Federal Deposit Insurance Corporation indicated in November 2018 that the 1.35% ratio was exceeded. Insured institutions of less than $10 billion of assets will receive credits for the portion of their assessments that contributed to raising the serve ratio between 1.15% and 1.35% effective when the fund rate achieves 1.38%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long range fund ratio of 2%.

 

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of The Provident Bank. Future insurance assessment rates cannot be predicted.

 

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

 

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO mature in 2017 through 2019. For the quarter ended March 31, 2019, the annualized FICO assessment was equal to 0.14 basis points of total assets less tangible capital.

 

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Privacy Regulations. Federal Deposit Insurance Corporation regulations generally require that The Provident Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, The Provident Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. The Provident Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

 

Community Reinvestment Act. Under the Community Reinvestment Act, or CRA, as implemented by Federal Deposit Insurance Corporation regulations, a non-member bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the Federal Deposit Insurance Corporation, in connection with its examination of a non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the Federal Deposit Insurance Corporation to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. The Provident Bank’s latest Federal Deposit Insurance Corporation CRA rating was “Satisfactory.”

 

 Massachusetts has its own statutory counterpart to the CRA which is also applicable to The Provident Bank. The Massachusetts version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. The Provident Bank’s most recent rating under Massachusetts law was “Satisfactory.”

 

Consumer Protection and Fair Lending Regulations. Massachusetts savings banks are subject to a variety of federal and Massachusetts statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.

 

USA PATRIOT Act. The Provident Bank is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.

 

Other Regulations

 

Interest and other charges collected or contracted for by The Provident Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

 

·Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

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·Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

·Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

 

·Massachusetts Debt Collection Regulations, establishing standards, by defining unfair or deceptive acts or practices, for the collection of debts from persons within the Commonwealth of Massachusetts and the General Laws of Massachusetts, Chapter 167E, which governs The Provident Bank’s lending powers; and

 

·Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.

 

The deposit operations of The Provident Bank also are subject to, among others, the:

 

·Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

·Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

·Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

 

·General Laws of Massachusetts, Chapter 167D, which governs deposit powers.

 

Federal Reserve System

 

The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $124.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $124.2 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.3 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. The Provident Bank is in compliance with these requirements.

 

Federal Home Loan Bank System

 

The Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. The Provident Bank was in compliance with this requirement at March 31, 2019. Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has no quoted market value and is carried at cost. The Provident Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank of Boston stock. As of March 31, 2019, no impairment has been recognized.

 

At its discretion, the Federal Home Loan Bank of Boston may declare dividends on the stock. The Federal Home Loan Banks are required to provide funds for certain purposes including the resolution of insolvent thrifts in

 

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the late 1980s and to contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. In 2018, the Federal Home Loan Bank of Boston paid dividends equal to an annual yield of 5.66%. There can be no assurance that such dividends will continue in the future.

 

Holding Company Regulation

 

New Provident will be subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. New Provident will be required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for the New Provident to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, prior approval may also be necessary from other agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be completed.

 

A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.

 

The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.

 

New Provident will be subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis) which have historically been similar to, though less stringent than, those of the Federal Deposit Insurance Corporation for The Provident Bank. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks apply to bank holding companies; as is the case with institutions themselves, the capital conservation buffer was phased in between 2016 and 2019. However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and recent legislation and the related issuance of regulations by the Federal Reserve Board has increased the threshold for the exception to $3.0 billion.

 

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.

 

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The Federal Reserve Board has issued a policy statement regarding capital distributions, including dividends, by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. In addition, the Federal Reserve Board has issued guidance that requires consultation with the agency prior to a bank holding company’s payment of dividends of repurchase of stock under certain circumstances. These regulatory policies could affect the ability of the New Provident to pay dividends, repurchase its stock or otherwise engage in capital distributions.

 

Under the Federal Deposit Insurance Act, depository institutions are liable to the Federal Deposit Insurance Corporation for losses suffered or anticipated by the Federal Deposit Insurance Corporation in connection with the default of a commonly controlled depository institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default.

 

The status of New Provident as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

 

Massachusetts Holding Company Regulation. Under the Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. The term “company” is defined by the Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the Massachusetts Commissioner of Banks; and (iii) is subject to examination by the Massachusetts Commissioner of Banks. New Provident will not be a “bank holding company” under the Massachusetts banking laws.

 

Federal Securities Laws

 

New Provident common stock will be registered with the Securities and Exchange Commission after the conversion and stock offering. New Provident will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

The registration under the Securities Act of 1933 of shares of common stock issued in New Provident’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of New Provident may be resold without registration. Shares purchased by an affiliate of New Provident will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If New Provident meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of New Provident that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of New Provident, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, New Provident may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year

 

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qualifies as an “emerging growth company.” New Provident qualifies as an emerging growth company under the JOBS Act until December 31, 2020.

 

An “emerging growth company” may choose not to hold shareholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Provident Bancorp, Inc. will also not be subject to additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $250 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. New Provident has elected to comply with new or amended accounting pronouncements in the same manner as a public company.

 

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

 

Change in Control Regulations

 

Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company such as New Provident unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as will be the case with New Provident, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

 

In addition, federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.

 

TAXATION

 

Provident Bancorp, Old Provident and The Provident Bank are, and New Provident will be, subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax

 

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matters and is not a comprehensive description of the tax rules applicable to Old Provident, New Provident or The Provident Bank.

 

Federal Taxation

 

General. Old Provident reports its income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to Old Provident in the same manner as to other corporations with some exceptions, including the reserve for bad debts discussed below. Old Provident’s federal income tax returns have been either audited or closed under the statute of limitations through December 31, 2014. For its 2018 tax year, The Provident Bank’s maximum federal income tax rate was 21%.

 

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

 

Prior to the Act, Section 162(m) of the Internal Revenue Code generally limited to $1 million the federal income tax deductibility of compensation paid in one year to a company’s chief executive officer or any of its three next-highest-paid employees (other than its chief financial officer), and performance-based compensation was not subject to this limit on deductibility provided certain requirements were met, including stockholder approval of material terms. The Act included a major overhaul to Section 162(m). Under the Act, the exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain binding, written arrangements in place as of November 2, 2017. Additionally, beginning with taxable years occurring after December 31, 2017,the Act expanded the group of individuals to whom this limit on deductibility applies to include a company’s chief financial officer, as well as any other individual that was previously a covered employee for any taxable year beginning after December 31, 2016. The Act contains a grandfathering provision that provides that any compensation pursuant to a written binding contract that was in effect on November 2, 2017 and is not materially modified after that date is not subject to this change. This limit on deductibility would apply to any future grants made under stock-based benefit plans that we may adopt following the completion of the stock offering. For a discussion of such stock-based benefit plans, see “Management—Benefits to be Considered Following Completion of the Conversion—Stock-Based Benefit Plans.”

 

Bad Debt Reserves. For taxable years beginning before January 1, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. However, those bad debt reserves accumulated prior to 1988 (“Base Year Reserves”) were not required to be recaptured unless the savings institution failed certain tests. The Provident Bank has recaptured all of its Base Year Reserves.

 

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State Taxation

 

Financial institutions in Massachusetts are required to file combined income tax returns beginning with the year ended December 31, 2009. The Massachusetts excise tax rate for savings banks is currently 9.0% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net operating losses and capital losses are not allowed. Old Provident’s state tax returns, as well as those of its subsidiaries, are not currently under audit.

 

A financial institution or business corporation is generally entitled to special tax treatment as a “security corporation” under Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a “security corporation” by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue Code must pay a tax equal to 1.32% of its gross income. The Provident Bank’s subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation, which engage in securities transactions on their own behalf, are qualified as security corporations. As such, each has received security corporation classification by the Massachusetts Department of Revenue; and does not conduct any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue.

 

The New Hampshire Business Profits tax is assessed at the rate of 8.5%. For this purpose, gross business profits generally mean federal taxable income subject to certain modifications provided for in New Hampshire law. The New Hampshire Business Enterprise tax is assessed at 0.75% of the total amount of payroll and certain employee benefits expense, interest expense, and dividends paid to shareholders. The New Hampshire Business Enterprise tax is applied as a credit towards the New Hampshire Business Profits tax.

 

As a Maryland business corporation, New Provident is required to file an annual report with and pay franchise taxes to the state of Maryland.

 

In addition, we operate in other states, primarily due to our nationwide lending operations. However, the tax obligations in other states related to those operations are not material to our financial condition or results of operations.

 

MANAGEMENT

 

Directors

 

Directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. Directors of The Provident Bank will be elected by New Provident as its sole stockholder.

 

The following sets forth information regarding our directors. Age information is as of December 31, 2018. Except as noted below, each of our directors has held their positions listed below for at least the past five years. None of the directors listed below currently serves as a director, or served as a director during the past five years, of a publicly-held entity (other than Old Provident). The following also includes the particular experience, qualifications, attributes, or skills considered by the Nominating and Corporate Governance Committee that led the Board of Directors to conclude that such person should serve as a director of Old Provident. The mailing address for each person listed is c/o The Provident Bank, 5 Market Street, Amesbury, Massachusetts 01913.

 

All of our directors are long-time residents of the communities we serve and many of such individuals have operated, or currently operate, businesses located in such communities. As a result, each nominee and director

 

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continuing in office has significant knowledge of the businesses that operate in our market area, an understanding of the general real estate market, values and trends in such communities and an understanding of the overall demographics of such communities. As a community banking institution, we believe that the local knowledge and experience of our directors assists us in assessing the credit and banking needs of our customers, developing products and services to better serve our customers and in assessing the risks inherent in our lending operations. As local residents, our directors are also exposed to the advertising, product offerings and community development efforts of competing institutions which, in turn, assists us in structuring its marketing efforts and community outreach programs.

 

Frank G. Cousins, Jr., age 60, is the President of the Greater Newburyport Chamber of Commerce. In 2016, Mr. Cousins retired as the Sheriff of Essex County, Massachusetts where he served for 20 years. Mr. Cousins’ years of service as a law enforcement officer in our community provides valuable insight into the economic and business needs of our community, as well as insight into where we can best serve our community in other ways, including charitable donations. Director of The Provident Bank since 2003. Term expires at the annual meeting following December 31, 2020.

 

James A. DeLeo, age 53, is a certified public accountant and the leading Partner at Gray, Gray & Gray, where he also co-chairs the Merger & Acquisition Practice Group. He has more than 25 years of experience and an educational background in entrepreneurial finance, making him a key contributor to fundless sponsors, search funds and larger private equity firms with established funds, all of which seek his advice when acquiring target companies in the middle market. Mr. DeLeo also works closely with private equity and mezzanine lenders. Mr. DeLeo’s educational and professional experience assist the Board of Directors in assessing our accounting practices, tax matters and operational needs, as well as providing knowledge of and access to the capital markets and advice with respect to mergers and acquisitions. Director of The Provident Bank since 2017. Term expires at the annual meeting following December 31, 2019.

 

Lisa DeStefano, age 55, is the Principal Architect and Founder of DeStefano Architects. A LEED certified and registered architect in New Hampshire, Maine, Massachusetts and Connecticut, Ms. DeStefano has been a practicing architect since 1983 and founded DeStefano Architects in 1995. Her design work has won multiple awards including the 2016 AIANH Excellence in Architecture People’s Choice Award and in 2015 her firm was named one of the fastest growing women-led companies in Boston by Inc. 5000.  Ms. DeStefano was awarded the 2015 Business Excellence Award in the Real Estate and Construction category from New Hampshire Business Review magazine. Ms. DeStefano’s experience provides the Board of Directors with extensive knowledge of real estate and business matters, and she is well-known in our New Hampshire seacoast market area. Director of The Provident Bank since 2013. Term expires at the annual meeting following December 31, 2021.

 

Jay E. Gould, age 65, is the founder of Flatbread Company, a clay-oven restaurant specializing in all-natural, wood-fired pizza, salads and desserts. Founded in Amesbury, Massachusetts in 1998, Flatbread Company has grown into 15 restaurants with locations in New England, Hawaii and British Columbia. Mr. Gould has extensive developmental and operational experience developing a distinct and unique brand within the full-service restaurant market. Mr. Gould also owned and operated a successful family insurance business in Amesbury, Massachusetts from 1977 until its sale in 2015. As a business owner and entrepreneur, Mr. Gould offers a valuable perspective on developing a successful business as well as the challenges and risks an organization may face as it grows its product offerings and markets into new areas. Director of The Provident Bank since 1995. Term expires at the annual meeting following December 31, 2021.

 

Laurie H. Knapp, age 61, is a certified public accountant and sole owner of Laurie H. Knapp CPA PC, an accounting firm located in Amesbury, Massachusetts. Ms. Knapp specializes in personal and corporate taxes. Her experience as a certified public accountant assists the Board of Directors in assessing our accounting practices and tax matters. Director of The Provident Bank since 1998. Term expires at the annual meeting following December 31, 2019.

 

David P. Mansfield, age 57, has served as the President and Chief Executive Officer of Provident Bancorp, Inc. and Chief Executive Officer of The Provident Bank since May 2013, having joined The Provident Bank as

 

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Chief Financial Officer in 2001. Mr. Mansfield served as Interim Chairman of the Board of Provident Bancorp, Inc. and The Provident Bank from April 2018 to April 2019. Mr. Mansfield previously worked as a bank examiner for both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, and is a Chartered Financial Analyst. Mr. Mansfield’s positions as President and Chief Executive Officer foster clear accountability, effective decision-making, a clear and direct channel of communication from senior management to the full Board of Directors, and alignment on corporate strategy. Director of The Provident Bank since 2013. Term expires at the annual meeting following December 31, 2021.

 

Richard L. Peeke, age 74, is a former insurance executive who retired in 2007 after 41 years of experience in the insurance industry. Mr. Peeke’s experience as an insurance adjuster, including as a National General Adjuster at American International Group (AIG), gives him unique insights into our challenges, opportunities and operations in the insurance products field and with respect to our insurance needs. Director of The Provident Bank since 1990. Term expires at the annual meeting following December 31, 2019.

 

Joseph B. Reilly, age 62, has more than 35 years of experience in the New Hampshire banking industry. He was the Co-Founder and President/CEO of Centrix Bank, which merged with Eastern Bank in October 2014. Prior to Centrix, Reilly held positions at Bank of New Hampshire, TD Bank, Centerpoint Bank and Fleet Bank. Mr. Reilly is a former Chairman and Director of the New Hampshire Bankers Association (NHBA); Chairman of the NHBA Legislative Committee; State of New Hampshire Captain for Team 21, a national organization of the American Bankers Association (ABA); and a member of the Government Relations Council of the ABA.  Mr. Reilly has also served on numerous not-for-profit board leadership positions. Mr. Reilly was elected Chairman of the Board of Provident Bancorp, Inc. and The Provident Bank in April 2019. Director of the Provident Bank since 2018. Term expires at the annual meeting following December 31, 2020.

 

Arthur Sullivan, age 60, is Principal Partner of Brady Sullivan Properties based in Manchester, New Hampshire. Mr. Sullivan is a 40-year commercial and real estate industry veteran. A licensed Real Estate Broker, Mr. Sullivan has become one of New England’s largest developer of affordable commercial and residential real estate. Under his leadership, Brady Sullivan has successfully procured and managed a diverse portfolio of over four million square feet of mill, office and industrial space, over 2,000 residential units and over 5,000 condominium conversions throughout New England and Florida. Mr. Sullivan is the recipient of the 2013 Commerce Citizen of the Year Award from the Manchester Chamber of Commerce, and has served as a corporator of Provident Bancorp since 2008. Mr. Sullivan provides the Board of Directors with significant knowledge of commercial real estate as well as experience in managing a large business in Southern New Hampshire. Director of The Provident Bank since 2016. Term expires at the annual meeting following December 31, 2020.

 

Charles F. Withee, age 56, is The Provident Bank’s President and Chief Lending Officer, positions he has held since 2013. Mr. Withee joined The Provident Bank as Senior Lender in 2004, and has nearly 30 years of commercial banking experience in Massachusetts and New Hampshire. Director of The Provident Bank since 2013. Term expires at the annual meeting following December 31, 2020.

 

Executive Officer who is not a Director

 

The following provides information regarding our executive officer as of December 31, 2018, who is not a director of the Company. The executive officers of New Provident and The Provident Bank are elected annually. Except as noted below, each of our executive officers has held their positions listed below for at least the past five years.

 

Carol L. Houle, age 48, is Executive Vice President and Chief Financial Officer of Old Provident and The Provident Bank. Ms. Houle is a Certified Public Accountant and joined The Provident Bank in 2013. Previously, Ms. Houle was a partner at the accounting firm of Shatswell, MacLeod & Company, P.C., where she worked for 17 years.

 

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Board Independence

 

The Board of Directors has determined that each of our directors, with the exception of directors Mansfield and Withee, is “independent” as defined in, and for purposes of satisfying the listing standards of, the Nasdaq Stock Market, Inc. Directors Mansfield and Withee are not independent because each is an executive officer of New Provident.

 

In determining the independence of our directors, the Board of Directors considered the following relationships between The Provident Bank and our directors and officers, which are not required to be reported under “ —Transactions With Certain Related Persons” below. The Provident Bank has made loans to the following directors or their related entities: Lisa B. DeStefano, line of credit; Jay E. Gould, residential mortgage loan, commercial real estate loans, term loans and commercial lines of credit; Laurie H. Knapp, commercial real estate loan and residential mortgage loan; Arthur Sullivan, commercial real estate line of credit and demand note; and Richard L. Peeke, home equity line of credit. The Provident Bank also provides overdraft lines of credit to all of its directors.

 

Code of Ethics for Senior Officers

 

We have adopted a Code of Ethics for Senior Officers that applies to Old Provident’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics for Senior Officers is available on our website at www.theprovidentbank.com. Amendments to and waivers from the Code of Ethics for Senior Officers will also be disclosed on our website.

 

We have also established procedures to receive, retain and treat complaints regarding accounting, internal accounting controls and auditing matters. These procedures ensure that individuals may submit concerns regarding questionable accounting or auditing matters in a confidential and anonymous manner.

 

Transactions With Certain Related Persons

 

The Sarbanes-Oxley Act of 2002 generally prohibits publicly traded companies from making loans to their executive officers and directors, but it contains a specific exemption from the prohibition for loans made by federally insured financial institutions, such as The Provident Bank, to their executive officers and directors in compliance with federal banking regulations. At March 31, 2019, all of our loans to directors and executive officers were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to The Provident Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. These loans were performing according to their original terms at March 31, 2019, and were made in compliance with federal banking regulations.

 

Pursuant to our Policy and Procedures for Approval of Related Persons Transactions, the Audit Committee periodically reviews, at least twice a year, a summary of our transactions with our directors and executive officers, as well as any other related person transactions, to determine whether to approve or ratify such transactions. Also, in accordance with banking regulations, the Board of Directors reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of Provident Bancorp, Inc.’s capital and surplus (up to a maximum of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the Board of Directors. Additionally, pursuant to The Provident Bank’s Ethics Policy, all officers and directors must disclose their involvement in loans being made by The Provident Bank, directly or indirectly, and any bank employee may not represent The Provident Bank in any transaction where her or she has a material financial interest (including interests of relatives or personal friends).

 

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Executive Compensation

 

Summary Compensation Table

 

The table below summarizes, for the years ended December 31, 2018 and 2017, the total compensation paid to, or earned by, Mr. Mansfield, who serves as The Provident Bank’s Chief Executive Officer, Mr. Withee, who serves as The Provident Bank’s President and Chief Lending Officer, and Ms. Houle, who serves as The Provident Bank’s Executive Vice President and Chief Financial Officer. We refer to these individuals as “Named Executive Officers.”

 

Summary Compensation Table
Name and Principal
Position
  Year  Salary
($)
   Bonus
($)(1)
   Stock
awards ($)
   Option
awards ($)
   Non-Equity
Incentive Plan
Compensation
($)(2)
   All Other
Compensation
($)(3)
   Total
($)
 
                                
David P. Mansfield  2018   480,000                231,840    44,829    756,669 
Chief Executive Officer  2017   458,920    30,000            170,397    51,578    710,895 
                                       
Charles F. Withee  2018   360,000                149,040    43,968    553,008 
President and Chief Lending Officer  2017   344,190    18,000            100,641    50,915    513,746 
                                       
Carol L. Houle  2018   270,000                111,780    37,445    419,225 
Executive Vice President and Chief Financial Officer  2017   240,200    10,000            59,535    41,915    351,650 

 

 

(1)Reflects discretionary cash bonuses.
(2)Represents cash incentives earned under The Provident Bank Executive Annual Incentive Plan. See “—Executive Annual Incentive Plan” for further details.
(3)The amounts reflect what we have paid to, or reimbursed, the applicable Named Executive Officer for various benefits we provide. A break-down of the various elements of compensation in this column for the year ended December 31, 2018 is set forth in the table immediately below.

 

All Other Compensation
Name  Year  Employer
Matching
Contribution
To 401(k) Plan (a)
($)
   Allocations
Under
Employee
Stock
Ownership
Plan (b)
($)
   Long-Term
Disability
Premiums
($)
   Car
Allowance
($)
   Total
($)
 
David P. Mansfield  2018   15,900    15,545    3,384    10,000    44,829 
Charles F. Withee  2018   13,423    15,545        15,000    43,968 
Carol L. Houle  2018   15,900    15,545        6,000    37,445 

 

 

(a)Represents the matching contributions made by The Provident Bank to the Named Executive Officer’s 401(k) plan account for the plan year.
(b)Represents the approximate value of shares allocated to the individual’s Employee Stock Ownership Plan account for the year ended December 31, 2018, using the Company’s stock price as of December 31, 2018.

 

Employment Agreements

 

The Provident Bank has entered into employment agreements with Messrs. Mansfield and Withee and Ms. Houle. The employment agreements with Messrs. Mansfield and Withee have terms of three years. The employment agreement with Ms. Houle has a term of two years. Beginning as of January 1, 2016, and continuing as of each January 1 thereafter, the disinterested members of the Board of Directors must conduct a comprehensive performance evaluation and affirmatively approve any extension of the agreements for an additional year or determine not to extend the term of any of the agreements.

 

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The employment agreements provide Messrs. Mansfield and Withee and Ms. Houle with current base salaries of $500,000, $360,000 and $295,000, respectively. The Provident Bank may increase the base salaries from time to time. In addition to base salaries, the executives are entitled to participate in any employee benefit plans and bonus programs in effect from time to time for senior executives of The Provident Bank. The Provident Bank will also reimburse the executives for all reasonable business expenses incurred by them in the performance of their duties and responsibilities.

 

In the event of an executive’s involuntary termination of employment for reasons other than cause, disability or death, or in the event of his or her resignation for “good reason,” in either case prior to the attainment of age 65, he or she will receive a severance payment equal to the sum of (i) his or her base salary then in effect and (ii) his or her “Average Bonus”, that would have been paid through the expiration date of the employment agreement. These payments increase to three times (in the case of Messrs. Mansfield and Withee) and two times (in the case of Ms. Houle) the sum of (i) and (ii), above, in the event the termination occurs in connection with or following a change on control or if the agreement has a remaining term of more than 24 months at the time of termination, in the case of Mr. Mansfield. For purposes of the employment agreements, the term “Average Bonus” means the average of the aggregate bonuses paid (or accrued, but not yet paid) to the executive for the three calendar years immediately preceding the termination of employment. The Provident Bank will make the payments in 12 monthly installments, unless the termination of employment occurs within two years of a change in control, in which case The Provident Bank will make the payment in a lump sum at the time of the termination of employment. In addition, the executives will be entitled to receive from The Provident Bank continued life insurance and non-taxable medical and dental insurance coverage through the then remaining unexpired term of the agreement and all outstanding awards under The Provident Bank Amended and Restated Long-Term Incentive Plan will become immediately and fully vested. Under the employment agreements, the term “good reason” includes: (i) the failure of the Board of Directors to elect or continue to employ the executive in his or her current position or a material reduction in the executive’s authority, duties or responsibilities; (ii) a reduction in the executive’s base salary; or (iii) a material breach of any provision of the agreement that is not cured within 30 days of notice of the breach from the executive. In addition, the term “good reason” includes, if the event occurs within two years following a change in control: (i) a relocation of his or her principal place of employment by more than ten miles; (ii) the failure of The Provident Bank to continue to provide the executive with certain employee benefits substantially similar to those available to the executive prior to the change in control; or (iii) the failure of The Provident Bank to obtain a satisfactory agreement from any successor to assume and honor the employment agreement.

 

In addition, should The Provident Bank terminate an executive’s employment following the executive becoming disabled, The Provident Bank will continue to pay the executive his or her base salary from the date of the termination of employment until the earlier of: (i) the expiration of 180 days; (ii) the date on which long-term disability benefits are payable to the executive under any plan covering employees of The Provident Bank; (iii) the executive’s death; or (iv) the date the term of the employment agreement expires. If at the end of 180 days, the executive is not yet receiving disability payments under a plan covering employees of The Provident Bank, The Provident Bank will continue to pay the executive his or her base salary at a rate of 60% until the earlier of: (i) the date he or she becomes entitled to disability benefits under such a plan; (ii) his or her death; or (iii) the expiration of the term of the employment agreement. In the event of the death of any of the executives, The Provident Bank will pay his or her beneficiaries the base salary the executive would have earned for six months following his or her death, and his or her family will continue to receive medical coverage for one year at the same out-of-pocket expense that the executive paid prior to his or her death.

 

If the executive voluntarily terminates employment on account of his or her “retirement” (that is on or after attaining age 62 for Messrs. Mansfield and Withee, or 65 for Ms. Houle), the executive will be entitled to continue to receive medical benefits at the same level in effect on, and on the same out-of-pocket cost to the executive as of, his or her termination of employment for a period of one year. The executive will not be entitled to any severance benefits under the employment agreement if The Provident Bank terminates the executive’s employment for “cause” (as defined under the employment agreement).

 

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Upon any termination of employment that would entitle an executive to a severance payment (other than a termination in connection with a change in control), the executive will be required to adhere to one-year non-competition and non-solicitation covenants.

 

Executive Annual Incentive Plan

 

The Provident Bank has adopted The Provident Bank Executive Annual Incentive Plan, which is designed to align the interests of the executives of The Provident Bank with the overall performance of The Provident Bank and Provident Bancorp, Inc.

 

Employees selected by the Compensation Committee, which include the Named Executive Officers, are eligible to participate in the plan. For each plan year (which is the calendar year), the Compensation Committee determine the annual bonus award amount, designated as a percentage of base salary, and the performance objectives that must be satisfied for the participant to receive the annual bonus award. The specific performance objectives will be determined annually by the Compensation Committee, but generally include objective performance targets on financial performance, growth, asset quality and risk management and subjective performance objectives, such as particular qualitative factors for the participant, based on his or her duties to The Provident Bank. Each performance objective will specify level of achievements at “threshold,” “target” and “maximum” levels and will be weighted by priority as a percentage of the total annual bonus award payable to the participant.

 

The bank-wide performance objectives for 2018 focused on the following metrics, with different metrics selected for different Named Executive Officers: (i) return on average assets, (ii) efficiency ratio, and (iii) loan growth. Each performance objective was assigned a percentage weight to reflect its importance and the Named Executive Officer’s direct impact in meeting the performance objective.

 

For 2018, peer group target results, and The Provident Bank’s results were as follows:

 

Item  Target Results   The Provident Bank
Adjusted Results
 
Return on average assets   0.99%   1.03%
Efficiency ratio   64.95%   61.53%
Commercial loan growth   7.94%   13.69%

 

Based on these results, Messrs. Mansfield and Withee, and Ms. Houle, earned an annual incentive award for the year ended December 31, 2018 equal to 48.30% of base salary, 41.40% of base salary and 41.40% of base salary, respectively.

 

The bank-wide performance objectives for 2017 focused on the following metrics, with different metrics selected for different Named Executive Officers: (i) return on equity, (ii) net interest income on a fully tax equivalent basis to average earning assets, (iii) non-current loans plus other real estate owned to total loans plus other real estate owned, (iv) efficiency ratio, (v) core deposit growth and (vi) net loan growth. Each performance objective was assigned a percentage weight to reflect its importance and the Named Executive Officer’s direct impact in meeting the performance objective.

 

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For 2017, peer group target results, and The Provident Bank’s results were as follows:

 

Item   Peer Target Results     The Provident Bank
Adjusted Results
 
Return on equity     7.15 %     7.38 %
Net interest income on a fully tax equivalent basis to average earning assets     3.33 %     4.00 %
Non-current loans plus other real estate owned to total loans plus other real estate owned     0.73 %     1.20 %
Efficiency ratio     73.78 %     64.95 %
Core deposit growth     8.27 %     18.54 %
Net loan growth     8.05 %     18.08 %

 

Based on these results, Messrs. Mansfield and Withee, and Ms. Houle, earned an annual incentive award for the year ended December 31, 2017 equal to 37.13% of base salary, 29.15% of base salary and 24.70% of base salary, respectively.

 

The annual bonus award will be payable to each participant in a cash lump sum within 2.5 months following the end of each plan year, to the extent the performance objectives are determined to be satisfied by the Compensation Committee.

 

Benefit Plans

 

401(k) Plan. The Provident Bank currently maintains a tax-qualified profit sharing plan with a salary deferral feature under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All employees who have attained age 21 are eligible to participate in the 401(k) Plan and receive a safe harbor matching contribution or discretionary profit sharing contribution from The Provident Bank.

 

A participant may contribute up to 100% of his or her compensation to the 401(k) Plan on a pre-tax basis, subject to the limitations imposed by the Internal Revenue Code. For 2018, the pre-tax deferral contribution limit is $18,500 provided, however, that a participant over age 50 may contribute, on a pre-tax basis, an additional $6,000 to the 401(k) Plan (subject to applicable cost-of-living adjustments in future years). In addition to salary deferral contributions, the 401(k) Plan provides that The Provident Bank will make a safe harbor matching contribution to each participant’s account equal to 100% of the participant’s contribution, up to a maximum of 6% of the participant’s compensation earned during the plan year. A participant is always 100% vested in his or her salary deferral contributions and safe harbor matching contributions. However, a participant will vest 100% in his or her discretionary profit sharing contributions following the completion of three years of service. Participants also become fully vested in the event of their death or disability. The 401(k) Plan permits a participant to direct the investment of his or her own account into various investment options.

 

Participants in the 401(k) Plan are permitted to invest elective deferrals and employer matching contributions in Provident Bancorp, Inc. common stock.

 

Employee Stock Ownership Plan. In connection with the stock offering in 2015, The Provident Bank implemented an employee stock ownership plan for eligible employees. Eligible employees begin participation in the employee stock ownership plan as of their date of hire.

 

The employee stock ownership plan trustee purchased, on behalf of the employee stock ownership plan, 357,152 shares of Provident Bancorp, Inc. common stock. The employee stock ownership plan funded its stock purchase with a loan from Provident Bancorp, Inc. The loan will be repaid principally through The Provident Bank’s contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 15-year term of the loan. The interest rate for the employee stock ownership plan loan is an adjustable-rate equal to the prime rate, as published in The Wall Street Journal, on the closing date of the offering. The interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year.

 

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The trustee holds the shares purchased by the employee stock ownership plan in an unallocated suspense account. Shares will be released from the suspense account on a pro-rata basis as the loan is repaid by the employee stock ownership plan. The trustee allocates the shares released among the participants’ accounts on the basis of each participant’s proportional share of compensation relative to all participants. Participants will become 100% vested in their benefit after the completion of three years of service. Participants who were employed immediately prior to the stock offering will receive credit for vesting purposes for years of service prior to adoption of the employee stock ownership plan. Participants also will become fully vested upon normal retirement, death or disability, a change in control, or termination of the employee stock ownership plan. Generally, participants will receive distributions from the employee stock ownership plan upon severance from employment. The employee stock ownership plan reallocates any unvested shares forfeited upon termination of employment among the remaining participants.

 

Supplemental Executive Retirement Plans. The Provident Bank has entered into supplemental executive retirement agreements (“SERPs”) with Messrs. Mansfield and Withee and Ms. Houle. Under the SERPs, each executive becomes entitled to receive a benefit following his or her separation from service other than on account of cause (as defined in the agreements). Upon a separation from service, The Provident Bank will pay a lump sum benefit to the executive equal to the actuarial equivalent of a 20-year stream of annual payments of a certain benefit percentage multiplied by the executive’s final average compensation. Under the agreements, the benefit percentage equals a certain percentage (62% for Mr. Mansfield, 60% for Mr. Withee and 20% for Ms. Houle) multiplied by a factor that represents the service of the executive through his or her attainment of age 62. Messrs. Mansfield and Withee are fully vested, while Ms. Houle is subject to a five-year cliff vesting schedule. The executives’ SERP benefits will be immediately forfeited in the event of a termination by The Provident Bank as a result of a “specially defined cause” (as such term is defined in the SERPs). The benefit percentage factor will automatically equal 62%, 60% or 20% in the event of the executive’s death or disability or upon a change in control, and Ms. Houle would also become fully vested under such circumstances. In the case of Messrs. Mansfield and Withee, if the executive dies, or terminates employment involuntarily or with “good reason” within three years or a change in control or if the executive experiences a disability, he will become entitled to the retirement benefit he would have earned at age 62 by providing for an assumed increase in his annual compensation for each year from his separation from service, death or disability until the date he would have attained age 62. If Messrs. Mansfield or Withee experiences a disability, the benefits will be paid to them at age 62.

 

2016 Equity Incentive Plan. In 2016, our Board of Directors adopted, and shareholders approved, the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which provides officers, employees and directors of Provident Bancorp, Inc. and its subsidiaries, including The Provident Bank, with additional incentives to promote the growth and performance of Provident Bancorp, Inc. Subject to permitted adjustments for certain corporate transactions, the Equity Incentive Plan authorizes the issuance or delivery to participants of up to 625,015 shares of Provident Bancorp, Inc. common stock pursuant to grants of restricted stock awards, restricted unit awards, incentive stock options and non-qualified stock options; provided, however, that the maximum number of shares of stock that may be delivered pursuant to the exercise of stock options is 446,440 (all of which may be granted as incentive stock options) and the maximum number of shares of stock that may be issued as restricted stock awards or restricted stock units is 178,575.

 

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Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2018 for the Named Executive Officers.

 

Outstanding Equity Awards At December 31, 2018
   Option Awards  Stock Awards 
Name  Number of
securities
underlying
unexercised
options
exercisable
(#)
   Number of
securities
underlying
unexercised
options
unexercisable
(#) (1)
   Option
exercise price
($)
   Option
expiration date
    Number of shares
or units of stock
that have not
vested (#)(1)
   Market value of
shares or units of
stock that have
not vested ($)(2)
 
David P. Mansfield   44,640    66,960    17.40   11/17/2026   26,786    580,720 
Charles F. Withee   30,132    45,198    17.40   11/17/2026   18,081    391,996 
Carol L. Houle   19,936    29,905    17.40   11/17/2026   11,963    259,358 

 

 

(1)Options and shares of restricted stock vest one-fifth per year beginning November 17, 2017.
(2)Based on the closing price of our stock on December 31, 2018 of $21.68 per share.

 

Director Compensation

 

Set forth below is a summary of the compensation for each of our non-employee directors for the year ended December 31, 2018.

 

Name  Fees Earned or
Paid in Cash
($)
   Stock awards
($)(2)
   Option Awards
($)(3)
   Total
($)
 
John K. Bosen (1)   26,250            26,250 
Frank G. Cousins, Jr.   35,000            35,000 
James A. DeLeo   26,500            26,500 
Lisa DeStefano   30,500            30,500 
Jay E. Gould   22,000            22,000 
Laurie H. Knapp   39,500            39,500 
Richard L. Peeke   31,750            31,750 
Joseph B. Reilly   23,000    132,246    106,001    261,247 
Arthur Sullivan   28,000            28,000 

 

 

(1)Mr. Bosen resigned from the Board of Directors on August 3, 2018.
(2)Reflects the aggregate grant date fair value of restricted stock awards granted. The assumptions used in the valuation of this award is included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission.
(3)Reflects the aggregate grant date fair value of option awards granted. The value is the amount recognized for financial statement reporting purposes in accordance with FASB ASC Topic 718. The assumptions used in the valuation of this award is included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission.

 

As of December 31, 2018, Directors Cousins, DeLeo, DeStefano, Gould, Knapp, Peeke, and Sullivan each held 3,897 unvested shares of restricted stock. Restricted stock vests over a five-year period beginning November 17, 2017. In addition, these directors each held 9,740 unvested stock options, and 2,435 vested stock options. Stock options have an exercise price of $17.40 and vest over a five-year period beginning November 17, 2017. As of December 31, 2018, Director Reilly held 4,862 unvested shares of restricted stock. Restricted stock vests over a five-year period beginning on August 1, 2019. Mr. Reilly also held 12,170 unvested stock options, and no vested stock options. Stock options have an exercise price of $27.20 and vest over a five-year period beginning August 1, 2019.

 

In 2018, each director (other than the Chairman of the Board) received a $12,000 retainer fee and $1,250 for each board meeting attended. The Chairman of the Board received a $45,000 annual retainer, payable monthly (with no additional payments made to our Chief Executive Officer for the period for which he served as Chairman). The Chair of the Audit Committee received a $7,000 retainer and the Committee members received $750 per

 

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meeting. All other committee chairs received a $2,500 retainer and the committee members received $750 per meeting. The Risk Committee members received a $1,500 retainer. The Independent Director received $1,875 fee in 2018. Directors who are also employees are not compensated for serving as directors. In 2019, each director (other than the Chairman of the Board) will receive a $15,000 retainer fee and $1,250 for each board meeting attended. The Chairman of the Board will receive a $45,000 annual retainer, payable monthly. The Chair of the Audit Committee will receive a $7,000 retainer and the Committee members will receive $750 per meeting. All other committee chairs will receive a $3,500 retainer and the committee members will receive $750 per meeting. The Lead Independent Director will receive an annual premium of $7,500 paid quarterly.

 

Benefits to be Considered Following Completion of the Conversion

 

Stock-Based Benefit Plans. Following the stock offering, we intend to adopt one or more new stock-based benefit plans that will provide for grants of stock options and restricted common stock awards. If adopted within 12 months following the completion of the conversion, the aggregate number of shares reserved for the exercise of stock options or available for stock awards under the stock-based benefit plans would be limited to 10% and 4%, respectively, of the shares sold in the stock offering.

 

The stock-based benefit plans will not be established sooner than six months after the stock offering, and if adopted within one year after the stock offering, the plans must be approved by at least two-thirds of the votes eligible to be cast by our stockholders, unless otherwise determined by the Massachusetts Commissioner of Banks, in which case such plans must be approved by a majority of the votes eligible to be cast by our stockholders. If stock-based benefit plans are established more than one year after the stock offering, they must be approved by a majority of votes cast by our stockholders. The following additional restrictions would apply to our stock-based benefit plans only if such plans are adopted within one year after the stock offering:

 

·non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plans;

 

·any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans;

 

·any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans;

 

·any tax-qualified employee stock benefit plans and restricted stock plan, in the aggregate, may not acquire more than 10% of the shares sold in the offering, unless The Provident Bank has tangible capital of 10% or more, in which case tax-qualified employee stock benefit plans and restricted stock plans may acquire up to 12% of the shares sold in the offering;

 

·the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans;

 

·accelerated vesting is not permitted except for death, disability or upon a change in control of The Provident Bank or New Provident; and

 

·our executive officers or directors must exercise or forfeit their options in the event that The Provident Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive.

 

We have not determined whether we will present stock-based benefit plans for stockholder approval prior to or more than 12 months after the completion of the conversion. In the event either federal or state regulators change their regulations or policies regarding stock-based benefit plans, including any regulations or policies

 

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restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

 

We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.

 

The actual value of the shares awarded under stock-based benefit plans would be based in part on the price of New Provident’s common stock at the time the shares are awarded. The stock-based benefit plans are subject to stockholder approval, and cannot be implemented until at least six months after the offering. The following table presents the total value of all shares of restricted stock that would be available for issuance under the stock-based benefit plans, assuming the shares are awarded when the market price of our common stock ranges from $8.00 per share to $14.00 per share.

 

Share Price   391,000 Shares
Awarded at Minimum
of Offering Range
   460,000 Shares
Awarded at Midpoint
of Offering Range
   529,000 Shares
Awarded at Maximum
of Offering Range
 
(In thousands, except share price information) 
              
$8.00   $3,128   $3,680   $4,232 
 10.00    3,910    4,600    5,290 
 12.00    4,692    5,520    6,348 
 14.00    5,474    6,440    7,406 

 

The grant-date fair value of the options granted under the stock-based benefit plans will be based in part on the price of shares of common stock of New Provident at the time the options are granted. The value also will depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plans, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the options, and the actual value of the options may differ significantly from the value set forth in this table.

 

Exercise Price   Grant-Date Fair
Value Per Option
   977,500 Options at
Minimum of
Offering Range
   1,150,000 Options
at Midpoint of
Offering Range
   1,322,500 Options
at Maximum of
Offering Range
 
(In thousands, except exercise price and fair value information) 
                  
$8.00   $2.28   $2,229   $2,622   $3,015 
 10.00    2.85    2,786    3,278    3,769 
 12.00    3.42    3,343    3,933    4,523 
 14.00    3.99    3,900    4,589    5,277 

 

The tables presented above are provided for informational purposes only. There can be no assurance that our stock price will not trade below $10.00 per share. Before you make an investment decision, we urge you to read this prospectus carefully, including, but not limited to, the section entitled “Risk Factors” beginning on page 18.

 

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BENEFICIAL OWNERSHIP OF COMMON STOCK

 

The following table provides the beneficial ownership of shares of common stock of Old Provident held by our directors and executive officers, individually and as a group, and all individuals known to management to own more than 5% of our common stock as of July 29, 2019.

 

Name of Beneficial Owner  Total Shares Beneficially
Owned
   Percent of All Common
Stock Outstanding
 
         
Directors          
Frank G. Cousins, Jr.   12,371(1)   * 
James A. DeLeo   9,835(2)   * 
Lisa DeStefano   11,741(3)   * 
Jay E. Gould   24,741(4)   * 
Laurie H. Knapp   20,195(5)   * 
David P. Mansfield   107,561(6)   1.11%
Richard L. Peeke   14,441(7)   * 
Joseph B. Reilly   6,276(8)   * 
Arthur Sullivan   19,741(9)   * 
Charles F. Withee   79,370(10)   * 
           
Named Executive Officer Who Is Not Also a Director          
Carol L. Houle   56,418(11)   * 
           
All directors and executive officers as a group (11 persons)   362,690    3.77%
           
Provident Bancorp
5 Market Street
Amesbury, Massachusetts 01913
   5,034,323    52.3%

 

 

*Less than 1%.
(1) Includes 1,180 shares held in an individual retirement account, 100 shares held as custodian, 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(2) Includes 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(3) Includes 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(4) Includes 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(5) Includes 3,500 shares held in an individual retirement account, 3,500 shares held by Ms. Knapp’s spouse, 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(6) Includes 15,000 shares held in a 401(k) plan, 4,255 held in an individual retirement account, 3,475 shares allocated shares under the ESOP, 26,786 shares of unvested restricted stock over which the individual has voting control, 5,758 shares held by Mr. Mansfield’s spouse and 44,640 exercisable stock options.
(7) Includes 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(8) Includes 400 shares held in revocable trust and 4,862 shares of unvested restricted stock over which the individual has voting control.
(9) Includes 2,923 shares of unvested restricted stock over which the individual has voting control and 4,870 exercisable stock options.
(10) Includes 3,000 shares held in an individual retirement account, 15,000 shares held in a 401(k) plan, 3,475 shares allocated under the ESOP, 18,081 shares of unvested restricted stock over which the individual has voting control and 30,132 exercisable stock options.
(11) Includes 15,733 shares held in a 401(k) plan, 3,471 shares allocated under the ESOP, 11,963 shares of unvested restricted stock over which the individual has voting control and 19,936 exercisable stock options.

 

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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

 

The table below sets forth, for each of New Provident’s directors and executive officers, and for all of these individuals as a group, the following information:

 

(i) the number of exchange shares to be held upon completion of the conversion, based upon their beneficial ownership of Old Provident common stock as of July 29, 2019;

 

(ii)the proposed purchases of subscription shares, assuming sufficient shares of common stock are available to satisfy their subscriptions; and

 

(iii)the total shares of common stock to be held upon completion of the conversion.

 

In each case, it is assumed that subscription shares are sold at the minimum of the offering range. See “The Conversion and Offering—Additional Limitations on Common Stock Purchases.” Federal and state regulations prohibit our directors and officers from selling the shares they purchase in the offering for one year after the date of purchase. Subscriptions by management through our 401(k) plan are included in the proposed purchases set forth below and will be counted as part of the maximum number of shares such individuals may subscribe for in the stock offering and as part of the maximum number of shares directors and officers may purchase in the stock offering.

 

                            Total Common Stock to be
Held at Minimum of
 
    Number of     Proposed Purchases of Stock   Offering Range (3)  
    Exchange       in the Offering (2)             Percentage  
    Shares to Be     Number of               Number of     of Shares  
Name of Beneficial Owner   Held (1)     Shares     Amount     Shares     Outstanding  
Frank G. Cousins, Jr.     23,942       4,100     $ 41,000       28,042       *  
James A. DeLeo     19,034       500       5,000       19,534       *  
Lisa DeStefano     22,723       5,000       50,000       27,723       *  
Jay E. Gould     47,883       50,000       500,000       97,883       *  
Laurie H. Knapp     39,085       8,450       84,500       47,535       *  
David P. Mansfield     208,173       50,000       500,000       258,173       1.38 %
Richard L. Peeke     27,949       5,000       50,000       32,949       *  
Joseph B. Reilly     12,146       25,000       250,000       37,146       *  
Arthur Sullivan     38,206       50,000       500,000       88,206       *  
Charles F. Withee     153,612       50,000       500,000       203,612       1.09 %
Carol L. Houle     109,191       40,000       400,000       149,191       *  
Total for Directors and Executive Officers     701,944       288,050     $ 2,880,500       989,994       5.31 %

 

 

*Less than 1%.
(1)Based on information presented in “Beneficial Ownership of Common Stock,” and assuming an exchange ratio of 1.9354 at the minimum of the offering range.
(2)Includes proposed subscriptions, if any, by associates.
(3) At the maximum of the offering range, directors and executive officers would beneficially own 1,237,747 shares, or 4.90% of our outstanding shares of common stock when including stock options exercisable within 60 days of July 29, 2019.

 

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THE CONVERSION AND OFFERING

 

The Board of Trustees of Provident Bancorp and the Board of Directors of Old Provident have approved 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 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. 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

 

The Board of Trustees of Provident Bancorp and the Board of Directors of Old Provident initially adopted the plan of conversion on June 5, 2019. Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization to the fully stock form. Provident Bancorp, the mutual holding company parent of Old Provident, will be merged into Old Provident, and Provident Bancorp will no longer exist. Old Provident, which owns 100% of The Provident Bank, will be merged into a new Maryland corporation named Provident Bancorp, Inc. As part of the conversion, the 52.3% ownership interest of Provident Bancorp in Old Provident will be offered for sale in the stock offering. When the conversion is completed, all of the outstanding common stock of The Provident Bank will be owned by New Provident, and all of the outstanding common stock of New Provident will be owned by public stockholders. Old Provident and Provident Bancorp, as will the board of corporators of Provident Bancorp, will cease to exist. A diagram of our corporate structure before and after the conversion is set forth in the “Summary” section of this prospectus.

 

Under the plan of conversion, at the completion of the conversion and offering, each share of Old Provident common stock owned by persons other than Provident Bancorp will be converted automatically into the right to receive new shares of New Provident common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Old Provident for new shares of New Provident, the public stockholders will own the same aggregate percentage of shares of common stock of New Provident that they owned in Old Provident immediately prior to the conversion, excluding any shares they purchased in the offering and their receipt of cash paid in lieu of fractional shares, adjusted downward to reflect certain assets held by Provident Bancorp.

 

We intend to retain between $38.9 million and $54.2 million of the net proceeds of the offering and to invest between $47.7 million and $64.8 million of the net proceeds in The Provident Bank. 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 for sale in the subscription offering to our Eligible Account Holders, our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plans, and our employees, officers, trustees, directors and corporators. In addition, we will offer common stock for sale in a community offering to members of the general public, with a preference given first to natural persons residing in the Massachusetts cities and towns of Amesbury, Newburyport and Salisbury, and the New Hampshire cities and towns of Bedford, Exeter, Greenland, Hampton, Hampton Falls, Manchester, Newcastle, Newington, North Hampton, Portsmouth, Rye, Seabrook and Stratham, and second to other members of the general public.

 

We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering will begin at the same time as the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Massachusetts Commissioner of Banks. See “—Community Offering.”

 

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We also may offer for sale shares of common stock not purchased in the subscription or community offerings through a syndicated or firm commitment underwritten offering in which Sandler O’Neill & Partners, L.P. will be sole book-running manager. See “—Syndicated or Firm Commitment Underwritten Offering” herein.

 

We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal 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. The independent valuation will be updated and the final number of the 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.

 

The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each branch office of The Provident Bank. The plan of conversion is also filed as an exhibit to Provident Bancorp’s applications to convert from mutual to stock form of which this prospectus is a part, copies of which may be obtained from the Federal Reserve Board or inspected, without charge, 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 prospectus is a part. Copies of the registration statement may be obtained from the Securities and Exchange Commission or online at the Securities and Exchange Commission’s website, www.sec.gov. See “Where You Can Find Additional Information.”

 

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 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

 

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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 will adjust, based on the appraised value of New Provident as of May 10, 2019, assuming public stockholders of Old Provident own 47.7% 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%   8,886,143    47.6%   18,661,143    1.9354   $19.35   $22.02   193
Midpoint   11,500,000    52.4    10,454,286    47.6    21,954,286    2.2769    22.77    23.57   227
Maximum   13,225,000    52.4    12,022,429    47.6    25,247,429    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 $11.38, $10.35 and $9.60 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.

 

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.

 

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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 this 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 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.

 

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The independent valuation was prepared by RP Financial, LC. in reliance upon the information contained in this 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.

 

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.

 

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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.

 

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

 

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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 %     122.55 %
Medians   14.75x     121.56 %     121.56 %

  

 

(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 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.”

 

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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 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

 

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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.”

 

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 will 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, 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.

 

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The term “residing” or “resident” as used in this 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 is currently expected to terminate at the same time as 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.

 

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

 

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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 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, 10% beneficial stockholder;

 

(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

 

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(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.”

 

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

 

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·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 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 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

 

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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.

 

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, 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 this 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.

 

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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.

 

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-

 

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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 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

 

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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.

 

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 this 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.

 

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

 

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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.

 

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.

 

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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 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

 

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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 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.

 

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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.

 

COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF PROVIDENT BANCORP, INC.

 

General. As a result of the conversion, existing stockholders of Old Provident will become stockholders of New Provident. There are differences in the rights of stockholders of Old Provident and stockholders of New Provident caused by differences between Massachusetts and Maryland law and regulations and differences in Old Provident’s Massachusetts articles of organization and bylaws and New Provident’s Maryland articles of incorporation and bylaws.

 

This discussion is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the material differences and similarities affecting the rights of stockholders. See “Where You Can Find Additional Information” for procedures for obtaining a copy of New Provident’s articles of incorporation and bylaws.

 

Authorized Capital Stock. The authorized capital stock of Old Provident consists of 30,000,000 shares of common stock, 32,855 shares of preferred stock, and 17,145 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A, all with no par value per share.

 

The authorized capital stock of New Provident consists of 100,000,000 shares of common stock, $0.01 par value per share, and 50,000,000 shares of preferred stock, par value $0.01 per share.

 

Under Maryland General Corporation Law and New Provident’s articles of incorporation, a majority of the whole Board of Directors may increase or decrease the number of authorized shares without stockholder approval. Stockholder approval is required to increase or decrease the number of authorized shares of Old Provident.

 

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New Provident’s articles of incorporation and Old Provident’s articles of organization each authorize the Board of Directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, dividend rights, conversion and redemption rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, our Board of Directors has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a hostile tender offer, merger or other transaction by which a third party seeks control. We currently have no plans for the issuance of additional shares for such purposes.

 

Issuance of Capital Stock. Pursuant to applicable laws and regulations, Provident Bancorp is required to own not less than a majority of the outstanding shares of Old Provident common stock. Provident Bancorp will no longer exist following completion of the conversion.

 

Voting Rights. Neither Old Provident’s articles of organization or bylaws nor New Provident’s articles of incorporation or bylaws provide for cumulative voting for the election of directors. For additional information regarding voting rights, see “—Limitations on Voting Rights of Greater-than-10% Stockholders” below.

 

Payment of Dividends. Old Provident’s ability to pay dividends depends, to a large extent, upon The Provident Bank’s ability to pay dividends to Old Provident, which is restricted by Massachusetts statutes and by federal income tax considerations related to savings banks. In addition, Massachusetts law generally provides that Old Provident would not be able to issue a dividend if, after giving effect to the dividend, Old Provident (1) would not be able to pay its existing and reasonably foreseeable debts, liabilities and obligations, whether or not liquidated, matured, asserted or contingent, as they become due in the usual course of business; or (2) Old Provident’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if Old Provident was dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

 

New Provident’s ability to pay dividends also depends, to a large extent, upon The Provident Bank’s ability to pay dividends to New Provident, which is restricted by Massachusetts statutes and by federal income tax considerations related to savings banks. In addition, 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.

 

Board of Directors. Old Provident’s articles of organization and New Provident’s articles of incorporation require the Board of Directors to be divided into three classes and that the members of each class shall be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually.

 

Under Old Provident’s bylaws, any vacancies on the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. Persons elected by the Board of Directors of Old Provident to fill vacancies may only serve for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until such director’s successor has been duly elected and qualified. Under New Provident’s bylaws, any vacancy occurring on the Board of Directors, including any vacancy created by reason of an increase in the number of directors, may be filled only by the affirmative vote of two-thirds of the remaining directors, and any director so chosen shall hold office for the remainder of the term to which the director has been elected and until his or her successor is elected and qualified.

 

Limitations on Liability. Old Provident’s articles of organization provide that directors will not be personally liable for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability, except for (i) any breach of the duty of loyalty to Old Provident, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law, (iii) improper distributions under Massachusetts law or (iv) any transaction from which the director derived an improper benefit.

 

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New Provident’s articles of incorporation provide that directors and officers will not be personally liable for monetary damages to New Provident for certain actions as directors or officers, except for (i) receipt of an improper personal benefit, (ii) actions or omissions that are determined to have materially involved active and deliberate dishonesty, or (iii) to the extent otherwise provided by Maryland law. These provisions might, in certain instances, discourage or deter stockholders or management from bringing a lawsuit against directors or officers for a breach of their duties even though such an action, if successful, might benefit New Provident.

 

Indemnification of Directors, Officers, Employees and Agents. Old Provident’s bylaws provide that directors and officers shall be, and other employees may be in the discretion of the Board of Directors, indemnified by Old Provident to the fullest extent permitted by applicable law, against any and all liabilities that are incurred by him or her in connection with any threatened or brought proceeding in which the individual is involved as a result of serving as a director, officer or employee of Old Provident or its subsidiaries, or at any other entity at the request or direction of Old Provident. Indemnification can also be provided with respect to service at another entity if the Board of Directors determines such indemnification is appropriate. No indemnification will be provided with respect to a matter where the individual was adjudicated not to have acted in good faith in the reasonable belief that the individual’s action was in the best interests of Old Provident; in the case of a settled matter, no indemnification will be provided if there is a determination by a majority of the Board of Directors not involved in the proceeding that the individual did not act in good faith in the reasonable belief that the individual’s action was in the best interests of Old Provident. The bylaws also provide for payment of expenses in advance of final disposition, subject to receipt of an undertaking to repay in the event of adjudication or a determination that the individual is not entitled to indemnification.

 

The articles of incorporation of New Provident provide that it shall indemnify (i) its current and former directors and officers to the fullest extent required or permitted by Maryland law, including the advancement of expenses, and (ii) other employees or agents to such extent as shall be authorized by the Board of Directors and Maryland law, all subject to any applicable federal law. Maryland law allows New Provident to indemnify any person for expenses, liabilities, settlements, judgments and fines in suits in which such person has been made a party by reason of the fact that he or she is or was a director, officer or employee of New Provident. No such indemnification may be given if the acts or omissions of the person are adjudged to be in bad faith or a result of active and deliberate dishonesty and material to the matter giving rise to the proceeding or if such person had reason to believe that their act or omission was unlawful, if such person is liable to the corporation for an unlawful distribution, or if such person personally received an improper personal benefit. The right to indemnification includes the right to be paid the reasonable expenses incurred in advance of final disposition of a proceeding, subject to the receipt of an undertaking to repay the amount if it is ultimately determined that the standard of conduct has not been met.

 

Special Meetings of Stockholders. Old Provident’s bylaws provide that special meetings of stockholders may be called by the Chairman of the Board, the Chief Executive Officer or a majority of the members of the Board of Directors. Additionally, special meetings shall be called by the holder or holders of no less than a majority of all of the outstanding capital stock of Old Provident entitled to vote at the meeting.

 

New Provident’s bylaws provide that special meetings of stockholders may be called by the President, the Chief Executive Officer, the Chairman or by a majority vote of the total authorized directors, and shall be called upon the written request of stockholders entitled to cast at least a majority of all votes entitled to vote at the meeting.

 

Stockholder Nominations and Proposals. Old Provident’s bylaws provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must submit written notice to Old Provident not less than 80 calendar days nor more than 90 days prior to the scheduled annual meeting date, provided, however, that if the date of the annual meeting is advanced more than 30 days prior to the anniversary date of the preceding year’s annual meeting, then to be timely, notice by the shareholder must be received not later than the close of business on the tenth calendar day following the earlier of the day on which the meeting notice was mailed or publicly disclosed.

 

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New Provident’s bylaws provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must submit written notice to New Provident not less than 90 days nor more than 100 days prior to the anniversary of the prior year’s annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to the anniversary of the preceding year’s annual meeting, a stockholder’s written notice shall be timely only if delivered or mailed to and received by the Secretary of New Provident at the principal executive office of the corporation no earlier than the day on which public disclosure of the date of such annual meeting is first made and no later than the tenth day following the earlier of the notice of the meeting was mailed to stockholders or public disclosure of the date of such annual meeting is first made.

 

Management believes that it is in the best interest of New Provident and its stockholders to provide sufficient time to enable management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations, should management determine that doing so is in the best interests of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted. In certain instances, such provisions could make it more difficult to oppose management’s nominees or proposals, even if stockholders believe such nominees or proposals are in their best interests.

 

Stockholder Action Without a Meeting. Old Provident’s bylaws provide that any action to be taken at any annual or special meeting of shareholders may be taken without a meeting if all shareholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of shareholders.

 

New Provident’s bylaws do not provide for action to be taken by stockholders without a meeting. However, under Maryland law, action may be taken by stockholders without a meeting if all stockholders entitled to vote on the action consent to taking such action without a meeting.

 

Stockholder’s Right to Examine Books and Records. Provided that the stockholder gives the company written notice of his demand at least five business days before, Massachusetts law provides that a stockholder is entitled to inspect and copy, during regular business hours, a company’s (a) articles of organization, (b) bylaws, (c) resolutions adopted by its Board of Directors creating one or more classes or series of shares and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding, (d) the minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past three years, (e) all written communications to shareholders generally within the past three years, including the financial statements furnished for the past three years, (f) a list of the names and business addresses of its current directors and officers and (g) its most recent annual report delivered to the secretary of state.

 

Provided that the stockholder gives the company written notice of his demand at least five business days before and provided his demand is made in good faith and for a proper purpose, he describes with reasonable particularity his purpose and the records he desires to inspect, the records are directly connected with his purpose, and the corporation shall not have determined in good faith that disclosure of the records sought would adversely affect the corporation in the conduct of its business or, in the case of a public corporation, constitute material non-public information, Massachusetts law also provides that a stockholder is entitled to inspect and copy, during regular business hours, a company’s (a) excerpts from minutes reflecting action taken at any meeting of the Board of Directors, records of any action of a committee of the Board of Directors while acting in place of the Board of Directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or Board of Directors without a meeting; (b) accounting records of the corporation and (c) a record of its shareholders showing the number and class of shares held by each.

 

Maryland law provides that a stockholder may, on written request, inspect a company’s bylaws, stockholder minutes, annual statements of affairs and any voting trust agreements. However, only a stockholder or group of stockholders who together, for at least six months, hold at least 5% of the company’s total shares, have the right to inspect a company’s stock ledger, list of stockholders and books of accounts.

 

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Limitations on Voting Rights of Greater-than-10% Stockholders. Old Provident’s articles of organization and New Provident’s articles of incorporation provide that no beneficial owner, directly or indirectly, of more than 10% of the outstanding shares of common stock will be permitted to vote any shares in excess of such 10% limit.

 

In addition, federal regulations provide that for a period of three years following the date of the completion of the offering, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of New Provident’s equity securities without the prior written approval of the Federal Reserve Board. Where any person acquires beneficial ownership of more than 10% of a class of New Provident’s equity securities without the prior written approval of the Federal Reserve Board, the securities beneficially owned by such person in excess of 10% may not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote. Furthermore, Massachusetts regulations provide that, without prior written notice to us and the prior written approval of the Massachusetts Commissioner of Banks, no person may directly or indirectly offer to acquire the beneficial ownership of more than 10% of a converted holding company for a period of three years from the date of the completion of the conversion.

 

Business Combinations with Interested Stockholders. Old Provident’s articles of organization provide that certain “Business Combinations” require the affirmative vote of the holders of at least 80% of the voting power of the outstanding shares of Old Provident. A Business Combination means: (1) any merger or consolidation of Old Provident or any of its subsidiaries with any Interested Shareholder (as defined in the articles of organization) or its affiliate; (2) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or with any Interested Shareholder or its affiliate having an aggregate fair market value equal to or greater than 10% of the combined assets of Old Provident and its subsidiaries; (3) the issuance or transfer by Old Provident or any subsidiary of any securities of Old Provident or any subsidiary to any Interested Shareholder or its affiliate in exchange for cash, securities or other property having an aggregate fair market value equal to or greater than 10% of the combined assets of Old Provident and its subsidiaries; (4) the adoption of any plan or proposal for the liquidation or dissolution of Old Provident proposed by or on behalf of any Interested Shareholder or its affiliate; and (5) any reclassification of securities (including any reverse share split) or recapitalization of Old Provident or any merger or consolidation of Old Provident with any of its subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of equity or convertible securities of Old Provident or any subsidiary which is directly or indirectly owned by any Interested Shareholder or its affiliate. However, if certain conditions are met, including the Business Combination being approved by two-thirds of the independent directors then in office and/or certain price and procedure conditions, then only the affirmative vote, if any, as may be required by law would be required to approve the Business Combination.

 

Under Maryland law, “business combinations” between New Provident and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested stockholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested stockholder as: (i) any person who beneficially owns 10% or more of the voting power of New Provident’s voting stock after the date on which New Provident had 100 or more beneficial owners of its stock; or (ii) an affiliate or associate of New Provident at any time after the date on which New Provident had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of New Provident. A person is not an interested stockholder under the statute if the Board of Directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

 

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After the five-year prohibition, any business combination between New Provident and an interested stockholder generally must be recommended by the Board of Directors of New Provident and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of New Provident, and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of New Provident other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if New Provident’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

 

Mergers, Consolidations and Sales of Assets. Under Old Provident’s articles of organization, any merger, share exchange or consolidation of Old Provident, or the sale of all or substantially all of the property or assets of Old Provident, requires the affirmative vote of at least two-thirds of the total number of votes eligible to be cast by shareholders on such transaction. However, only an affirmative vote of at least a majority of the total number of votes eligible to be cast by shareholders on such transaction will be required if the Board of Directors recommends, by the affirmative vote of two-thirds of the Directors then in office, that the shareholders approve such transaction by the affirmative vote of a majority of the total votes eligible to be cast by shareholders on such transaction.

 

As a result of an election made in New Provident’s articles of incorporation, a merger or consolidation of New Provident requires approval of a majority of all votes entitled to be cast by stockholders. However, under Maryland law, no approval by stockholders is required for a merger where New Provident is the successor corporation, if:

 

·the plan of merger does not make an amendment to the articles of incorporation that would be required to be approved by the stockholders;

 

·each stockholder of the surviving corporation whose shares were outstanding immediately before the effective date of the merger will hold the same number of shares, with identical designations, preferences, limitations, and rights, immediately after; and

 

·the number of shares of any class or series of stock outstanding immediately after the effective time of the merger will not increase by more than 20% the total number of voting shares outstanding immediately before the merger.

 

In addition, under certain circumstances the approval of the stockholders shall not be required to authorize a merger with or into a 90% owned subsidiary of New Provident.

 

Under Maryland law, a sale of all or substantially all of New Provident’s assets other than in the ordinary course of business, or a voluntary dissolution of New Provident, requires the approval of its Board of Directors and the affirmative vote of two-thirds of the votes of stockholders entitled to be cast on the matter.

 

Evaluation of Offers. Old Provident’s articles of organization states that the Board of Directors of Old Provident, in considering what they reasonably believe to be in the best interests of Old Provident, may consider the interests  of Old Provident’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of Old Provident and its shareholders, including the possibility that these interests may be best served by the continued independence of Old Provident.

 

The articles of incorporation of New Provident provide that its Board of Directors, when evaluating a transaction that would or may involve a change in control of New Provident (whether by purchases of its securities, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in determining what is in the best interests of New Provident and its stockholders and in making any recommendation to the stockholders, give due consideration to all relevant factors, including, but not limited to:

 

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·the economic effect, both immediate and long-term, upon New Provident’s stockholders, including stockholders, if any, who do not participate in the transaction;

 

·the social and economic effect on the present and future employees, creditors and customers of, and others dealing with, New Provident and its subsidiaries and on the communities in which New Provident and its subsidiaries operate or are located;

 

·whether the proposal is acceptable based on the historical, current or projected future operating results or financial condition of New Provident;

 

·whether a more favorable price could be obtained for New Provident’s stock or other securities in the future;

 

·the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would affect the employees of New Provident and its subsidiaries;

 

·the future value of the stock or any other securities of New Provident or the other entity to be involved in the proposed transaction;

 

·any antitrust or other legal and regulatory issues that are raised by the proposal;

 

·the business and historical, current or expected future financial condition or operating results of the other entity to be involved in the transaction, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed transaction; and

 

·the ability of New Provident to fulfill its objectives as a financial institution holding company and on the ability of its subsidiary financial institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations.

 

If the Board of Directors determines that any proposed transaction should be rejected, it may take any lawful action to defeat such transaction.

 

Dissenters’ Rights of Appraisal. Under Massachusetts law, stockholders of Old Provident will not have dissenters’ appraisal rights in connection with a plan of merger or consolidation to which Old Provident is a party if all shareholders receive marketable securities of the surviving corporation and/or cash and no director, officer or controlling shareholder has a direct or indirect material financial interest in the merger other than in his capacity as (i) a shareholder of the corporation, (ii) a director, officer, employee or consultant of either the merging or the surviving corporation or of any affiliate of the surviving corporation if his financial interest is pursuant to bona fide arrangements with either corporation or any such affiliate, or (iii) in any other capacity so long as the shareholder owns not more than five percent of the voting shares of all classes and series of the corporation in the aggregate.

 

Under Maryland law, stockholders of New Provident will not have dissenters’ appraisal rights in connection with a plan of merger or consolidation to which New Provident is a party as long as the common stock of New Provident trades on a national securities exchange.

 

Amendment of Governing Instruments. Old Provident’s articles of organization may be amended by the Board of Directors without shareholder action to the fullest extent permitted by the Massachusetts Business Corporation Act. Old Provident’s articles of organization may also be amended by the affirmative vote of at least 80% of the total votes eligible to be cast by shareholders on such amendment; provided, however, that if the Board of Directors recommends, by the affirmative vote of at least two-thirds of the Independent Directors then in office,

 

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that shareholders approve such amendment at such meeting of shareholders, such amendment shall only require the affirmative vote of a majority of the total votes eligible to be cast by shareholders on such amendment. However, to the extent that any provision of Old Provident’s articles of organization provides for shareholder approval by a vote of more than a majority of the total votes eligible to be cast, such provision may only be amended, altered, changed or repealed after approval by the same percentage vote as is provided for in such provision. Old Provident’s bylaws may be amended by the affirmative vote of a majority of Old Provident’s directors or by the stockholders by the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders; provided, however, that if the Board of Directors recommends, by the affirmative vote of two-thirds of the Independent Directors then in office, that shareholders approve such amendment at such meeting of shareholders, such amendment shall only require the affirmative vote of a majority of the total votes eligible to be cast by shareholders on such amendment.

 

New Provident’s articles of incorporation may be amended, upon the submission of an amendment by the Board of Directors to a vote of the stockholders, by the affirmative vote of at least two-thirds of the outstanding shares of common stock, or by the affirmative vote of a majority of the outstanding shares of common stock if at least two-thirds of the members of the whole Board of Directors approves such amendment; provided, however, that approval by at least 80% of the outstanding voting stock is generally required to amend the following provisions:

 

(i)The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock;

 

(ii)The division of the Board of Directors into three staggered classes;

 

(iii)The ability of the Board of Directors to fill vacancies on the board;

 

(iv)The requirement that directors may only be removed for cause and by the affirmative vote of at least two-thirds of the votes eligible to be cast by stockholders;

 

(v)The ability of the Board of Directors to amend and repeal the bylaws;

 

(vi)The ability of the Board of Directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire New Provident;

 

(vii)The authority of the Board of Directors to provide for the issuance of preferred stock;

 

(viii)The validity and effectiveness of any action lawfully authorized by the affirmative vote of the holders of a majority of the total number of outstanding shares of common stock;

 

(ix)The number of stockholders constituting a quorum or required for stockholder consent;

 

(x)The indemnification of current and former directors and officers, as well as employees and other agents, by New Provident;

 

(xi)The limitation of liability of officers and directors to New Provident for money damages;

 

(xii)The inability of stockholders to cumulate their votes in the election of directors;

 

(xiii)       The advance notice requirements for stockholder proposals and nominations;

 

(xiv)The selection of Maryland as the sole and exclusive forum for any action brought by stockholders on behalf of New Provident or its stockholders or any action alleging a breach of the Maryland General Corporation Law; and

 

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(xv)The provision of the articles of incorporation requiring approval of at least 80% of the outstanding voting stock to amend the provisions of the articles of incorporation provided in (i) through (xiv) of this list.

 

New Provident’s articles of incorporation also provide that the bylaws may be amended by the affirmative vote of a majority of our directors or by the stockholders by the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Any amendment of this super-majority requirement for amendment of the bylaws would also require the approval of 80% of the outstanding voting stock.

 

RESTRICTIONS ON ACQUISITION OF NEW PROVIDENT

 

Although the Board of Directors of New Provident is not aware of any effort that might be made to obtain control of New Provident after the conversion, the Board of Directors believes that it is appropriate to include certain provisions as part of New Provident’s articles of incorporation to protect the interests of New Provident and its stockholders from takeovers which the Board of Directors might conclude are not in the best interests of The Provident Bank, New Provident or New Provident’s stockholders.

 

The following discussion is a general summary of the material provisions of Maryland law, New Provident’s articles of incorporation and bylaws and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description is necessarily general and is not intended to be a complete description of the document or regulatory provision in question. New Provident’s articles of incorporation and bylaws are included as part of Provident Bancorp’s application for conversion filed with the Federal Reserve Board and New Provident’s registration statement filed with the Securities and Exchange Commission. See “Where You Can Find Additional Information.”

 

Maryland Law and Articles of Incorporation and Bylaws of New Provident

 

Maryland law, as well as New Provident’s articles of incorporation and bylaws, contain a number of provisions relating to corporate governance and rights of stockholders that may discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the Board of Directors or management of New Provident more difficult.

 

Directors. The Board of Directors will be divided into three classes. The members of each class will be elected for a term of three years and only one class of directors will be elected annually. Thus, it would take at least two annual elections to replace a majority of the Board of Directors. The bylaws establish qualifications for board members, including restrictions on affiliations with competitors of The Provident Bank and restrictions based upon prior legal or regulatory violations. Further, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. Such notice and information requirements are applicable to all stockholder business proposals and nominations, and are in addition to any requirements under the federal securities laws.

 

Restrictions on Call of Special Meetings. The articles of incorporation and bylaws provide that special meetings of stockholders can be called by the President, the Chief Executive Officer, the Chairman, by a majority of the whole Board of Directors or upon the written request of stockholders entitled to cast at least a majority of all votes entitled to vote at the meeting.

 

Prohibition of Cumulative Voting. The articles of incorporation prohibit cumulative voting for the election of directors.

 

Limitation of Voting Rights. The articles of incorporation provide that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit. This provision has been included in the articles

 

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of incorporation in reliance on Section 2-507(a) of the Maryland General Corporation Law, which entitles stockholders to one vote for each share of stock unless the articles of incorporation provide for a greater or lesser number of votes per share or limit or deny voting rights.

 

Restrictions on Removing Directors from Office. The articles of incorporation provide that directors may be removed only for cause, and only by the affirmative vote of the holders of at least two-thirds of the voting power of all of New Provident’s then-outstanding common stock entitled to vote (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”).

 

Forum Selection for Certain Stockholder Lawsuits. The articles of incorporation provide that, unless New Provident consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of New Provident, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of New Provident to New Provident or New Provident stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Maryland General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Maryland, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Under the articles of incorporation, any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of New Provident shall be deemed to have notice of and consented to the exclusive forum provisions of the articles of incorporation. Because this provision permits claims to be brought in federal courts located in the state of Maryland, this provision would apply to a claim made under the U.S. federal securities laws where there is exclusive federal jurisdiction for such a claim.

 

Authorized but Unissued Shares. After the conversion, New Provident will have authorized but unissued shares of common and preferred stock. See “Description of Capital Stock of New Provident Following the Conversion.” The articles of incorporation authorize 50,000,000 shares of serial preferred stock. New Provident is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of New Provident that the Board of Directors does not approve, it may be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future attempt to gain control of New Provident. The Board of Directors has no present plan or understanding to issue any preferred stock.

 

Amendments to Articles of Incorporation and Bylaws. Amendments to the articles of incorporation must be approved by the Board of Directors and by the affirmative vote of at least two-thirds of the outstanding shares of common stock, or by the affirmative vote of a majority of the outstanding shares of common stock if at least two-thirds of the members of the whole Board of Directors approves such amendment; provided, however, that approval by at least 80% of the outstanding voting stock is generally required to amend certain provisions. A list of these provisions is provided under “Comparison of Stockholders’ Rights For Existing Stockholders of Provident Bancorp, Inc.—Amendment of Governing Instruments” above.

 

The articles of incorporation also provide that the bylaws may be amended by the affirmative vote of a majority of New Provident’s directors or by the stockholders by the affirmative vote of at least 80% of the total votes eligible to be cast at a duly constituted meeting of stockholders. Any amendment of this super-majority requirement for amendment of the bylaws would also require the approval of 80% of the total votes eligible to be cast.

 

The provisions requiring the affirmative vote of 80% of the total eligible votes eligible to be cast for certain stockholder actions have been included in the articles of incorporation of New Provident in reliance on Section 2-104(b)(4) of the Maryland General Corporation Law. Section 2-104(b)(4) permits the articles of incorporation to require a greater proportion of votes than the proportion that would otherwise be required for stockholder action under the Maryland General Corporation Law.

 

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Business Combinations. Maryland law restricts mergers, consolidations, sales of assets and other business combinations between New Provident and an “interested stockholder,” and provides certain vote standards for other mergers, consolidations, sales of assets and other business combinations. See “Comparison of Stockholder Rights for Existing Stockholders of Provident Bancorp, Inc.—Mergers, Consolidations and Sales of Assets” above.

 

Evaluation of Offers. The articles of incorporation provide that New Provident’s Board of Directors, when evaluating a transaction that would or may involve a change in control of New Provident (whether by purchases of its securities, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in determining what is in the best interests of New Provident and its stockholders and in making any recommendation to the stockholders, give due consideration to all relevant factors, including, but not limited to, certain enumerated factors. For a list of these enumerated factors, see “Comparison of Stockholder Rights for Existing Stockholders of Provident Bancorp, Inc.—Evaluation of Offers” above.

 

Purpose and Anti-Takeover Effects of New Provident’s Articles of Incorporation and Bylaws. Our Board of Directors believes that the provisions described above are prudent and will reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our Board of Directors. These provisions also will assist us in the orderly deployment of the offering proceeds into productive assets during the initial period after the conversion. We believe these provisions are in the best interests of New Provident and its stockholders. Our Board of Directors believes that it will be in the best position to determine the true value of New Provident and to negotiate more effectively for what may be in the best interests of all our stockholders. Accordingly, our Board of Directors believes that it is in the best interests of New Provident and all of our stockholders to encourage potential acquirers to negotiate directly with the Board of Directors and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of our Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of New Provident and that is in the best interests of all our stockholders.

 

Takeover attempts that have not been negotiated with and approved by our Board of Directors present the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by our Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for our stockholders, with due consideration given to matters such as the management and business of the acquiring corporation.

 

Although a tender offer or other takeover attempt may be made at a price substantially above the current market price, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders.

 

Despite our belief as to the benefits to stockholders of these provisions of New Provident’s articles of incorporation and bylaws, these provisions also may have the effect of discouraging a future takeover attempt that would not be approved by our Board of Directors, but pursuant to which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also make it more difficult to remove our Board of Directors and management. Our Board of Directors, however, has concluded that the potential benefits outweigh the possible disadvantages.

 

Federal Conversion Regulations

 

Federal Reserve Board regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquire stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Federal Reserve Board, no person may make an offer or announcement of an offer to purchase shares or actually acquire shares of a converted institution or its holding company for a period

 

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of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, the person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company. The Federal Reserve Board has defined “person” to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to a bank or its holding company, or to an underwriter or member of a selling group acting on the converting institution’s or its holding company’s behalf for resale to the general public, are excepted. The regulation also provides civil penalties for willful violation or assistance in any such violation of the regulation by any person connected with the management of the converting institution or its holding company or who controls more than 10% of the outstanding shares or voting rights of a converted institution or its holding company.

 

Massachusetts Conversion Regulations

 

Massachusetts regulations provide that, without prior written notice to us and the prior written approval of the Massachusetts Commissioner of Banks, no person may directly or indirectly offer to acquire the beneficial ownership of more than 10% of a converted holding company for a period of three years from the date of the completion of the conversion. Where a person, directly or indirectly, acquires beneficial ownership of more than 10% of a converted holding company, without prior written notice to the converted holding company and the prior written approval of the Massachusetts Commissioner of Banks, the securities beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote, shall not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and shall not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to stockholders for a vote, and the Massachusetts Commissioner of Banks may take any further action he may deem appropriate. The regulation provides for civil penalties for a violation of this regulation.

 

Change in Control Law and Regulations

 

Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company such as New Provident unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as will be the case with New Provident, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

 

In addition, federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.

 

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Massachusetts Banking Law

 

Under Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the Massachusetts Division of Banks; and (iii) is subject to examination by the Massachusetts Division of Banks. New Provident would become a Massachusetts bank holding company if it acquires a second banking institution and holds and operates it separately from The Provident Bank. In addition, for a period of three years following completion of a conversion to stock form, no person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of equity security of a converting mutual savings bank or mutual holding company without prior written approval of the Massachusetts Commissioner of Banks.

 

DESCRIPTION OF CAPITAL STOCK OF NEW PROVIDENT FOLLOWING THE CONVERSION

 

General

 

New Provident is authorized to issue 100,000,000 shares of common stock, par value of $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. New Provident currently expects to issue in the offering and exchange up to 25,247,429 shares of common stock, at the maximum of the offering range. New Provident will not issue shares of preferred stock in the conversion. Each share of common stock will have the same relative rights as, and will be identical in all respects to, each other share of common stock. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion, all of the shares of common stock will be duly authorized, fully paid and nonassessable.

 

The shares of common stock will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency.

 

Common Stock

 

Dividends. New Provident may pay dividends to an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and up to an amount that would not make us insolvent, as and when declared by our Board of Directors. The payment of dividends by New Provident is also subject to limitations that are imposed by law and applicable regulation, including restrictions on payments of dividends that would reduce New Provident’s assets below the then-adjusted balance of its liquidation account. The holders of common stock of New Provident will be entitled to receive and share equally in dividends as may be declared by our Board of Directors out of funds legally available therefor. If New Provident issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.

 

Voting Rights. Upon completion of the offering and exchange, the holders of common stock of New Provident will have exclusive voting rights in New Provident. They will elect New Provident’s Board of Directors and act on other matters as are required to be presented to them under Maryland law or as are otherwise presented to them by the Board of Directors. Generally, each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Any person who beneficially owns more than 10% of the then-outstanding shares of New Provident’s common stock, however, will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit. If New Provident issues shares of preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require the approval of 80% of our outstanding common stock.

 

As a Massachusetts-chartered stock savings bank, corporate powers and control of The Provident Bank are vested in its Board of Directors, who elect the officers of The Provident Bank and who fill any vacancies on the Board of Directors. Voting rights of The Provident Bank are vested exclusively in the owners of the shares of capital stock of The Provident Bank, which will be New Provident, and voted at the direction of New Provident’s

 

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Board of Directors. Consequently, the holders of the common stock of New Provident will not have direct control of The Provident Bank.

 

Liquidation. In the event of any liquidation, dissolution or winding up of The Provident Bank, New Provident, as the holder of 100% of The Provident Bank’s capital stock, would be entitled to receive all assets of The Provident Bank available for distribution, after payment or provision for payment of all debts and liabilities of The Provident Bank, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the liquidation account to Eligible Account Holders. In the event of liquidation, dissolution or winding up of New Provident, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities (including payments with respect to its liquidation account), all of the assets of New Provident available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.

 

Preemptive Rights. Holders of the common stock of New Provident will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock is not subject to redemption.

 

Preferred Stock

 

None of the shares of New Provident’s authorized preferred stock will be issued as part of the offering or the conversion. Preferred stock may be issued with preferences and designations as our Board of Directors may from time to time determine. Our Board of Directors may, without stockholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.

 

TRANSFER AGENT

 

The transfer agent and registrar for New Provident’s common stock is Continental Stock Transfer & Trust Company, New York, New York.

 

EXPERTS

 

The consolidated financial statements of Old Provident and subsidiaries as of December 31, 2018 and 2017, and for each of the years in the two-year period ended December 31, 2018, have been included herein and in the registration statement in reliance upon the reports of Whittlesey PC, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

RP Financial, LC. has consented to the publication herein of the summary of its report setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letters with respect to subscription rights and the liquidation accounts.

 

LEGAL MATTERS

 

Luse Gorman, PC, Washington, D.C., counsel to New Provident, Provident Bancorp, Old Provident and The Provident Bank, has issued to New Provident its opinion regarding the legality of the common stock and the federal income tax consequences of the conversion. Baker Newman & Noyes LLC, Portland, Maine has provided an opinion to us regarding the Massachusetts income tax consequences of the conversion. Certain legal matters will be passed upon for Sandler O’Neill & Partners, L.P. and, in the event of a syndicated or firm commitment underwritten offering, for any other co-managers, by Nutter McClennen & Fish LLP, Boston, Massachusetts.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

New Provident has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set

 

 166 

 

 

forth in the registration statement. Such information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge through the Securities and Exchange Commission’s web site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission, including New Provident. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract or document.

 

Provident Bancorp has filed an application for approval of the conversion with the Massachusetts Commissioner of Banks, and New Provident has filed a bank holding company application with the Federal Reserve Board. The application for conversion filed with the Massachusetts Commissioner of Banks may be inspected, without charge, at the offices of the Massachusetts Division of Banks, 1000 Washington Street, 10th Floor, Boston, Massachusetts. To obtain a copy of the application filed with the Federal Reserve Board, you may contact Scott Chu, Supervisory Analyst, of the Federal Reserve Bank of Boston, at (617) 973-3088. The plan of conversion is available, upon request, at each of The Provident Bank’s offices.

 

In connection with the offering, New Provident will register its common stock under Section 12(b) of the Securities Exchange Act of 1934 and, upon such registration, New Provident and the holders of its common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion, New Provident has undertaken that it will not terminate such registration for a period of at least three years following the offering.

 

 167 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PROVIDENT BANCORP, INC.

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 F-2
   
Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 F-3
   
Consolidated Statements of Comprehensive Income for the Three Months Ended  March 31, 2019 and 2018 F-4
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended  March 31, 2019 and 2018 F-5
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 F-6
 
Notes to the Condensed Consolidated Financial Statements (Unaudited) F-8 – F-26
   
Report of Independent Registered Public Accounting Firm F-27
   
Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 F-28
   
Consolidated Statements of Income for the Years Ended December 31, 2018 and 2017 F-29
   
Consolidated Statements of Comprehensive Income Years Ended December 31, 2018 and 2017 F-30
 
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2018 and  2017 F-31
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-32
   
Notes to Consolidated Financial Statements F-34 – F-68

 

F-1

 

 

Provident Bancorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

March 31, 2019 and December 31, 2018

 

   March 31,   December 31, 
(In thousands)  2019   2018 
   (unaudited)      
Assets          
Cash and due from banks  $9,151   $10,941 
Short-term investments   14,575    17,672 
Cash and cash equivalents   23,726    28,613 
Investments in available-for-sale securities (at fair value)   49,662    51,403 
Federal Home Loan Bank stock, at cost   3,515    2,650 
Loans, net   859,269    835,528 
Bank owned life insurance   26,403    26,226 
Premises and equipment, net   21,467    16,086 
Other real estate owned   1,720    1,676 
Accrued interest receivable   3,171    2,638 
Deferred tax asset, net   6,589    6,437 
Other assets   2,997    2,822 
Total assets  $998,519   $974,079 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits:          
Noninterest-bearing  $198,733   $195,293 
Interest-bearing   576,544    572,803 
Total deposits   775,277    768,096 
Borrowings   79,942    68,022 
Operating lease liabilities   3,919    - 
Other liabilities   11,109    12,377 
Total liabilities   870,247    848,495 
Shareholders' equity          
Preferred stock; authorized 50,000 shares:          
no shares issued and outstanding   -    - 
Common stock, no par value: 30,000,000 shares authorized;          
9,662,181 shares issued, 9,625,719 shares outstanding at March 31, 2019 and December 31, 2018   -    - 
Additional paid-in capital   46,236    45,895 
Retained earnings   85,569    83,351 
Accumulated other comprehensive loss   (186)   (255)
Unearned compensation - ESOP   (2,559)   (2,619)
Treasury stock: 36,462 shares   (788)   (788)
Total shareholders' equity   128,272    125,584 
Total liabilities and shareholders' equity  $998,519   $974,079 

 

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

 

F-2

 

 

Provident Bancorp, Inc. and Subsidiary

 

Consolidated Statements of Income

For the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

   Three months ended 
   March 31, 
(In thousands)  2019   2018 
Interest and dividend income:          
Interest and fees on loans  $11,699   $9,276 
Interest and dividends on securities   404    435 
Interest on short-term investments   26    42 
Total interest and dividend income   12,129    9,753 
Interest expense:          
Interest on deposits   1,437    920 
Interest on borrowings   534    114 
Total interest expense   1,971    1,034 
Net interest and dividend income   10,158    8,719 
Provision for loan losses   1,462    656 
Net interest and dividend income after provision for loan losses   8,696    8,063 
Noninterest income:          
Customer service fees on deposit accounts   329    362 
Service charges and fees - other   412    455 
Gain on sales of securities, net   113    - 
Bank owned life insurance   177    171 
Other income   15    25 
 Total noninterest income   1,046    1,013 
Noninterest expense:          
Salaries and employee benefits   4,294    4,164 
Occupancy expense   644    450 
Equipment expense   106    122 
Data processing   203    204 
Marketing expense   55    53 
Professional fees   422    248 
Directors' fees   181    163 
Other   841    972 
Total noninterest expense   6,746    6,376 
Income before income tax expense   2,996    2,700 
Income tax expense   778    678 
 Net income  $2,218   $2,022 
           
Earnings per share:          
Basic  $0.24   $0.22 
Diluted  $0.24   $0.22 
           
Weighted Average Shares:          
Basic   9,267,106    9,219,865 
Diluted   9,305,284    9,295,003 

 

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

 

F-3

 


Provident Bancorp, Inc. and Subsidiary

 

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

   Three months ended 
   March 31, 
(In thousands)  2019   2018 
         
Net income  $2,218   $2,022 
Other comprehensive income (loss):          
Unrealized holding gains (losses)   215    (1,213)
Reclassification adjustment for realized gains in net income   (113)   - 
Unrealized gain (loss)   102    (1,213)
Income tax effect   (33)   354 
Other comprehensive loss, net of tax   69    (859)
Total comprehensive income  $2,287   $1,163 

 

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

 

F-4

 

 

Provident Bancorp, Inc. and Subsidiary

 

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

                      Accumulated                    
    Shares of     Additional           Other     Unearned              
    Common     Paid-in     Retained     Comprehensive     Compensation     Treasury        
(In  thousands, except share data)   Stock     Capital     Earnings     (Loss) Income     ESOP     Stock     Total  
                                           
Balance, December 31, 2018     9,625,719     $ 45,895     $ 83,351     $ (255 )   $ (2,619 )   $ (788 )   $ 125,584  
Net income     -       -       2,218       -       -       -       2,218  
Other comprehensive loss     -       -       -       69       -       -       69  
Stock-based compensation expense     -       265       -       -       -       -       265  
ESOP shares earned     -       76       -       -       60       -       136  
Balance, March 31, 2019     9,625,719     $ 46,236     $ 85,569     $ (186 )   $ (2,559 )   $ (788 )   $ 128,272  
                                                         
Balance, December 31, 2017     9,628,496     $ 44,592     $ 74,047     $ 589     $ (2,857 )   $ (594 )   $ 115,777  
Net income     -       -       2,022       -       -       -       2,022  
Other comprehensive loss     -       -       -       (859 )     -       -       (859 )
Stock-based compensation expense     -       240       -       -       -       -       240  
ESOP shares earned     -       91       -       -       59       -       150  
Balance, March 31, 2018     9,628,496     $ 44,923     $  76,069     $  (270 )   $  (2,798 )   $  (594 )   $  117,330  

 

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

 

F-5

 

 

Provident Bancorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

   Three months ended 
   March 31, 
(In thousands)  2019   2018 
Cash flows from operating activities:          
Net income  $2,218   $2,022 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net of accretion   49    67 
ESOP expense   136    150 
Gain on sale of securities, net   (113)   - 
Change in deferred loan fees, net   285    (27)
Provision for loan losses   1,462    656 
Depreciation and amortization   404    185 
(Increase) decrease in accrued interest receivable   (533)   75 
Deferred tax benefit   (185)   - 
Share-based compensation expense   265    240 
Increase in cash surrender value of life insurance   (177)   (171)
Principal repayments of operating lease obligations   (18)   - 
(Increase) decrease in other assets   (175)   611 
Decrease in other liabilities   (1,166)   (664)
Net cash provided by operating activities   2,452    3,144 
           
Cash flows from investing activities:          
Purchases of available-for-sale securities   (13,729)   - 
Proceeds from sales of available-for-sale securities   13,565    - 
Proceeds from pay downs, maturities and calls of available-for-sale securities   2,071    2,359 
Purchase of Federal Home Loan Bank Stock   (865)   (312)
Loan originations and purchases, net of paydowns   (25,488)   (18,373)
Additions to premises and equipment   (1,950)   (58)
Additions to assets held-for-sale   -    (147)
Additions to other real estate owned   (44)   - 
 Net cash used in investing activities   (26,440)   (16,531)

 

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

 

F-6

 

 

Provident Bancorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows (Continued)

For the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

   Three months ended 
   March 31, 
(In thousands)  2019   2018 
Cash flows from financing activities:          
Net decrease in demand deposits, NOW and savings accounts   (15,544)   (22,826)
Net increase (decrease) in time deposits   22,725    (7,526)
Net change in short-term borrowings   11,920    18,370 
Net cash provided by (used in) financing activities   19,101    (11,982)
           
Net decrease in cash and cash equivalents   (4,887)   (25,369)
Cash and cash equivalents at beginning of year   28,613    47,689 
Cash and cash equivalents at end of year  $23,726   $22,320 
           
Supplemental disclosures:          
Interest paid  $1,995   $1,098 
Income taxes paid   290    - 
Recognition of right-of-use assets in premises and equipment (1)   3,836    - 
Recognition of operating lease liabilities (1)   3,938    - 
Reclassification of accrued branch rent from other liabilities to premises and equipment (1)   102    - 
Assets held-for-sale transferred to premises and equipment   -    3,433 

 

(1) Adoption of ASU 2016-02, Leases (Note 9)

 

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

 

F-7

 

 

Notes to Consolidated Financial Statements

 

Note 1 – Basis of Presentation

 

The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. All material intercompany balances and transactions have been eliminated in consolidation.

 

In the opinion of management, all adjustments (consisting solely of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three months ended March 31, 2019, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

In preparing the unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”); management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, impairment on investment securities, fair value measurements of assets and liabilities, and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

 

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of interim financial statements. The consolidated financial statements presented should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018, of Provident Bancorp, Inc. as filed with the SEC.

 

Provident Bancorp, Inc. and Subsidiary

 

F-8

 

 

Notes to Consolidated Financial Statements

 

Note 2 - Investments Securities Available-for-Sale

 

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at March 31, 2019 and December 31, 2018:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
(In thousands)  Basis   Gains   Losses   Value 
     
March 31, 2019                    
State and municipal securities  $11,453   $144   $62   $11,535 
Asset-backed securities   6,116    -    68    6,048 
Government mortgage-backed securities   32,353    95    369    32,079 
Total available-for-sale securities  $49,922   $239   $499   $49,662 
                     
December 31, 2018                    
State and municipal securities  $20,118   $272   $135   $20,255 
Asset-backed securities   6,512    -    141    6,371 
Government mortgage-backed securities   25,135    138    496    24,777 
Total available-for-sale securities  $51,765   $410   $772   $51,403 

 

The scheduled maturities of debt securities were as follows at March 31, 2019. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

   Available-for-Sale 
   Amortized   Fair 
(In thousands)  Cost   Value 
         
Due within one year  $95   $95 
Due after one year through five years   604    606 
Due after five years through ten years   2,028    2,067 
Due after ten years   8,726    8,767 
Government mortgage-backed securities   32,353    32,079 
Asset-backed securities   6,116    6,048 
   $49,922   $49,662 

 

During the three months ended March 31, 2019, gross realized gains on sales and calls were $216,000, and gross losses realized were $103,000. There were no realized gains or losses on sales and calls during the three months ended March 31, 2018.

 

There were no securities of issuers whose aggregate carrying amount exceeded 10% of equity at March 31, 2019.

 

Provident Bancorp, Inc. and Subsidiary

 

F-9

 

 

Notes to Consolidated Financial Statements

 

Securities with carrying amounts of $38.1 million and $31.1 million were pledged to secure available borrowings with the Federal Reserve Bank and Federal Home Loan Bank at March 31, 2019 and December 31, 2018, respectively.

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are temporarily impaired, are as follows at March 31, 2019 and December 31, 2018:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
                         
March 31, 2019                              
Temporarily impaired securities:                              
State and municipal  $373   $5   $3,681   $57   $4,054   $62 
Asset-backed securities   -    -    6,048    68    6,048    68 
Government mortgage-backed securities   4,860    81    12,285    288    17,145    369 
Total temporarily impaired securities  $5,233   $86   $22,014   $413   $27,247   $499 
                               
December 31, 2018                              
Temporarily impaired securities:                              
State and municipal  $6,137   $115   $597   $20   $6,734   $135 
Asset-backed securities   3,833    98    2,538    43    6,371    141 
Government mortgage-backed securities   2,864    32    14,152    464    17,016    496 
Total temporarily impaired securities  $12,834   $245   $17,287   $527   $30,121   $772 

 

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Because the decline in fair value of the government mortgage-backed securities, asset-backed securities and state and municipal securities is primarily attributable to changes in market interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

 

Provident Bancorp, Inc. and Subsidiary

 

F-10

 

 

Notes to Consolidated Financial Statements

 

Note 3 – Loans

 

Loans consisted of the following at March 31, 2019 and December 31, 2018:

 

   March 31,   December 31, 
(In thousands)  2019   2018 
         
Commercial real estate  $373,435   $364,867 
Commercial   382,550    361,782 
Residential real estate   54,898    57,361 
Construction and land development   42,441    44,606 
Consumer   19,310    19,815 
    872,634    848,431 
Allowance for loan losses   (11,857)   (11,680)
Deferred loan fees, net   (1,508)   (1,223)
Net loans  $859,269   $835,528 

 

The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:

 

(In thousands)  Commercial
Real Estate
   Commercial   Residential
Real Estate
   Construction
and Land
Development
   Consumer   Unallocated   Total 
                             
Allowance for loan losses:                                   
                                    
Balance at December 31, 2018  $4,152   $5,742   $251   $738   $710   $87   $11,680 
Charge-offs   -    (1,033)   -    -    (281)   -    (1,314)
Recoveries   -    10    -    -    19    -    29 
Provision (credit)   95    1,027    (11)   (4)   364    (9)   1,462 
Balance at March 31, 2019  $4,247   $5,746   $240   $734   $812   $78   $11,857 
                                    
                                    
Balance at December 31, 2017  $4,483   $3,280   $300   $965   $649   $80   $9,757 
Charge-offs   -    (20)   -    -    (166)   -    (186)
Recoveries   -    1    -    -    8    -    9 
Provision (credit)   124    407    (8)   (26)   187    (28)   656 
Balance at March 31, 2018  $4,607   $3,668   $292   $939   $678   $52   $10,236 

 

Provident Bancorp, Inc. and Subsidiary

 

F-11

 

 

Notes to Consolidated Financial Statements

 

The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at March 31, 2019 and December 31, 2018:

 

(In thousands)  Commercial
Real Estate
   Commercial   Residential
Real Estate
   Construction
and Land
Development
   Consumer   Unallocated   Total 
                             
March 31, 2019                                   
Allowance for loan losses:                                   
                                    
Ending balance:                                   
Individually evaluated for impairment  $-   $886   $-   $-   $-   $-   $886 
Ending balance:                                   
Collectively evaluated for impairment   4,247    4,860    240    734    812    78    10,971 
Total allowance for loan losses ending balance  $4,247   $5,746   $240   $734   $812   $78   $11,857 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $1,838   $7,328   $383   $-   $-        $9,549 
Ending balance:                                   
Collectively evaluated for impairment   371,597    375,222    54,515    42,441    19,310         863,085 
Total loans ending balance  $373,435   $382,550   $54,898   $42,441   $19,310        $872,634 
                                    
December 31, 2018                                   
Allowance for loan losses:                                   
                                    
Ending balance:                                   
Individually evaluated for impairment  $62   $1,039   $-   $-   $-   $-   $1,101 
Ending balance:                                   
Collectively evaluated for impairment   4,090    4,703    251    738    710    87    10,579 
Total allowance for loan losses ending balance  $4,152   $5,742   $251   $738   $710   $87   $11,680 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $1,853   $5,291   $388   $-   $-        $7,532 
Ending balance:                                   
Collectively evaluated for impairment   363,014    356,491    56,973    44,606    19,815         840,899 
Total loans ending balance  $364,867   $361,782   $57,361   $44,606   $19,815        $848,431 

  

At March 31, 2019 and December 31, 2018, loans with an aggregate principal balance of $423.2 million and $393.8 million, respectively, were pledged to secure possible borrowings from the Federal Reserve Bank.

 

Provident Bancorp, Inc. and Subsidiary

 

F-12

 

 

Notes to Consolidated Financial Statements

 

The following tables set forth information regarding non-accrual loans and past-due loans by portfolio segment at March 31, 2019 and December 31, 2018:

 

                           90 Days     
           90 Days   Total           or More     
   30 - 59   60 - 89   or More   Past   Total   Total   Past Due   Nonaccrual 
(In thousands)  Days   Days   Past Due   Due   Current   Loans   and Accruing   Loans 
                                 
March 31, 2019                                        
Commercial real estate  $-   $-   $519   $519   $372,916   $373,435   $-   $519 
Commercial   131    -    1,861    1,992    380,558    382,550    -    6,919 
Residential real estate   227    358    29    614    54,284    54,898    -    822 
Construction and land development   -    -    -    -    42,441    42,441    -    - 
Consumer   30    85    114    229    19,081    19,310    -    115 
Total  $388   $443   $2,523   $3,354   $869,280   $872,634   $-   $8,375 
                                         
December 31, 2018                                        
Commercial real estate  $742   $-   $519   $1,261   $363,606   $364,867   $-   $519 
Commercial   40    -    3,167    3,207    358,575    361,782    -    4,830 
Residential real estate   321    223    30    574    56,787    57,361    -    850 
Construction and land development   -    -    -    -    44,606    44,606    -    - 
Consumer   62    46    59    167    19,648    19,815    -    62 
Total  $1,165   $269   $3,775   $5,209   $843,222   $848,431   $-   $6,261 

 

Provident Bancorp, Inc. and Subsidiary

 

F-13

 

 

Notes to Consolidated Financial Statements

 

Information about the Company’s impaired loans by portfolio segment was as follows at March 31, 2019 and December 31, 2018:

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
                     
March 31, 2019                    
With no related allowance recorded:                         
Commercial real estate  $1,838   $1,838   $-   $1,846   $21 
Commercial   1,966    1,986    -    2,020    6 
Residential real estate   383    383    -    386    5 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance  $4,187   $4,207   $-   $4,252   $32 
                          
With an allowance recorded:                         
Commercial real estate  $-   $-   $-   $-   $- 
Commercial   5,362    5,385    886    5,369    - 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded  $5,362   $5,385   $886   $5,369   $- 
                          
Total                         
Commercial real estate  $1,838   $1,838   $-   $1,846   $21 
Commercial   7,328    7,371    886    7,389    6 
Residential real estate   383    383    -    386    5 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $9,549   $9,592   $886   $9,621   $32 

 

Provident Bancorp, Inc. and Subsidiary

 

F-14

 

 

Notes to Consolidated Financial Statements

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
                     
December 31, 2018                    
With no related allowance recorded:                         
Commercial real estate  $1,334   $1,334   $-   $5,614   $69 
Commercial   4,050    4,110    -    4,894    38 
Residential real estate   388    388    -    396    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance  $5,772   $5,832   $-   $10,904   $127 
                          
With an allowance recorded:                         
Commercial real estate  $519   $519   $62   $519   $- 
Commercial   1,241    1,267    1,039    1,695    52 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded  $1,760   $1,786   $1,101   $2,214   $52 
                          
Total                         
Commercial real estate  $1,853   $1,853   $62   $6,133   $69 
Commercial   5,291    5,377    1,039    6,589    90 
Residential real estate   388    388    -    396    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $7,532   $7,618   $1,101   $13,118   $179 

 

Provident Bancorp, Inc. and Subsidiary

 

F-15

 

 

Notes to Consolidated Financial Statements

 

The following summarizes troubled debt restructurings entered into during the three months ended March 31, 2019:

 

(Dollars in thousands)  Number of
Contracts
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
             
March 31, 2019            
Troubled debt restructurings:               
Commercial   1   $1,963   $1,963 
    1   $1,963   $1,963 

 

In the three months ended March 31, 2019, the Company approved one troubled debt restructuring totaling $2.0 million. This commercial loan was placed on an extended 12-month interest-only period with re-amortization to follow. An impairment analysis was performed and a specific reserve of $100,000 was allocated to this relationship.

 

There were no troubled debt restructurings entered into during the year ended December 31, 2018.

 

At March 31, 2019, there were no commitments to lend additional funds to borrowers whose loans were modified in troubled debt restructurings.

 

Credit Quality Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.

 

Provident Bancorp, Inc. and Subsidiary

 

F-16

 

 

Notes to Consolidated Financial Statements

 

The following tables present the Company’s loans by risk rating and portfolio segment at March 31, 2019 and December 31, 2018:

 

               Construction         
(In thousands)  Commercial
Real Estate
   Commercial   Residential
Real Estate
   and Land
Development
   Consumer   Total 
                         
March 31, 2019                              
Grade:                              
 Pass  $349,204   $363,366   $-   $42,441   $-   $755,011 
 Special mention   22,321    11,040    -    -    -    33,361 
 Substandard   1,910    8,144    561    -    -    10,615 
 Not formally rated   -    -    54,337    -    19,310    73,647 
Total  $373,435   $382,550   $54,898   $42,441   $19,310   $872,634 
                               
December 31, 2018                              
Grade:                              
 Pass  $356,415   $339,079   $-   $44,606   $-   $740,100 
 Special mention   6,531    11,339    -    -    -    17,870 
 Substandard   1,921    10,447    571    -    -    12,939 
 Doubtful   -    917    -    -    -    917 
 Not formally rated   -    -    56,790    -    19,815    76,605 
Total  $364,867   $361,782   $57,361   $44,606   $19,815   $848,431 

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $18.6 million and $18.8 million at March 31, 2019 and December 31, 2018, respectively.

 

Note 4 - Deposits

 

The following is a summary of deposit balances by type at March 31, 2019 and December 31, 2018:

 

   March 31,   December 31, 
(In thousands)  2019   2018 
     
NOW and demand  $312,286   $332,064 
Regular savings   115,614    109,322 
Money market deposits   227,256    229,314 
Total non-certificate accounts   655,156    670,700 
           
Certificate accounts of $250,000 or more   15,583    14,164 
Certificate accounts less than $250,000   104,538    83,232 
Total certificate accounts   120,121    97,396 
Total deposits  $775,277   $768,096 

 

Provident Bancorp, Inc. and Subsidiary

 

F-17

 

 

Notes to Consolidated Financial Statements

 

At March 31, 2019 and December 31, 2018, the aggregate amount of brokered certificates of deposit was $69.1 million and $55.8 million respectively. Brokered certificates of deposit are not included in the totals for time deposits in denominations over $250,000 listed above.

 

At March 31, 2019 and December 31, 2018, the scheduled maturities for certificate accounts for each of the following five years are as follows:

 

   March 31,   December 31, 
(In thousands)  2019   2018 
         
Within one year  $77,622   $55,061 
More than one year to two years   32,457    32,089 
More than two years to three years   8,740    8,938 
More than three years to four years   840    794 
More than four years through five years   462    514 
Total  $120,121   $97,396 

 

Note 5 - Borrowings

 

Borrowings from the Federal Home Loan Bank (the “FHLB”) are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial real estate loans and other qualified assets.

 

Maturities of advances from the FHLB as of March 31, 2019 are summarized as follows:

 

   March 31, 
(In thousands)  2019 
     
Fiscal Year-End     
2019  $54,979 
2020   11,463 
2021   5,000 
2023   8,500 
Total  $79,942 

 

Provident Bancorp, Inc. and Subsidiary

 

F-18

 

 

Notes to Consolidated Financial Statements

 

Note 6 – Employee Benefits & Share-Based Compensation Plans

 

Employee Stock Ownership Plan

 

The Bank maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.

 

The Company loaned funds to the ESOP to purchase 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan is payable annually over 15 years at a rate per annum equal to the Prime Rate as of December 31 (5.50% at December 31, 2018). Loan payments are principally funded by cash contributions from the Bank.

 

Shares held by the ESOP include the following:

 

   March 31, 2019   December 31, 2018 
Allocated   95,240    71,430 
Committed to be allocated   5,952    23,810 
Unallocated   255,960    261,912 
Total   357,152    357,152 

 

Share-Based Compensation Plan

 

Stock Options

 

A summary of the status of the Company’s stock option grants for the three months ended March 31, 2019, is presented in the table below:

 

   Stock Option
Awards
   Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
(years)
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018   396,438   $17.89           
Granted   -                
Forfeited   -                
Exercised   -                
Outstanding at March 31, 2019   396,438   $17.89    7.76   $1,888,000 
Outstanding and expected to vest at March 31, 2019   396,438   $17.89    7.76   $1,888,000 
Vested and Exercisable at March 31, 2019   151,272   $17.50    7.66   $632,000 
Unrecognized compensation cost  $1,136,000                
Weighted average remaining  recognition period (years)   2.76                

 

Total expense for the stock options was $97,000 and $101,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Provident Bancorp, Inc. and Subsidiary

 

F-19

 

 

Notes to Consolidated Financial Statements

 

Restricted Stock

 

The following table presents the activity in unvested restricted stock awards under the Equity Plan for the three months ended March 31, 2019:

 

   Number of Shares   Weighted Average
Grant Price
 
Unvested restricted stock awards at Decemer 31, 2018   98,073   $18.13 
Granted   -      
Forfeited   -      
Vested   -      
Unvested restricted stock awards at March 31, 2019   98,073   $18.13 
Unrecognized compensation cost  $1,557,000      
Weighted average remaining recognition period (years)   2.76      

 

Total expense for the restricted stock awards was $168,000 and $139,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Note 7 - Earnings Per Share

 

Earnings per share consisted of the following components for the three months ended March 31, 2019 and 2018.

 

   Three months ended 
   March 31, 
(Dollars in thousands)  2019   2018 
Net income attributable to common shareholders  $2,218   $2,022 
           
Average number of common shares outstanding   9,662,181    9,657,319 
Less:          
average unallocated ESOP shares   (271,525)   (286,226)
average unvested restricted stock   (87,268)   (122,405)
average treasury stock acquired   (36,282)   (28,823)
Average number of common shares outstanding to calculate basic earnings per common share   9,267,106    9,219,865 
           
Effect of dilutive unvested restricted stock and stock option awards   38,178    75,138 
Average number of common shares outstanding to calculate diluted earnings per common share   9,305,284    9,295,003 
           
Earnings per common share:          
Basic  $0.24   $0.22 
Diluted  $0.24   $0.22 

 

Provident Bancorp, Inc. and Subsidiary

 

F-20

 

 

Notes to Consolidated Financial Statements

 

 

Note 8 - Regulatory Matters

 

The Bank’s actual capital amounts and ratios at March 31, 2019 and December 31, 2018 are summarized as follows:

 

                      To Be Well 
                      Capitalized Under 
   Actual   For Capital   Prompt Corrective 
   Capital   Adequacy Purposes   Action Provisions 
(Dollars in thousands)  Amount   Ratio   Amount      Ratio   Amount      Ratio 
                               
March 31, 2019                                    
Total Capital (to Risk Weighted Assets)  $131,884    14.45%  $73,014   >   8.0%  $91,267   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   120,471    13.20    54,760   >   6.0    73,014   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   120,471    13.20    41,070   >   4.5    59,324   >   6.5 
Tier 1 Capital (to Average Assets)   120,471    12.20    39,512   >   4.0    49,391   >   5.0 
                                     
December 31, 2018                                    
Total Capital (to Risk Weighted Assets)  $128,939    14.55%  $70,891   >   8.0%  $88,614   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   117,855    13.30    53,168   >   6.0    70,891   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   117,855    13.30    39,876   >   4.5    57,599   >   6.5 
Tier 1 Capital (to Average Assets)   117,855    12.69    37,157   >   4.0    46,446   >   5.0 

 

Note 9 - Leases

 

Effective January 1, 2019, the Company adopted Accounting Standard Update (ASU) No. 2016-02, Leases (Topic 842). This standard required the Company to recognize on the balance sheet right-of-use assets and lease liabilities, which approximate the present value of the Company’s remaining lease payments. As of March 31, 2019, the Company recognized right-of-use assets and lease liabilities totaling $3.8 million and $3.9 million, respectively. The right-of-use assets are included in the total for premises and equipment net.

 

In July 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-11, which provided a practical expedient package for lessees. The Company has elected to use the expedient package and did not reassess whether any existing contracts contain leases; did not reassess the lease classification for existing leases; and did not reassess initial direct costs for any existing leases. As a result, all leases are considered operating leases. The Company’s leases do not provide an implicit rate so an incremental borrowing rate based on the information available at adoption date was used in determining the present value of future payments.

 

The lease liabilities recognized by the Company represent three leased branch locations. The Company’s leases have remaining initial contractual lease terms ranging from nine months to 16.5 years. The Company is terminating the lease on the Hampton, New Hampshire branch effective Mary 2019, therefore the Company chose to account for this lease using the short-term lease exemption and did not apply the new accounting guidance to this lease. Some of the Company’s leases include options to extend the lease for up to 20 years. The lease liabilities recognized include certain lease extensions as it is expected that the Company will use substantially all lease renewal options. Rent expense for the operating leases has been straight lined for the remaining lease term. For the three months ended March 31, 2019, rent expense for the three operating leases totaled $72,000.

 

Provident Bancorp, Inc. and Subsidiary

 

F-21

 

  

Notes to Consolidated Financial Statements

 

 

The maturities of the annual cash flows for our lease liabilities and other information as of March 31, 2019 are summarized as follows:

 

(Dollars in thousands)    
Fiscal Year-End  Dollar Amount 
2019   153 
2020   165 
2021   172 
2022   172 
2023   172 
Thereafter   6,461 
Total lease payments   7,295 
Less imputed interest   (3,376)
Total lease liabilities  $3,919 

 

Weighted-average remaining lease term - operating leases  32.4 years 
Weighted-average discount rate - operating leases   3.77%

 

Note 10 - Fair Value Measurements

 

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

 

Basis of Fair Value Measurements

 

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

 

·Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

 

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

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-22

 

  

Notes to Consolidated Financial Statements

 

 

Fair Values of Assets Measured on a Recurring Basis

 

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

 

The following summarizes assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018:

 

   Fair Value Measurements at Reporting Date Using 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
March 31, 2019                    
State and municipal  $11,535   $-   $11,535   $- 
Asset-backed securities   6,048    -    6,048    - 
Mortgage-backed securities   32,079    -    32,079    - 
Totals  $49,662   $-   $49,662   $- 
                     
December 31, 2018                    
State and municipal  $20,255   $-   $20,255   $- 
Asset-backed securities   6,371    -    6,371    - 
Government mortgage-backed securities   24,777    -    24,777    - 
Totals  $51,403   $-   $51,403   $- 

 

The Company did not have any transfers of assets measured at fair value on a recurring basis between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2019.

 

Fair Values of Assets Measured on a Nonrecurring Basis

 

The Company’s only assets measured at fair value on a nonrecurring basis are loans identified as impaired for which a write-off or specific reserve has been recorded, and other real estate owned.

 

Certain impaired loans of the Company are reported at the fair value of the underlying collateral, less estimated selling costs. The Company classifies impaired loans as Level 3 in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party, but can be adjusted and therefore classified as level 3. The Company classifies other real estate owned as Level 2 in the fair value hierarchy if the Company has received a purchase and sales agreement.

 

Provident Bancorp, Inc. and Subsidiary

 

F-23

 

 

Notes to Consolidated Financial Statements

 

 

The following summarizes assets measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018:

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
                 
March 31, 2019                    
Impaired loans  $4,476   $-   $-   $4,476 
Other real estate owned   1,720    -    1,720    - 
                     
December 31, 2018                    
Impaired loans  $659   $-   $-   $659 
Other real estate owned   1,676    -    1,676    - 

 

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018:

 

(In thousands)  Fair Value   Valuation Technique  Unobservable Input
           
March 31, 2019           
Impaired loans  $4,476    Real estate appraisals
and business valuation
  Discount for dated appraisals
and comparable company evaluations
            
December 31, 2018           
Impaired loans  $659   Real estate appraisals
and business valuation
  Discount for dated appraisals
and comparable company evaluations

 

Provident Bancorp, Inc. and Subsidiary

 

F-24

 

 

Notes to Consolidated Financial Statements

 

 

Note 11 - Disclosures About Fair Values of Financial Instruments

 

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

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at March 31, 2019 and December 31, 2018:

 

   Carrying   Fair Value 
(In thousands)  Amount   Level 1   Level 2   Level 3   Total 
                     
March 31, 2019                         
Financial assets:                         
Cash and cash equivalents  $23,726   $23,726   $-   $-   $23,726 
Available-for-sale securities   49,662    -    49,662    -    49,662 
Federal Home Loan Bank of Boston stock   3,515    3,515    -    -    3,515 
Loans, net   859,269    -    -    852,305    852,305 
Accrued interest receivable   3,171    -    3,171    -    3,171 
Financial liabilities:                         
Deposits   775,277    -    -    775,554    775,554 
Borrowings   79,942    -    79,984    -    79,984 
                          
December 31, 2018                         
Financial assets:                         
Cash and cash equivalents  $28,613   $28,613   $-   $-   $28,613 
Available-for-sale securities   51,403    -    51,403    -    51,403 
Federal Home Loan Bank of Boston stock   2,650    2,650    -    -    2,650 
Loans, net   835,528    -    -    827,090    827,090 
Accrued interest receivable   2,638    -    2,638    -    2,638 
Financial liabilities:                         
Deposits   768,096    -    -    768,010    768,010 
Borrowings   68,022    -    67,846    -    67,846 

 

The carrying amounts of financial instruments shown above are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

 

Provident Bancorp, Inc. and Subsidiary

 

F-25

 

 

Notes to Consolidated Financial Statements

 

 

Note 12– Commitments & Contingencies

 

In April 2018, the Bank conducted a foreclosure sale of certain real and personal property which secured four non-accruing loans originally made by the Bank. The aggregate outstanding principal balance of these loans was approximately $7.5 million, of which (a) approximately $4.9 million was due and owing to the Bank and (b) approximately $2.6 million was due and owing to another financial institution who purchased participation interests in certain of these loans (the “Participant”). The Bank received approximately $8.3 million in proceeds from this foreclosure sale. The U.S. Small Business Administration (“SBA”), which also made a secured loan to the same obligors, has since disputed the Bank’s retention of, and claimed priority to, a portion of the proceeds generated from this foreclosure sale, alleging a breach of contract and seeking monetary damages in the approximate amount of $2.0 million. The Bank has partially denied liability, and in addition to its defenses, has asserted a counterclaim against the SBA and its assignee, Granite State Economic Development Corporation, seeking equitable reformation of the contract at issue on the basis of a mutual mistake of fact. On March 5, 2019, the Bank participated in a mediation of this matter. Pending the outcome of this lawsuit and this mediation, the Bank has segregated into a separate deposit account the entire amount in dispute, consisting of $1.4 million that would be retained by the Bank, and $543,000 that would be provided to the participating institution. Management does not believe that the ultimate resolution of this matter will be material to the Bank’s financial condition or results of operations.

 

Note 13– Subsequent Event

 

On June 5, 2019, the Board of Trustees of Provident Bancorp (“MHC”) and the Board of Directors of the Company adopted a Plan of Conversion and Reorganization (the “Plan”). Pursuant to the Plan, the MHC will convert from the mutual holding company form of organization to the fully public form. The MHC will be merged into the Company, and the MHC will no longer exist. The Company will merge into a new Maryland corporation named Provident Bancorp, Inc. As part of the conversion, the MHC’s ownership interest of the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represents the remaining ownership interest in the Company, will be exchanged for new shares of common stock of Provident Bancorp, Inc., the new Maryland Corporation. The exchange ratio will ensure that immediately after the conversion and public offering, the public shareholders of the Company will own the same aggregate percentage of Provident Bancorp, Inc. common stock that they owned immediately prior to that time (excluding shares purchased in the stock offering and cash received in lieu of fractional shares), adjusted to reflect assets held by the MHC. When the conversion and public offering are completed, all of the capital stock of The Provident Bank will be owned by Provident Bancorp, Inc., the Maryland corporation.

 

The Plan provides for the establishment, upon the completion of the conversion, of special “liquidation accounts” for the benefit of certain depositors of The Provident Bank in an amount equal to the MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the prospectus plus the MHC’s net assets (excluding its ownership of the Company). Following the completion of the conversion, the Company and The Provident Bank will not be permitted to pay dividends on their capital stock if the shareholders’ equity of Provident Bancorp, Inc., the Maryland corporation, or the shareholder’s equity of The Provident Bank, would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.

 

Direct costs of the conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public offering. Costs of $30,000 have been incurred related to the conversion as of March 31, 2019.

 

Provident Bancorp, Inc. and Subsidiary

 

F-26

 

 

Report of Independent Registered Public Accounting Firm

 

To The Board of Directors and Shareholders

Provident Bancorp, Inc. and Subsidiary

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Provident Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Whittlesey PC  

 

We have served as the Company's auditor since 2013.

 

Hartford, Connecticut

March 14, 2019

 

F-27

 

 

Provident Bancorp, Inc. and Subsidiary

 

  

Consolidated Balance Sheets

December 31, 2018 and 2017 

 

(In thousands)  2018   2017 
Assets          
Cash and due from banks  $10,941   $10,326 
Short-term investments   17,672    37,363 
Cash and cash equivalents   28,613    47,689 
Investments in available-for-sale securities (at fair value)   51,403    61,429 
Federal Home Loan Bank stock, at cost   2,650    1,854 
Loans, net   835,528    742,138 
Assets held-for-sale   -    3,286 
Bank owned life insurance   26,226    25,540 
Premises and equipment, net   16,086    10,981 
Other real estate owned   1,676    - 
Accrued interest receivable   2,638    2,345 
Deferred tax asset, net   6,437    4,920 
Other assets   2,822    2,083 
Total assets  $974,079   $902,265 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits:          
Noninterest-bearing  $195,293   $186,222 
Interest-bearing   572,803    563,835 
Total deposits   768,096    750,057 
Borrowings   68,022    26,841 
Other liabilities   12,377    9,590 
Total liabilities   848,495    786,488 
Shareholders' equity          
Preferred stock; authorized 50,000 shares:          
no shares issued and outstanding   -    - 
Common stock, no par value: 30,000,000 shares authorized;          
9,662,181 shares issued, 9,625,719 shares outstanding at December 31, 2018 and 9,657,319 shares issued, 9,628,496 shares outstanding at December 31, 2017   -    - 
Additional paid-in capital   45,895    44,592 
Retained earnings   83,351    74,047 
Accumulated other comprehensive (loss) income   (255)   589 
Unearned compensation - ESOP   (2,619)   (2,857)
Treasury stock: 36,462 and 28,823 shares at December 31, 2018 and 2017, respectively   (788)   (594)
Total shareholders' equity   125,584    115,777 
Total liabilities and shareholders' equity  $974,079   $902,265 

 

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

 

 F-28 

 

 

Provident Bancorp, Inc. and Subsidiary

 

 

Consolidated Statements of Income

For the Years Ended December 31, 2018 and 2017

 

(In thousands)  2018   2017 
Interest and dividend income:          
Interest and fees on loans  $40,358   $32,510 
Interest and dividends on securities   1,669    3,172 
Interest on short-term investments   313    100 
Total interest and dividend income   42,340    35,782 
Interest expense:          
Interest on deposits   4,468    2,944 
Interest on borrowings   745    782 
Total interest expense   5,213    3,726 
Net interest and dividend income   37,127    32,056 
Provision for loan losses   3,329    2,929 
Net interest and dividend income after provision for loan losses   33,798    29,127 
Noninterest income:          
Customer service fees on deposit accounts   1,435    1,392 
Service charges and fees - other   1,993    1,919 
Gain on sales of securities, net   -    5,912 
Bank owned life insurance   686    645 
Other income   64    87 
 Total noninterest income   4,178    9,955 
Noninterest expense:          
Salaries and employee benefits   16,801    15,365 
Occupancy expense   1,733    1,839 
Equipment expense   471    587 
FDIC assessment   301    309 
Data processing   810    741 
Marketing expense   245    300 
Professional fees   1,223    936 
Directors' fees   620    607 
Other   3,210    3,065 
Total noninterest expense   25,414    23,749 
Income before income tax expense   12,562    15,333 
Income tax expense   3,237    7,418 
 Net income  $9,325   $7,915 
           
Earnings per share:          
Basic  $1.01   $0.86 
Diluted  $1.00   $0.86 
           
Weighted Average Shares:          
Basic   9,240,086    9,199,274 
Diluted   9,306,316    9,199,887 

 

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

 

 F-29 

 

 

Provident Bancorp, Inc. and Subsidiary

 

 

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2018 and 2017

 

(In thousands)  2018   2017 
         
Net income  $9,325   $7,915 
Other comprehensive loss:          
Unrealized holding (losses) gains   (1,120)   2,466 
Reclassification adjustment for realized gains in net income   -    (5,912)
Unrealized losses   (1,120)   (3,446)
Income tax effect   276    1,413 
Other comprehensive loss, net of tax   (844)   (2,033)
Total comprehensive income  $8,481   $5,882 

 

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

 

F-30

 

 

Provident Bancorp, Inc. and Subsidiary

 

 

Consolidated Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2018 and 2017

 

               Accumulated             
   Shares of   Additional       Other   Unearned         
   Common   Paid-in   Retained   Comprehensive   Compensation   Treasury     
(In  thousands, except share data)  Stock   Capital   Earnings   Income (Loss)   ESOP   Stock   Total 
                             
Balance, December 31, 2016   9,652,448   $43,393   $66,229   $2,622   $(3,095)  $-   $109,149 
Net income   -    -    7,915    -    -    -    7,915 
Other comprehensive loss   -    -    -    (2,130)   -    -    (2,130)
Reclassification from AOCI to retained earnings             (97)   97              - 
Stock-based compensation expense   -    926    -    -    -    -    926 
Restricted stock award grants   4,871    -    -    -    -    -    - 
Treasury stock acquired   (28,823)   -    -    -    -    (594)   (594)
ESOP shares earned   -    273    -    -    238    -    511 
                                    
Balance, December 31, 2017   9,628,496    44,592    74,047    589    (2,857)   (594)   115,777 
Net income   -    -    9,325    -    -    -    9,325 
Other comprehensive loss   -    -    -    (844)   -    -    (844)
Stock-based compensation expense   -    928    -    -    -    -    928 
Restricted stock award grants   4,862    -    -    -    -    -    - 
Exercise of stock options, net   1,010    -    (21)   -    -    21    - 
Treasury stock acquired   (8,649)   -    -    -    -    (215)   (215)
ESOP shares earned   -    375    -    -    238    -    613 
Balance, December 31, 2018   9,625,719   $45,895   $83,351   $(255)  $(2,619)  $(788)  $125,584 

  

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

 

F-31

 

 

Provident Bancorp, Inc. and Subsidiary

 

 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2018 and 2017

 

(In thousands)  2018   2017 
Cash flows from operating activities:          
Net income  $9,325   $7,915 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net of accretion   274    740 
ESOP expense   613    511 
Gain on sale of securities, net   -    (5,912)
Change in deferred loan fees, net   378    418 
Provision for loan losses   3,329    2,929 
Depreciation and amortization   721    811 
Loss on disposal of premises and equipment   6    2 
Increase in accrued interest receivable   (293)   (25)
Deferred tax (benefit) expense   (1,241)   1,309 
Share-based compensation expense   928    926 
Increase in cash surrender value of life insurance   (686)   (645)
Decrease (increase) in other assets   613    (539)
Increase in other liabilities   2,787    1,036 
Net cash provided by operating activities   16,754    9,476 
           
Cash flows from investing activities:          
Purchases of available-for-sale securities   -    (13,121)
Proceeds from sales of available-for-sale securities   -    57,259 
Proceeds from pay downs, maturities and calls of available-for-sale securities   8,632    14,026 
(Purchase) redemption of Federal Home Loan Bank Stock   (796)   933 
Loan originations and purchases, net of paydowns   (100,073)   (121,060)
Additions to premises and equipment   (2,399)   (3,426)
Additions to assets held-for-sale   (147)   (67)
Additions to other real estate owned   (52)   - 
Purchase of bank owned life insurance   -    (5,500)
Net cash used in investing activities   (94,835)   (70,956)

  

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

 

F-32

 

 

Provident Bancorp, Inc. and Subsidiary

 

 

Consolidated Statements of Cash Flows (Continued)

For the Years Ended December 31, 2018 and 2017

 

(In thousands)  2018   2017 
Cash flows from financing activities:          
Net increase in demand deposits, NOW and savings accounts   22,841    110,748 
Net (decrease) increase in time deposits   (4,802)   11,327 
Proceeds from advances from the Federal Home Loan Bank   10,000    7,000 
Net change in short-term borrowings   31,181    (30,017)
Purchase of treasury stock   (215)   (594)
Net cash provided by financing activities   59,005    98,464 
           
Net (decrease) increase in cash and cash equivalents   (19,076)   36,984 
Cash and cash equivalents at beginning of year   47,689    10,705 
Cash and cash equivalents at end of year  $28,613   $47,689 
           
Supplemental disclosures:          
Interest paid  $5,326   $3,725 
Income taxes paid   3,638    6,667 
Loan transferred to other real estate owned   1,624    - 
Loan transferred to other assets   1,352    - 
Transfer from assets held-for-sale to premises and equipment   3,433    - 
Transfer from premises and equipment to assets held-for-sale   -    3,219 

  

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

 

F-33

 

 

Notes to Consolidated Financial Statements

 

 

Note 1 - Nature of Operations

 

Provident Bancorp, Inc. (the “Company”) is a Massachusetts-chartered corporation organized for the purpose of owning all of the outstanding capital stock of The Provident Bank (the “Bank”). Provident Bancorp, the Company’s mutual holding company (the “MHC”), owns approximately 52.3% of the Company’s stock.

 

The Company is headquartered in Amesbury, Massachusetts. The Bank operates its business from eight banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Hampton, Bedford, and Seabrook, New Hampshire. The Bank provides a variety of financial services to individuals and small businesses. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are commercial mortgages and commercial loans.

 

Note 2 - Accounting Policies

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, stock-based compensation expense and deferred income taxes.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. All material intercompany balances and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, and short-term investments comprised of interest-bearing demand deposits with other banks and federal funds sold.

 

Investment Securities

 

Investments in debt securities are adjusted for amortization of premiums and accretion of discounts so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis and are recorded as of the trade date.

 

Debt and equity securities may be classified into one of three categories: held-to-maturity, available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

 

Provident Bancorp, Inc. and Subsidiary

 

F-34

 

 

Notes to Consolidated Financial Statements

 

 

·Held-to-maturity securities, if any, are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or as a separate component of shareholders’ equity.

 

·Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) as a separate component of shareholders’ equity until realized.

 

·Trading securities, if any, are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

 

The Company evaluates securities within the Company’s available for sale portfolio for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

 

Federal Home Loan Bank Stock

 

As a member of the Federal Home Loan Bank of Boston (the “FHLB”), the Company is required to invest in $100 par value stock of the FHLB. The FHLB capital structure mandates that members own stock as determined by their Total Stock Investment Requirement which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. FHLB stock is a non-marketable equity security that is carried at cost and evaluated for impairment when deemed necessary.

 

Loans

 

Loan receivables that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

 

Interest income is accrued on the unpaid principal balance.

 

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is recognized as an adjustment of the related loan yield using the interest method. The Company is amortizing these amounts over the contractual life of the related loans.

 

Provident Bancorp, Inc. and Subsidiary

 

F-35

 

 

Notes to Consolidated Financial Statements

 

 

Residential real estate loans are generally placed on non-accrual status when reaching 90 days past due or in process of collection. Past due status is based on the contractual terms of the loan. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on non-accrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months. Interest income received on non-accrual loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual.

 

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibality of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-36

 

  

Notes to Consolidated Financial Statements

 

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. These historical loss factors are adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

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

 

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

 

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans. Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower and value of collateral. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

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

 

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

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated selling costs, if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.

 

The Company from time to time, may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modified loan is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-37

 

  

Notes to Consolidated Financial Statements

 

 

Assets Held-for-Sale

 

Assets held-for-sale represented a commercial property being held for sale to a real estate developer. Assets designated as held for sale were held at the lower of carrying amount at designation or fair value less costs to sell. Depreciation is not charged against assets classified as held for sale. In 2018, the Company decided to retain this property for use and reclassified the property to premises and equipment.

 

Bank-Owned Life Insurance

 

Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes.

 

Premises and Equipment

 

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Generally, depreciation on the buildings and equipment is calculated principally on the straight line method, and depreciation and amortization expense is charged against operations over the estimated useful lives of the related assets.

 

Other Real Estate Owned and Repossessed Assets

 

Assets acquired through, or in lieu of, loan foreclosure or repossession are held for sale and are initially recorded at the lower of the investment in the loan or fair value less estimated costs to sell at the date of foreclosure or repossession, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations, changes in the valuation allowance, any direct write-downs and gains or losses on sales are included in other real estate owned expense.

 

Advertising

 

The Company directly expenses costs associated with advertising as they are incurred.

 

Earnings per Share

 

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

 

Employee Stock Ownership Plan

 

Compensation expense for The Provident Bank Employee Stock Ownership Plan (the “ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of shareholders’ equity on the consolidated balance sheets. The difference between the average fair value and the cost of the shares by the ESOP is recorded as an adjustment to additional paid-in-capital.

 

Provident Bancorp, Inc. and Subsidiary

 

F-38

 

 

Notes to Consolidated Financial Statements

 

 

Stock-based Compensation Plans

 

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

 

Treasury Stock

 

Common stock repurchased are recorded as treasury stock at cost.

 

Income Taxes

 

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.

 

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

 

Fair Values of Financial Instruments

 

GAAP requires that the Company disclose estimated fair values for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows:

 

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.

 

Investments: Fair values for investments are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or pricing models. See footnote 15 for further details.

 

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. In connection with the adoption of ASU 2016-01 on January 1, 2018, the Company refined its methodology to estimate the fair value of the loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions.

 

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

 

Deposit liabilities: The fair values disclosed for deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

Borrowings: Fair values of Federal Reserve Bank (“FRB”) Discount Window and Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

Provident Bancorp, Inc. and Subsidiary

 

F-39

 

  

Notes to Consolidated Financial Statements

 

 

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portions of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

 

Recent Accounting Pronouncements

 

ASU (Accounting Standards Update) No. 2014-09 – Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission, and the entity is not exposed to credit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).

 

This ASU was effective for the Company on January 1, 2018. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), the Company concluded that the new guidance did not impact the elements of its consolidated statements of income most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains). The Company completed its identification of all revenue streams included in its financial statements and has identified its deposit-related fees, service charges, debit and prepaid card interchange income and other fee income to be within the scope of the standard. The Company has also completed its review of the related contracts. The Company's overall assessment indicates that adoption of this ASU did not materially change its current method and timing of recognizing revenue for the identified revenue streams and therefore, the adoption of this ASU as of January 1, 2018, did not have a significant impact to the Company's financial condition, results of operations and consolidated financial statements.

 

Provident Bancorp, Inc. and Subsidiary

 

F-40

 

  

Notes to Consolidated Financial Statements

 

 

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, those without readily determinable fair values, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard was effective for the Company on January 1, 2018. The Company evaluated the impact of this pronouncement and divested its entire marketable equity securities portfolio in 2017. The Company’s investment in Federal Home Loan Bank Stock is not included in the scope of this pronouncement. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

 

ASU 2016-02, Leases (Topic 842). The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance is effective for the Company on January 1, 2019, with early adoption permitted. In July 2018, the FASB issued 2018-11, which allows a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented or as a cumulative effect adjustment as of the date of adoption. The Company’s assets and liabilities will increase based on the present value of the remaining lease payments in place the adoption date; however, this is not expected to be material to the Company’s results of operations or financial position. The Company adopted ASU 2016-02 on January 1, 2019 as a cumulative effect adjustment as of that date, and there was no material impact on the Company's consolidated financial statements.

 

ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for the Company on January 1, 2020. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.

 

Provident Bancorp, Inc. and Subsidiary

 

F-41

 

 

Notes to Consolidated Financial Statements

 

 

ASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.” This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update were effective for the Company on January 1, 2018. As the guidance only affects the classification within the statement of cash flows, the adoption of this guidance did not have an impact on the Company’s financial statements.

 

ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for the Company on January 1, 2019. The Company adopted this guidance on January 1, 2019 and there was no impact on the Company’s financial statements.

 

ASU No. 2018-13, Fair Value Measurement (Topic 820): “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU will be effective for the Company on January 1, 2020. As the guidance only revises disclosure requirements, the adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

Provident Bancorp, Inc. and Subsidiary

 

F-42

 

 

Notes to Consolidated Financial Statements

 

 

Note 3 - Investments Securities Available-for-Sale

 

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at December 31, 2018 and 2017:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
(In thousands)  Basis   Gains   Losses   Value 
     
December 31, 2018                    
State and municipal  $20,118   $272   $135   $20,255 
Asset-backed securities   6,512    -    141    6,371 
Government mortgage-backed securities   25,135    138    496    24,777 
Total available-for-sale securities  $51,765   $410   $772   $51,403 
                     
December 31, 2017                    
State and municipal  $20,726   $745   $17   $21,454 
Asset-backed securities   7,524    30    37    7,517 
Government mortgage-backed securities   32,421    317    280    32,458 
Total available-for-sale securities  $60,671   $1,092   $334   $61,429 

  

The scheduled maturities of debt securities were as follows at December 31, 2018. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

   Available-for-Sale 
   Amortized   Fair 
(In thousands)  Cost   Value 
         
Due within one year  $95   $95 
Due after one year through five years   604    608 
Due after five years through ten years   2,120    2,169 
Due after ten years   17,299    17,383 
Government mortgage-backed securities   25,135    24,777 
Asset-backed securities   6,512    6,371 
   $51,765   $51,403 

  

There were no realized gains or losses on sales and calls during the year ended December 31, 2018. During the year ended December 31, 2017, gross realized gains on sales and calls were $6.4 million, and gross losses realized were $505,000.

 

There were no securities of issuers whose aggregate carrying amount exceeded 10% of equity at December 31, 2018.

 

Securities with carrying amounts of $31.1 million and $39.8 million were pledged to secure available borrowings with the Federal Reserve Bank and Federal Home Loan Bank at December 31, 2018 and 2017, respectively.

 

Provident Bancorp, Inc. and Subsidiary

 

F-43

 

 

Notes to Consolidated Financial Statements

 

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are temporarily impaired, are as follows at December 31, 2018 and 2017:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
                         
December 31, 2018                              
Temporarily impaired securities:                              
State and municipal  $6,137   $115   $597   $20   $6,734   $135 
Asset-backed securities   3,833    98    2,538    43    6,371    141 
Government mortgage-backed securities   2,864    32    14,152    464    17,016    496 
Total temporarily impaired securities  $12,834   $245   $17,287   $527   $30,121   $772 
                               
December 31, 2017                              
Temporarily impaired securities:                              
State and municipal  $-   $-   $611   $17   $611   $17 
Asset-backed securities   1,745    13    1,335    24    3,080    37 
Government mortgage-backed securities   5,231    20    13,584    260    18,815    280 
Total temporarily impaired securities  $6,976   $33   $15,530   $301   $22,506   $334 

  

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Because the decline in fair value of the government mortgage-backed securities, asset-backed securities and state and municipal securities is primarily attributable to changes in market interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

 

Note 4 – Loans

 

Loans consisted of the following at December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
         
Commercial real estate  $364,867   $371,510 
Commercial   361,782    240,223 
Residential real estate   57,361    67,724 
Construction and land development   44,606    55,828 
Consumer   19,815    17,455 
    848,431    752,740 
Allowance for loan losses   (11,680)   (9,757)
Deferred loan fees, net   (1,223)   (845)
Net loans  $835,528   $742,138 

 

Provident Bancorp, Inc. and Subsidiary

 

F-44

 

 

Notes to Consolidated Financial Statements

 

The following tables set forth information regarding the allowance for loans and impaired loans by portfolio segment as of and for the years ended December 31, 2018 and 2017:

 

(In thousands) 

Commercial

Real Estate

   Commercial  

Residential

Real Estate

  

Construction

and Land

Development

   Consumer   Unallocated   Total 
December 31, 2018                                   
Allowance for loan losses:                                   
Beginning balance  $4,483   $3,280   $300   $965   $649   $80   $9,757 
Charge-offs   (670)   (190)   -    -    (699)   -    (1,559)
Recoveries   -    87    2    -    64    -    153 
Provision (credit)   339    2,565    (51)   (227)   696    7    3,329 
Ending balance  $4,152   $5,742   $251   $738   $710   $87   $11,680 
                                    
Ending balance:                                   
Individually evaluated for impairment  $62   $1,039   $-   $-   $-   $-   $1,101 
Ending balance:                                   
Collectively evaluated for impairment   4,090    4,703    251    738    710    87    10,579 
Total allowance for loan losses ending balance  $4,152   $5,742   $251   $738   $710   $87   $11,680 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $1,853   $5,291   $388   $-   $-        $7,532 
Ending balance:                                   
Collectively evaluated for impairment   363,014    356,491    56,973    44,606    19,815         840,899 
Total loans ending balance  $364,867   $361,782   $57,361   $44,606   $19,815        $848,431 

 

Provident Bancorp, Inc. and Subsidiary

 

F-45

 

 

Notes to Consolidated Financial Statements

 

(In thousands) 

Commercial

Real Estate

   Commercial  

Residential

Real Estate

  

Construction

and Land

Development

   Consumer   Unallocated   Total 
December 31, 2017                                   
Allowance for loan losses:                                   
Beginning balance  $4,503   $2,513   $328   $882   $279   $85   $8,590 
Charge-offs   (1,522)   (107)   -    -    (190)   -    (1,819)
Recoveries   -    45    -    -    12    -    57 
Provision (credit)   1,502    829    (28)   83    548    (5)   2,929 
Ending balance  $4,483   $3,280   $300   $965   $649   $80   $9,757 
                                    
Ending balance:                                   
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $- 
Ending balance:                                   
Collectively evaluated for impairment   4,483    3,280    300    965    649    80    9,757 
Total allowance for loan losses ending balance  $4,483   $3,280   $300   $965   $649   $80   $9,757 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $8,623   $3,202   $404   $-   $-        $12,229 
Ending balance:                                   
Collectively evaluated for impairment   362,887    237,021    67,320    55,828    17,455         740,511 
Total loans ending balance  $371,510   $240,223   $67,724   $55,828   $17,455        $752,740 

 

At December 31, 2018 and 2017, loans with an aggregate principal balance of $393.8 million and $357.1 million, respectively, were pledged to secure possible borrowings from the Federal Reserve Bank.

 

Provident Bancorp, Inc. and Subsidiary

 

F-46

 

 

Notes to Consolidated Financial Statements

 

Certain directors and executive officers of the Company and companies in which they have significant ownership interests were customers of the Bank during 2018. The following is a summary of the loans to such persons and their companies at December 31, 2018 and 2017:

 

(In thousands)    
      
Balance beginning January 1, 2017  $7,739 
Effect of changes in composition of related parties   (85)
Advances   18,809 
Principal payments   (4,190)
Ending balance, December 31, 2017  $22,273 
      
Balance beginning January 1, 2018  $22,273 
Effect of changes in composition of related parties   (339)
Advances   11 
Principal payments   (9,988)
Ending balance, December 31, 2018  $11,957 

 

The following tables set forth information regarding non-accrual loans and past-due loans by portfolio segment at December 31, 2018 and 2017:

 

                           90 Days     
           90 Days   Total           or More     
   30 - 59   60 - 89   or More   Past   Total   Total   Past Due   Nonaccrual 
(In thousands)  Days   Days   Past Due   Due   Current   Loans   and Accruing   Loans 
                                 
December 31, 2018                                        
Commercial real estate  $742   $-   $519   $1,261   $363,606   $364,867   $-   $519 
Commercial   40    -    3,167    3,207    358,575    361,782    -    4,830 
Residential real estate   321    223    30    574    56,787    57,361    -    850 
Construction and land development   -    -    -    -    44,606    44,606    -    - 
Consumer   62    46    59    167    19,648    19,815    -    62 
Total  $1,165   $269   $3,775   $5,209   $843,222   $848,431   $-   $6,261 
                                         
December 31, 2017                                        
Commercial real estate  $-   $3,669   $-   $3,669   $367,841   $371,510   $-   $7,102 
Commercial   12    -    -    12    240,211    240,223    -    1,505 
Residential real estate   699    178    81    958    66,766    67,724    -    364 
Construction and land development   -    -    -    -    55,828    55,828    -    - 
Consumer   63    45    60    168    17,287    17,455    -    62 
Total  $774   $3,892   $141   $4,807   $747,933   $752,740   $-   $9,033 

 

Provident Bancorp, Inc. and Subsidiary

 

F-47

 

 

Notes to Consolidated Financial Statements

 

Information about the Company’s impaired loans by portfolio segment was as follows at December 31, 2018 and 2017:

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
                     
December 31, 2018                         
With no related allowance recorded:                         
Commercial real estate  $1,334   $1,334   $-   $5,614   $69 
Commercial   4,050    4,110    -    4,894    38 
Residential real estate   388    388    -    396    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance  $5,772   $5,832   $-   $10,904   $127 
                          
With an allowance recorded:                         
Commercial real estate  $519   $519   $62   $519   $- 
Commercial   1,241    1,267    1,039    1,695    52 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded  $1,760   $1,786   $1,101   $2,214   $52 
                          
Total                         
Commercial real estate  $1,853   $1,853   $62   $6,133   $69 
Commercial   5,291    5,377    1,039    6,589    90 
Residential real estate   388    388    -    396    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $7,532   $7,618   $1,101   $13,118   $179 

 

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
                     
December 31, 2017                         
With no related allowance recorded:                         
Commercial real estate  $8,623   $10,139   $-   $4,562   $70 
Commercial   3,202    3,202    -    2,054    123 
Residential real estate   404    404    -    412    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance  $12,229   $13,745   $-   $7,028   $213 
                          
With an allowance recorded:                         
Commercial real estate  $-   $-   $-   $-   $- 
Commercial   -    -    -    -    - 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded  $-   $-   $-   $-   $- 
                          
Total                         
Commercial real estate  $8,623   $10,139   $-   $4,562   $70 
Commercial   3,202    3,202    -    2,054    123 
Residential real estate   404    404    -    412    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $12,229   $13,745   $-   $7,028   $213 

 

There were no troubled debt restructurings entered into during the year ended December 31, 2018.

  

Provident Bancorp, Inc. and Subsidiary

 

F-48

 

 

Notes to Consolidated Financial Statements

 

The following summarizes troubled debt restructurings entered into during the year ended December 31, 2017:

 

(Dollars in thousands) 

Number of

Contracts

  

Pre-

Modification

Outstanding

Recorded

Investment

  

Post-

Modification

Outstanding
Recorded

Investment

 
             
Year-Ended December 31, 2017               
Troubled debt restructurings:               
Commercial   1   $249   $249 
    1   $249   $249 

 

In 2017, we approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s collateral coverage. The term of this commercial loan was extended to a three-year term.

 

The loan modified as troubled debt restructuring during 2017 did not default during the one-year period after modification.

 

At December 31, 2018 and 2017, there were no commitments to lend additional funds to borrowers whose loans were modified in troubled debt restructurings.

 

Credit Quality Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-49

 

 

Notes to Consolidated Financial Statements

 

For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.

 

Provident Bancorp, Inc. and Subsidiary

 

F-50

 

 

Notes to Consolidated Financial Statements

 

The following tables present the Company’s loans by risk rating and portfolio segment at December 31, 2018 and 2017:

 

(In thousands)  Commercial
Real Estate
   Commercial   Residential
Real Estate
   Construction
and Land
Development
   Consumer   Total 
                         
December 31, 2018                              
Grade:                              
Pass  $356,415   $339,079   $-   $44,606   $-   $740,100 
Special mention   6,531    11,339    -    -    -    17,870 
Substandard   1,921    10,447    571    -    -    12,939 
Doubtful   -    917    -    -    -    917 
Not formally rated   -    -    56,790    -    19,815    76,605 
Total  $364,867   $361,782   $57,361   $44,606   $19,815   $848,431 
                               
December 31, 2017                              
Grade:                              
Pass  $355,623   $224,190   $-   $55,828   $-   $635,641 
Special mention   6,852    9,155    -    -    -    16,007 
Substandard   9,035    6,878    679    -    -    16,592 
Not formally rated   -    -    67,045    -    17,455    84,500 
Total  $371,510   $240,223   $67,724   $55,828   $17,455   $752,740 

 

In 2017, the Bank had sold mortgage loans with servicing rights retained. The fair value of those servicing rights under GAAP was not material and was not recognized in the 2017 consolidated financial statements. In 2018, the Bank sold the servicing portfolio totaling $294,000.

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $18.8 million and $15.6 million at December 31, 2018 and 2017, respectively.

 

Note 5 - Premises and Equipment

 

The following is a summary of premises and equipment at December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
         
Land  $2,424   $2,424 
Buildings and leasehold improvements   9,241    9,241 
Furniture and equipment   4,520    4,649 
Leasehold improvements   4,234    4,241 
Construction in progress   5,748    - 
    26,167    20,555 
Accumulated depreciation and amortization   (10,081)   (9,574)
Premises and equipment, net  $16,086   $10,981 

 

Provident Bancorp, Inc. and Subsidiary

 

F-51

 

 

Notes to Consolidated Financial Statements

 

Depreciation and amortization expense was $721,000 and $811,000 for the years ended December 31, 2018 and 2017, respectively.

 

Note 6 - Deposits

 

The following is a summary of deposit balances by type at December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
     
NOW and demand  $332,064   $309,514 
Regular savings   109,322    112,610 
Money market deposits   229,314    225,735 
Total non-certificate accounts   670,700    647,859 
           
Certificate accounts of $250,000 or more   14,164    5,061 
Certificate accounts less than $250,000   83,232    97,137 
Total certificate accounts   97,396    102,198 
Total deposits  $768,096   $750,057 

 

At December 31, 2018 and 2017, the aggregate amount of brokered certificates of deposit was $55.8 million and $62.3 million respectively. Brokered certificates of deposit are not included in the totals for time deposits in denominations over $250,000 listed above.

 

At December 31, 2018 and 2017, the scheduled maturities for certificate accounts for each of the following five years are as follows:

 

(In thousands)   2018   2017 
          
2018   $-   $81,791 
2019    55,061    16,105 
2020    32,089    3,052 
2021    8,938    410 
2022    794    840 
2023    514    - 
Total   $97,396   $102,198 

 

Deposits from related parties held by the Company at December 31, 2018 and 2017 amounted to $7.4 million and $16.0 million, respectively.

 

Provident Bancorp, Inc. and Subsidiary

 

F-52

 

 

Notes to Consolidated Financial Statements

 

Note 7 – Borrowings

 

Advances consist of funds borrowed from the FHLB and the FRB borrower-in-custody (“BIC”) program. Maturities of advances from the FHLB and FRB for years ending after December 31, 2018 and 2017 are summarized as follows:

 

(In thousands)   2018   2017 
          
2018   $-   $12,000 
2019    43,071    4,936 
2020    11,451    6,405 
2021    5,000    - 
2023    8,500    - 
Thereafter    -    3,500 
Total   $68,022   $26,841 

 

Borrowings from the FRB BIC program are secured by a Uniform Commercial Code (“UCC”) financing statement on qualified collateral, consisting of certain commercial loans and qualified mortgage-backed government securities. At December 31, 2018, FRB borrowings consisted of overnight borrowings totaling $8.1 million and had an interest rate of 3.00%.

 

Borrowings from the FHLB, which aggregated $59,922 and $26,841 at December 31, 2018 and 2017, respectively, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial loans and qualified mortgage-backed government securities. At December 31, 2018, the interest rates on FHLB advances ranged from 1.53% to 3.01%, and the weighted average interest rate on FHLB advances was 2.52%.

 

The Bank modified $5.0 million and $3.5 million of its FHLB borrowings and extended the maturity in May of 2017 and August of 2015, respectively. The Bank incurred a prepayment penalty of $87,000 and $233,000 in May of 2017 and August of 2015, respectively. In accordance with ASC 470, the prepayment penalties are being amortized over the life of the newly modified borrowings.

 

Provident Bancorp, Inc. and Subsidiary

 

F-53

 

 

Notes to Consolidated Financial Statements

 

Note 8 - Income Taxes

 

The components of income tax expense are as follows for the years ended December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
     
Current tax expense (benefit):          
Federal  $3,214   $5,044 
State   1,278    1,079 
Net operating loss carryforward   (14)   (14)
    4,478    6,109 
Deferred tax expense (benefit):          
Federal   (926)   1,523 
State   (315)   (214)
    (1,241)   1,309 
Income tax expense  $3,237   $7,418 

 

The following is a summary of the differences between the statutory federal income tax rate and the effective tax rates for the years ended December 31, 2018 and 2017:

 

   2018   2017 
Federal income tax at statutory rate   21.0%   34.0%
Increase (decrease) in tax resulting from:          
State tax, net of federal tax benefit   5.7    4.6 
Tax exempt income and dividends received deduction   (1.0)   (3.3)
Change in enacted federal tax rate   -    13.4 
Other   0.1    (0.3)
Effective tax rate   25.8%   48.4%

 

On December 22, 2017, the U.S. government approved a reduction in the federal statutory income tax rate from a maximum rate of 35% to 21%, effective in 2018. For the purposes of calculating deferred taxes, GAAP requires deferred taxes to be measured at the enacted tax rate at the balance sheet date, which was 21% at December 31, 2017. The impact of the rate reduction to the Company was a decrease in the Bank's net deferred tax asset by $2.0 million, which is reflected in the Company's tax provision for the year ended December 31, 2017.

 

Provident Bancorp, Inc. and Subsidiary

 

F-54

 

 

Notes to Consolidated Financial Statements

 

This adjustment to deferred taxes included $97,000 related to unrealized gains and losses associated with the Company’s investment securities. Because these unrealized gains and losses were initially recorded as items of accumulated other comprehensive income in the Company's capital accounts, the adjustment to deferred taxes resulted in a disproportionate tax effect of $97,000 that became stranded in accumulated other comprehensive income. In February of 2018, the FASB issued ASU No. 2018-02,"Income Statement- Reporting Comprehensive income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which permitted entities to reclassify retained earnings to accumulated other comprehensive income to eliminate the amount stranded in accumulated other comprehensive income, and the FASB allowed entities to adopt this guidance in 2017. The Company elected to adopt this new guidance early, and reclassified $97,000 from retained earnings to accumulated other comprehensive income as of December 31, 2017.

 

The following is a summary of the Company’s gross deferred tax assets and gross deferred tax liabilities at December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
Deferred tax assets:          
Allowance for loan losses  $3,251   $2,743 
Depreciation   160    41 
Net operating loss carryforward   16    25 
Employee benefit plans and share-based compensation plans   2,498    1,979 
Deferred loan fees, net   339    238 
Reserve for unfunded commitments   31    39 
Net unrealized loss on securities   107    - 
Other   109    140 
 Gross deferred tax assets   6,511    5,205 
           
Deferred tax liabilities:          
Prepaid expenses   (45)   (64)
FHLB restructure fees   (29)   (52)
Net unrealized holding gain on securities   -    (169)
Gross deferred tax liabilities   (74)   (285)
Net deferred tax asset  $6,437   $4,920 

 

At December 31, 2018, the Company had federal net operating loss carryovers of $76,000. The carryovers were transferred to the Company upon the merger with Amesbury Cooperative Bank during the year ended December 31, 2001. The losses will expire in 2020 and are subject to certain annual limitations which amount to $42,000 per year.

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-55

 

 

Notes to Consolidated Financial Statements

 

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2018 and 2017, there was no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2015 through December 31, 2017.

 

Note 9 - Employee Benefits & Share-Based Compensation Plans

 

401(k) Plan

 

The Company sponsors a 401(k) plan. All employees are eligible to join the 401(k) plan. However, participants in the 401(k) plan must complete one year of service to be eligible for safe harbor contributions and employer discretionary contributions. A Safe Harbor Plan was adopted by the Company effective January 1, 2007. Under the Safe Harbor Plan, the Company matches 100% of employee contributions up to 6% of compensation. In addition, the Company may make a discretionary contribution to the 401(k) plan determined on an annual basis. Employees may contribute up to 75% of their salary subject to certain limits based on federal tax laws. The expense recognized under the 401(k) plan was $494,000 and $440,000 for the years ended December 31, 2018 and 2017, respectively.

 

Supplemental Executive Retirement Plans

 

The Company has Supplemental Executive Retirement Agreements with certain executive officers. These agreements are designed to supplement the benefits available through the Company’s retirement plan. The liability for the retirement benefits amounted to $6.8 million and $5.6 million at December 31, 2018 and 2017, respectively, and is included in other liabilities. The expense recognized for these benefits was $1.1 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively.

 

Employee Stock Ownership Plan

 

The Bank maintains the ESOP to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.

 

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 357,152 shares of the Company’s stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company’s subsidiary to purchase Company stock is payable annually over 15 years at a rate per annum equal to the prime rate (5.50% at December 31, 2018). Loan payments are principally funded by cash contributions from the Company.

 

Shares held by the ESOP include the following:

 

   December 31, 2018   December 31, 2017 
Allocated   71,430    47,620 
Committed to be allocated   23,810    23,810 
Unallocated   261,912    285,722 
Total   357,152    357,152 

 

Provident Bancorp, Inc. and Subsidiary

 

F-56

 

 

Notes to Consolidated Financial Statements

 

Shared-Based Compensation Plan

 

Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "Equity Plan"), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with 446,440 shares reserved for options. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 178,575. The value of restricted stock grants is based on the market price of the stock on grant date. Options and awards vest ratably over five years.

 

Expense related to options and restricted stock granted to directors is recognized as directors' fees within non-interest expense.

 

Stock Options

 

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

 

·Volatility is based on peer group volatility because the Company does not have a sufficient trading history.
·Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.
·The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

 

The fair value of options granted in 2018 and 2017 is based on the following assumptions:

 

   2018   2017 
Vesting period (years)   5    5 
Expiration date (years)   10    10 
Expected volatility   21.23%   21.53%
Expected life (years)   7.5    7.5 
Expected dividend yield   0.00%   0.00%
Risk free interest rate   2.97%   2.25%
Fair value per option  $8.71   $7.05 

 

Provident Bancorp, Inc. and Subsidiary

 

F-57

 

 

Notes to Consolidated Financial Statements

 

A summary of the status of the Company’s stock option grants for the year ended December 31, 2018, is presented in the table below:

 

   Stock Option
Awards
   Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
(years)
   Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2018   396,443   $17.61           
Granted   12,170    27.20           
Forfeited   (9,740)   17.40           
Exercised   (2,435)   17.40           
Outstanding at December 31, 2018   396,438   $17.89    8.00   $1,503,000 
Outstanding and expected to vest
at December 31, 2018
   396,438   $17.89    8.00   $1,503,000 
Vested and Exercisable
at December 31, 2018
   151,272   $17.50    7.90   $632,000 
Unrecognized compensation cost  $1,233,000                
Weighted average remaining
recognition period (years)
   3.01                

 

Total expense for the stock options was $404,000 and $388,000 for the years ended December 31, 2018 and 2017, respectively.

 

Restricted Stock

 

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

 

The following table presents the activity in unvested restricted stock awards under the Equity Plan for the year ended December 31, 2018:

 

   Number of Shares   Weighted Average
Grant Price
 
Unvested restricted stock awards at January 1, 2018   127,852   $17.59 
Granted   4,862    27.20 
Forfeited   (3,896)   17.40 
Vested   (30,745)   17.59 
Unvested restricted stock awards at Decemer 31, 2018   98,073   $18.13 
Unrecognized compensation cost  $1,724,000      
Weighted average remaining recognition period (years)   3.01      

 

Total expense for the restricted stock awards was $524,000 and $538,000 for the years ended December 31, 2018 and 2017, respectively.

 

Provident Bancorp, Inc. and Subsidiary

 

F-58

 

 

Notes to Consolidated Financial Statements

 

Note 10 - Earnings Per Share

 

Earnings per share consisted of the following components for the year ended December 31, 2018 and 2017.

 

(Dollars in thousands)  2018   2017 
Net income attributable to common shareholders  $9,325   $7,915 
           
Average number of common shares outstanding   9,659,357    9,652,448 
Less:          
average unallocated ESOP shares   (283,337)   (298,680)
average unvested restricted stock   (106,033)   (136,986)
average treasury stock acquired   (29,901)   (17,508)
Average number of common shares outstanding
to calculate basic earnings per common share
   9,240,086    9,199,274 
           
Effect of dilutive unvested restricted stock and stock option awards   66,230    613 
Average number of common shares outstanding
to calculate diluted earnings per common share
   9,306,316    9,199,887 
           
Earnings per common share:          
Basic  $1.01   $0.86 
Diluted  $1.00   $0.86 

 

Note 11 - Regulatory Matters

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-59

 

 

 

Notes to Consolidated Financial Statements

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The regulations require a minimum Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a total risk-based capital ratio of 10.0% or greater and a leverage ratio of 5.0% or greater. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. At December 31, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Failure to maintain the capital conservation buffer could limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

 

As of December 31, 2018 and 2017, the Bank met the conditions to be classified as well capitalized under the regulatory framework for prompt corrective action.

 

The Bank’s actual capital amounts and ratios at December 31, 2018 and 2017 are summarized as follows:

 

                     To Be Well 
                     Capitalized Under 
   Actual   For Capital   Prompt Corrective 
   Capital   Adequacy Purposes   Action Provisions 
(Dollars in thousands)  Amount   Ratio   Amount     Ratio   Amount     Ratio 
                             
December 31, 2018                                  
Total Capital (to Risk Weighted Assets)  $128,939    14.55%  $70,891  >   8.0%  $88,614  >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   117,855    13.30    53,168  >   6.0    70,891  >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   117,855    13.30    39,876  >   4.5    57,599  >   6.5 
Tier 1 Capital (to Average Assets)   117,855    12.69    37,157  >   4.0    46,446  >   5.0 
                                   
December 31, 2017                                  
Total Capital (to Risk Weighted Assets)  $116,869    14.96%  $62,514  >   8.0%  $78,142  >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   107,112    13.71    46,885  >   6.0    62,514  >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   107,112    13.71    35,164  >   4.5    50,792  >   6.5 
Tier 1 Capital (to Average Assets)   107,112    11.80    36,299  >   4.0    45,374  >   5.0 

 

Liquidation Account

 

Upon the completion of the Company’s stock offering in 2015, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.

 

Provident Bancorp, Inc. and Subsidiary

 

F-60

 

 

Notes to Consolidated Financial Statements

 

Note 12 - Commitments and Contingent Liabilities

 

At December 31, 2018, the Company was obligated under non-cancelable operating leases for bank premises and equipment.

 

The total minimum rental due in future periods under these existing agreements is as follows at December 31, 2018:

 

(In thousands)    
2019  $285 
2020   244 
2021   252 
2022   252 
2023   252 
Years thereafter   1,908 
Total minimum lease payments  $3,193 

 

The total rental expense amounted to $460,000 and $349,000 for the years ended December 31, 2018 and 2017, respectively.

 

Litigation

 

In April 2018, the Bank conducted a foreclosure sale of certain real and personal property which secured four non-accruing loans originally made by the Bank.  The aggregate outstanding principal balance of these loans was approximately $7.5 million, of which (a) approximately $4.9 million was due and owing to the Bank and (b) approximately $2.6 million was due and owing to another financial institution who purchased participation interests in certain of these loans (the “Participant”). The Bank received approximately $8.3 in proceeds from this foreclosure sale. The U.S. Small Business Administration (“SBA”), which also made a secured loan to the same obligors, has since disputed the Bank’s retention of, and claimed priority to, a portion of the proceeds generated from this foreclosure sale, alleging a breach of contract and seeking monetary damages in the approximate amount of $2.0 million. The Bank has partially denied liability, and in addition to its defenses, has asserted a counterclaim against the SBA and its assignee, Granite State Economic Development Corporation, seeking equitable reformation of the contract at issue on the basis of a mutual mistake of fact. On March 5, 2019, the Bank participated in a mediation of this matter. Pending the outcome of this lawsuit and this mediation, the Bank has segregated into a separate deposit account the entire amount in dispute, consisting of $1.4 million that would be retained by the Bank, and $543,000 that would be provided to the participating institution. Management does not believe that the ultimate resolution of this matter will have a significant impact on the Bank’s financial condition or results of operations.

 

From time to time, the Company is involved in litigation incidental to its business. The Company does not believe that the ultimate resolution of these legal matters will have a significant impact on the Company’s financial condition and results of operations.

 

Provident Bancorp, Inc. and Subsidiary

 

F-61

 

 

Notes to Consolidated Financial Statements

 

Note 13 - Financial Instruments with Off-Balance Sheet Risk

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in real property, accounts receivable, inventory, property, plant and equipment and income producing properties.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2018 and 2017, the maximum potential amount of the Company’s obligation was $1.5 million and $2.0 million, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

 

Notional amounts of financial instruments with off-balance sheet credit risk are as follows at December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
         
Commitments to originate loans  $42,625   $18,641 
Letters of credit   1,546    2,004 
Unadvanced portions of loans   196,104    166,314 
   $240,275   $186,959 

 

Note 14 - Significant Group Concentrations of Credit Risk

 

Most of the Company's business activity is with customers located within northeast Massachusetts and southeast New Hampshire. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Company's loan portfolio is comprised of loans collateralized by real estate located in northeast Massachusetts and southeast New Hampshire.

 

Provident Bancorp, Inc. and Subsidiary

 

F-62

 

 

Notes to Consolidated Financial Statements

 

Note 15 - Fair Value Measurements

 

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

 

Basis of Fair Value Measurements

 

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

 

·Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

 

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

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Fair Values of Assets Measured on a Recurring Basis

 

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

 

Provident Bancorp, Inc. and Subsidiary

 

F-63

 

 

Notes to Consolidated Financial Statements

 

The following summarizes assets measured at fair value on a recurring basis at December 31, 2018 and 2017:

 

   Fair Value Measurements at Reporting Date Using 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
                 
December 31, 2018                    
State and municipal  $20,255   $-   $20,255   $- 
Asset-backed securities   6,371    -    6,371    - 
Mortgage-backed securities   24,777    -    24,777    - 
Totals  $51,403   $-   $51,403   $- 
                     
December 31, 2017                    
State and municipal  $21,454   $-   $21,454   $- 
Asset-backed securities   7,517    -    7,517    - 
Government mortgage-backed securities   32,458    -    32,458    - 
Totals  $61,429   $-   $61,429   $- 

 

The Company did not have any transfers of assets measured at fair value on a recurring basis between Levels 1 and 2 of the fair value hierarchy during the years ended December 31, 2018 and 2017.

 

Fair Values of Assets Measured on a Nonrecurring Basis

 

The Company’s only assets measured at fair value on a nonrecurring basis are loans identified as impaired for which a write-off or specific reserve has been recorded, and other real estate owned.

 

Certain impaired loans of the Company are reported at the fair value of the underlying collateral, less estimated selling costs. The Company classifies impaired loans as Level 3 in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party, but can be adjusted and therefore classified as level 3. The Company classifies other real estate owned as Level 2 in the fair value hierarchy if the Company has received a purchase and sales agreement.

 

Provident Bancorp, Inc. and Subsidiary

 

F-64

 

 

Notes to Consolidated Financial Statements

 

The following summarizes assets measured at fair value on a nonrecurring basis at December 31, 2018 and 2017:

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
                 
December 31, 2018                    
Impaired loans  $659   $-   $-   $659 
Other real estate owned   1,676    -    1,676    - 
                     
December 31, 2017                    
Impaired loans  $3,670   $-   $-   $3,670 

 

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at December 31, 2018 and 2017:

 

(In thousands)  Fair Value   Valuation Technique  Unobservable Input
           
December 31, 2018           
Impaired loans  $659    Real estate appraisals
   and business valuation
   Discount for dated appraisals
   and comparable company evaluations
            
December 31, 2017           
Impaired loans  $3,670    Real estate appraisals   Discount for dated appraisals

 

Provident Bancorp, Inc. and Subsidiary

 

F-65

 

 

Notes to Consolidated Financial Statements

 

Note 16 - Disclosures About Fair Values of Financial Instruments

 

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

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at December 31, 2018 and 2017:

 

   Carrying   Fair Value 
(In thousands)  Amount   Level 1   Level 2   Level 3   Total 
                     
December 31, 2018                         
Financial assets:                         
Cash and cash equivalents  $28,613   $28,613   $-   $-   $28,613 
Available-for-sale securities   51,403    -    51,403    -    51,403 
Federal Home Loan Bank of Boston stock   2,650    2,650    -    -    2,650 
Loans, net   835,528    -    -    827,090    827,090 
Accrued interest receivable   2,638    -    2,638    -    2,638 
Financial liabilities:                         
Deposits   768,096    -    -    768,010    768,010 
Borrowings   68,022    -    67,846    -    67,846 
                          
December 31, 2017                         
Financial assets:                         
Cash and cash equivalents  $47,689   $47,689   $-   $-   $47,689 
Available-for-sale securities   61,429    -    61,429    -    61,429 
Federal Home Loan Bank of Boston stock   1,854    1,854    -    -    1,854 
Loans, net   742,138    -    -    745,637    745,637 
Accrued interest receivable   2,345    -    2,345    -    2,345 
Financial liabilities:                         
Deposits   750,057    -    -    749,898    749,898 
Borrowings   26,841    -    26,655    -    26,655 

 

The carrying amounts of financial instruments shown above are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

 

Note 17 - Reclassification

 

Certain amounts in the prior year have been reclassified to be consistent with the current year's consolidated financial statement presentation, and had no effect on the net income reported in the consolidated income statement.

 

Provident Bancorp, Inc. and Subsidiary

 

F-66

 

 

Notes to Consolidated Financial Statements

 

Note 18 – Condensed Financial Statements of Parent Only

 

Financial information pertaining only to Provident Bancorp, Inc. is as follows:

 

Provident Bancorp, Inc. - Parent Only Balance Sheet        
(In thousands)  2018   2017 
Assets          
Cash and due from banks  $5,249   $5,224 
Investment in common stock of The Provident Bank   117,615    107,629 
Other assets   2,755    2,946 
Total assets  $125,619   $115,799 
           
Liabilities and Shareholders' Equity          
Accrued expenses  $35   $22 
Shareholders' equity   125,584    115,777 
Total liabilities and shareholders' equity  $125,619   $115,799 

 

Provident Bancorp, Inc. - Parent Only Income Statement  Years Ended 
   December 31, 
(In thousands)  2018   2017 
Total income  $140   $120 
Operating expenses   90    88 
Income before income taxes and equity in undistributed net income of The Provident Bank   50    32 
Applicable income tax provision   14    13 
Income before equity in income of subsidiaries   36    19 
Equity in undistributed net income of The Provident Bank   9,289    7,896 
Net income  $9,325   $7,915 

 

Provident Bancorp, Inc. and Subsidiary

 

F-67

 

 

Notes to Consolidated Financial Statements

 

Provident Bancorp, Inc. - Parent Only Statement of Cash Flows  Twelve Months Ended 
   December 31, 
(In thousands)  2018   2017 
Cash flows from operating activities:          
Net income  $9,325   $7,915 
Adjustments to reconcile net income to net cash provided by operating activities:          
Equity in undistributed earnings of subsidiaries   (9,289)   (7,896)
Decrease in other assets   191    191 
Increase (decrease) in other liabilities   13    (51)
Net cash provided by operating activities   240    159 
           
Cash flows from financing activities:          
Purchase of treasury stock   (215)   (594)
Net cash used in financing activities   (215)   (594)
           
Net increase (decrease) in cash and cash equivalents   25    (435)
Cash and cash equivalents at beginning of year   5,224    5,659 
Cash and cash equivalents at end of year  $5,249   $5,224 

 

Note 19 – Selected Quarterly Financial Data (unaudited)

 

   First Quarter   Second Quarter   Third Quarter   Fourth Quarter 
(In thousands)  2018   2017   2018   2017   2018   2017   2018   2017 
                                 
Interest and dividend income  $9,753   $8,112   $10,377   $8,816   $10,833   $9,239   $11,377   $9,615 
Interest expense   1,034    781    1,213    879    1,429    1,005    1,537    1,062 
Net interest and dividend income   8,719    7,331    9,164    7,937    9,404    8,234    9,840    8,553 
Provision for loan losses   656    563    638    892    1,421    1,012    614    462 
Gain on sale of securities, net   -    482    -    58    -    1,851    -    3,521 
Other income   1,013    1,020    1,118    1,012    1,059    1,046    988    966 
Total noninterest income   1,013    1,502    1,118    1,070    1,059    2,897    988    4,487 
Total noninterest expense   6,376    5,621    6,411    5,875    6,223    5,914    6,404    6,339 
Income tax expense   678    847    843    639    741    1,434    975    4,498 
Net income  $2,022   $1,802   $2,390   $1,601   $2,078   $2,771   $2,835   $1,741 
                                         
Income per share:                                        
Basic  $0.22   $0.16   $0.26   $0.15   $0.22   $0.19   $0.31   $0.19 
Diluted  $0.22   $0.16   $0.26   $0.15   $0.22   $0.19   $0.30   $0.19 
                                         
Weighted Average Shares:                                        
Basic   9,219,865    9,192,568    9,233,745    9,193,836    9,247,367    9,201,634    9,258,858    9,208,854 
Diluted   9,225,003    9,192,568    9,302,425    9,198,286    9,355,410    9,213,056    9,339,431    9,257,702 

 

Provident Bancorp, Inc. and Subsidiary

 

F-68

 

 

 

 

No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by Provident Bancorp, Inc. or The Provident Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of Provident Bancorp, Inc. or The Provident Bank since any of the dates as of which information is furnished herein or since the date hereof.

 

Up to 13,225,000 Shares

 

Provident Bancorp, Inc.

 

(Proposed Holding Company for

The Provident Bank)

 

COMMON STOCK

par value $0.01 per share

 

__________________

 

PROSPECTUS

__________________

 

Sandler O’Neill + Partners, L.P.

 

[prospectus date]

________________

 

These securities are not deposits or accounts and are not federally insured or guaranteed.

________________

 

Until ______________, 2019, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

   

 

 

[Existing Logo of Provident Bancorp, Inc.]

 

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 Provident Bancorp, Inc. 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 Provident Bancorp, Inc.’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 Provident Bancorp, Inc. 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 a discussion of the exchange ratio. Based on the $______ 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, unless at least _____________ shares of New Provident common stock are sold in the offering (which is between the _____________ and the ____________ of the offering range), 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 Provident Bancorp, Inc. 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 9 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 [document date], and it is first being mailed to stockholders of Provident Bancorp, Inc. on or about ___________, 2019.

 

 

 

 

Provident Bancorp, Inc.

5 Market Street

Amesbury, Massachusetts 10913

(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

[document date]

 

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS FOR STOCKHOLDERS OF PROVIDENT BANCORP, INC. REGARDING THE PLAN OF CONVERSION 1
SUMMARY 5
RISK FACTORS 9
INFORMATION ABOUT THE SPECIAL MEETING 10
PROPOSAL 1 — APPROVAL OF THE PLAN OF CONVERSION 13
PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING 15
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 16
RECENT DEVELOPMENTS 16
FORWARD-LOOKING STATEMENTS 16
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 16
OUR DIVIDEND POLICY 16
MARKET FOR THE COMMON STOCK 16
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 16
CAPITALIZATION 16
PRO FORMA DATA 16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
BUSINESS OF NEW MERIDIAN AND OLD MERIDIAN 16
BUSINESS OF THE PROVIDENT BANK 16
SUPERVISION AND REGULATION 16
TAXATION 16
MANAGEMENT 17
BENEFICIAL OWNERSHIP OF COMMON STOCK 17
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 17
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF PROVIDENT BANCORP, INC. 17
RESTRICTIONS ON ACQUISITION OF NEW MERIDIAN 17
DESCRIPTION OF CAPITAL STOCK OF NEW MERIDIAN FOLLOWING THE CONVERSION 17
TRANSFER AGENT 17
EXPERTS 17
LEGAL MATTERS 17
WHERE YOU CAN FIND ADDITIONAL INFORMATION 17
STOCKHOLDER PROPOSALS 17
ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING 17
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING 19
OTHER MATTERS 19
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,” 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. will 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

 

[same as prospectus]

 

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

 

[same as prospectus]

 

Business Strategy

 

[same as prospectus]

 

Reasons for the Conversion

 

[same as prospectus]

 

 

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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

 

[same as prospectus]

 

The Exchange of Existing Shares of Old Provident Common Stock

 

[same as prospectus]

 

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

 

[same as prospectus]

 

How We Intend to Use the Proceeds From the Offering

 

[same as prospectus]

 

Our Dividend Policy

 

[same as prospectus]

 

Purchases and Ownership by Officers and Directors

 

[same as prospectus]

 

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

 

[same as prospectus]

 

Market for Common Stock

 

[same as prospectus]

 

Tax Consequences

 

[same as prospectus]

 

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.

 

 

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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

 

Before you vote on the conversion, you should read the “Risk Factors” section beginning on page 9 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

 

[same as prospectus]

 

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 $_________, unless at least ______________ shares of New Provident common stock are sold in the offering (which is between the ____________ and the ______________ of the offering range), 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.

 

[Remaining risks same as prospectus]

 

9

 

 

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 9,625,719 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.

 

10

 

 

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

 

11

 

 

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 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. 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. Shares for which no voting instructions are given or for which instructions were not timely received will be voted at the discretion of the 401(k) plan trustee. The deadline for returning your voting instructions is _______________, 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.

 

12

 

 

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

 

13

 

 

 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 will 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 is expected to begin concurrently with 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.

 

[Remaining sections same as Prospectus under “The Conversion and Offering,” with the following to be added]

 

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.

 

14

 

 

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.

 

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 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.

 

15

 

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

[Same as prospectus]

 

RECENT DEVELOPMENTS

 

[Same as prospectus]

 

FORWARD-LOOKING STATEMENTS

 

[Same as prospectus]

 

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

[Same as prospectus]

 

OUR DIVIDEND POLICY

 

[Same as prospectus]

 

MARKET FOR THE COMMON STOCK

 

[Same as prospectus]

 

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

[Same as prospectus]

 

CAPITALIZATION

 

[Same as prospectus]

 

PRO FORMA DATA

 

[Same as prospectus]

 

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

 

[Same as prospectus]

 

BUSINESS OF NEW MERIDIAN AND OLD MERIDIAN

 

[Same as prospectus]

 

BUSINESS OF THE PROVIDENT BANK

 

[Same as prospectus]

 

SUPERVISION AND REGULATION

 

[Same as prospectus]

 

TAXATION

 

[Same as prospectus]

 

16

 

 

MANAGEMENT

 

[Same as prospectus]

 

BENEFICIAL OWNERSHIP OF COMMON STOCK

 

[Same as prospectus]

 

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

 

[Same as prospectus]

 

COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING
STOCKHOLDERS OF PROVIDENT BANCORP, INC.

 

[Same as prospectus]

 

RESTRICTIONS ON ACQUISITION OF NEW MERIDIAN

 

[Same as prospectus]

 

DESCRIPTION OF CAPITAL STOCK OF NEW MERIDIAN
FOLLOWING THE CONVERSION

 

[Same as prospectus]

 

TRANSFER AGENT

 

[Same as prospectus]

 

EXPERTS

 

[Same as prospectus]

 

LEGAL MATTERS

 

[Same as prospectus]

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

[Same as prospectus]

 

STOCKHOLDER PROPOSALS

 

In order to be eligible for inclusion in our proxy materials for our 2020 Annual Meeting of Stockholders, any stockholder proposal to take action at such meeting must be received at our executive office, 5 Market Street, Amesbury, Massachusetts 10913, no later than December December 25, 2019. Any such proposals shall be subject to the requirements of the proxy rules adopted under the Exchange Act.

 

ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING

 

Provisions of Old Provident’s Bylaws. Under Old Provident’s Bylaws, any stockholder desiring to make a proposal for new business at a meeting of stockholders or to nominate one or more candidates for election as directors at a meeting of stockholders must have given timely notice thereof in writing to the Secretary of Old

 

17

 

 

Provident. To be timely, a stockholder’s notice must be received at the principal executive offices of Old Provident not less than 80 days nor more than ninety 90 days prior to the scheduled annual or special meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to the anniversary of the preceding year’s annual meeting, the stockholder’s notice must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such meeting notice was mailed or publicly disclosed.

 

A stockholder’s notice with respect to a proposal for new business shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the proposal desired to be brought before such meeting and the reasons for conducting such business at the meeting, (ii) the name and address of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, and (iii) any financial interest of the stockholder proposing such business or of any other stockholder in such proposal.

 

A stockholder’s notice with respect to a nomination shall set forth: (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director and as to the stockholder giving the notice (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of Old Provident’s capital shares which are beneficially owned by such person on the date of such stockholder notice, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder, including, but not limited to, the written consent of such person to serve as a director if elected; and (b) as to the stockholder giving the notice (i) the name and address as they appear on Old Provident’s books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (ii) the class and number of Old Provident’s capital shares which are beneficially owned by such stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice.  At the request of the Board of Directors, any person nominated by, or at the direction of, the Board of Directors for election as a director at an annual meeting shall furnish to the Secretary of Old Provident that information required to be set forth in the stockholder’s notice of nomination which pertains to the nominee.

 

Provisions of New Provident’s Bylaws. New Provident’s Bylaws provide an advance notice procedure for certain business, or nominations to the Board of Directors, to be brought before an annual meeting of stockholders. In order for a stockholder to properly bring business before an annual meeting, or to propose a nominee to the board of directors, New Provident’s Secretary must receive written notice not earlier than the 100th day nor later than the 90th day prior to the anniversary of the prior year’s annual meeting; provided, however, that in the event the date of the annual meeting is advanced more than 30 days prior to the anniversary of the preceding year’s annual meeting, then, to be timely, notice by the stockholder must be so received no earlier than the day on which public disclosure of the date of such annual meeting is first and made not later than the tenth day following the earlier of the day notice of the meeting was mailed to stockholders or such public announcement was made.

 

The notice with respect to stockholder proposals that are not nominations for director must set forth as to each matter such stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address of such stockholder as they appear on New Provident’s books and of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class or series and number of shares of capital stock of New Provident which are owned beneficially or of record by such stockholder and such beneficial owner; (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business; and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.

 

The notice with respect to director nominations must include: (a) as to each person whom the stockholder proposes to nominate for election as a director, (i) all information relating to such person that would indicate such person’s qualification to serve on the Board of Directors of New Provident; (ii) an affidavit that such person would

 

18

 

 

not be disqualified under the provisions of Article II, Section 12 of New Provident’s Bylaws; (iii) such information relating to such person that is required to be disclosed in connection with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, or any successor rule or regulation; and (iv) a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address of such stockholder as they appear on New Provident’s books and of the beneficial owner, if any, on whose behalf the nomination is made; (ii) the class or series and number of shares of capital stock of New Provident which are owned beneficially or of record by such stockholder and such beneficial owner; (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder; (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act or any successor rule or regulation.

 

The 2020 annual meeting of stockholders is expected to be held May 21, 2020. If the conversion is completed, advance written notice for certain business, or nominations to the Board of Directors, to be brought before the next annual meeting must be given to us no earlier than February 11, 2020 and no later than February 21, 2020. If notice is received earlier than February 11, 2020 or after February 21, 2020, it will be considered untimely, and we will not be required to present the matter at the stockholders meeting. If the conversion is not completed, advance written notice for certain business, or nominations to the Board of Directors, to be brought before the next annual meeting must be given to us between February 21, 2020 and March 2, 2020. If notice is received before February 21, 2020 or after March 2, 2020, it will be considered untimely, and we will not be required to present the matter at the stockholders meeting.

 

Nothing in this proxy statement/prospectus shall be deemed to require us to include in our proxy statement and proxy relating to an annual meeting any stockholder proposal that does not meet all of the requirements for inclusion established by the Securities and Exchange Commission in effect at the time such proposal is received.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING

 

The Notice of Special Meeting of Stockholders, Proxy Statement/Prospectus and Proxy Card are available at www.cstproxy.com/theprovidentbank/sm2019.

 

OTHER MATTERS

 

As of the date of this document, the board of directors is not aware of any business to come before the special meeting other than the matters described above in the proxy statement/prospectus. However, if any matters should properly come before the special meeting, it is intended that the holders of the proxies will act in accordance with their best judgment.

 

19

 

 

PART II:   INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of shares of common stock being registered.

 

*  Registrant’s Legal Fees and Expenses  $600,000 
*  Registrant’s Accounting Fees and Expenses, Including Tax Opinion Fees   147,000 
*  Data Conversion Fees and Expense   40,000 
*  Appraisal Fees and Expenses   130,000 
*  Printing, Postage, Mailing and EDGAR Fees   174,000 
*  Filing Fees (FINRA, SEC)   68,000 
*  Transfer Agent Fees and Expenses   20,000 
*  Business Plan Fees and Expenses   58,000 
*  Other   93,000 
*  Total  $1,335,000 

 

 
*Estimated.

 

Item 14.Indemnification of Directors and Officers

 

Articles 10 and 11 of the Articles of Incorporation of Provident Bancorp, Inc. (the “Corporation”) set forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability which they incur in their capacities as such. References to the MGCL refer to Maryland General Corporation Law:

 

ARTICLE 10. Indemnification, etc. of Directors and Officers.

 

A.       Indemnification. The Corporation shall indemnify (1) its current and former directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or permitted by the MGCL now or hereafter in force, including the advancement of expenses under the procedures and to the fullest extent permitted by law, and (2) other employees and agents to such extent as shall be authorized by the Board of Directors and permitted by law; provided, however, that, except as provided in Section B of this Article 10 with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.

 

B.       Procedure. If a claim under Section A of this Article 10 is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be reimbursed the expense of prosecuting or defending such suit. It shall be a defense to any action for advancement of expenses that the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the indemnitee of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard for indemnification set forth in the MGCL. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit

 

 II-1 

 

 

that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the MGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 10 or otherwise shall be on the Corporation.

 

C.       Non-Exclusivity. The rights to indemnification and to the advancement of expenses conferred in this Article 10 shall not be exclusive of any other right that any Person may have or hereafter acquire under any statute, these Articles, the Corporation’s Bylaws, any agreement, any vote of stockholders or the Board of Directors, or otherwise.

 

D.       Insurance. The Corporation may maintain insurance, at its expense, to insure itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such Person against such expense, liability or loss under the MGCL.

 

E.       Miscellaneous. The Corporation shall not be liable for any payment under this Article 10 in connection with a claim made by any indemnitee to the extent such indemnitee has otherwise actually received payment under any insurance policy, agreement, or otherwise, of the amounts otherwise indemnifiable hereunder. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article 10 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee’s heirs, executors and administrators.

 

F.       Limitations Imposed by Federal Law. Notwithstanding any other provision set forth in this Article 10, in no event shall any payments made by the Corporation pursuant to this Article 10 exceed the amount permissible under applicable federal law, including, without limitation, Section 18(k) of the Federal Deposit Insurance Act and the regulations promulgated thereunder.

 

Any repeal or modification of this Article 10 shall not in any way diminish any rights to indemnification or advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Article 10 is in force.

 

ARTICLE 11. Limitation of Liability. An officer or director of the Corporation, as such, shall not be liable to the Corporation or its stockholders for money damages, except (A) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received; or (B) to the extent that a judgment or other final adjudication adverse to the Person is entered in a proceeding based on a finding in the proceeding that the Person’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (C) to the extent otherwise provided by the MGCL. If the MGCL is amended to further eliminate or limit the personal liability of officers and directors, then the liability of officers and directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the MGCL, as so amended.

 

Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification.

 

Item 15.Recent Sales of Unregistered Securities

 

Not applicable.

 

 II-2 

 

 

Item 16.Exhibits and Financial Statement Schedules:

 

The exhibits and financial statement schedules filed as part of this registration statement are as follows:

 

(a)List of Exhibits

 

1.1 Engagement Letter between The Provident Bank, Provident Bancorp, Provident Bancorp, Inc. and Sandler O’Neill & Partners, L.P.*
1.2Form of Agency Agreement between The Provident Bank, Provident Bancorp, Inc., Provident Bancorp and Sandler O’Neill & Partners, L.P.
2Plan of Conversion
3.1 Articles of Incorporation of Provident Bancorp, Inc.*
3.2 Bylaws of Provident Bancorp, Inc.*
4 Form of Common Stock Certificate of Provident Bancorp, Inc.*
5 Opinion of Luse Gorman, PC regarding legality of securities being registered*
8.1Federal Tax Opinion
8.2State Tax Opinion
10.1Employment Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.2Employment Agreement with Charles F. Withee† (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.3Employment Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.4Amended and Restated Supplemental Executive Retirement Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.5Amended and Restated Supplemental Executive Retirement Agreement with Charles F. Withee† (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.6Supplemental Executive Retirement Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.7The Provident Bank Executive Annual Incentive Plan† (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.8The Provident Bank 2005 Amended and Restated Long-Term Incentive Plan† (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.9Provident Bancorp, Inc. 2016 Equity Incentive Plan† (Incorporated by reference to Appendix A to the definitive proxy statement for the Special Meeting of Shareholders of Provident Bancorp, Inc. (file no. 001-37504), filed with the Securities and Exchange Commission on August 9, 2016)
10.10Form of Incentive Stock Option Award Agreement†(Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.11Form of Non-Statutory Incentive Stock Option Award Agreement† (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.12Form of Restricted Stock Award Agreement† (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.13First Amendment to Employment Agreement with David P. Mansfield† (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)

  

 II-3 

 

10.14First Amendment to Employment Agreement with Charles F. Withee† (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)
10.15First Amendment to Employment Agreement with Carol L. Houle† (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)
21 Subsidiaries of Provident Bancorp, Inc.*
23.1Consent of Luse Gorman, PC (set forth in Exhibits 5 and 8.1)
23.2Consent of Whittlesey PC
23.3Consent of Baker Newman & Noyes LLC with respect to state tax opinion (set forth in Exhibit 8.2)
23.4Consent of RP Financial, LC.
24Power of Attorney (set forth on the signature page to this Registration Statement)
99.1 Engagement Letter with RP Financial, LC. to serve as appraiser*
99.2 Letter of RP Financial, LC. with respect to subscription rights*
99.3 Appraisal Report of RP Financial, LC.*
99.4 Marketing Materials*
99.5 Stock Order and Certification Form*
99.6 Letter of RP Financial, LC. with respect to Liquidation Rights*
99.7 Form of Provident Bancorp, Inc. Stockholder Proxy Card
101 Interactive Data Files‡*

 

 

* Previously filed.
Management contract or compensation plan or arrangement.
Attached as Exhibit 101 to this Registration Statement are documents formatted in XBRL (Extensible Business Reporting Language).

 

(b)Financial Statement Schedules

 

No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.

 

Item 17.Undertakings

 

The undersigned Registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

 II-4 

 

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(7) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

(8) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

 II-5 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Amesbury, Commonwealth of Massachusetts, on July 24, 2019.

 

  Provident Bancorp, Inc.

 

  By: /s/ David P. Mansfield    
    David P. Mansfield
    President and Chief Executive Officer
    (Duly Authorized Representative)

 

POWER OF ATTORNEY

 

We, the undersigned directors of Provident Bancorp, Inc. (the “Company”), severally constitute and appoint David P. Mansfield with full power of substitution, our true and lawful attorney and agent, to do any and all things and acts in our names in the capacities indicated below which said David P. Mansfield may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the Registration Statement on Form S-1 relating to the offering of the Company common stock, including specifically, but not limited to, power and authority to sign for us or any of us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said David P. Mansfield shall do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signatures   Title  

Date 

         
/s/ David P. Mansfield   President, Chief Executive Officer and Director   July 24, 2019
David P. Mansfield   (Principal Executive Officer)    
         
/s/ Carol L. Houle   Executive Vice President and Chief Operating   July 24, 2019
Carol L. Houle   Officer (Principal Financial and Accounting Officer)    
         
/s/ Frank G. Cousins, Jr.   Director   July 24, 2019
Frank G. Cousins, Jr.        
         
/s/ James A. DeLeo   Director   July 24, 2019
James A. DeLeo        
         
/s/ Lisa B. DeStefano   Director   July 24, 2019
Lisa B. DeStefano        
         
/s/ Jay E. Gould   Director   July 24, 2019
Jay E. Gould        
         
/s/ Laurie H. Knapp   Director   July 24, 2019
Laurie H. Knapp        

 

 

 

 

/s/ Richard L. Peeke        
Richard L. Peeke   Director   July 24, 2019
         
/s/ Joseph B. Reilly   Director   July 24, 2019
Joseph B. Reilly        
         
/s/ Arthur W. Sullivan   Director   July 24, 2019
Arthur W. Sullivan        
         
/s/ Charles F. Withee   Director   July 24, 2019
Charles F. Withee        

 

 

 

  

As filed with the Securities and Exchange Commission on July 24, 2019

 

Registration No. 333-232018

 

  

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

 

EXHIBITS

TO

FORM S-1/A

PRE-EFFECTIVE AMENDMENT NO. 1 TO THE

REGISTRATION STATEMENT

 

 

 

 

 

 

 

 

 

 

 

Provident Bancorp, Inc.

SBERA 401(k) Plan as Adopted by The Provident Bank

Amesbury, Massachusetts

 

 

 

 

 

 

EXHIBIT INDEX 

 

1.1 Engagement Letter between The Provident Bank, Provident Bancorp, Provident Bancorp, Inc. and Sandler O’Neill & Partners, L.P.*
1.2Form of Agency Agreement between The Provident Bank, Provident Bancorp, Inc., Provident Bancorp and Sandler O’Neill & Partners, L.P.
2Plan of Conversion
3.1 Articles of Incorporation of Provident Bancorp, Inc.*
3.2 Bylaws of Provident Bancorp, Inc.*
4 Form of Common Stock Certificate of Provident Bancorp, Inc.*
5 Opinion of Luse Gorman, PC regarding legality of securities being registered*
8.1Federal Tax Opinion
8.2State Tax Opinion
10.1Employment Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.2Employment Agreement with Charles F. Withee† (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.3Employment Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.4Amended and Restated Supplemental Executive Retirement Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.5Amended and Restated Supplemental Executive Retirement Agreement with Charles F. Withee† (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.6Supplemental Executive Retirement Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.7The Provident Bank Executive Annual Incentive Plan† (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.8The Provident Bank 2005 Amended and Restated Long-Term Incentive Plan† (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015)
10.9Provident Bancorp, Inc. 2016 Equity Incentive Plan† (Incorporated by reference to Appendix A to the definitive proxy statement for the Special Meeting of Shareholders of Provident Bancorp, Inc. (file no. 001-37504), filed with the Securities and Exchange Commission on August 9, 2016)
10.10Form of Incentive Stock Option Award Agreement†(Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.11Form of Non-Statutory Incentive Stock Option Award Agreement† (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.12Form of Restricted Stock Award Agreement† (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-8 (file no. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.13First Amendment to Employment Agreement with David P. Mansfield† (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)

 

 

 

 

10.14First Amendment to Employment Agreement with Charles F. Withee† (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)
10.15First Amendment to Employment Agreement with Carol L. Houle† (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed with the Securities and Exchange Commission on December 26, 2018)
21 Subsidiaries of Provident Bancorp, Inc.*
23.1Consent of Luse Gorman, PC (set forth in Exhibits 5 and 8.1)
23.2Consent of Whittlesey PC
23.3Consent of Baker Newman & Noyes LLC with respect to state tax opinion (set forth in Exhibit 8.2)
23.4Consent of RP Financial, LC.
24Power of Attorney (set forth on the signature page to this Registration Statement)
99.1 Engagement Letter with RP Financial, LC. to serve as appraiser*
99.2 Letter of RP Financial, LC. with respect to subscription rights*
99.3 Appraisal Report of RP Financial, LC.*
99.4 Marketing Materials*
99.5 Stock Order and Certification Form*
99.6 Letter of RP Financial, LC. with respect to Liquidation Rights*
99.7 Form of Provident Bancorp, Inc. Stockholder Proxy Card
101 Interactive Data Files‡*

 ________________________________

  * Previously filed.
  Management contract or compensation plan or arrangement.
  Attached as Exhibit 101 to this Registration Statement are documents formatted in XBRL (Extensible Business Reporting Language).

 

 

 

EX-1.2 2 tv525519_ex1-2.htm EXHIBIT 1.2

 

Exhibit 1.2

 

Up to 13,225,000 Shares

 

Provident Bancorp, Inc.
(a Maryland corporation)

 

Common Stock
(par value $0.01 per share)

 

AGENCY AGREEMENT

 

, 2019

 

Sandler O’Neill & Partners, L.P.

1251 Avenue of the Americas

6th Floor

New York, New York 10020

 

Ladies and Gentlemen:

 

Provident Bancorp, Inc., a newly formed Maryland corporation (the “Company”), Provident Bancorp, Inc., a Massachusetts corporation and “mid-tier” holding company (the “Mid-Tier Company”), Provident Bancorp, a Massachusetts-chartered mutual holding company (the “MHC”), and The Provident Bank, a Massachusetts-chartered stock savings bank (the “Bank”), hereby confirm their agreement with Sandler O’Neill & Partners, L.P. (“Sandler O’Neill” or the “Agent”) with respect to the offer and sale by the Company of up to 13,225,000 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”). The shares of Common Stock to be sold by the Company in the Offerings (as defined below) are hereinafter called the “Securities.” The Company, the Mid-Tier Company, the Bank and the MHC are sometimes referred to herein as the “Provident Parties.”

 

The Securities are being offered for sale in accordance with the Plan of Conversion (the “Plan”) adopted by the Board of Trustees of the MHC and the Board of Directors of the Mid-Tier Company pursuant to which the MHC intends to convert from the mutual to stock holding company form of organization pursuant to the following steps, or in any other manner that is consistent with the purpose of the Plan and applicable laws and regulations: (i) the establishment of the Company as a Maryland corporation subsidiary of the Mid-Tier Company; (ii) the merger of the MHC with and into the Mid-Tier Company with the Mid-Tier Company as the surviving entity (the “MHC Merger”); (iii) the merger of the Mid-Tier Company with and into the Company with the Company as the surviving entity (the “Mid-Tier Company Merger”); and (iv) the sale and exchange of Common Stock pursuant to the Plan and the regulations of the Commonwealth of Massachusetts Division of Banks (the “Division”) and the Board of Governors of the Federal Reserve System (the “FRB”). As a result of the Mid-Tier Company Merger, the Bank will become a wholly owned subsidiary of the Company. The outstanding shares of common stock of the Mid-Tier Company held by persons other than the MHC will be converted into Common Stock pursuant to an exchange ratio as defined in the Plan, which will result in the holders of such shares receiving and owning in the aggregate approximately the same percentage of the Common Stock to be outstanding upon the completion of the conversion as the percentage of Mid-Tier Company common stock owned by them in the aggregate immediately prior to consummation of the conversion before giving effect to (a) cash paid in lieu of any fractional interests of Common Stock, (b) assets of the MHC and (c) any Securities purchased in the Offerings.

 

Pursuant to the Plan, the Company will offer to certain depositors of the Bank and to the Bank’s tax qualified employee benefit plans, including the Bank’s employee stock ownership plan (the “ESOP”)

 

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(collectively, the “Employee Plans”), rights to subscribe for the Securities in a subscription offering (the “Subscription Offering”). Employees, officers, trustees, directors and corporators of the Bank and the MHC also will have rights to subscribe for the Securities in the Subscription Offering, subject to the priority rights of depositors and the Employee Plans. To the extent Securities are not subscribed for in the Subscription Offering, such Securities will be offered to certain members of the general public in a community offering (the “Community Offering”), with preference given first to residents of the Massachusetts cities and towns of Amesbury, Newburyport and Salisbury, and the New Hampshire cities and towns of Bedford, Exeter, Greenland, Hampton, Hampton Falls, Manchester, Newcastle, Newington, North Hampton, Portsmouth, Rye, Seabrook and Stratham, and second to other members of the general public. The Community Offering, which together with the Subscription Offering, as each may be extended or reopened from time to time, are herein referred to as the “Subscription and Community Offering,” may be commenced concurrently with, during or promptly after the Subscription Offering. It is currently anticipated by the Bank and the Company that any Securities not subscribed for in the Subscription and Community Offering will be offered, subject to Section 2 hereof, in a syndicated offering (the “Syndicated Offering”) or an underwritten public offering (the “Public Offering”); provided, however, that the Community Offering may occur concurrently with the Subscription Offering and the Syndicated Offering or the Public Offering. The Subscription and Community Offering, the Syndicated Offering and the Public Offering are hereinafter referred to collectively as the “Offerings.” The conversion and reorganization of the MHC from mutual to stock holding company form, the formation of the Company, the MHC Merger, the Mid-Tier Company Merger, the exchange of the Mid-Tier Company’s public stockholders’ shares for shares of Common Stock (the “Exchange Shares”), the acquisition of the capital stock of the Bank by the Company as a consequence of the Mid-Tier Company Merger, and the Offerings are hereinafter referred to collectively as the “Conversion.” It is acknowledged that the number of Securities to be sold in the Conversion may be increased or decreased as described in the Prospectus (as hereinafter defined). If the number of Securities is increased or decreased in accordance with the Plan, the term “Securities” shall mean such greater or lesser number, where applicable. If there is a Public Offering, the Public Offering will be governed by a separate Underwriting Agreement, as hereinafter defined, as described in Section 2 hereof.

 

The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (No. 333-232018), including a related prospectus, for the registration of the sale of the Securities under the Securities Act of 1933, as amended (the “Securities Act”), has filed such amendments thereto, if any, and such amended prospectus as may have been required to the date hereof by the Commission in order to declare such registration statement effective, and will file such additional amendments thereto and such amended prospectus and prospectus supplements as may hereafter be required. Such registration statement (as amended to date, if applicable, and as from time to time amended or supplemented hereafter, including post-effective amendments thereto containing the preliminary and final prospectus for the Public Offering, if any) and the prospectus constituting a part thereof (including in each case all documents incorporated or deemed to be incorporated by reference therein and the information, if any, deemed to be a part thereof pursuant to the rules and regulations of the Commission promulgated under the Securities Act, as from time to time amended or supplemented pursuant to the Securities Act or otherwise (the “Securities Act Regulations”), as well as the preliminary prospectus, if any, as defined in Rule 430A of the Securities Act Regulations contained in a post-effective amendment to the Registration Statement or a new registration statement and the final prospectus filed pursuant to Rule 430A and Rule 424(b) of the Securities Act Regulations for use in the Public Offering), are hereinafter referred to as the “Registration Statement” and the “Prospectus,” respectively, except that if any revised prospectus shall be used by the Company in connection with the Subscription and Community Offering, the Syndicated Offering or the Public Offering, if any, which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations), the term “Prospectus” shall refer to such revised prospectus from and after

 

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the time it is first provided to the Agent for such use.

 

In accordance with the Massachusetts General Laws and the rules and regulations governing the conversion of Massachusetts mutual holding companies to stock holding companies (including, without limitation, Chapter 167H of the Massachusetts General Laws and Chapter 33, Subpart D of the Code of Massachusetts Regulations), as from time to time amended or supplemented (the “Massachusetts Regulations”), the MHC has filed the Plan with the Massachusetts Division of Banks (the “Division”) and has filed such amendments thereto and supplementary materials as may have been required to the date hereof (such application, as amended to date, if applicable, and as subsequently amended, if applicable, is hereinafter referred to as the “Massachusetts Conversion Application”), including copies of the MHC’s Notice and Information Statement for a Special Meeting of its Corporators relating to the Conversion (the “Information Statement”), the Appraisal (as hereinafter defined), and the Prospectus.

 

In addition, the Company has filed with the Board of Governors of the Federal Reserve System (the “FRB”) an Application to Become a Bank Holding Company and/or Acquire an Additional Bank or Bank Holding Company on Form FR Y-3 (the “Holding Company Application”) to become a bank holding company under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHCA”), as in effect at the time and the FRB has approved the Holding Company Application. The Massachusetts Conversion Application and the Holding Company Application are collectively referred to herein as the “Applications.”

 

Concurrently with the execution of this Agreement, the Company is delivering to the Agent copies of the Prospectus to be used in the Subscription and Community Offering and, if necessary, will deliver copies of the Prospectus and a prospectus supplement for use in a Syndicated Offering or Public Offering, if any. Such Prospectus contains information with respect to the Provident Parties, the Common Stock, and the Offerings.

 

SECTION 1. Representations and Warranties.

 

(a)          The Company, the Mid-Tier Company, the Bank and the MHC jointly and severally represent and warrant to the Agent as of the date hereof as follows:

 

(i)           The Registration Statement has been declared effective by the Commission, no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the Commission. At the time the Registration Statement became effective and at the Closing Time referred to in Section 2 hereof, the Registration Statement complied and will comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus as of the date hereof does not, and at the Closing Time referred to in Section 2 hereof will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information with respect to the Agent furnished to the Company in writing by the Agent or its counsel expressly for use in the Registration Statement or Prospectus which the Provident Parties agree consists solely of the Agent Information (as hereinafter defined) described as such in Section 6(a) hereof.

 

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(ii)          At the time of filing the Registration Statement relating to the offering of the Securities and as of the date hereof, the Company was not, and is not, an ineligible issuer, as defined in Rule 405 of the Securities Act Regulations. At the time of the filing of the Registration Statement and at the time of the use of any issuer free writing prospectus, as defined in Rule 433(h) of the Securities Act Regulations, the Company met the conditions required by Rules 164 and 433 of the Securities Act Regulations for the use of a free writing prospectus. If required to be filed, the Company has filed any issuer free writing prospectus related to the Securities at the time it was required to be filed under Rule 433 and, if not required to be filed, it has retained such free writing prospectus in the Company’s records pursuant to Rule 433(g) of the Securities Act Regulations and, if any issuer free writing prospectus is used after the date hereof in connection with the offering of the Securities, the Company will file or retain such free writing prospectus as required by Rule 433.

 

(iii)         As of the Applicable Time, neither (i) the Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus issued at or prior to the Applicable Time, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the Securities or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Agent specifically for use therein, it being understood and agreed that the only information furnished by the Agent consists of the Agent Information described in Section 6(a) hereof. As used in this paragraph and elsewhere in this Agreement:

 

1.       “Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Securities.

 

2.       “Statutory Prospectus”, as of any time, means the Prospectus relating to the Securities that is included in the Registration Statement relating to the Securities immediately prior to that time, including any document incorporated by reference therein.

 

3.       “Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h) of the Securities Act Regulations, relating to the Securities. The term does not include any writing exempted from the definition of prospectus pursuant to clause (a) of Section 2(a)(10) of the Securities Act, without regard to Rule 172 or Rule 173 of the Securities Act Regulations.

 

4.       “Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors.

 

5.       “Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of the Securities Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) of the Securities Act Regulations or otherwise, even though not required to be filed with the Commission.

 

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(iv)         Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offerings and sale of the Securities or until any earlier date that the Company notified or notifies the Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement relating to the Securities, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus materially conflicted, conflicts or would conflict with the information contained in the Registration Statement relating to the offering of the Securities or included, includes or would include an untrue statement of a material fact or omitted, omits or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is amended or supplemented and the Company has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Agent expressly for use therein.

 

(v)         The Company has filed the Holding Company Application with the FRB and has published notice of such filing, and the Holding Company Application is accurate and complete in all material respects. The Company has received written notice from the FRB of its approval of the acquisition of the Bank, such approval remains in full force and effect and no order has been issued by the FRB suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the FRB or any other applicable regulator. At the date of such approval, the Holding Company Application complied in all material respects with the applicable provisions of the BHCA and the regulations promulgated thereunder, except as the FRB or any other applicable regulator has expressly waived such regulations in writing.

 

(vi)         The MHC has filed the Massachusetts Conversion Application with the Division, and the Massachusetts Conversion Application is accurate and complete in all material respects. The MHC has received written notice from the Division of its approval of the Conversion, such approval remains in full force and effect and no order has been issued by the Division suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the Division. At the date of such approval, the Massachusetts Conversion Application complied in all material respects with the applicable provisions of the Massachusetts Regulations, except as the Division or any other applicable regulator has expressly waived such Massachusetts Regulations in writing.

 

(vii)        The Provident Parties have filed the Prospectus, the Information Statement and any supplemental sales literature with the Commission, the FRB, the Division and any other applicable regulator. The Prospectus and all supplemental sales literature, as of the date the Registration Statement became effective and on the Closing Time referred to in Section 2 hereof, complied and will comply in all material respects with the applicable requirements of the Securities Act Regulations, the Massachusetts Regulations and, at or prior to the time of their first use, will have received all required authorizations of the Division and the Commission and any other applicable regulator for use in final form. The Information Statement, as of the date of the Division’s approval of the Information Statement, complied in all material respects with the

 

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applicable requirements of the Massachusetts Regulations. No approval of any other regulatory or supervisory or other public authority is required in connection with the distribution of the Prospectus, the Information Statement and any supplemental sales literature that has not been obtained and a copy of which has been delivered to the Agent. The Company, the Mid-Tier Company, the MHC and the Bank have not distributed any offering material in connection with the Offering except for the Prospectus, the Information Statement and any supplemental sales material that has been filed with the Registration Statement and the Applications and authorized for use by the Commission, the FRB and the Division, or any other applicable regulator. The information contained in the supplemental sales material filed as an exhibit to both the Registration Statement and the Applications does not conflict in any material respects with information contained in the Registration Statement and the Prospectus.

 

(viii)       At the Closing Time referred to in Section 2 hereof, the Company, the Mid-Tier Company, the MHC and the Bank will have completed the conditions precedent to the Conversion in accordance with the Plan, the applicable FRB Regulations and Massachusetts Regulations and all other applicable laws, regulations, decisions and orders, including all material terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the FRB, the Division or any other regulatory authority, other than those which the regulatory authority permits to be completed after the Conversion. The Conversion, the Offerings and other transactions contemplated hereby do not and will not require any material consent, approval, authorization or permit or filing with any other governmental agency or regulatory authority, except as disclosed in the Prospectus.

 

(ix)          None of the Commission, the FRB, the Division or any state securities (“Blue Sky”) authority has, by order or otherwise, prevented or suspended the use of the Prospectus, the Information Statement or any supplemental sales literature authorized by the Company, the Mid-Tier Company, the MHC or the Bank for use in connection with the Offerings, and no proceedings for such purposes are pending or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened.

 

(x)           RP Financial, LC. (the “Appraiser”), which prepared the valuation of the Common Stock as part of the Plan (the “Appraisal”), has advised the Provident Parties in writing that it satisfies all requirements for an appraiser set forth in the Massachusetts Regulations and FRB Regulations and any interpretation or guideline issued by the Division or the FRB or their respective staffs with respect thereto.

 

(xi)          Whittlesey PC, the accountants who audited and reported on the consolidated financial statements of the Mid-Tier Company and its subsidiaries included in the Registration Statement, has advised the Mid-Tier Company in writing within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Rule 3526, that such accountants are not in violation of the auditor independence requirements of the PCAOB, the Securities Act and the Securities Act Regulations.

 

(xii)         The only direct subsidiary of the Mid-Tier Company is the Bank, and the only direct subsidiaries of the Bank are Provident Security Corporation and 5 Market Street Security Corporation (collectively, the “Subsidiaries”). Except for the Subsidiaries and except as set forth in the Prospectus, none of the Provident Parties directly or indirectly controls any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization. Upon completion of the Conversion, the only direct subsidiary of the Company will be the Bank.

 

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(xiii)       The consolidated financial statements and the related notes thereto included in the Registration Statement and the Prospectus present fairly the financial position of the Mid-Tier Company and its Subsidiaries at the dates indicated and the income, comprehensive income, stockholders’ equity and cash flows for the periods specified, and comply as to form with the applicable accounting requirements of the Securities Act Regulations, the Massachusetts Regulations and the FRB Regulations; except as otherwise stated in the Registration Statement and Prospectus, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis except as noted therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been consistently applied on the basis described therein.

 

(xiv)       Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein: (A) there has been no material adverse change in the financial condition, results of operations, business affairs or prospects of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business (“Material Adverse Effect”), (B) except for transactions specifically referred to or contemplated in the Registration Statement and Prospectus, there have been no transactions entered into by the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, other than those in the ordinary course of business consistent with past practice, which are material with respect to the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise, (C) the capitalization, liabilities, assets, properties and business of the Company, the Mid-Tier Company, the MHC and the Bank conform in all material respects to the descriptions contained in the Prospectus and none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries has any material liabilities of any kind, contingent or otherwise, except as disclosed in the Registration Statement or the Prospectus and (D) none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries has issued any securities or incurred any liability or obligation, direct or contingent, or borrowed money, except borrowings in the ordinary course of business consistent with past practice from the same or similar sources and in similar amounts as indicated in the Prospectus, except that the Company will issue 100 shares of its Common Stock to the Mid-Tier Company in connection with its formation, which shares will be cancelled prior to the Closing Time.

 

(xv)       The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland with corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby; and the Company is duly qualified to transact business and is in good standing in the State of Maryland and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xvi)       Upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Company will be within the range as set forth in the Prospectus under “Capitalization” (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus); except as set forth elsewhere in this Agreement, no shares of Common Stock have been or will be issued and outstanding prior to the Closing Time referred to in Section 2 hereof, except that the Company will issue 100 shares of its Common Stock to the Mid-Tier Company in connection with its formation, which shares will be

 

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cancelled prior to the Closing Time; at the time of the Conversion, the Securities will have been duly authorized for issuance and, when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and stated on the cover page of the Prospectus, will be duly and validly issued and fully paid and nonassessable; the Exchange Shares have been duly authorized for issuance and, when issued, will be duly and validly issued and fully paid and nonassessable; the terms and provisions of the Common Stock and the other capital stock of the Company conform in all material respects to all statements relating thereto contained in the Prospectus; any certificate representing the shares of Common Stock will conform in all material respects to the requirements of applicable law and regulations; and the issuance of the Securities and the Exchange Shares is not subject to preemptive or other similar rights except for subscription rights granted pursuant to the Plan in accordance with the FRB Regulations and the Massachusetts Regulations.

 

(xvii)     The MHC has been duly organized and is validly existing as a Massachusetts-chartered mutual holding company with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus, and to enter into and perform its obligations under this Agreement and consummate the transactions contemplated hereby including the MHC Merger; and the MHC is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and in any other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xviii)    The MHC has no capital stock. The MHC does not own any equity securities or any equity interest in any business enterprise except as described in the Prospectus.

 

(xix)       The Mid-Tier Company has been duly organized and is validly existing as a Massachusetts corporation with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby including the Mid-Tier Company Merger; and the Company is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xx)       The Bank is a duly organized and validly existing Massachusetts-chartered stock savings bank with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus, and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby; and the Bank is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and the State of New Hampshire and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xxi)       The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share (the “Company Preferred Stock”). The authorized capital stock of the Mid-Tier Company consists of 30,000,000 shares of common stock, no par value per share (“Mid-Tier Company Common Stock”), and 50,000 authorized shares of preferred stock, no par value per

 

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share (“Mid-Tier Company Preferred Stock”), of which 9,625,719 shares of Mid-Tier Company Common Stock are issued and outstanding as of the date hereof and no shares of Mid-Tier Company Preferred Stock are issued and outstanding as of the date hereof. The authorized capital stock of the Bank consists of 500,000 shares of common stock, $1.00 par value per share (“Bank Common Stock”), and the issued and outstanding capital stock of the Bank is 500,000 shares of Bank Common Stock, all of which are owned beneficially and of record by the Mid-Tier Company free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; the certificates representing the shares of the Bank Common Stock conform with the requirements of applicable laws and regulations; and there are no warrants, options or rights of any kind to acquire shares of capital stock of or other equity interests in any Subsidiary. No additional shares of Common Stock, Mid-Tier Company Common Stock or Bank Common Stock, and no shares of Company Preferred Stock or Mid-Tier Company Preferred Stock will be issued prior to the Closing Time, except for shares of Mid-Tier Company Common Stock that may be issued upon the exercise of options granted under the Mid-Tier Company’s 2016 Equity Incentive Plan. The issued and outstanding shares of Common Stock, Mid-Tier Company Common Stock and Bank Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws. The MHC owns 5,034,323 shares of Mid-Tier Company Common Stock beneficially and of record free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. The terms and provisions of the Mid-Tier Company Common Stock conform to all statements relating thereto contained in the Prospectus.

 

(xxii)      The Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries have each obtained all licenses, permits and other governmental authorizations currently required for the conduct of their respective businesses, except where the failure to obtain such licenses, permits or other governmental authorizations would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are in full force and effect and the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries are in all material respects in compliance therewith; none of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary has received notice of any proceeding or action relating to the revocation or modification of any such license, permit or other governmental authorization which, singularly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Effect.

 

(xxiii)      Each Subsidiary has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and Prospectus, and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect; the activities of each Subsidiary are permitted to subsidiaries of a Massachusetts-chartered stock savings bank by the rules, regulations and practices of the Federal Deposit Insurance Corporation (“FDIC”), the FRB, and the Division; all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Bank, free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; and there are no warrants, options or rights of any kind to acquire shares of capital stock of or other equity interests in any Subsidiary.

 

(xxiv)     The Bank is a member in good standing of the Federal Home Loan Bank of Boston; the deposit accounts of the Bank are insured by the FDIC up to the applicable limits and

 

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the deposit accounts of the Bank are insured in excess of FDIC limits by the Depositors Insurance Fund (the “DIF”). Upon consummation of the Conversion, the liquidation account for the benefit of eligible account holders will be duly established in accordance with the requirements of the FRB Regulations and Massachusetts Regulations.

 

(xxv)       Each of the Company, the Mid-Tier Company, the MHC and the Bank have taken all corporate action necessary for them to execute, deliver and perform this Agreement and the transactions contemplated hereby including, as applicable, the MHC Merger and the Mid-Tier Company Merger, and this Agreement has been duly executed and delivered by, and is the valid and binding agreement of, the Company, the Mid-Tier Company, the MHC and the Bank, enforceable against each of them in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforceability of the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification and contribution provisions may be limited by applicable securities laws.

 

(xxvi)      Subsequent to the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus and prior to the Closing Time referred to in Section 2 hereof, except as otherwise may be indicated or contemplated therein, none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries will have (A) issued any securities or incurred any liability or obligation, direct or contingent, or borrowed money, except borrowings in the ordinary course of business consistent with past practice from the same or similar sources and in similar amounts as indicated in the General Disclosure Package and the Prospectus and except for shares of Mid-Tier Company Common Stock that may be issued upon the exercise of options granted under the Mid-Tier Company’s 2016 Equity Incentive Plan, or (B) entered into any transaction or series of transactions which are material in light of the business of the Provident Parties and the Subsidiaries, taken as a whole, excluding the origination, purchase and sale of loans or the purchase or sale of investment securities or mortgage-backed securities in the ordinary course of business consistent with past practice.

 

(xxvii)     No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or the issuance of the Securities and the Exchange Shares or the consummation of the Conversion that has not been obtained or will not be obtained prior to the Closing Time and a copy of which has been delivered to the Agent, except as may be required under the “Blue Sky” or securities laws of various jurisdictions.

 

(xxviii)    None of the Provident Parties or the Subsidiaries is in violation of their respective certificate of incorporation, organization certificate, articles of incorporation or charter, as the case may be, or bylaws; and none of the Provident Parties or the Subsidiaries is in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which any of the Provident Parties or the Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Provident Parties or the Subsidiaries is subject, except for such defaults that would not, individually or in the aggregate, have a Material Adverse Effect; and there are no contracts or documents of the Provident Parties which are required to be filed as exhibits to the Registration Statement or the Applications which have not been so filed.

 

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(xxix)      The Conversion has been duly authorized by all necessary corporate action on the part of the Company, the Mid-Tier Company, the MHC and the Bank; the Conversion, execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein, including the MHC Merger and the Mid-Tier Company Merger, do not and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary is a party or by which any of them may be bound, or to which any of the property or assets of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries is subject, except for such conflicts, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect; nor will such action result in any violation of the provisions of the respective charters, articles of incorporation, organization certificate, certificate of incorporation or charter or bylaws of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, or any applicable law, administrative regulation or administrative or court decree.

 

(xxx)       No labor dispute with the employees of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries exists or, to the knowledge of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, has been threatened; and the Company, the Mid-Tier Company, the MHC and the Bank are not aware of any existing or threatened labor disturbance by the employees of any of the Bank’s principal borrowers, suppliers or contractors that might be expected to have a Material Adverse Effect.

 

(xxxi)       Each of the Provident Parties and the Subsidiaries has good and marketable title to all of their properties and assets for which ownership is material to the business of the Provident Parties or the Subsidiaries and to those properties and assets described in the General Disclosure Package and the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions, except as such are described in the General Disclosure Package and the Prospectus or are not material in relation to the business of the Provident Parties or the Subsidiaries, considered as one enterprise; and all of the leases and subleases material to the business of the Provident Parties or the Subsidiaries under which the Provident Parties or the Subsidiaries hold properties, including those described in the General Disclosure Package and the Prospectus, are valid and binding agreements of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, as applicable, in full force and effect, enforceable in accordance with their terms except as may be limited by bankruptcy, insolvency or similar laws or equitable remedies affecting the enforceability of the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification and contribution provisions may be limited by applicable securities laws.

 

(xxxii)      None of the Provident Parties or the Subsidiaries is in violation of any order or directive from the Division, the FRB, the FDIC, the Commission, the DIF or any other regulatory authority to make any material change in the method of conducting its respective businesses; the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries have conducted and are conducting their respective businesses so as to comply in all material respects with all applicable statutes, regulations and administrative and court decrees (including, without limitation, all regulations, decisions, directives and orders of the Division, the FRB, the FDIC, the Commission and the DIF). Except as disclosed in the General Disclosure Package and the Prospectus, none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to any cease-and-desist order, agreement, consent

 

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agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been a recipient of any supervisory letter from, or has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that materially relates to their capital adequacy, their credit policies (including concentration policies), their management or their business (each, a “Regulatory Agreement”), nor has the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries been advised by any Regulatory Agency that it is considering issuing or requesting the issuance of any additional Regulatory Agreement; there is no unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examination of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries which might reasonably be expected to have a Material Adverse Effect, or which might materially and adversely affect the properties or assets thereof or which might materially and adversely affect the consummation of the Offerings or the performance of this Agreement; neither the Company, the MHC, nor the Bank has received from any Regulatory Agency any order or direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (and each such order or direction, if any, has been disclosed in writing to the Agent to the extent permitted by applicable law or regulation). As used herein, the term “Regulatory Agency” means any federal or state agency charged with the supervision or regulation of depository institutions or holding companies of depository institutions, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries.

 

(xxxiii)    There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened, against or affecting the Company, the Mid-Tier Company, the MHC or the Bank which is required to be disclosed in the Registration Statement (other than as disclosed therein), or that might result in any Material Adverse Effect, or that might materially and adversely affect the properties or assets thereof, or which might materially and adversely affect the consummation of the Conversion or the performance of this Agreement; all pending legal or governmental proceedings to which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to their business, are considered in the aggregate not material.

 

(xxxiv)    The Company, the Mid-Tier Company, the MHC and the Bank has obtained one or more opinions of its counsel, Luse Gorman, PC, with respect to the legality of the Securities and the Exchange Shares and certain federal income tax consequences of the Conversion, copies of which are filed as exhibits to the Registration Statement; all material aspects of the aforesaid opinions are accurately summarized in the Prospectus under “The Conversion and Offering—Material Income Tax Consequences” and “Legal Matters.” The facts and representations upon which such opinions are based are truthful, accurate and complete in all material respects, and none of the Provident Parties has taken or will take any action inconsistent therewith.

 

(xxxv)     The Company is not and, upon completion of the Conversion and the Offerings and sale of the Securities and the application of the net proceeds therefrom, will not be, required to be registered as an “investment company” as that term is defined under the Investment Company Act of 1940, as amended.

 

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(xxxvi)     All of the loans represented as assets on the most recent consolidated financial statements or selected financial information of the Mid-Tier Company included in the Prospectus meet or are exempt from all requirements of federal, state or local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulations Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not result in a Material Adverse Effect.

 

(xxxvii)   To the knowledge of the Company, the Mid-Tier Company, the MHC and the Bank, with the exception of the intended loan to the Bank’s ESOP by the Company to enable the ESOP to purchase securities in an amount up to eight percent (8.0%) of the Common Stock that will be sold in the Offerings, none of the Company, the Mid-Tier Company, the MHC, the Bank or their employees has made any payment of funds of the Company, the Mid-Tier Company, the MHC or the Bank as a loan for the purchase of the Common Stock or made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

 

(xxxviii)  Each of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management’s general or specific authorizations; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (c) access to assets is permitted only in accordance with management’s general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

(xxxix)    The Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries are in compliance in all material respects with the applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transaction Reporting Act of 1970, as amended, and the rules and regulations thereunder. The Bank has established compliance programs with respect to, and is in compliance in all material respects with the requirements of, the USA PATRIOT Act and all applicable regulations promulgated thereunder, and, except as disclosed in the General Disclosure Package and the Prospectus, there is no charge, investigation, action, suit or proceeding before any court, regulatory authority or governmental agency or body pending or, to the knowledge of the Company, the Mid-Tier Company, the MHC and the Bank, threatened regarding the Bank’s compliance with the USA PATRIOT Act or any regulations promulgated thereunder.

 

(xl)          None of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary nor any property owned or operated by the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, and to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, any collateral securing a loan owned by the Bank or any subsidiary, is in material violation of or liable under any Environmental Law (as defined below), except for such violations or liabilities that, individually or in the aggregate, would not result in a Material Adverse Effect. There are no actions, suits or proceedings, or demands, claims, notices or investigations (including, without limitation, notices, demand letters or requests for information from any environmental agency) instituted or pending, or to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened, relating to the liability of any property owned or operated by the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary under any Environmental Law, except for such actions, suits or proceedings, or demands, claims, notices or investigations that, individually or in the aggregate, would not have a

 

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Material Adverse Effect. For purposes of this subsection, the term “Environmental Law” means any federal, state, local or foreign law, whether common law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the public health or environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), (ii) regulation of industrial hygiene, and/or (iii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component, and all amendments thereto as of this date.

 

(xli)         The Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary have timely filed all federal, state and local income and franchise tax returns required to be filed and have made timely payments of all taxes shown as due and payable in respect of such returns, and no deficiency has been asserted with respect thereto by any taxing authority. The Company, the Mid-Tier Company, the MHC and the Bank have no knowledge of any tax deficiency which could be asserted against the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries.

 

(xlii)        The Company has received, or will receive prior to the Closing Time, all approvals required to consummate the Conversion and to have the Securities and the Exchange Shares listed on the Nasdaq Capital Market effective as of the Closing Time referred to in Section 2 hereof.

 

(xliii)       At or prior to the Closing Time, the Company will have filed a Form 8-K or a Form 8-A for the Securities and the Exchange Shares to be registered under Section 12(b) of the Exchange Act (the “Exchange Act Registration Statement”).

 

(xliv)       To the knowledge of the Provident Parties, there are not and have not been any affiliations or associations (as such terms are defined by the Financial Industry Regulatory Authority (“FINRA”)) between any member of FINRA and any of the Provident Parties’ officers, directors or 5% or greater security holders, except as set forth in the Registration Statement, filings with FINRA or the Prospectus.

 

(xlv)        Each of the Mid-Tier Company, the MHC and the Bank carries, or is covered by, and the Company will carry, or be covered by, prior to the Closing Time, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties as is customary for companies engaged in similar industries.

 

(xlvi)      The Company, the Mid-Tier Company, the MHC and the Bank have not relied on the Agent or its counsel for any legal, tax or accounting advice in connection with the Conversion.

 

(xlvii)     The records of eligible account holders of the Bank are accurate and complete in all material respects.

 

(xlviii)    The Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary are in compliance in all material respects with all presently applicable provisions of the Employee

 

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Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, respectively, would have any liability; each of the Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pension plan” for which the Company, the Mid-Tier Company, the MHC, the Bank and any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, that would cause the loss of such qualification.

 

(xlix)       The Mid-Tier Company has established and maintains and the Company has established or will establish and maintain prior to Closing Time disclosure controls and procedures (as such term is defined in Rule 13a-14 and 15d-14 under the Exchange Act), that (i) are designed to ensure that material information relating to the Company and the Mid-Tier Company, including the Bank consolidated subsidiaries, is made known to each of the Company’s and the Mid-Tier Company’s principal executive officer and its principal financial officer by others within those entities, (ii) have been (or will be) evaluated for effectiveness as of a date within 90 days prior to the filing of the Company’s annual or quarterly report filed with the Commission subsequent to the Closing Time and (iii) are effective in all material respects to perform the functions for which they were established. The Mid-Tier Company’s independent registered public accounting firm and the Audit Committee of the Board of Directors have been advised of: (i) any significant deficiencies in the design or operation of internal controls which could adversely affect the Mid-Tier Company’s ability to record, process, summarize, and report financial data and (ii) any fraud, whether or not material, that involves management or other employees who have a role in the Mid-Tier Company’s internal controls; and such deficiencies or fraud have either been disclosed in the Prospectus and the General Disclosure Package, or are not material to the Company, the MHC, the Mid-Tier Company and the Bank, considered as one enterprise; and since the date of the most recent evaluation of such disclosure controls and procedures, there have been no material changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies, material weaknesses or fraud.

 

(l)            Each of the Company and the Mid-Tier Company is in compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the rules and regulations of the Commission thereunder, and the Nasdaq corporate governance rules applicable to them, and will use its best efforts to comply with those provisions of the Sarbanes-Oxley Act and the Nasdaq corporate governance rules that will become effective in the future upon their effectiveness.

 

(li)           No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the General Disclosure Package, the Prospectus and any Issuer-Represented Free Writing Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

(lii)          Neither the Company, the Mid-Tier Company, the MHC or the Bank nor any director, officer, employee or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, after due inquiry, any agent, affiliate or other person associated with or acting

 

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on behalf of the Company, the Mid-Tier Company, the MHC or the Bank is (a) currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) or relevant sanctioning authority; (b) located, organized or resident in a country or territory that is the subject of such sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria); and (c) the Company will not, directly or indirectly, use the proceeds of the Offerings, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person, or engage in dealings or transactions with any person, or in any country, or territory, subject to any U.S. sanctions administered by OFAC or relevant sanctioning authority.

 

(liii)         Neither the Company, the Mid-Tier Company, the MHC or the Bank nor any director, officer or employee of the Company, the Mid-Tier Company, the MHC or the Bank nor, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, any agent, affiliate or other person associated with or acting on behalf of the Company, the Mid-Tier Company, the MHC or the Bank has (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (b) made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (c) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom or any other applicable anti-bribery or anti-corruption law; or (d) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Company, the Mid-Tier Company, the MHC and the Bank have instituted, maintain and enforce, and the Company and the Bank will continue to maintain and enforce policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.

 

(liv)         Except as described in the Prospectus and the General Disclosure Package, there are no contractual encumbrances or contractual restrictions or regulatory restrictions on the ability (i) of the Company, the Mid-Tier Company or the Bank to pay dividends or to make any other distributions on the Company’s, the Mid-Tier Company’s, the Bank’s capital stock or (ii) of the Company, the Mid-Tier Company or the Bank (A) to pay any indebtedness owed to the Company, the Mid-Tier Company or the Bank, (B) to make any loans or advances to, or investments in, the Company, the Mid-Tier Company or the Bank, subject to applicable law and regulation, or (C) to transfer any of its property or assets to the Company, the Mid-Tier Company or the Bank.

 

(b)           Any certificate signed by any officer of the Company, the Mid-Tier Company, the MHC or the Bank and delivered to the Agent or counsel for the Agent shall be deemed a representation and warranty for purposes of this Agreement by the Company, the Mid-Tier Company, the MHC or the Bank to the Agent as to the matters covered thereby. 

 

SECTION 2. Appointment of Sandler O’Neill; Sale and Delivery of the Securities; Closing. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby appoints Sandler O’Neill (i) as its exclusive marketing

 

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agent to consult with and advise the Company, and to assist the Company with the solicitation of subscriptions and purchase orders for the Securities, in the Subscription Offering and the Community Offering, (ii) as sole book-running manager in connection with the solicitation of purchase orders for the Securities in the Syndicated Offering, if applicable, and (iii) as the sole book-running manager in the Public Offering, if applicable. On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, Sandler O’Neill accepts such appointment and agrees to use its best efforts to assist the Company with the solicitation of subscriptions and purchase orders for Securities in accordance with this Agreement; provided, however, that the Agent shall not be obligated to take any action that is inconsistent with any applicable laws, regulations, decisions or orders.

 

The services to be rendered by Sandler O’Neill pursuant to this appointment include the following: (i) consulting as to the securities marketing implications of any aspect of the Plan; (ii) reviewing with the Board of Trustees of the MHC and the Boards of Directors of the Mid-Tier Company and the Bank the financial impact of the Offerings on the Company, based upon the Appraiser’s appraisal of the Common Stock; (iii) reviewing all Offering documents, including the Prospectus, stock order forms and related Offering materials (it being understood that preparation and filing of such documents is the sole responsibility of the Company, the Mid-Tier Company, the MHC and the Bank and their counsel); (iv) assisting in the design and implementation of a marketing strategy for the Offerings; (v) assisting management of the Mid-Tier Company and the Bank in scheduling and preparing for meetings with potential investors and other broker-dealers in connection with the Offerings, including assistance in preparing presentation materials for such meetings; and (vi) providing such other general advice and assistance as may be requested to promote the successful completion of the Offerings.

 

The appointment of the Agent hereunder shall terminate upon consummation of the Offerings, but in no event later than 45 days after the completion of the Subscription Offering unless the Provident Parties and the Agent agree in writing to extend such period and the FRB agrees to extend the period of time in which the Securities may be sold.

 

If any of the Securities remain available after the expiration of the Subscription Offering and, if held, the Community Offering, at the request of the Company, Sandler O’Neill will either (i) seek to form a syndicate of registered brokers or dealers (“Selected Dealers”) to assist in the solicitation of purchase orders of such Securities on a best efforts basis in a Syndicated Offering, or (ii) enter into an underwriting agreement with the Company, the Mid-Tier Company, the Bank and the MHC (the “Underwriting Agreement”) for the Public Offering in the form attached as Exhibit A to this Agreement. Sandler O’Neill will serve as sole book-running manager of any Syndicated Offering or Public Offering. Sandler O’Neill will endeavor to distribute the Securities among the Selected Dealers or selected underwriters, as applicable, in a fashion that best meets the distribution objectives of the Company and the requirements of the Plan, which may result in limiting the allocation of stock to certain Selected Dealers or selected underwriters, as applicable. It is understood that in no event shall the Agent be obligated to act as a Selected Dealer, to enter into the Underwriting Agreement or to take or purchase any Securities except pursuant to the Underwriting Agreement.

 

This Agreement is not intended to constitute, and should not be construed as, an agreement or commitment between the MHC, the Company, the Mid-Tier Company and the Bank and Sandler O’Neill relating to the firm commitment underwriting of the Securities or any other securities of the Company.

 

In the event the Company is unable to sell at least the minimum amount of the Securities, as set forth on the cover page of the Prospectus, within the period herein provided, this Agreement shall terminate and the Company shall refund to each person who has subscribed for any of the Securities the full amount that it may have received from them, together with interest as provided in the Prospectus, and no party to this Agreement shall have any obligation to the others hereunder, except for the obligations of

 

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the Company, the Mid-Tier Company, the MHC and the Bank as set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing the funds received from subscriptions for Securities or other offers to purchase Securities in special interest-bearing accounts with the Bank until all Securities are sold and paid for were made by the Company prior to the commencement of the Subscription Offering, with provision for refund to the purchasers as set forth above, or for delivery to the Company if all Securities are sold.

 

If at least the minimum amount of Securities, as set forth on the cover page of the Prospectus, are sold, the Company agrees to issue or have issued the Securities sold and to release for delivery certificates for such Securities or statements reflecting book entry ownership of such Securities at the Closing Time against payment therefor by release of funds from the special interest-bearing accounts referred to above. The closing shall be held at the offices of Luse Gorman, PC, at 10:00 a.m., Eastern Time, or at such other place and time as shall be agreed upon by the parties hereto, on a business day to be agreed upon by the parties hereto. The Company shall notify the Agent by telephone, confirmed in writing, when funds shall have been received for all the Securities. Certificates or statements reflecting book entry ownership for Securities shall be delivered directly to the purchasers thereof in accordance with their directions. Notwithstanding the foregoing, certificates or statements reflecting book entry ownership for Securities purchased through Selected Dealers shall be made available to the Agent for inspection at least 48 hours prior to the Closing Time at such office as the Agent shall designate. The hour and date upon which the Company shall release for delivery all of the Securities, in accordance with the terms hereof, is herein called the “Closing Time.”

 

The Company will pay any stock issue and transfer taxes that may be payable with respect to the sale of the Securities.

 

In addition to the reimbursement of the expenses specified in Section 4 hereof, the Agent will receive: 

 

(a)           as compensation for its marketing agent services, a fee of one percent (1.00%) of the aggregate purchase price of the Securities sold in the Subscription Offering and a fee of one and one-half percent (1.50%) of the aggregate purchase price of the Securities sold in the Community Offering, excluding in each case Securities purchased by or on behalf of (i) any employee benefit plan or trust of the Company, the Mid-Tier Company, the MHC or the Bank established for the benefit of their respective directors, officers and employees, (ii) any charitable foundation established by the Company, the Mid-Tier Company, the MHC or the Bank (or any Securities contributed to such charitable foundation), and (iii) any director, corporator, trustee, officer or employee of the Company, the Mid-Tier Company, the MHC or the Bank or members of their immediate families (which term shall mean parents, grandparents, spouses, siblings, children and grandchildren), whether directly or through a personal trust; and

 

(b)           with respect to any Securities sold in the Syndicated Offering or Public Offering, an aggregate fee of five and one-half percent (5.5%) of the aggregate purchase price of all Securities sold in the Syndicated Offering or Public Offering.

 

If this Agreement is terminated by the Agent in accordance with the provisions of Section 9(a) hereof or the Conversion is terminated by the Company, no fee shall be payable by the Company to the Agent; provided, however, that the Company shall reimburse the Agent for all of its reasonable out-of-pocket expenses incurred prior to termination, including the reasonable fees and disbursements of counsel for the Agent, in accordance with the provisions of Section 4 hereof. In addition, the Company shall be obligated to pay the fees and expenses as contemplated by the provisions of Section 4 hereof in the event of any such termination.

 

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All fees payable to the Agent hereunder shall be payable in immediately available funds by wire transfer at the Closing Time, or upon the termination of this Agreement, as the case may be.

 

The Agent shall also receive a fee of $40,000 for certain records management agent services set forth in the letter agreement, dated May 2, 2019, among the Mid-Tier Company, the MHC, the Bank and the Agent, which fee shall be payable as set forth in such letter agreement.

 

SECTION 3. Covenants of the Company, the Mid-Tier Company, the MHC and the Bank. The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally covenant with the Agent as follows:

 

 (a)         The Company, the Mid-Tier Company, the MHC and the Bank will prepare and file such amendments or supplements to the Registration Statement, the Prospectus, the Plan, the Applications and the Information Statement as may hereafter be required by the Commission Regulations, the Massachusetts Regulations or the FRB Regulations or as may hereafter be requested by the Agent. Following completion of the Subscription and Community Offerings, in the event of a Syndicated Offering or Public Offering, the Company, the Mid-Tier Company, the MHC and the Bank will (i) promptly prepare and file with the Commission a post-effective amendment to the Registration Statement relating to the results of the Subscription and Community Offerings, any additional information with respect to the proposed plan of distribution, including the Syndicated Offering or the Public Offering, if any, and any revised pricing information or (ii) if no such post-effective amendment is required, will, if required, file with the Commission a prospectus or prospectus supplement containing information relating to the results of the Subscription and Community Offerings and pricing information pursuant to Rule 424 of the Securities Act Regulations, in either case in a form acceptable to the Agent. The Company, the Mid-Tier Company, the MHC and the Bank will notify the Agent immediately, and confirm the notice in writing, (i) of the effectiveness of any post-effective amendment to the Registration Statement, the filing of any supplement to the Prospectus and the filing of any amendment to the Applications, (ii) of the receipt of any comments from the Division, the FRB, the Commission or any other governmental entity with respect to the transactions contemplated by this Agreement or the Plan, (iii) of any request by the Division, the FRB, the Commission, or any other governmental entity for any amendment to the Registration Statement or the Applications or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Division, the FRB or any other governmental entity of any order suspending the Offerings, any approval of the Applications or the use of the Prospectus or the initiation of any proceedings for that purpose, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceeding for that purpose, and (vi) of the receipt of any notice with respect to the suspension of any qualification of the Securities for offering or sale in any jurisdiction. The Company, the Mid-Tier Company, the MHC and the Bank will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.

 

(b)          The Company represents and agrees that, unless it obtains the prior written consent of the Agent, and the Agent represents and agrees that, unless it obtains the prior written consent of the Company, they have not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations, or that would constitute a “free writing prospectus,” as defined in Rule 405 of the Securities Act Regulations, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and the Agent is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents that it has and will comply with the requirements of Rule 433 of the Securities Act Regulations applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. The Company represents that it will satisfy the conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show.

 

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(c)           The Provident Parties will give the Agent prompt notice of their intention to file or prepare any amendment to the Applications, the Plan or Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use in connection with any Syndicated Offering or Public Offering that differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Securities Act Regulations), will furnish the Agent with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Agent or counsel for the Agent may reasonably object.

 

(d)          The Company, the Mid-Tier Company, the MHC and the Bank will deliver to the Agent as many signed copies and as many conformed copies of the Applications and the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) as the Agent may reasonably request, and from time to time such number of copies of the Prospectus as the Agent may reasonably request.

 

(e)           During the period when the Prospectus is required to be delivered, the Company, the Mid-Tier Company, the MHC and the Bank will comply, at their own expense, with all requirements imposed upon them by the Commission, the Division, the applicable Massachusetts Regulations, the FRB, the applicable FRB Regulations, the Nasdaq Capital Market, the Securities Act, the Securities Act Regulations, the Exchange Act and the regulations promulgated thereunder, including, without limitation, Regulation M under the Exchange Act, so far as necessary to permit the continuance of sales or dealing in shares of the Securities during such period in accordance with the provisions hereof and the Prospectus.

 

(f)            If any event or circumstance shall occur as a result of which it is necessary, in the reasonable opinion of counsel for the Agent, to amend or supplement the Registration Statement or the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Company, the Mid-Tier Company, the MHC and the Bank will forthwith amend or supplement the Registration Statement and/or Prospectus (in form and substance reasonably satisfactory to counsel for the Agent) so that, as so amended or supplemented, the Registration Statement or the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, and the Company, the Mid-Tier Company, the MHC and the Bank will furnish to the Agent a reasonable number of copies of such amendment or supplement. For the purpose of this subsection, the Company, the Mid-Tier Company, the MHC and the Bank will each furnish such information with respect to itself as the Agent may from time to time reasonably request.

 

(g)          The Company, the Mid-Tier Company, the MHC and the Bank will take all necessary action, in cooperation with the Agent, to qualify the Securities for offering and sale under the applicable securities laws of such states of the United States and other jurisdictions as the FRB Regulations and/or the Massachusetts Regulations may require and as the Agent and the Company have agreed; provided, however, that none of the Company, the Mid-Tier Company, the MHC or the Bank shall be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. In each jurisdiction in which the Securities have been so qualified, the Company, the Mid-Tier Company, the MHC and the Bank will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement.

 

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(h)          The Company authorizes the Agent and any Selected Dealer to act as agents of the Company in distributing the Prospectus to persons entitled to receive subscription rights and other persons to be offered Securities having record addresses in the states or jurisdictions set forth in a survey of the securities or “blue sky” laws of the various jurisdictions in which the Offerings will be made (the “Blue Sky Survey”).

 

(i)            The Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the Securities Act Regulations) covering a twelve-month period beginning not later than the first day of the Company’s fiscal quarter next following the effective date of the Registration Statement (as defined in said Rule 158).

 

(j)            During the period ending on the third anniversary of the expiration of the fiscal year during which the Closing Time occurs, the Company will furnish to its stockholders as soon as practicable after the end of each such fiscal year an annual report (including consolidated statements of financial condition and consolidated statements of income, stockholders’ equity and cash flows, certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), the Company will make available to its stockholders consolidated summary financial information of the Company and the Bank for such quarter in reasonable detail. In addition, the Company will use its reasonable best efforts to make public summary financial information contained in such annual report and quarterly financial information through the issuance of appropriate press releases at the same time or prior to the time of the furnishing thereof to stockholders of the Company.

 

(k)           During the period ending on the third anniversary of the expiration of the fiscal year during which the Closing Time occurs, the Company will furnish to the Agent (i) as soon as publicly available, a copy of each report or other document of the Company furnished generally to stockholders of the Company or furnished to or filed with the Commission under the Exchange Act or any national securities exchange or system on which any class of securities of the Company is listed, and (ii) from time to time, such other information concerning the Company as the Agent may reasonably request. For purposes of this paragraph, any document filed electronically with the Commission shall be deemed furnished to the Agent.

 

(l)           The Company will promptly inform the Agent upon its receipt of service with respect to any material litigation or administrative action instituted with respect to the Conversion or the Offerings.

 

(m)          Each of the Company and the Bank will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under “Use of Proceeds.”

 

(n)          The Company will report the use of proceeds from the Offerings on its first periodic report filed following the Closing Time pursuant to Sections 13(a) and 15(d) of the Exchange Act and on any subsequent periodic reports as may be required pursuant to Rule 463 of the Securities Act Regulations.

 

(o)          The Company will maintain the effectiveness of the Exchange Act Registration Statement for not less than three years and will use its best efforts to comply in all material respects with its filing obligations under the Exchange Act during such period. For not less than three years, the Company will use its best efforts to effect and maintain the listing of the Common Stock on the Nasdaq Capital Market, and once listed on the Nasdaq Capital Market, the Company will use its best efforts to comply with all applicable corporate governance standards required by the Nasdaq Capital Market. The Company will file with the Nasdaq Capital Market all documents and notices required by the Nasdaq

 

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Capital Market of companies that have issued securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq Capital Market.

 

(p)          The Company and the Bank will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with FINRA Rule 5130 and all related rules.

 

(q)          Other than in connection with any employee benefit plan or arrangement described in the Prospectus, the Company will not, without the prior written consent of the Agent, sell or issue, contract to sell or otherwise dispose of, any shares of Common Stock other than the Securities or the Exchange Shares for a period of 180 days following the Closing Time.

 

(r)           During the period beginning on the date hereof and ending on the later of the third anniversary of the Closing Time or the date on which the Agent receives full payment in satisfaction of any claim for indemnification or contribution to which it may be entitled pursuant to Sections 6 or 7 made prior to the third anniversary of the Closing Time, respectively, none of the Company, the Mid-Tier Company, the MHC or the Bank shall, without the prior written consent of the Agent, take or permit to be taken any action that could result in the Common Stock or the Bank Common Stock becoming subject to any security interest, mortgage, pledge, lien or encumbrance, with the exception of the Bank’s proposed loan to the ESOP.

 

(s)          The Company, the Mid-Tier Company, the MHC and the Bank will comply with the conditions imposed by or agreed to with the Division in connection with its approval of the Massachusetts Conversion Application and the FRB in connection with its approval of the Holding Company Application.

 

(t)           The Company shall not deliver the Securities or the Exchange Shares until the Company, the Mid-Tier Company, the MHC and the Bank have satisfied each condition set forth in Section 5 hereof, unless such condition is waived by the Agent.

 

(u)          The Company, the Mid-Tier Company, the MHC and the Bank will furnish to the Agent as early as practicable prior to the Closing Time, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements of the Mid-Tier Company which have been read by Whittlesey PC, as stated in their letters to be furnished pursuant to subsections (f) and (g) of Section 5 hereof.

 

(v)           During the period in which the Prospectus is required to be delivered, each of the Company, the Mid-Tier Company, the MHC and the Bank will conduct its business in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the Commission, the Nasdaq Capital Market, the Division and the FRB.

 

(w)          None of the Company, the Mid-Tier Company, the MHC or the Bank will amend the Plan in any manner that would affect the sale of the Securities or the terms of this Agreement without the consent of the Agent.

 

(x)           The Company, the Mid-Tier Company, the MHC and the Bank will not, prior to the Closing Time, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business substantially consistent with past practice, except as disclosed in the Prospectus.

 

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(y)          The Company, the Mid-Tier Company, the MHC and the Bank will use all reasonable efforts to comply with, or cause to be complied with, the conditions precedent to the several obligations of the Agent specified in Section 5 hereof.

 

(z)           The Company, the Mid-Tier Company, the MHC and the Bank will provide the Agent with any information necessary to carry out the allocation of the Securities in the event of an oversubscription, and such information will be accurate and reliable in all material respects.

 

(aa)        The Company, the Mid-Tier Company, the MHC and the Bank will notify the Agent when funds have been received for the minimum number of Securities set forth in the Prospectus.

 

(bb)        The Company, the Mid-Tier Company, the MHC and the Bank will use their best efforts to conduct the Conversion, including the Offerings and complete the conditions precedent to the Offerings and the Conversion, in each case in accordance with the Plan, the applicable FRB Regulations, the applicable Massachusetts Regulations and all other applicable laws, regulations, decisions and orders, including all material terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the Commission, the FRB, the Division or any other regulatory authority or Blue Sky authority, and to comply with those which the regulatory authority permits to be completed after the Conversion.

 

(cc)         The Company will file the Exchange Act Registration Statement, prior to the Closing Time.

 

(dd)        The Company, the Mid-Tier Company, the MHC and the Bank will comply, at their own expense, with all requirements imposed by the Commission, the FRB, the Division and Nasdaq or pursuant to the applicable Commission Regulations, FRB Regulations, Massachusetts Regulations and Nasdaq regulations as from time to time in force.

 

SECTION 4. Payment of Expenses. The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally agree to pay all expenses incident to the performance of the obligations of the Provident Parties under this Agreement, including but not limited to (i) the cost of obtaining all securities and bank regulatory approvals, including any required FINRA filing fees, (ii) the preparation, printing and filing of the Registration Statement, the Massachusetts Conversion Application and the Holding Company Application, each as originally filed and of each amendment thereto, (iii) the preparation, issuance and delivery of the certificates for the Securities to the purchasers in the Offerings, (iv) the fees and disbursements of the Company’s and the Bank’s counsel, accountants, appraiser and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(g) hereof, including filing fees and the fees and disbursements of the Company’s and the Bank’s counsel in connection therewith and in connection with the preparation of the Blue Sky Survey, (vi) the printing and delivery to the Agent (in such quantities as the Agent shall reasonably request) of copies of the Registration Statement as originally filed and of each amendment thereto and the printing and delivery of the Prospectus and any amendment or supplement thereto to the purchasers in the Offerings and the Agent (in such quantities as the Agent shall reasonably request), (vii) the printing and delivery to the Agent of copies of a Blue Sky Survey, (viii) the fees and expenses incurred in connection with the listing of the Securities on the Nasdaq Capital Market, and (ix) the establishment and operational expense of the stock information center. In the event the Agent incurs any such fees and expenses on behalf of the Company or the Bank, the Bank will reimburse the Agent for such fees and expenses whether or not any of the Offerings is consummated; provided, however, that the Agent shall not incur any substantial expenses on behalf of the Company or the Bank pursuant to this Section without the prior approval of the Bank.

 

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The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally agree to pay certain expenses incident to the performance of the Agent’s obligations under this Agreement, regardless of whether the Offerings is consummated, including (i) the filing fees paid or incurred by the Agent in connection with all filings with FINRA, and (ii) all reasonable documented out-of-pocket expenses actually incurred by the Agent relating to the Offerings, including without limitation, legal fees and expenses, document reproduction, advertising, promotional, syndication and travel expenses; provided, however, that such expenses shall not exceed $165,000 without the prior approval of the Provident Parties. All fees and expenses to which the Agent is entitled to reimbursement under this paragraph of this Section 4 shall be due and payable upon receipt by the Provident Parties of a written accounting therefor, to the reasonable satisfaction of the Provident Parties, setting forth in reasonable detail the expenses incurred by the Agent.

 

SECTION 5. Conditions of Agent’s Obligations. The Company, the Mid-Tier Company, the MHC, the Bank and the Agent agree that the issuance and the sale of Securities and the issuance of the Exchange Shares and all obligations of the Agent hereunder are subject to the accuracy of the representations and warranties of the Company, the Mid-Tier Company, the MHC and the Bank herein contained as of the date hereof and the Closing Time, to the accuracy of the statements of officers and directors of the Company, the Mid-Tier Company, the MHC and the Bank made pursuant to the provisions hereof, to the performance by the Company, the Mid-Tier Company, the MHC and the Bank of their obligations hereunder, and to the following further conditions:

 

(a)           No stop order suspending the effectiveness of the Registration Statement, including any post-effective amendment thereto, shall have been issued under the Securities Act or proceedings therefor initiated or, to the knowledge of the Company, threatened by the Commission, no order suspending the Offerings or the authorization for final use of the Prospectus, including any prospectus included in a post-effective amendment to the Registration Statement, shall have been issued or proceedings therefor initiated or, to the knowledge of the Company, threatened by the Commission, the FRB or the Division, and no order suspending the sale of the Securities in any jurisdiction shall have been issued. 

 

(b)           At Closing Time, the Agent shall have received:

 

(i)           The written opinion contained in Exhibit B hereof, dated as of Closing Time, of Luse Gorman, PC, counsel for the Company, the Mid-Tier Company, the MHC and the Bank, in form and substance reasonably satisfactory to the Agent.

 

(ii)          The favorable opinion contained in Exhibit C hereof, dated as of Closing Time, of Nutter, McClennen & Fish LLP, counsel for the Agent, in form and substance reasonably satisfactory to the Agent.

 

(iii)          In addition to giving their opinions required by subsections (b)(l) and (b)(2), respectively, of this Section, Luse Gorman, PC and Nutter, McClennen & Fish, LLP shall each additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (except for financial statements and schedules and other financial or statistical data included therein, as to which counsel need make no statement), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules and other financial, pro forma, appraisal or statistical data included therein, as to which counsel need make no statement), at the time the Registration Statement became effective or at the Closing Time, or (if applicable) that the General Disclosure Package as of the Applicable Time, included or includes an untrue

 

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statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 

 

The opinions may be limited to matters governed by the laws of the United States, the State of Maryland and the Commonwealth of Massachusetts. In giving their opinions, Luse Gorman, PC, and Nutter, McClennen & Fish, LLP may rely as to matters of fact on certificates of officers and directors of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, as applicable, and certificates of public officials, and Nutter, McClennen & Fish, LLP may also rely on the opinion of Luse Gorman, PC with respect to matters set forth in paragraphs (iv), (x), (xiv), (xv) and (xvii) therein. 

 

(c)           At the Closing Time referred to in Section 2 hereof, the Company, the Mid-Tier Company, the MHC and the Bank shall have completed in all material respects the conditions precedent to the Conversion in accordance with the Plan, the applicable Massachusetts Regulations, FRB Regulations and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the Division, the FRB or any other regulatory authority, other than those which the Division, the FRB or such other regulatory authority permits to be completed after the Conversion.

 

(d)           At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any Material Adverse Effect whether or not arising in the ordinary course of business consistent with past practice, and the Agent shall have received a certificate of the President and Chief Executive Officer of the Company, the Mid-Tier Company, the MHC and the Bank and the Chief Financial or Chief Accounting Officer of the Company, the Mid-Tier Company, the MHC and the Bank, dated as of Closing Time, to the effect that (i) there has been no such Material Adverse Effect, (ii) there has been no material transaction entered into by the Company, the Mid-Tier Company, the MHC, or the Bank from the latest date as of which the financial condition of the Company, the Mid-Tier Company, the MHC or the Bank is set forth in the Registration Statement and the Prospectus, other than transactions referred to or contemplated therein and transactions in the ordinary course of business substantially consistent with past practice, except as disclosed in the Prospectus, (iii) neither the Company, the Mid-Tier Company, the MHC, nor the Bank has received from the Division, the FRB or the FDIC any order or direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (which order or direction, if any, shall have been disclosed in writing to the Agent) or which materially and adversely would affect the business, financial condition, results of operations or prospects of the Company, the Mid-Tier Company, the MHC or the Bank, considered as one enterprise, (iv) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, (v) each of the Company, the Mid-Tier Company, the MHC and the Bank has complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to Closing Time, (vi) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to their knowledge, threatened by the Commission, and (vii) no order suspending the FRB’s approval of the Holding Company Application or the Division’s approval of the Massachusetts Conversion Application, or the transactions contemplated thereby, has been issued and no proceedings for that purpose have been initiated or, to their knowledge, threatened by the FRB or the Division and, to their knowledge, no person has sought to obtain regulatory or judicial review of the action of the FRB or the Division in approving the Plan in accordance with the FRB Regulations or the Massachusetts Regulations, as applicable, nor has any person sought to obtain regulatory or judicial review of the action of the FRB in approving the Holding Company Application or the Division in approving the Massachusetts Conversion Application.

 

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(e)           At the Closing Time, the Agent shall have received a certificate of the Chief Executive Officer and President of the Company, the Mid-Tier Company, the MHC and the Bank and the Chief Financial Officer of the Company, the Mid-Tier Company, the MHC and the Bank, dated as of Closing Time, to the effect that (i) they have reviewed the contents of the Registration Statement and the Prospectus; (ii) based on each of their knowledge, the Registration Statement and the Prospectus do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which such statements were made, not misleading; and (iii) based on each of their knowledge, the financial statements and other financial information included in the Registration Statement and the Prospectus fairly present the financial condition and results of operations of the Mid-Tier Company and the Bank as of and for the dates and periods covered by the Registration Statement and the Prospectus.

 

(f)            As of the date hereof, the Agent shall have received from Whittlesey PC a letter dated such date, in form and substance satisfactory to the Agent, to the effect that: (i) they are independent public accountants with respect to the Mid-Tier Company and the Bank within the meaning of the Securities Act and the applicable rules and regulations adopted by the SEC; (ii) it is their opinion that the consolidated financial statements included in the Registration Statement and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations; (iii) based upon limited procedures as agreed upon by the Agent and Whittlesey PC set forth in detail in such letter, nothing has come to their attention which causes them to believe that (A) the unaudited consolidated financial statements of the Mid-Tier Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations, or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus, (B) the unaudited amounts of net interest income and net income set forth under “Selected Consolidated Financial and Other Data” or under “Recent Developments” in the Prospectus do not agree with the amounts set forth in unaudited consolidated financial statements as of and for the dates and periods presented under such captions or such amounts were not determined on a basis substantially consistent with that used in determining the corresponding amounts in the audited consolidated financial statements included in the Registration Statement, (C) at a specified date not more than five (5) business days prior to the date of this Agreement, there has been any increase in the consolidated borrowings of the Mid-Tier Company or any decrease in consolidated total assets, the allowance for loan losses, total deposits or total stockholders’ equity of the Mid-Tier Company, in each case as compared with the amounts shown in the consolidated statements of financial condition included in the Registration Statement or, (D) during the period from March 31, 2019 to a specified date not more than five (5) business days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding fiscal year, in total interest income, net interest income, net interest income after provision for loan losses, income before income tax expense or net income of the Mid-Tier Company, except in all instances for increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (iv) in addition to the examination referred to in their opinion and the limited procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are included in the Registration Statement and Prospectus and that are specified by the Agent, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Mid-Tier Company, identified in such letter.

 

(g)           At Closing Time, the Agent shall have received from Whittlesey PC a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to

 

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subsection (f) of this Section, except that the specified date referred to shall be a date not more than five (5) days prior to Closing Time.

 

(h)          The “lock-up” agreements, each substantially in the form of Exhibit D hereto, between the Agent and the persons set forth on Exhibit E hereto, relating to sales and certain other dispositions of shares of Common Stock, Mid-Tier Company Common Stock or certain other securities, shall be delivered to the Agent on or before the date hereof and shall be in full force and effect on the Closing Time.

 

(i)            At Closing Time, the Securities and the Exchange Shares shall have been approved for quotation on the Nasdaq Capital Market upon notice of issuance.

 

(j)            At Closing Time, the Agent shall have received a letter from the Appraiser, dated as of the Closing Time, confirming its Appraisal.

 

(k)           At Closing Time, counsel for the Agent shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities and the Exchange Shares as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities and the Exchange Shares as herein contemplated shall be satisfactory in form and substance to the Agent and counsel for the Agent.

 

(l)            At any time prior to Closing Time, (i) there shall not have occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which, in the judgment of the Agent, are so material and adverse as to make it impracticable to market the Securities or to enforce contracts, including subscriptions or orders, for the sale of the Securities, and (ii) trading generally on either the American Stock Exchange, the New York Stock Exchange or the Nasdaq Stock Market shall not have been suspended, and minimum or maximum prices for trading shall not have been fixed, or maximum ranges for prices for securities have been required, by any of said Exchanges or by order of the Commission or any other governmental authority, and a banking moratorium shall not have been declared by either Federal, Massachusetts or New York authorities.

 

SECTION 6. Indemnification.

 

(a)          The Company, the Mid-Tier Company, the MHC and the Bank, jointly and severally, agree to indemnify and hold harmless the Agent, each person, if any, who controls the Agent, within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and its respective partners, directors, officers, employees and agents as follows:

 

(i)           from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, related to or arising out of the Conversion or any action taken by the Agent where acting as agent of the Company, the Mid-Tier Company, the MHC or the Bank or otherwise as described in Section 2 hereof; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense found in a final judgment by a court of competent jurisdiction to have resulted primarily from the bad faith, willful misconduct or gross negligence of the Agent;

 

(ii)          from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, based upon or arising out of any untrue statement or alleged untrue

 

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statement of a material fact contained in the Registration Statement, the General Disclosure Package, any Issuer-Represented Free Writing Prospectus, when considered together with the General Disclosure Package, or any amendment or supplement thereto (including any post-effective amendment) or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Information Statement or the Prospectus or the General Disclosure Package or any Issuer-Represented Free Writing Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

 

(iii)         from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever described in clauses (i) or (ii) above, if such settlement is effected with the written consent of the Company, the Mid-Tier Company, the MHC or the Bank, which consent shall not be unreasonably withheld; and

 

(iv)         from and against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the fees and disbursements of counsel chosen by the Agent), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation, proceeding or inquiry by any governmental agency or body, commenced or threatened, or any claim pending or threatened whatsoever described in clauses (i) or (ii) above, to the extent that any such expense is not paid under clause (i), (ii) or (iii) above;

 

provided, however, that the indemnification provided for in this paragraph (a) shall not apply to any loss, liability, claim, damage or expense to the extent that (i) it arises out of any untrue statement or alleged untrue statement of a material fact contained in the Prospectus or the General Disclosure Package or any Issuer-Represented Free Writing Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading which was made in reliance upon and in conformity with the written information furnished to the Company by the Agent expressly for use therein, provided that Company, the Mid-Tier Company, the MHC and the Bank hereby acknowledge and agree that the only information that the Agent has furnished to the Company consists solely of the information set forth in the fourth sentence of the second paragraph of “Summary—Terms of the Offering”, the fifth sentence of the section “Summary—Market for Common Stock”, the fifth sentence of the section “Market for the Common Stock,” the section “The Conversion and Offering—Syndicated or Firm Commitment Underwritten Offering,” the section “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” and the section “The Conversion and Offering—Records Management” in the Prospectus (the “Agent Information”), or (ii) is primarily attributable to the gross negligence, willful misconduct or bad faith of the Agent. To the extent required by law, the indemnification provided for in this paragraph (a) shall be subject to and limited by Section 23A of the Federal Reserve Act, as amended.

 

 (b)          The Agent agrees to indemnify and hold harmless the Company, the Mid-Tier Company, the MHC and the Bank, their directors or trustees, as applicable, each of their officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, of a material fact made in the Prospectus or the General Disclosure Package or any Issuer-Represented Free

 

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Writing Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Agent Information.

 

(c)           Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability that it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to no more than one local counsel in each separate jurisdiction in which any action or proceeding is commenced) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

 

(d)          The Company, the Mid-Tier Company, the MHC and the Bank also agree that the Agent shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to the MHC, the Bank, the Mid-Tier Company and its security holders, the Company and its security holders or the MHC’s, the Mid-Tier Company’s, the Bank’s or the Company’s creditors relating to or arising out of the engagement of the Agent pursuant to, or the performance by the Agent of the services contemplated by, this Agreement, except to the extent that any loss, claim, damage or liability is found in a final judgment by a court of competent jurisdiction to have resulted primarily from the Agent’s bad faith, willful misconduct or gross negligence.

 

(e)           In addition to, and without limiting, the provisions of Section (6)(a)(iv) hereof, in the event that the Agent, any person, if any, who controls the Agent within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or any of its partners, directors, officers, employees or agents is requested or required to appear as a witness or otherwise gives testimony in any action, proceeding, investigation or inquiry brought by or on behalf of or against the Company, the Mid-Tier Company, the MHC, the Bank, the Agent or any of its respective affiliates or any participant in the transactions contemplated hereby in which the Agent or such person or agent is not named as a defendant, the Company, the Mid-Tier Company, the MHC and the Bank, jointly and severally, agree to reimburse the Agent and its partners, directors, officers, employees or agents for all reasonable and necessary out-of-pocket expenses incurred by them in connection with preparing or appearing as a witness or otherwise giving testimony and to compensate the Agent and its partners, directors, officers, employees or agents in an amount to be mutually agreed upon.

 

(f)           Notwithstanding any other provision set forth in this Section 6, in no event shall any payment made by the Company, the Mid-Tier Company, the MHC or the Bank pursuant to this Section 6 exceed the amount permissible under applicable federal law, including, without limitation, Section 18(k) of the Federal Deposit Insurance Act and the regulations promulgated thereunder.

 

SECTION 7. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 6 hereof is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Mid-Tier Company, the MHC, the Bank, and the Agent shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company, the Mid-Tier Company, the MHC or the Bank and the Agent, as incurred, in such proportions (i) that the Agent is responsible for that portion represented by the percentage that the maximum aggregate marketing fees appearing on the cover page of the Prospectus bears to the maximum aggregate gross proceeds appearing thereon and the Company, the Mid-Tier Company, the MHC and the Bank are jointly and severally responsible for the balance or (ii) if, but only if, the allocation provided for

 

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in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits to the Company, the Mid-Tier Company, the MHC and the Bank on the one hand and the Agent on the other, as reflected in clause (i), but also the relative fault of the Company, the Mid-Tier Company, the MHC and the Bank on the one hand and the Agent on the other, as well as any other relevant equitable considerations; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls the Agent within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Agent, and each director or trustee of the Company, the Mid-Tier Company, the MHC and the Bank, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company, the Mid-Tier Company, the MHC or the Bank within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company, the Mid-Tier Company, the MHC and the Bank. Notwithstanding anything to the contrary set forth herein, to the extent permitted by applicable law, in no event shall the Agent be required to contribute an aggregate amount in excess of the aggregate marketing fees to which the Agent is entitled and actually paid pursuant to this Agreement.

 

SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement, or contained in certificates of officers of the Company, the Mid-Tier Company, the MHC or the Bank submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Agent or any controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities and the Exchange Shares.

 

SECTION 9. Termination of Agreement.

 

(a)          The Agent may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any Material Adverse Effect, whether or not arising in the ordinary course of business, (ii) if there has occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which, in the good faith judgment of the Agent, are so material and adverse as to make it impracticable to market the Securities or to enforce contracts, including subscriptions or orders, for the sale of the Securities, (iii) if trading generally on the Nasdaq Capital Market, the American Stock Exchange or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by either Federal, Massachusetts or New York authorities, (iv) if any condition specified in Section 5 hereof shall not have been fulfilled when and as required to be fulfilled, (v) if there shall have been such material adverse changes in the condition of the Company, the Mid-Tier Company, the MHC or the Bank or the prospective market for the Company’s Securities as in the Agent’s good faith opinion would make it inadvisable to proceed with the offering, sale or delivery of the Securities, (vi) if, in the Agent’s good faith opinion, the aggregate price for the Securities established by the Appraiser is not reasonable or equitable under then-prevailing market conditions, or (vii) if the Offerings are not consummated on or prior to December 31, 2019.

 

(b)           If this Agreement is terminated pursuant to this Section 9, such termination shall be without liability of any party to any other party except as provided in Sections 2 and 4 hereof relating to the reimbursement of expenses and except that the provisions of Sections 6 and 7 hereof shall survive any termination of this Agreement.

 

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SECTION 10. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Agent shall be directed to the Agent at 1251 Avenue of the Americas, 6th Floor, New York, NY 10020, attention of General Counsel, with a copy to Nutter, McClennen & Fish, LLP, 155 Seaport Blvd., Boston, Massachusetts 02210, attention of Michael K. Krebs; notices to the Company, the Mid-Tier Company, the MHC and the Bank shall be directed to any of them at The Provident Bank, 5 Market Street, Amesbury, MA 01913, attention of David P. Mansfield, with a copy to Luse Gorman, PC, 5335 Wisconsin Avenue, N.W., Suite 780, Washington, D.C. 20015, attention of Ned A. Quint.

 

SECTION 11. Parties. This Agreement shall inure to the benefit of and be binding upon the Agent, the Company, the Mid-Tier Company, the MHC and the Bank and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Agent, the Company, the Mid-Tier Company, the MHC and the Bank and their respective successors and the controlling persons and the partners, officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein or therein contained. This Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the Agent, the Company, the Mid-Tier Company, the MHC and the Bank and their respective successors, and said controlling persons, partners, officers and directors and their heirs, partners, legal representatives, and for the benefit of no other person, firm or corporation.

 

SECTION 12. Entire Agreement; Amendment; Counterparts; Facsimile Delivery. This Agreement represents the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made, except for (i) the engagement letter dated April 2, 2019, by and between the Agent, the Company, the Mid-Tier Company, the MHC and the Bank, relating to the Agent’s providing records management agent services to the Company, the Mid-Tier Company, the MHC and the Bank in connection with the Conversion and (ii) the Underwriting Agreement, if entered into in connection with the Public Offering. No waiver, amendment or other modification of this Agreement shall be effective unless in writing and signed by the parties hereto. This Agreement may be executed in several counterparts, each of which is deemed an original but all of which constitute one and the same instrument. Delivery of an executed counterpart by fax, pdf or other electronic means shall be equally effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 13. Governing Law and Time. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state without regard to the conflicts of laws provisions thereof. Unless otherwise noted, specified times of day refer to Eastern Time.

 

SECTION 14. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

 

SECTION 15. Headings. Section headings are not to be considered part of this Agreement, are for convenience and reference only, and are not to be deemed to be full or accurate descriptions of the contents of any paragraph or subparagraph.

 

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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Agent on the one hand, and the Company, the Mid-Tier Company, the MHC and the Bank on the other in accordance with its terms.

 

  Very truly yours,
     
  PROVIDENT BANCORP, INC.
  (a Maryland corporation)
     
  By:                 
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  PROVIDENT BANCORP, INC.
  (a Massachusetts corporation)
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  THE PROVIDENT BANK
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  PROVIDENT BANCORP
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer

 

CONFIRMED AND ACCEPTED,  
as of the date first above written:  
     
SANDLER O’NEILL & PARTNERS, L.P.  
     
By: Sandler O’Neill & Partners Corp.,
the sole general partner
 
     
By:    
  Name:  
  Title:  

 

[Signature Page to Agency Agreement]

 

 

 

 

EXHIBIT A TO AGENCY AGREEMENT

 

FORM OF UNDERWRITING AGREEMENT

 

Shares

 

Provident Bancorp, Inc.
(a Maryland corporation)

 

Common Stock
(par value $0.01 per share)

 

UNDERWRITING AGREEMENT

 

, 2019

 

Sandler O’Neill & Partners, L.P.

As Representative of the
Several Underwriters

c/o Sandler O’Neill & Partners, L.P.
1251 Avenue of the Americas, 6th Floor

New York, New York 10020

 

Ladies and Gentlemen:

 

Provident Bancorp, Inc., a Maryland corporation (the “Company”) proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the “Underwriters”), for whom Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”) is acting as representative (in such capacity, the “Representative”), an aggregate of             shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”). The shares of Common Stock to be sold by the Company in the Offerings (as defined below), including the Shares being sold pursuant to this Agreement, are hereinafter called the “Securities.”

 

The Securities are being offered for sale in accordance with the Plan of Conversion (the “Plan”) adopted by the Board of Trustees of Provident Bancorp, a Massachusetts-chartered mutual holding company (the “MHC”), and the Boards of Directors of Provident Bancorp, Inc., a Massachusetts corporation and “mid-tier” holding company (the “Mid-Tier Company”), and The Provident Bank, a Massachusetts-chartered stock savings bank (the “Bank” and, collectively with the Company, the Mid-Tier Company and the MHC, the “Provident Parties”). Pursuant to the Plan, the MHC will convert from the mutual to stock holding company form of organization pursuant to the following steps, or in any other manner that is consistent with the purpose of the Plan and applicable laws and regulations: (i) the establishment of the Company as a Maryland corporation subsidiary of the Mid-Tier Company; (ii) the merger of the MHC with and into the Mid-Tier Company with the Mid-Tier Company as the surviving entity (the “MHC Merger”); (iii) the merger of the Mid-Tier Company with and into the Company with the Company as the surviving entity (the “Mid-Tier Company Merger”); and (iv) the sale and exchange of Common Stock pursuant to the Plan and the regulations of the Commonwealth of Massachusetts Division of Banks (the “Division”) and the Board of Governors of the Federal Reserve System (the “FRB”). As a result of the Mid-Tier Company Merger, the Bank will become a wholly owned subsidiary of the Company. The outstanding shares of common stock of the Mid-Tier Company held by persons other than the MHC will be converted into Common Stock pursuant to an exchange ratio as defined in the Plan, which will result in the holders of such shares receiving and owning in the aggregate approximately the same percentage of the Common Stock to be outstanding upon the completion of the conversion as the percentage of Mid-Tier Company common stock owned by them in the aggregate immediately prior to

 

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consummation of the conversion before giving effect to (a) cash paid in lieu of any fractional interests of Common Stock, (b) assets of the MHC and (c) any Securities purchased in the Offerings.

 

Pursuant to the Plan, the Company offered to certain depositors of the Bank and to the Bank’s tax qualified employee benefit plans, including the Bank’s employee stock ownership plan (the “ESOP”) (collectively, the “Employee Plans”), rights to subscribe for the Securities in a subscription offering (the “Subscription Offering”). Employees, officers, trustees, directors and corporators of the Bank and the MHC also had rights to subscribe for the Securities in the Subscription Offering, subject to the priority rights of depositors and the Employee Plans. In addition, Securities were offered to certain members of the general public in a community offering (the “Community Offering”). The Community Offering, together with the Subscription Offering, are herein referred to as the “Subscription and Community Offering.” The Subscription and Community Offering and the firm commitment public offering (the “Public Offering”) to which this Agreement relates are hereinafter referred to collectively as the “Offerings.”

 

The conversion and reorganization of the MHC from mutual to stock holding company form, the formation of the Company, the MHC Merger, the Mid-Tier Company Merger, the exchange of the Mid-Tier Company’s public stockholders’ shares for shares of Common Stock (the “Exchange Shares”), the acquisition of the capital stock of the Bank by the Company as a consequence of the Mid-Tier Company Merger, and the Offerings are hereinafter referred to collectively as the “Conversion.”

 

The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (No. 333-232018), including a related prospectus, for the registration of the sale of the Securities under the Securities Act of 1933, as amended (the “Securities Act”), has filed such amendments thereto, if any, and such amended prospectuses as may have been required to the date hereof by the Commission in order to declare such registration statement effective, and will file such additional amendments thereto and such amended prospectuses and prospectus supplements as may hereafter be required. Such registration statement (as amended to date, if applicable, and as from time to time amended or supplemented hereafter, including post-effective amendments thereto containing the preliminary prospectus (“Preliminary Prospectus”) as defined in Rule 430A of the rules and regulations of the Commission promulgated under the Securities Act, as from time to time amended or supplemented pursuant to the Securities Act or otherwise (the “Securities Act Regulations”) for the Public Offering) and the prospectuses constituting a part thereof (including in each case all documents incorporated or deemed to be incorporated by reference therein and the information, if any, deemed to be a part thereof pursuant to the Securities Act Regulations, including all information deemed to be part of the Registration Statement pursuant to Rule 430A of the Securities Act Regulations as well as the Preliminary Prospectus contained in a post-effective amendment to the Registration Statement or a new registration statement and the prospectus filed pursuant to Rule 430A and Rule 424(b) of the Securities Act Regulations for use in the Public Offering), are hereinafter referred to as the “Registration Statement” and the “Prospectus,” respectively, except that if any revised prospectus shall be used by the Company in connection with the Public Offering that differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations), the term “Prospectus” shall refer to such revised prospectus from and after the time it is first provided to the Representative for such use in connection with the Public Offering of the Shares by the Underwriters.

 

In accordance with the Massachusetts General Laws and the rules and regulations governing the conversion of Massachusetts mutual holding companies to stock holding companies (including, without limitation, Chapter 167H of the Massachusetts General Laws and Chapter 33, Subpart D of the Code of Massachusetts Regulations), as from time to time amended or supplemented (the “Massachusetts Regulations”), the MHC has filed the Plan with the Massachusetts Division of Banks (the “Division”) and

 

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has filed such amendments thereto and supplementary materials as may have been required to the date hereof (such application, as amended to date, if applicable, and as subsequently amended, if applicable, is hereinafter referred to as the “Massachusetts Conversion Application”), including copies of the MHC’s Notice and Information Statement for a Special Meeting of its Corporators relating to the Conversion (the “Information Statement”), the Appraisal (as hereinafter defined), and the Prospectus.

 

In addition, the Company has filed with the Board of Governors of the Federal Reserve System (the “FRB”) an Application to Become a Bank Holding Company and/or Acquire an Additional Bank or Bank Holding Company on Form FR Y-3 (the “Holding Company Application”) to become a bank holding company under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHCA”), as in effect at the time and the FRB has approved the Holding Company Application. The Massachusetts Conversion Application and the Holding Company Application are collectively referred to herein as the “Applications.”

 

Concurrently with the execution of this Agreement, the Company is delivering to the Representative copies of the Prospectus to be used in the Public Offering. Such Prospectus contains information with respect to the Provident Parties, the Common Stock, and the Offerings.

 

SECTION 1. Representations and Warranties.

 

(a)          The Company, the Mid-Tier Company, the Bank and the MHC jointly and severally represent and warrant to the Representative as of the date hereof as follows:

 

(i)           The Registration Statement has been declared effective by the Commission, no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the Commission. At the time the Registration Statement, including any post-effective amendment thereto, became effective and at the Time of Delivery referred to in Section 2 hereof, the Registration Statement complied and will comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus as of the date hereof does not, and at the Time of Delivery referred to in Section 2 hereof will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information with respect to the Underwriters furnished to the Company in writing by the Representative or its counsel expressly for use in the Registration Statement or Prospectus which the Provident Parties agree consists solely of the Underwriters’ Information (as hereinafter defined) described as such in Section 6(a) hereof.

 

(ii)          At the time of filing the Registration Statement relating to the offering of the Securities and as of the date hereof, the Company was not, and is not, an ineligible issuer, as defined in Rule 405 of the Securities Act Regulations. At the time of the filing of the Registration Statement and at the time of the use of any issuer free writing prospectus, as defined in Rule 433(h) of the Securities Act Regulations, the Company met the conditions required by Rules 164 and 433 of the Securities Act Regulations for the use of a free writing prospectus. If required to be filed, the Company has filed any issuer free writing prospectus related to the Securities at the time it was required to be filed under Rule 433 and, if not required to be filed, it has retained such free writing prospectus in the Company’s records pursuant to Rule 433(g) of the Securities Act

 

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Regulations and, if any issuer free writing prospectus is used after the date hereof in connection with the offering of the Securities, the Company will file or retain such free writing prospectus as required by Rule 433.

 

(iii)          As of the Applicable Time, neither (i) the Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus and the final pricing information included on the cover page of the Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus issued at or prior to the Applicable Time, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the Securities or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Representative specifically for use therein, it being understood and agreed that the only information furnished by the Underwriters consists of the Underwriters’ Information described in Section 6(a) hereof. As used in this paragraph and elsewhere in this Agreement:

 

1.       “Applicable Time” means __:___ __.m. Eastern Time as of the date of this Agreement.

 

2.       “Statutory Prospectus”, as of any time, means the Preliminary Prospectus relating to the Shares that is included in the Registration Statement relating to the Shares immediately prior to that time, including any document incorporated by reference therein.

 

3.       “Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h) of the Securities Act Regulations, relating to the Securities. The term does not include any writing exempted from the definition of prospectus pursuant to clause (a) of Section 2(a)(10) of the Securities Act, without regard to Rule 172 or Rule 173 of the Securities Act Regulations.

 

4.       “Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors.

 

5.       “Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of the Securities Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) of the Securities Act Regulations or otherwise, even though not required to be filed with the Commission.

 

(iv)         Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offerings and sale of the Securities or until any earlier date that the Company notified or notifies the Representative (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement relating to the Securities, including the Shares, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented

 

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Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus materially conflicted, conflicts or would conflict with the information contained in the Registration Statement relating to the offering of the Securities or included, includes or would include an untrue statement of a material fact or omitted, omits or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or will notify promptly the Representative so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is amended or supplemented and the Company has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Underwriters expressly for use therein.

 

(v)         The Company has filed the Holding Company Application with the FRB and has published notice of such filing, and the Holding Company Application is accurate and complete in all material respects. The Company has received written notice from the FRB of its approval of the acquisition of the Bank, such approval remains in full force and effect and no order has been issued by the FRB suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the FRB or any other applicable regulator. At the date of such approval, the Holding Company Application complied in all material respects with the applicable provisions of the BHCA and the regulations promulgated thereunder, except as the FRB or any other applicable regulator has expressly waived such regulations in writing.

 

(vi)        The MHC has filed the Massachusetts Conversion Application with the Division, and the Massachusetts Conversion Application is accurate and complete in all material respects. The MHC has received written notice from the Division of its approval of the Conversion, such approval remains in full force and effect and no order has been issued by the Division suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Provident Parties, threatened by the Division. At the date of such approval, the Massachusetts Conversion Application complied in all material respects with the applicable provisions of the Massachusetts Regulations, except as the Division or any other applicable regulator has expressly waived such Massachusetts Regulations in writing.

 

(vii)       The Provident Parties have filed the Preliminary Prospectus, the Prospectus, the Information Statement and any supplemental sales literature with the Commission, the FRB, the Division and any other applicable regulator. The Preliminary Prospectus, the Prospectus and all supplemental sales literature, as of the date the Registration Statement became effective and on the Time of Delivery referred to in Section 2 hereof, complied and will comply in all material respects with the applicable requirements of the Securities Act Regulations, the Massachusetts Regulations and, at or prior to the time of their first use, will have received all required authorizations of the Division and the Commission and any other applicable regulator for use in final form. The Information Statement, as of the date of the Division’s approval of the Information Statement, complied in all material respects with the applicable requirements of the Massachusetts Regulations. No approval of any other regulatory or supervisory or other public authority is required in connection with the distribution of the Preliminary Prospectus, the Prospectus, the Information Statement and any supplemental sales literature that has not been obtained and a copy of which has been delivered to the Underwriters. The Company, the Mid-Tier Company, the MHC and the Bank have not distributed any offering material in connection with the Offering except for the Preliminary Prospectus, the Prospectus, the Information

 

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Statement and any supplemental sales material that has been filed with the Registration Statement and the Applications and authorized for use by the Commission, the FRB and the Division, or any other applicable regulator. The information contained in the supplemental sales material filed as an exhibit to both the Registration Statement and the Applications does not conflict in any material respects with information contained in the Registration Statement, the Preliminary Prospectus and the Prospectus.

 

(viii)       At the Time of Delivery referred to in Section 2 hereof, the Company, the Mid-Tier Company, the MHC and the Bank will have completed the conditions precedent to the Conversion in accordance with the Plan, the applicable FRB Regulations and Massachusetts Regulations and all other applicable laws, regulations, decisions and orders, including all material terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the FRB, the Division or any other regulatory authority, other than those which the regulatory authority permits to be completed after the Conversion. The Conversion, the Offerings and other transactions contemplated hereby do not and will not require any material consent, approval, authorization or permit or filing with any other governmental agency or regulatory authority, except as disclosed in the Prospectus.

 

(ix)          None of the Commission, the FRB, the Division or any state securities (“Blue Sky”) authority has, by order or otherwise, prevented or suspended the use of the Prospectus, the Information Statement or any supplemental sales literature authorized by the Company, the Mid-Tier Company, the MHC or the Bank for use in connection with the Offerings, and no proceedings for such purposes are pending or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened.

 

(x)           RP Financial, LC. (the “Appraiser”), which prepared the valuation of the Common Stock as part of the Plan (the “Appraisal”), has advised the Provident Parties in writing that it satisfies all requirements for an appraiser set forth in the Massachusetts Regulations and FRB Regulations and any interpretation or guideline issued by the Division or the FRB or their respective staffs with respect thereto.

 

(xi)          Whittlesey PC, the accountants who audited and reported on the consolidated financial statements of the Mid-Tier Company and its subsidiaries included in the Registration Statement, has advised the Mid-Tier Company in writing within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Rule 3526, that such accountants are not in violation of the auditor independence requirements of the PCAOB, the Securities Act and the Securities Act Regulations.

 

(xii)        The only direct subsidiary of the Mid-Tier Company is the Bank, and the only direct subsidiaries of the Bank are Provident Security Corporation and 5 Market Street Security Corporation (collectively, the “Subsidiaries”). Except for the Subsidiaries and except as set forth in the Prospectus, none of the Provident Parties directly or indirectly controls any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization. Upon completion of the Conversion, the only direct subsidiary of the Company will be the Bank.

 

(xiii)       The consolidated financial statements and the related notes thereto included in the Registration Statement and the Prospectus present fairly the financial position of the Mid-Tier Company and its Subsidiaries at the dates indicated and the income, comprehensive income, stockholders’ equity and cash flows for the periods specified, and comply as to form with the applicable accounting requirements of the Securities Act Regulations, the Massachusetts

 

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Regulations and the FRB Regulations; except as otherwise stated in the Registration Statement and Prospectus, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis except as noted therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been consistently applied on the basis described therein.

 

(xiv)       Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein: (A) there has been no material adverse change in the financial condition, results of operations, business affairs or prospects of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business (“Material Adverse Effect”), (B) except for transactions specifically referred to or contemplated in the Registration Statement and Prospectus, there have been no transactions entered into by the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, other than those in the ordinary course of business consistent with past practice, which are material with respect to the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise, (C) the capitalization, liabilities, assets, properties and business of the Company, the Mid-Tier Company, the MHC and the Bank conform in all material respects to the descriptions contained in the Prospectus and none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries has any material liabilities of any kind, contingent or otherwise, except as disclosed in the Registration Statement or the Prospectus and (D) none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries has issued any securities or incurred any liability or obligation, direct or contingent, or borrowed money, except borrowings in the ordinary course of business consistent with past practice from the same or similar sources and in similar amounts as indicated in the Prospectus, except that the Company will issue 100 shares of its Common Stock to the Mid-Tier Company in connection with its formation, which shares will be cancelled prior to the Time of Delivery.

 

(xv)       The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland with corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby; and the Company is duly qualified to transact business and is in good standing in the State of Maryland and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xvi)       Upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Company will be within the range as set forth in the Prospectus under “Capitalization” (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus); except as set forth elsewhere in this Agreement, no shares of Common Stock have been or will be issued and outstanding prior to the Time of Delivery referred to in Section 2 hereof, except that the Company will issue 100 shares of its Common Stock to the Mid-Tier Company in connection with its formation, which shares will be cancelled prior to the Time of Delivery; at the time of the Conversion, the Securities will have been duly authorized for issuance and, when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and stated on the cover page of the Prospectus, will be duly and validly issued and fully paid and nonassessable; the Exchange Shares have been duly authorized for issuance and, when issued,

 

 A-7 

 

 

will be duly and validly issued and fully paid and nonassessable; the terms and provisions of the Common Stock and the other capital stock of the Company conform in all material respects to all statements relating thereto contained in the Prospectus; any certificate representing the shares of Common Stock will conform in all material respects to the requirements of applicable law and regulations; and the issuance of the Securities and the Exchange Shares is not subject to preemptive or other similar rights except for subscription rights granted pursuant to the Plan in accordance with the FRB Regulations and the Massachusetts Regulations.

 

(xvii)     The MHC has been duly organized and is validly existing as a Massachusetts-chartered mutual holding company with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus, and to enter into and perform its obligations under this Agreement and consummate the transactions contemplated hereby including the MHC Merger; and the MHC is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and in any other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xviii)    The MHC has no capital stock. The MHC does not own any equity securities or any equity interest in any business enterprise except as described in the Prospectus.

 

(xix)       The Mid-Tier Company has been duly organized and is validly existing as a Massachusetts corporation with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby including the Mid-Tier Company Merger; and the Company is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xx)        The Bank is a duly organized and validly existing Massachusetts-chartered stock savings bank with full corporate power and authority to own, lease and operate its properties, to conduct its business as described in the Registration Statement and the Prospectus, and to enter into and perform its obligations under this Agreement and the transactions contemplated hereby; and the Bank is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and the State of New Hampshire and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect.

 

(xxi)       The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share (the “Company Preferred Stock”). The authorized capital stock of the Mid-Tier Company consists of 30,000,000 shares of common stock, no par value per share (“Mid-Tier Company Common Stock”), and 50,000 authorized shares of preferred stock, no par value per share (“Mid-Tier Company Preferred Stock”), of which 9,625,719 shares of Mid-Tier Company Common Stock are issued and outstanding as of the date hereof and no shares of Mid-Tier Company Preferred Stock are issued and outstanding as of the date hereof. The authorized capital stock of the Bank consists of 500,000 shares of common stock, $1.00 par value per share (“Bank Common Stock”), and the issued and outstanding capital stock of the Bank is 500,000 shares of

 

 A-8 

 

 

Bank Common Stock, all of which are owned beneficially and of record by the Mid-Tier Company free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; the certificates representing the shares of the Bank Common Stock conform with the requirements of applicable laws and regulations; and there are no warrants, options or rights of any kind to acquire shares of capital stock of or other equity interests in any Subsidiary. No additional shares of Common Stock, Mid-Tier Company Common Stock or Bank Common Stock, and no shares of Company Preferred Stock or Mid-Tier Company Preferred Stock will be issued prior to the Time of Delivery, except for shares of Mid-Tier Company Common Stock that may be issued upon the exercise of options granted under the Mid-Tier Company’s 2016 Equity Incentive Plan. The issued and outstanding shares of Common Stock, Mid-Tier Company Common Stock and Bank Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws. The MHC owns 5,034,323 shares of Mid-Tier Company Common Stock beneficially and of record free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. The terms and provisions of the Mid-Tier Company Common Stock conform to all statements relating thereto contained in the Prospectus.

 

(xxii)      The Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries have each obtained all licenses, permits and other governmental authorizations currently required for the conduct of their respective businesses, except where the failure to obtain such licenses, permits or other governmental authorizations would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are in full force and effect and the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries are in all material respects in compliance therewith; none of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary has received notice of any proceeding or action relating to the revocation or modification of any such license, permit or other governmental authorization which, singularly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Effect.

 

(xxiii)      Each Subsidiary has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and Prospectus, and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a Material Adverse Effect; the activities of each Subsidiary are permitted to subsidiaries of a Massachusetts-chartered stock savings bank by the rules, regulations and practices of the Federal Deposit Insurance Corporation (“FDIC”), the FRB, and the Division; all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Bank, free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; and there are no warrants, options or rights of any kind to acquire shares of capital stock of or other equity interests in any Subsidiary.

 

(xxiv)     The Bank is a member in good standing of the Federal Home Loan Bank of Boston; the deposit accounts of the Bank are insured by the FDIC up to the applicable limits and the deposit accounts of the Bank are insured in excess of FDIC limits by the Depositors Insurance Fund (the “DIF”). Upon consummation of the Conversion, the liquidation account for the benefit of eligible account holders will be duly established in accordance with the requirements of the FRB Regulations and Massachusetts Regulations.

 

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(xxv)       Each of the Company, the Mid-Tier Company, the MHC and the Bank have taken all corporate action necessary for them to execute, deliver and perform this Agreement and the transactions contemplated hereby including, as applicable, the MHC Merger and the Mid-Tier Company Merger, and this Agreement has been duly executed and delivered by, and is the valid and binding agreement of, the Company, the Mid-Tier Company, the MHC and the Bank, enforceable against each of them in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforceability of the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification and contribution provisions may be limited by applicable securities laws.

 

(xxvi)      Subsequent to the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus and prior to the Time of Delivery referred to in Section 2 hereof, except as otherwise may be indicated or contemplated therein, none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries will have (A) issued any securities or incurred any liability or obligation, direct or contingent, or borrowed money, except borrowings in the ordinary course of business consistent with past practice from the same or similar sources and in similar amounts as indicated in the General Disclosure Package and the Prospectus and except for shares of Mid-Tier Company Common Stock that may be issued upon the exercise of options granted under the Mid-Tier Company’s 2016 Equity Incentive Plan, or (B) entered into any transaction or series of transactions which are material in light of the business of the Provident Parties and the Subsidiaries, taken as a whole, excluding the origination, purchase and sale of loans or the purchase or sale of investment securities or mortgage-backed securities in the ordinary course of business consistent with past practice.

 

(xxvii)     No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or the issuance of the Securities and the Exchange Shares or the consummation of the Conversion that has not been obtained or will not be obtained prior to the Time of Delivery and a copy of which has been delivered to the Representative, except as may be required under the “Blue Sky” or securities laws of various jurisdictions.

 

(xxviii)    None of the Provident Parties or the Subsidiaries is in violation of their respective certificate of incorporation, organization certificate, articles of incorporation or charter, as the case may be, or bylaws; and none of the Provident Parties or the Subsidiaries is in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which any of the Provident Parties or the Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Provident Parties or the Subsidiaries is subject, except for such defaults that would not, individually or in the aggregate, have a Material Adverse Effect; and there are no contracts or documents of the Provident Parties which are required to be filed as exhibits to the Registration Statement or the Applications which have not been so filed.

 

(xxix)      The Conversion has been duly authorized by all necessary corporate action on the part of the Company, the Mid-Tier Company, the MHC and the Bank; the Conversion, execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein, including the MHC Merger and the Mid-Tier Company Merger, do not and will not conflict with or constitute a breach of, or default under, or result in the creation or

 

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imposition of any lien, charge or encumbrance upon any property or assets of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary is a party or by which any of them may be bound, or to which any of the property or assets of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries is subject, except for such conflicts, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect; nor will such action result in any violation of the provisions of the respective charters, articles of incorporation, organization certificate, certificate of incorporation or charter or bylaws of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, or any applicable law, administrative regulation or administrative or court decree.

 

(xxx)       No labor dispute with the employees of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries exists or, to the knowledge of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, has been threatened; and the Company, the Mid-Tier Company, the MHC and the Bank are not aware of any existing or threatened labor disturbance by the employees of any of the Bank’s principal borrowers, suppliers or contractors that might be expected to have a Material Adverse Effect.

 

(xxxi)       Each of the Provident Parties and the Subsidiaries has good and marketable title to all of their properties and assets for which ownership is material to the business of the Provident Parties or the Subsidiaries and to those properties and assets described in the General Disclosure Package and the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions, except as such are described in the General Disclosure Package and the Prospectus or are not material in relation to the business of the Provident Parties or the Subsidiaries, considered as one enterprise; and all of the leases and subleases material to the business of the Provident Parties or the Subsidiaries under which the Provident Parties or the Subsidiaries hold properties, including those described in the General Disclosure Package and the Prospectus, are valid and binding agreements of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries, as applicable, in full force and effect, enforceable in accordance with their terms except as may be limited by bankruptcy, insolvency or similar laws or equitable remedies affecting the enforceability of the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification and contribution provisions may be limited by applicable securities laws.

 

(xxxii)      None of the Provident Parties or the Subsidiaries is in violation of any order or directive from the Division, the FRB, the FDIC, the Commission, the DIF or any other regulatory authority to make any material change in the method of conducting its respective businesses; the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries have conducted and are conducting their respective businesses so as to comply in all material respects with all applicable statutes, regulations and administrative and court decrees (including, without limitation, all regulations, decisions, directives and orders of the Division, the FRB, the FDIC, the Commission and the DIF). Except as disclosed in the General Disclosure Package and the Prospectus, none of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to any cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been a recipient of any supervisory letter from, or has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that materially relates to their capital

 

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adequacy, their credit policies (including concentration policies), their management or their business (each, a “Regulatory Agreement”), nor has the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries been advised by any Regulatory Agency that it is considering issuing or requesting the issuance of any additional Regulatory Agreement; there is no unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examination of the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries which might reasonably be expected to have a Material Adverse Effect, or which might materially and adversely affect the properties or assets thereof or which might materially and adversely affect the consummation of the Offerings or the performance of this Agreement; neither the Company, the MHC, nor the Bank has received from any Regulatory Agency any order or direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (and each such order or direction, if any, has been disclosed in writing to the Representative to the extent permitted by applicable law or regulation). As used herein, the term “Regulatory Agency” means any federal or state agency charged with the supervision or regulation of depository institutions or holding companies of depository institutions, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries.

 

(xxxiii)      There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened, against or affecting the Company, the Mid-Tier Company, the MHC or the Bank which is required to be disclosed in the Registration Statement (other than as disclosed therein), or that might result in any Material Adverse Effect, or that might materially and adversely affect the properties or assets thereof, or which might materially and adversely affect the consummation of the Conversion or the performance of this Agreement; all pending legal or governmental proceedings to which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to their business, are considered in the aggregate not material.

 

(xxxiv)    The Company, the Mid-Tier Company, the MHC and the Bank has obtained one or more opinions of its counsel, Luse Gorman, PC, with respect to the legality of the Securities and the Exchange Shares and certain federal income tax consequences of the Conversion, copies of which are filed as exhibits to the Registration Statement; all material aspects of the aforesaid opinions are accurately summarized in the Prospectus under “The Conversion and Offering—Material Income Tax Consequences” and “Legal Matters.” The facts and representations upon which such opinions are based are truthful, accurate and complete in all material respects, and none of the Provident Parties has taken or will take any action inconsistent therewith.

 

(xxxv)    The Company is not and, upon completion of the Conversion and the Offerings and sale of the Securities and the application of the net proceeds therefrom, will not be, required to be registered as an “investment company” as that term is defined under the Investment Company Act of 1940, as amended.

 

(xxxvi)    All of the loans represented as assets on the most recent consolidated financial statements or selected financial information of the Mid-Tier Company included in the Prospectus meet or are exempt from all requirements of federal, state or local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulations Z and

 

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12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not result in a Material Adverse Effect.

 

(xxxvii)  To the knowledge of the Company, the Mid-Tier Company, the MHC and the Bank, with the exception of the intended loan to the Bank’s ESOP by the Company to enable the ESOP to purchase securities in an amount up to eight percent (8.0%) of the Common Stock that will be sold in the Offerings, none of the Company, the Mid-Tier Company, the MHC, the Bank or their employees has made any payment of funds of the Company, the Mid-Tier Company, the MHC or the Bank as a loan for the purchase of the Common Stock or made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

 

(xxxviii)  Each of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management’s general or specific authorizations; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (c) access to assets is permitted only in accordance with management’s general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

(xxxix)    The Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries are in compliance in all material respects with the applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transaction Reporting Act of 1970, as amended, and the rules and regulations thereunder. The Bank has established compliance programs with respect to, and is in compliance in all material respects with the requirements of, the USA PATRIOT Act and all applicable regulations promulgated thereunder, and, except as disclosed in the General Disclosure Package and the Prospectus, there is no charge, investigation, action, suit or proceeding before any court, regulatory authority or governmental agency or body pending or, to the knowledge of the Company, the Mid-Tier Company, the MHC and the Bank, threatened regarding the Bank’s compliance with the USA PATRIOT Act or any regulations promulgated thereunder.

 

(xl)         None of the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary nor any property owned or operated by the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, and to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, any collateral securing a loan owned by the Bank or any subsidiary, is in material violation of or liable under any Environmental Law (as defined below), except for such violations or liabilities that, individually or in the aggregate, would not result in a Material Adverse Effect. There are no actions, suits or proceedings, or demands, claims, notices or investigations (including, without limitation, notices, demand letters or requests for information from any environmental agency) instituted or pending, or to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, threatened, relating to the liability of any property owned or operated by the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary under any Environmental Law, except for such actions, suits or proceedings, or demands, claims, notices or investigations that, individually or in the aggregate, would not have a Material Adverse Effect. For purposes of this subsection, the term “Environmental Law” means any federal, state, local or foreign law, whether common law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration

 

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of the public health or environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), (ii) regulation of industrial hygiene, and/or (iii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component, and all amendments thereto as of this date.

 

(xli)        The Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary have timely filed all federal, state and local income and franchise tax returns required to be filed and have made timely payments of all taxes shown as due and payable in respect of such returns, and no deficiency has been asserted with respect thereto by any taxing authority. The Company, the Mid-Tier Company, the MHC and the Bank have no knowledge of any tax deficiency which could be asserted against the Company, the Mid-Tier Company, the MHC, the Bank or the Subsidiaries.

 

(xlii)       The Company has received, or will receive prior to the Time of Delivery, all approvals required to consummate the Conversion and to have the Securities and the Exchange Shares listed on the Nasdaq Capital Market effective as of the Time of Delivery referred to in Section 2 hereof.

 

(xliii)      At or prior to the Time of Delivery, the Company will have filed a Form 8-K or a Form 8-A for the Securities and the Exchange Shares to be registered under Section 12(b) of the Exchange Act (the “Exchange Act Registration Statement”).

 

(xliv)      To the knowledge of the Provident Parties, there are not and have not been any affiliations or associations (as such terms are defined by the Financial Industry Regulatory Authority (“FINRA”)) between any member of FINRA and any of the Provident Parties’ officers, directors or 5% or greater security holders, except as set forth in the Registration Statement, filings with FINRA or the Prospectus.

 

(xlv)       Each of the Mid-Tier Company, the MHC and the Bank carries, or is covered by, and the Company will carry, or be covered by, prior to the Time of Delivery, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties as is customary for companies engaged in similar industries.

 

(xlvi)     The Company, the Mid-Tier Company, the MHC and the Bank have not relied on the Representative or the counsel to the Underwriters for any legal, tax or accounting advice in connection with the Conversion.

 

(xlvii)    The records of eligible account holders of the Bank are accurate and complete in all material respects.

 

(xlviii)   The Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary are in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company, the Mid-Tier Company, the MHC, the Bank or any Subsidiary, respectively, would have any liability; each of

 

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the Company, the Mid-Tier Company, the MHC, the Bank and each Subsidiary has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pension plan” for which the Company, the Mid-Tier Company, the MHC, the Bank and any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, that would cause the loss of such qualification.

 

(xlix)      The Mid-Tier Company has established and maintains and the Company has established or will establish and maintain prior to the Time of Delivery disclosure controls and procedures (as such term is defined in Rule 13a-14 and 15d-14 under the Exchange Act), that (i) are designed to ensure that material information relating to the Company and the Mid-Tier Company, including the Bank consolidated subsidiaries, is made known to each of the Company’s and the Mid-Tier Company’s principal executive officer and its principal financial officer by others within those entities, (ii) have been (or will be) evaluated for effectiveness as of a date within 90 days prior to the filing of the Company’s annual or quarterly report filed with the Commission subsequent to the Time of Delivery and (iii) are effective in all material respects to perform the functions for which they were established. The Mid-Tier Company’s independent registered public accounting firm and the Audit Committee of the Board of Directors have been advised of: (i) any significant deficiencies in the design or operation of internal controls which could adversely affect the Mid-Tier Company’s ability to record, process, summarize, and report financial data and (ii) any fraud, whether or not material, that involves management or other employees who have a role in the Mid-Tier Company’s internal controls; and such deficiencies or fraud have either been disclosed in the Prospectus and the General Disclosure Package, or are not material to the Company, the MHC, the Mid-Tier Company and the Bank, considered as one enterprise; and since the date of the most recent evaluation of such disclosure controls and procedures, there have been no material changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies, material weaknesses or fraud.

 

(l)           Each of the Company and the Mid-Tier Company is in compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the rules and regulations of the Commission thereunder, and the Nasdaq corporate governance rules applicable to them, and will use its best efforts to comply with those provisions of the Sarbanes-Oxley Act and the Nasdaq corporate governance rules that will become effective in the future upon their effectiveness.

 

(li)          No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the General Disclosure Package, the Prospectus and any Issuer-Represented Free Writing Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

(lii)         Neither the Company, the Mid-Tier Company, the MHC or the Bank nor any director, officer, employee or, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, after due inquiry, any agent, affiliate or other person associated with or acting on behalf of the Company, the Mid-Tier Company, the MHC or the Bank is (a) currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) or relevant sanctioning authority; (b) located, organized or resident in a country or territory that is the subject of such sanctions (including, without limitation,

 

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Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria); and (c) the Company will not, directly or indirectly, use the proceeds of the Offerings, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person, or engage in dealings or transactions with any person, or in any country, or territory, subject to any U.S. sanctions administered by OFAC or relevant sanctioning authority.

 

(liii)        Neither the Company, the Mid-Tier Company, the MHC or the Bank nor any director, officer or employee of the Company, the Mid-Tier Company, the MHC or the Bank nor, to the knowledge of the Company, the Mid-Tier Company, the MHC or the Bank, any agent, affiliate or other person associated with or acting on behalf of the Company, the Mid-Tier Company, the MHC or the Bank has (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (b) made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (c) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom or any other applicable anti-bribery or anti-corruption law; or (d) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Company, the Mid-Tier Company, the MHC and the Bank have instituted, maintain and enforce, and the Company and the Bank will continue to maintain and enforce policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.

 

(liv)        Except as described in the Prospectus and the General Disclosure Package, there are no contractual encumbrances or contractual restrictions or regulatory restrictions on the ability (i) of the Company, the Mid-Tier Company or the Bank to pay dividends or to make any other distributions on the Company’s, the Mid-Tier Company’s, the Bank’s capital stock or (ii) of the Company, the Mid-Tier Company or the Bank (A) to pay any indebtedness owed to the Company, the Mid-Tier Company or the Bank, (B) to make any loans or advances to, or investments in, the Company, the Mid-Tier Company or the Bank, subject to applicable law and regulation, or (C) to transfer any of its property or assets to the Company, the Mid-Tier Company or the Bank.

 

(b)         Any certificate signed by any officer of the Company, the Mid-Tier Company, the MHC or the Bank and delivered to the Underwriters or counsel for the Underwriters shall be deemed a representation and warranty for purposes of this Agreement by the Company, the Mid-Tier Company, the MHC or the Bank to the Underwriters as to the matters covered thereby. 

 

SECTION 2. Purchase, Sale and Delivery of the Shares.

 

(a)         Subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $[     ], the number of Shares set forth opposite the name of such Underwriter in Schedule I hereto, subject to adjustments in accordance with Section 9 hereof.

 

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(b)         Upon the authorization by the Company of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions set forth in the Prospectus.

 

(c)         The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as the Representative may request (or in the form of one or more global certificates deposited with the Depository Trust Company (“DTC”) and registered in the name of Cede & Co., as nominee for DTC) upon at least forty-eight (48) hours prior notice to the Company shall be delivered by or on behalf of the Company to the Representative, through the facilities of DTC, for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same day) funds to the account specified by the Company, to the Representative at least forty-eight hours in advance of such payment. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the “Designated Office”). The time and date of such delivery and payment shall be, with respect to the Shares, _____:______ ____.m., Eastern Time, on [                   ], 201[ ] or such other time and date as the Representative and the Company may agree upon in writing. Such time and date at which the Company shall release for delivery of all the Securities, in accordance with the terms hereof, is herein called the “Time of Delivery.”

 

(d)        The documents to be delivered at the Time of Delivery by or on behalf of the parties hereto pursuant to Section 5 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 5(k) hereof, will be delivered at the offices of Luse Gorman, PC (the “Closing Location”), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at [      ] p.m., Eastern Time, on the business day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto.

 

(e)         It is understood that each Underwriter has authorized the Representative, for such Underwriter’s account, to accept delivery of, receipt for, and make payment of the purchase price for, the Shares which such Underwriter has agreed to purchase. Sandler O’Neill, individually and not as Representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Shares to be purchased by any Underwriter whose funds have not been received by Sandler O’Neill by the Time of Delivery, but such payment shall not relieve such Underwriter from its obligations hereunder.

 

SECTION 3. Covenants of the Company, the Mid-Tier Company, the MHC and the Bank. The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally covenant with the Representative as follows:

 

(a)         The Provident Parties agree to: prepare the Prospectus in a form approved by the Representative and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission’s close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) of the Securities Act Regulations; to make no further amendment or any supplement to the Registration Statement or Prospectus or Issuer-Represented Free Writing Prospectus which shall be disapproved by the Representative promptly after reasonable notice thereof; to advise the Representative, promptly after it receives

 

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notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representative with copies thereof; to advise the Representative, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus, Issuer-Represented Free Writing Prospectus or Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose or pursuant to Section 8A of the Securities Act, or of any request by the Commission for the amending or supplementing of the Registration Statement, any Preliminary Prospectus, any Issuer-Represented Free Writing Prospectus or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus, Issuer-Represented Free Writing Prospectus or Prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order.

 

(b)        The Company represents and agrees that, unless it obtains the prior written consent of the Representative, and the Representative represents and agrees that, unless it obtains the prior written consent of the Company, they have not made and will not make any offer relating to the Shares that would constitute an “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations, or that would constitute a “free writing prospectus,” as defined in Rule 405 of the Securities Act Regulations, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and the Representative is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents that it has and will comply with the requirements of Rule 433 of the Securities Act Regulations applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. The Company represents that it will satisfy the conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show.

 

(c)        The Provident Parties will give the Representative prompt notice of their intention to file or prepare any amendment to the Applications, the Plan or Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use in connection with the Public Offering of the Shares that differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Securities Act Regulations), will furnish the Representative with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or use any such prospectus to which the Representative or counsel for the Underwriters may reasonably object.

 

(d)        The Company, the Mid-Tier Company, the MHC and the Bank will deliver to the Representative as many signed copies and as many conformed copies of the Applications and the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) as the Representative may reasonably request prior to 10:00 a.m. Eastern Time on the business day next succeeding the date of this Agreement, and from time to time such number of copies of the Prospectus as the Representative may reasonably request.

 

(e)         During the period when the Prospectus is required to be delivered, the Company, the Mid-Tier Company, the MHC and the Bank will comply, at their own expense, with all requirements imposed upon them by the Commission, the Division, the applicable Massachusetts Regulations, the FRB, the applicable FRB Regulations, the Nasdaq Capital Market, the Securities Act, the Securities Act Regulations, the Exchange Act and the regulations promulgated thereunder, including, without limitation, Regulation M under the Exchange Act, so far as necessary to permit the continuance of sales or dealing in shares of the Securities during such period in accordance with the provisions hereof and the Prospectus.

 

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(f)          If any event or circumstance shall occur as a result of which it is necessary, in the reasonable opinion of counsel for the Underwriters, to amend or supplement the Registration Statement or the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Company, the Mid-Tier Company, the MHC and the Bank will forthwith amend or supplement the Registration Statement and/or Prospectus (in form and substance reasonably satisfactory to counsel for the Underwriters) so that, as so amended or supplemented, the Registration Statement or the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, and the Company, the Mid-Tier Company, the MHC and the Bank will furnish to the Representative a reasonable number of copies of such amendment or supplement. For the purpose of this subsection, the Company, the Mid-Tier Company, the MHC and the Bank will each furnish such information with respect to itself as the Representative may from time to time reasonably request.

 

(g)        The Company, the Mid-Tier Company, the MHC and the Bank will take all necessary action, in cooperation with the Representative, to qualify the Securities for offering and sale under the applicable securities laws of such states of the United States and other jurisdictions as the FRB Regulations and/or the Massachusetts Regulations may require and as the Representative and the Company have agreed; provided, however, that none of the Company, the Mid-Tier Company, the MHC or the Bank shall be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. In each jurisdiction in which the Securities, including the Shares, have been so qualified, the Company, the Mid-Tier Company, the MHC and the Bank will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement.

 

(h)        The Company will make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the Securities Act Regulations) covering a twelve-month period beginning not later than the first day of the Company’s fiscal quarter next following the effective date of the Registration Statement (as defined in said Rule 158).

 

(i)          During the period ending on the third anniversary of the expiration of the fiscal year during which the closing of the transactions contemplated hereby occurs, the Company will furnish to its stockholders as soon as practicable after the end of each such fiscal year an annual report (including consolidated statements of financial condition and consolidated statements of income, stockholders’ equity and cash flows, certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), the Company will make available to its stockholders consolidated summary financial information of the Company and the Bank for such quarter in reasonable detail. In addition, the Company will use its reasonable best efforts to make public summary financial information contained in such annual report and quarterly financial information through the issuance of appropriate press releases at the same time or prior to the time of the furnishing thereof to stockholders of the Company.

 

(j)          During the period ending on the third anniversary of the expiration of the fiscal year during which the closing of the transactions contemplated hereby occurs, the Company will furnish to the Representative (i) as soon as publicly available, a copy of each report or other document of the Company furnished generally to stockholders of the Company or furnished to or filed with the Commission under the Exchange Act or any national securities exchange or system on which any class of securities of the Company is listed, and (ii) from time to time, such other information concerning the Company as the

 

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Representative may reasonably request. For purposes of this paragraph, any document filed electronically with the Commission shall be deemed furnished to the Representative.

 

(k)         The Company will promptly inform the Representative upon its receipt of service with respect to any material litigation or administrative action instituted with respect to the Conversion or the Offerings.

 

(l)          Each of the Company and the Bank will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under “Use of Proceeds.”

 

(m)        The Company will report the use of proceeds from the Offerings on its first periodic report filed following the Time of Delivery pursuant to Sections 13(a) and 15(d) of the Exchange Act and on any subsequent periodic reports as may be required pursuant to Rule 463 of the Securities Act Regulations.

 

(n)         The Company will maintain the effectiveness of the Exchange Act Registration Statement for not less than three years and will use its best efforts to comply in all material respects with its filing obligations under the Exchange Act during such period. For not less than three years, the Company will use its best efforts to effect and maintain the listing of the Common Stock on the Nasdaq Capital Market, and once listed on the Nasdaq Capital Market, the Company will use its best efforts to comply with all applicable corporate governance standards required by the Nasdaq Capital Market. The Company will file with the Nasdaq Capital Market all documents and notices required by the Nasdaq Capital Market of companies that have issued securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq Capital Market.

 

(o)         The Company and the Bank will take such actions and furnish such information as are reasonably requested by the Representative in order for the Representative to ensure compliance with FINRA Rule 5130 and all related rules.

 

(p)         Other than in connection with any employee benefit plan or arrangement described in the Prospectus, the Company will not, without the prior written consent of the Representative, sell or issue, contract to sell or otherwise dispose of, any shares of Common Stock other than the Securities or the Exchange Shares for a period of 180 days following the Time of Delivery.

 

(q)         During the period beginning on the date hereof and ending on the later of the third anniversary of the Time of Delivery or the date on which the Representative receives full payment in satisfaction of any claim for indemnification or contribution to which it may be entitled pursuant to Sections 6 or 7 made prior to the third anniversary of the Time of Delivery, respectively, none of the Company, the Mid-Tier Company, the MHC or the Bank shall, without the prior written consent of the Representative, take or permit to be taken any action that could result in the Common Stock or the Bank Common Stock becoming subject to any security interest, mortgage, pledge, lien or encumbrance, with the exception of the Bank’s proposed loan to the ESOP.

 

(r)         The Company, the Mid-Tier Company, the MHC and the Bank will comply with the conditions imposed by or agreed to with the Division in connection with its approval of the Massachusetts Conversion Application and the FRB in connection with its approval of the Holding Company Application.

 

(s)        The Company shall not deliver the Securities until the Company, the Mid-Tier Company, the MHC and the Bank have satisfied each condition set forth in Section 5 hereof, unless such condition is waived by the Representative.

 

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(t)         The Company, the Mid-Tier Company, the MHC and the Bank will furnish to the Representative as early as practicable prior to the Time of Delivery, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements of the Mid-Tier Company which have been read by Whittlesey PC, as stated in their letters to be furnished pursuant to subsections (f) and (g) of Section 5 hereof.

 

(u)         During the period in which the Prospectus is required to be delivered, each of the Company, the Mid-Tier Company, the MHC and the Bank will conduct its business in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the Commission, the Nasdaq Capital Market, the Division and the FRB.

 

(v)         None of the Company, the Mid-Tier Company, the MHC or the Bank will amend the Plan in any manner that would affect the sale of the Securities or the terms of this Agreement without the consent of the Representative.

 

(w)        The Company, the Mid-Tier Company, the MHC and the Bank will not, prior to the Time of Delivery, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business substantially consistent with past practice, except as disclosed in the Prospectus.

 

(x)         The Company, the Mid-Tier Company, the MHC and the Bank will use all reasonable efforts to comply with, or cause to be complied with, the conditions precedent to the several obligations of the Representative specified in Section 5 hereof.

 

(y)         The Company, the Mid-Tier Company, the MHC and the Bank will use their best efforts to conduct the Conversion, including the Offerings and complete the conditions precedent to the Offerings and the Conversion, in each case in accordance with the Plan, the applicable FRB Regulations, the applicable Massachusetts Regulations and all other applicable laws, regulations, decisions and orders, including all material terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the Commission, the FRB, the Division or any other regulatory authority or Blue Sky authority, and to comply with those which the regulatory authority permits to be completed after the Conversion.

 

(z)         The Company will file the Exchange Act Registration Statement, prior to the Time of Delivery.

 

(aa)       The Company, the Mid-Tier Company, the MHC and the Bank will comply, at their own expense, with all requirements imposed by the Commission, the FRB, the Division and Nasdaq or pursuant to the applicable Commission Regulations, FRB Regulations, Massachusetts Regulations and Nasdaq regulations as from time to time in force.

 

(bb)      The Company will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock or any other reference security, whether to facilitate the sale or resale of the Shares or otherwise, and the Company will, and shall use its commercially reasonable best efforts to cause each of its affiliates to, comply with all applicable provisions of Regulation M with respect to the Shares. If the limitations of Rule 102 of Regulation M (“Rule 102”) do not apply with respect to the Shares or any other reference security pursuant to any exception set forth in Section (d) of Rule 102, then promptly upon notice from the Representative (or, if later, at the time stated in the notice), the Company will, and shall use its commercially reasonable best efforts to cause each of its affiliates to, comply with Rule 102 as though

 

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such exception were not available but the other provisions of Rule 102 (as interpreted by the Commission) did apply.

 

SECTION 4. Payment of Expenses. The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally agree to reimburse the Underwriters for their reasonable out-of-pocket expenses incurred in connection with the performance of their obligations under this Agreement and the Agency Agreement; provided, however, that such expenses shall not exceed $165,000 without the prior approval of the Provident Parties. All fees and expenses to which the Underwriters are entitled to reimbursement under this paragraph of this Section 4 shall be due and payable upon receipt by the Provident Parties of a written accounting therefor, to the reasonable satisfaction of the Provident Parties, setting forth in reasonable detail the expenses incurred by the Underwriters. The Underwriters acknowledge and agree that the dollar amount of expenses specified above are inclusive of the expenses incurred in connection with the Subscription and Community Offering.

 

The Company, the Mid-Tier Company, the MHC and the Bank jointly and severally agree to pay all expenses incident to the performance of their obligations under this Agreement, including but not limited to (i) the cost of obtaining all securities and bank regulatory approvals, including any required FINRA or other filing fees, (ii) the cost of printing and distributing the Public Offering materials, (iii) the costs of Blue Sky qualification (including fees and expenses of Blue Sky counsel) of the Shares in the various states, (iv) the fees and expenses incurred in connection with obtaining the listing of the Securities and the Exchange Securities on the Nasdaq Capital Market, and (v) all fees and disbursements of the Company’s counsel, accountants and other advisors. In the event the Underwriters incur any such fees and expenses on behalf of the Company or the Bank, the Bank will reimburse the Underwriters for such fees and expenses whether or not the Public Offering is consummated.

 

SECTION 5. Conditions of Underwriters’ Obligations. The Company, the Mid-Tier Company, the MHC, the Bank and the Representative agree that the issuance and the sale of the Shares, the issuance and the sale of Securities in the Subscription Offering and the Community Offering, the issuance of the Exchange Shares and all obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company, the Mid-Tier Company, the MHC and the Bank herein contained as of the date hereof and the Time of Delivery, to the accuracy of the statements of officers and directors of the Company, the Mid-Tier Company, the MHC and the Bank made pursuant to the provisions hereof, to the performance by the Company, the Mid-Tier Company, the MHC and the Bank of their obligations hereunder, and to the following further conditions:

 

(a)         The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the Securities Act Regulations and in accordance with Section 3(a) hereof (or a post-effective amendment shall have been filed and declared effective in accordance with the requirements of Rule 430A); no stop order suspending the effectiveness of the Registration Statement, including any post-effective amendment thereto, shall have been issued under the Securities Act or proceedings therefor initiated or, to the knowledge of the Company, threatened by the Commission; no order suspending the Offerings or the authorization for final use of the Prospectus, including any prospectus included in a post-effective amendment to the Registration Statement, shall have been issued or proceedings therefor initiated or, to the knowledge of the Company, threatened by the Commission, the FRB or the Division, and no order suspending the sale of the Shares in any jurisdiction shall have been issued. 

 

(b)         At the Time of Delivery, the Representative shall have received:

 

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(i)          The written opinion contained in Exhibit A hereof, dated as of the Time of Delivery, of Luse Gorman, PC, counsel for the Company, the Mid-Tier Company, the MHC and the Bank, in form and substance reasonably satisfactory to the Underwriters.

 

(ii)         The favorable opinion contained in Exhibit B hereof, dated as of the Time of Delivery, of Nutter, McClennen & Fish LLP, counsel for the Underwriters, in form and substance reasonably satisfactory to the Underwriters.

 

(iii)         In addition to giving their opinions required by subsections (b)(l) and (b)(2), respectively, of this Section, Luse Gorman, PC and Nutter, McClennen & Fish, LLP shall each additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (except for financial statements and schedules and other financial or statistical data included therein, as to which counsel need make no statement), at the time it became effective (and at the time any post-effective amendment was declared effective), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules and other financial, pro forma, appraisal or statistical data included therein, as to which counsel need make no statement), at the time the Registration Statement became effective or at the Time of Delivery, or (if applicable) that the General Disclosure Package as of the Applicable Time, included or includes an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 

 

The opinions may be limited to matters governed by the laws of the United States, the State of Maryland and the Commonwealth of Massachusetts. In giving their opinions, Luse Gorman, PC, and Nutter, McClennen & Fish, LLP may rely as to matters of fact on certificates of officers and directors of the Company, the Mid-Tier Company, the MHC, the Bank and the Subsidiaries, as applicable, and certificates of public officials, and Nutter, McClennen & Fish, LLP may also rely on the opinion of Luse Gorman, PC with respect to matters set forth in paragraphs (iv), (x), (xiv), (xv) and (xvii) therein. 

 

(c)          At the Time of Delivery referred to in Section 2 hereof, the Company, the Mid-Tier Company, the MHC and the Bank shall have completed in all material respects the conditions precedent to the Conversion in accordance with the Plan, the applicable Massachusetts Regulations, FRB Regulations and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the Division, the FRB or any other regulatory authority, other than those which the Division, the FRB or such other regulatory authority permits to be completed after the Offerings.

 

(d)         At the Time of Delivery, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any Material Adverse Effect whether or not arising in the ordinary course of business consistent with past practice, and the Representative shall have received a certificate of the President and Chief Executive Officer of the Company, the Mid-Tier Company, the MHC and the Bank and the Chief Financial or Chief Accounting Officer of the Company, the Mid-Tier Company, the MHC and the Bank, dated as of the Time of Delivery, to the effect that (i) there has been no such Material Adverse Effect, (ii) there has been no material transaction entered into by the Company, the Mid-Tier Company, the MHC, or the Bank from the latest date as of which the financial condition of the Company, the Mid-Tier Company, the MHC or the Bank is set forth in the Registration Statement and the Prospectus, other than transactions referred to or contemplated therein and transactions in the ordinary course of business substantially consistent with past practice, except as disclosed in the Prospectus, (iii) neither the Company, the Mid-Tier Company, the

 

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MHC, nor the Bank has received from the Division, the FRB or the FDIC any order or direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (which order or direction, if any, shall have been disclosed in writing to the Representative) or which materially and adversely would affect the business, financial condition, results of operations or prospects of the Company, the Mid-Tier Company, the MHC or the Bank, considered as one enterprise, (iv) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Time of Delivery, (v) each of the Company, the Mid-Tier Company, the MHC and the Bank has complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Time of Delivery, including all agreements and conditions set forth in the Agency Agreement, (vi) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to their knowledge, threatened by the Commission, and (vii) no order suspending the FRB’s approval of the Holding Company Application or the Division’s approval of the Massachusetts Conversion Application, or the transactions contemplated thereby, has been issued and no proceedings for that purpose have been initiated or, to their knowledge, threatened by the FRB or the Division and, to their knowledge, no person has sought to obtain regulatory or judicial review of the action of the FRB or the Division in approving the Plan in accordance with the FRB Regulations or the Massachusetts Regulations, as applicable, nor has any person sought to obtain regulatory or judicial review of the action of the FRB in approving the Holding Company Application or the Division in approving the Massachusetts Conversion Application.

 

(e)         At the Time of Delivery, the Representative shall have received a certificate of the Chief Executive Officer and President of the Company, the Mid-Tier Company, the MHC and the Bank and the Chief Financial Officer of the Company, the Mid-Tier Company, the MHC and the Bank, dated as of the Time of Delivery, to the effect that (i) they have reviewed the contents of the Registration Statement and the Prospectus; (ii) based on each of their knowledge, the Registration Statement and the Prospectus do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which such statements were made, not misleading; and (iii) based on each of their knowledge, the financial statements and other financial information included in the Registration Statement and the Prospectus fairly present the financial condition and results of operations of the Mid-Tier Company and the Bank as of and for the dates and periods covered by the Registration Statement and the Prospectus.

 

(f)          As of the date hereof, the Representative shall have received from Whittlesey PC a letter dated such date, in form and substance satisfactory to the Representative, to the effect that: (i) they are independent public accountants with respect to the Mid-Tier Company and the Bank within the meaning of the Securities Act and the applicable rules and regulations adopted by the SEC; (ii) it is their opinion that the consolidated financial statements included in the Registration Statement and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations; (iii) based upon limited procedures as agreed upon by the Representative and Whittlesey PC set forth in detail in such letter, nothing has come to their attention which causes them to believe that (A) the unaudited consolidated financial statements of the Mid-Tier Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations, or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus, (B) the unaudited amounts of net interest income and net income set forth under “Selected Consolidated Financial and Other Data” or under “Recent Developments” in the Prospectus do not agree with the amounts set forth in unaudited consolidated financial statements as of and for the dates and periods presented under such captions or such amounts were not determined on a basis substantially consistent with that used in determining the corresponding amounts in the audited consolidated financial statements included in the Registration Statement, (C) at a

 

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specified date not more than five (5) business days prior to the date of this Agreement, there has been any increase in the consolidated borrowings of the Mid-Tier Company or any decrease in consolidated total assets, the allowance for loan losses, total deposits or total stockholders’ equity of the Mid-Tier Company, in each case as compared with the amounts shown in the consolidated statements of financial condition included in the Registration Statement or, (D) during the period from March 31, 2019 to a specified date not more than five (5) business days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding fiscal year, in total interest income, net interest income, net interest income after provision for loan losses, income before income tax expense or net income of the Mid-Tier Company, except in all instances for increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (iv) in addition to the examination referred to in their opinion and the limited procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are included in the Registration Statement and Prospectus and that are specified by the Representative, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Mid-Tier Company, identified in such letter.

 

(g)         At the Time of Delivery, the Representative shall have received from Whittlesey PC a letter, dated as of the Time of Delivery, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (f) of this Section, except that the specified date referred to shall be a date not more than five (5) days prior to the Time of Delivery.

 

(h)         The “lock-up” agreements, each substantially in the form of Exhibit C hereto, between the Underwriters and the persons set forth on Exhibit D hereto, relating to sales and certain other dispositions of shares of Common Stock, Mid-Tier Company Common Stock or certain other securities, shall be delivered to the Representative on or before the date hereof and shall be in full force and effect on the Time of Delivery.

 

(i)          At the Time of Delivery, the Securities shall have been approved for quotation on the Nasdaq Capital Market upon notice of issuance.

 

(j)          At the Time of Delivery, the Representative shall have received a letter from the Appraiser, dated as of the Time of Delivery, confirming its Appraisal.

 

(k)         At the Time of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities, including the Shares, as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Underwriters.

 

(l)          At any time prior to the Time of Delivery, (i) there shall not have occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which, in the judgment of the Representative, are so material and adverse as to make it impracticable to market the Securities or to enforce contracts, including subscriptions or orders, for the sale of the Securities, and (ii) trading generally on either the American Stock Exchange, the New York Stock Exchange or the Nasdaq Stock Market shall not have been suspended, and minimum or maximum prices for trading shall not have been fixed, or maximum ranges for prices for securities have been required, by any of said Exchanges or by order of the

 

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Commission or any other governmental authority, and a banking moratorium shall not have been declared by either Federal, Massachusetts or New York authorities.

 

SECTION 6. Indemnification.

 

(a)         The Company, the Mid-Tier Company, the MHC and the Bank, jointly and severally, agree to indemnify and hold harmless each Underwriter, each person, if any, who controls such Underwriter, within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and its respective partners, directors, officers, employees and agents as follows:

 

(i)           from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, related to or arising out of the Conversion or any action taken by the Underwriters where acting as agent of the Company, the Mid-Tier Company, the MHC or the Bank or otherwise as described in Section 2 hereof; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense found in a final judgment by a court of competent jurisdiction to have resulted primarily from the bad faith, willful misconduct or gross negligence of an Underwriter;

 

(ii)          from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, based upon or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the General Disclosure Package, any Issuer-Represented Free Writing Prospectus, when considered together with the General Disclosure Package, or any amendment or supplement thereto (including any post-effective amendment) or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Information Statement or the Prospectus or the General Disclosure Package or any Issuer-Represented Free Writing Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

 

(iii)         from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever described in clauses (i) or (ii) above, if such settlement is effected with the written consent of the Provident Parties, which consent shall not be unreasonably withheld; and

 

(iv)         from and against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the fees and disbursements of counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation, proceeding or inquiry by any governmental agency or body, commenced or threatened, or any claim pending or threatened whatsoever described in clauses (i) or (ii) above, to the extent that any such expense is not paid under clause (i), (ii) or (iii) above;

 

provided, however, that the indemnification provided for in this paragraph (a) shall not apply to any loss, liability, claim, damage or expense to the extent that (i) it arises out of any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Prospectus, the Prospectus or the General Disclosure Package or any Issuer-Represented Free Writing Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading which

 

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was made in reliance upon and in conformity with the written information furnished to the Company by an Underwriter through the Representative or counsel for the Underwriters expressly for use therein, provided that Company, the Mid-Tier Company, the MHC and the Bank hereby acknowledge and agree that the only information that the Underwriters or counsel for the Underwriters has furnished to the Company consists solely of the information set forth in the fourth sentence of the second paragraph of “Summary—Terms of the Offering”, the fifth sentence of the section “Summary—Market for Common Stock”, the fifth sentence of the section “Market for the Common Stock,” the section “The Conversion and Offering—Syndicated or Firm Commitment Underwritten Offering,” the section “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” and the section “The Conversion and Offering—Records Management” in the Prospectus (the “Underwriters’ Information”), or (ii) is primarily attributable to the gross negligence, willful misconduct or bad faith of such Underwriter. To the extent required by law, the indemnification provided for in this paragraph (a) shall be subject to and limited by Section 23A of the Federal Reserve Act, as amended.

 

 (b)        Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, the Mid-Tier Company, the MHC and the Bank, their directors or trustees, as applicable, each of their officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, of a material fact made in the Preliminary Prospectus, the Prospectus or the General Disclosure Package or any Issuer-Represented Free Writing Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriters’ Information.

 

(c)         Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability that it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to no more than one local counsel in each separate jurisdiction in which any action or proceeding is commenced) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

 

(d)        The Provident Parties also agree that no Underwriter shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the MHC, the Bank, the Mid-Tier Company and its security holders, the Company and its security holders or the MHC’s, the Mid-Tier Company’s, the Bank’s or the Company’s creditors relating to or arising out of the performance by the Underwriters of the services contemplated by, this Agreement, except to the extent that any loss, claim, damage or liability is found in a final judgment by a court of competent jurisdiction to have resulted primarily from such Underwriter’s bad faith, willful misconduct or gross negligence.

 

(e)         In addition to, and without limiting, the provisions of Section (6)(a)(iv) hereof, in the event that an Underwriter, any person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or any of its partners, directors, officers, employees or agents is requested or required to appear as a witness or otherwise gives testimony in any action, proceeding, investigation or inquiry brought by or on behalf of or against the Provident Parties, the Underwriter or any of its respective affiliates or any participant in the transactions contemplated hereby in which the Underwriter or such person or agent is not named as a defendant, the Company, the Mid-Tier

 

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Company, the MHC and the Bank, jointly and severally, agree to reimburse the Underwriter and its partners, directors, officers, employees or agents for all reasonable and necessary out-of-pocket expenses incurred by them in connection with preparing or appearing as a witness or otherwise giving testimony and to compensate the Underwriter and its partners, directors, officers, employees or agents in an amount to be mutually agreed upon.

 

(f)          Notwithstanding any other provision set forth in this Section 6, in no event shall any payment made by the Company, the Mid-Tier Company, the MHC or the Bank pursuant to this Section 6 exceed the amount permissible under applicable federal law, including, without limitation, Section 18(k) of the Federal Deposit Insurance Act and the regulations promulgated thereunder.

 

SECTION 7. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 6 hereof is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Provident Parties and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Provident Parties and the Underwriters, as incurred, in such proportions (i) that the Underwriters are responsible for that portion represented by the percentage that the total underwriting discounts and commissions received by the Underwriters bear to the total net proceeds from the Public Offering of the Shares (before deducting expenses) received by the Company, in each case as set forth in the table on the cover page of the Prospectus, and the Company, the Mid-Tier Company, the MHC and the Bank are jointly and severally responsible for the balance or (ii) if, but only if, the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits to the Provident Parties on the one hand and the Underwriters on the other, as reflected in clause (i), but also the relative fault of the Provident Parties on the one hand and the Underwriters on the other, as well as any other relevant equitable considerations; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Underwriters, and each director or trustee of the Company, the Mid-Tier Company, the MHC and the Bank, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company, the Mid-Tier Company, the MHC or the Bank within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company, the Mid-Tier Company, the MHC and the Bank. Notwithstanding anything to the contrary set forth herein, to the extent permitted by applicable law, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

 

SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement, or contained in certificates of officers of the Company, the Mid-Tier Company, the MHC or the Bank submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Representative or any controlling persons, or by or on behalf of the Company, and shall survive delivery of the Shares.

 

SECTION 9. Default by Underwriters.

 

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(a)         If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, the Representative may in its discretion arrange for it or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter the Representative does not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to the Representative to purchase such Shares on such terms. In the event that, within the respective prescribed periods, the Representative notifies the Company that it has so arranged for the purchase of such Shares, or the Company notifies the Representative that it has so arranged for the purchase of such Shares, the Representative or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in the Representative’s opinion may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares.

 

(b)         If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the Representative and the Company as provided in Section 9(a), the aggregate number of such Shares which remains unpurchased does not exceed one tenth of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

 

(c)         If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the Representative and the Company as provided in Section 9(a) hereof, the aggregate number of such Shares which remains unpurchased exceeds one-tenth of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in Section 9(b) hereof to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for obligations under Section 4 and the indemnity and contribution agreements in Sections 6 and 7 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

 

(d)         If this Agreement is terminated pursuant to Section 9(c) hereof, none of the Provident Parties shall then be under any liability to any Underwriter except as provided in Sections 4, 6 and 7 hereof; but, if this Agreement is terminated pursuant to Section 5 or for any other reason, and Shares are not delivered by or on behalf of the Company as provided herein, the Company, the Mid-Tier Company, the Bank and the MHC, jointly and severally, will reimburse the Underwriters for all out-of-pocket expenses, including fees and disbursements of counsel, incurred by the Underwriters in connection with the transactions contemplated hereby, including, without limitation, marketing, syndication and travel expenses incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 6 and 7 hereof.

 

SECTION 10. Termination of Agreement.

 

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(a)        The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to Time of Delivery (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any Material Adverse Effect, whether or not arising in the ordinary course of business, (ii) if there has occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which, in the good faith judgment of the Representative, are so material and adverse as to make it impracticable to market the Shares or to enforce contracts, including subscriptions or orders, for the sale of the Shares, (iii) if trading generally on the Nasdaq Capital Market, the American Stock Exchange or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by either Federal, Massachusetts or New York authorities, (iv) if any condition specified in Section 5 hereof shall not have been fulfilled when and as required to be fulfilled, or (v) if there shall have been such material adverse changes in the condition of the Company or the Bank or the prospective market for the Company’s Securities as in the Representative’s good faith opinion would make it inadvisable to proceed with the offering, sale or delivery of the Shares.

 

(b)         If this Agreement is terminated pursuant to this Section 10, such termination shall be without liability of any party to any other party except as provided in Sections 2 and 4 hereof relating to the reimbursement of expenses and except that the provisions of Sections 6 and 7 hereof shall survive any termination of this Agreement.

 

SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Representative shall be directed to 1251 Avenue of the Americas, 6th Floor, New York, NY 10020, attention of General Counsel, with a copy to Nutter, McClennen & Fish, LLP, 155 Seaport Blvd., Boston, Massachusetts 02210, attention of Michael K. Krebs; notices to the Company, the Mid-Tier Company, the MHC and the Bank shall be directed to any of them at The Provident Bank, 5 Market Street, Amesbury, MA 01913, attention of David P. Mansfield, with a copy to Luse Gorman, PC, 5335 Wisconsin Avenue, N.W., Suite 780, Washington, D.C. 20015, attention of Ned A. Quint.

 

SECTION 12. Parties. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company and the Bank and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Bank and their respective successors and the controlling persons and the partners, officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein or therein contained. This Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Bank and their respective successors, and said controlling persons, partners, officers and directors and their heirs, partners, legal representatives, and for the benefit of no other person, firm or corporation.

 

SECTION 13. Entire Agreement; Amendment; Counterparts; Facsimile Delivery. This Agreement represents the entire understanding of the parties hereto with reference to the Public Offering contemplated hereby and supersedes any and all other oral or written agreements heretofore made, except for (i) the engagement letter dated April 2, 2019, by and between Sandler O’Neill, the Company, the Mid-Tier Company, the MHC and the Bank, relating to Sandler O’Neill’s providing records management agent services to the Company, the Mid-Tier Company, the MHC and the Bank in connection with the

 

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Conversion and (ii) the Agency Agreement relating to Sandler O’Neill serving as marketing agent in the Subscription and Community Offering. No waiver, amendment or other modification of this Agreement shall be effective unless in writing and signed by the parties hereto. This Agreement may be executed in several counterparts, each of which is deemed an original but all of which constitute one and the same instrument. Delivery of an executed counterpart by fax, pdf or other electronic means shall be equally effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 14. Governing Law and Time. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state without regard to the conflicts of laws provisions thereof. Unless otherwise noted, specified times of day refer to Eastern Time.

 

SECTION 15. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

 

SECTION 16. Headings. Section headings are not to be considered part of this Agreement, are for convenience and reference only, and are not to be deemed to be full or accurate descriptions of the contents of any paragraph or subparagraph.

 

[The next page is the signature page]

 

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If the foregoing is in accordance with your understanding, please sign and return to us a counterpart hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company, the Mid-Tier Company, the Bank and the MHC. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof.

 

  Very truly yours,
     
  PROVIDENT BANCORP, INC.
  (a Maryland corporation)
     
  By:                   
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  PROVIDENT BANCORP, INC.
  (a Massachusetts corporation)
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  THE PROVIDENT BANK
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer
     
  PROVIDENT BANCORP
     
  By:  
    Name: Carol L. Houle
    Title: Executive Vice President & Chief Financial Officer

 

[Signature Page to Underwriting Agreement]

 

 

 

 

CONFIRMED AND ACCEPTED,  
as of the date first above written:  
     
SANDLER O’NEILL & PARTNERS, L.P.  
As Representative of the Several Underwriters  
     
By: Sandler O’Neill & Partners Corp.,
the sole general partner
 
     
By:                         
  Name:  
  Title:  

 

[Signature Page to Underwriting Agreement]

 

 

 

 

SCHEDULE I

 

Underwriter Total Number of Shares to be Purchased
   
Sandler O’Neill & Partners, L.P.  
   
Total  

 

 

 

 

EXHIBIT B TO AGENCY AGREEMENT

 

FORM OF OPINION OF LUSE GORMAN, PC

 

At the Closing Time, Agent shall have received:

 

The favorable opinion, dated as of the Closing Time, of Luse Gorman, PC, counsel for the Company, the Mid-Tier Company, the MHC and the Bank, in form and substance acceptable to the Agent to the effect that:

 

(i)          The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland; the Mid-Tier Company has been duly organized and is validly existing as a Massachusetts corporation; the MHC has been duly organized and is validly existing as a Massachusetts-chartered mutual holding company; and the Bank has been duly organized and is validly existing as a Massachusetts-chartered stock savings bank.

 

(ii)          Each of the Company, the Mid-Tier Company, the MHC and the Bank has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Prospectus and the General Disclosure Package.

 

(iii)         Each of the Company, the Mid-Tier Company, the MHC and the Bank is qualified to conduct its business in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify would not have a Material Adverse Effect. Upon completion of the Conversion, the Company will be a bank holding company as that term is used in the BHCA.

 

(iv)        The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share; upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Company will be within the range set forth in the Prospectus under “Capitalization” and, except for 100 shares of Common Stock issued to the Mid-Tier Company, which shares have been cancelled, no shares of Common Stock or preferred stock of the Company have been or will be issued and outstanding prior to the Closing Time.

 

(v)         The Securities have been duly and validly authorized for issuance; the Exchange Shares have been duly and validly authorized for issuance; the Securities, when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, will be duly and validly issued and fully paid and non-assessable; the Exchange Shares, when issued, will be duly and validly issued and fully paid and non-assessable.

 

(vi)        Except for subscription rights with respect to the Securities, the issuance of the Securities and the Exchange Shares is not subject to preemptive or other similar rights arising by operation of law or regulation or the articles of incorporation, charter or bylaws of the Company, the Mid-Tier Company, the MHC or the Bank.

 

(vii)       The Bank is duly qualified to transact business and is in good standing under the laws of the Commonwealth of Massachusetts and the State of New Hampshire and in each other jurisdiction in which such qualification is required.

 

(viii)      The Bank is a member in good standing of the Federal Home Loan Bank of

 

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Boston.

 

(ix)        The deposit accounts of the Bank are insured by the FDIC up to the applicable limits; and the deposit accounts of the Bank are insured in excess of FDIC limits by the Depositors Insurance Fund.

 

(x)         The authorized capital stock of the Bank consists of 500,000 shares of common stock, $1.00 par value per share. Upon consummation of the Conversion, all of the issued and outstanding capital stock of the Bank will be duly authorized and validly issued and fully paid and non-assessable, and, to such counsel’s knowledge, all such capital stock will be owned beneficially and of record by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity.

 

(xi)        The Division has approved the Massachusetts Conversion Application and the FRB has approved the Holding Company Application; to such counsel’s knowledge, each of such approvals remains in full force and effect and no order has been issued by the Division or the FRB suspending or revoking such approval and no proceedings therefor have been initiated or threatened by the Division or by the FRB, and no person has sought to obtain review of the final action of the Division in approving the Massachusetts Conversion Application or of the FRB in approving the Holding Company Application; as of the respective date of each of such approvals, the Massachusetts Conversion Application and the Holding Company Application, including the Prospectus and the Information Statement, complied as to form in all material respects with the applicable requirements of the Massachusetts Regulations, the BHCA and the FRB Regulations promulgated thereunder, as the case may be (it being understood, however, that (i) no opinion need be rendered with respect to the financial statements, notes to the financial statements, or other financial and statistical and appraisal data included in, or omitted from, the Applications, (ii) in passing upon the compliance as to form of the Applications, counsel need not assume any responsibility for the accuracy, completeness or fairness of the statements contained therein, and (iii) no opinion need be rendered with respect to the business plan or the appraisal report), and to such counsel’s knowledge, include all documents required to be filed as exhibits thereto.

 

(xii)       At the time of their use, the Information Statement and all supplemental sales literature complied in all material respects with the applicable requirements of the Securities Act Regulations (other than the financial statements, notes to the financial statements and the other tabular financial and other statistical and appraisal data included therein as to which no opinion need be rendered).

 

(xiii)       The Company, the Mid-Tier Company, the MHC and the Bank have full corporate power and authority to enter into and perform their obligations under this Agreement and to consummate the transactions contemplated hereby and by the Plan. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, (a) have been duly authorized by all necessary action on the part of each of the Company, the Mid-Tier Company, the MHC and the Bank, (b) will not violate the articles of incorporation, organization certificate, charter or bylaws of the Company, the Mid-Tier Company, the MHC or the Bank, and (c) will not result in a breach of or default, or result in the creation of any lien, charge or encumbrance under any agreement filed as an exhibit to the Registration Statement.

 

(xiv)      The Registration Statement has been declared effective by the Commission under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement, including any post-effective amendment thereto, has been issued under the Securities Act and no proceedings for such purpose have been initiated or, to such counsel’s knowledge, threatened by

 

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the Commission.

 

(xv)       The Prospectus, the Information Statement and any supplemental sales literature have been approved by the Division, and such counsel has not been advised by the Division’s staff that an order suspending such clearance of the Prospectus or the Information Statement has been issued by the Division, and, to such counsel’s knowledge, no proceedings for such purpose have been initiated or threatened by the Division.

 

(xvi)      No further approval, authorization, consent or other order of any public board or body is required in connection with the execution and delivery of the Agreement, the issuance of the Securities and the Exchange Shares and the consummation of the Conversion except as may be required under the securities or “Blue Sky” laws of various jurisdictions or the rules and regulations of FINRA, as to which no opinion need be rendered.

 

(xvii)     At the time the Registration Statement became effective, the Registration Statement complied as to form in all material respects with the requirements of the Securities Act and the Securities Act Regulations; it being understood, however, that (a) no opinion need be rendered with respect to the financial statements, the notes thereto, or other tabular, financial, statistical and appraisal data included in, or omitted from, the Registration Statement and (b) in passing upon the compliance as to form of the Registration Statement, such counsel may assume that the statements made therein are correct and complete, except as otherwise set forth in paragraph (xx).

 

(xviii)    The Common Stock conforms to the description thereof contained in the Registration Statement, the General Disclosure Package and the Prospectus, and, to the extent certificates are used to evidence the Common Stock, the form of certificate used to evidence the Common Stock complies with the laws of the State of Maryland.

 

(xix)       The statements in the Prospectus under the captions “Risk Factors—Risks Related to Our Business—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,” “—The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny,” “—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,” “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,” “Our Dividend Policy,” “Supervision and Regulation,” “Taxation,” “The Conversion and Offering,” “Restrictions on Acquisition of New Provident,” and “Description of Capital Stock of New Provident Following the Conversion,” insofar as they purport to summarize matters of law or to describe documents referred to therein, are accurate summaries and descriptions in all material respects.

 

(xx)        To such counsel’s knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement, the Prospectus and the General Disclosure Package or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto and the descriptions thereof or references thereto are correct in all material respects, and, except as described in the Prospectus and the General Disclosure Package, no default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default, in the due performance or observance of any material obligation, agreement, covenant or condition contained in any

 

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contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed.

 

(xxi)       The Plan has been duly authorized by the Boards of Trustees or Directors of the Company, the Mid-Tier Company, the MHC and the Bank, and the Plan has been approved by the requisite vote of the MHC’s corporators and of the Mid-Tier Company’s stockholders.

 

(xxii)      To such counsel’s knowledge, the Company, the Mid-Tier Company, the MHC and the Bank have conducted the Conversion in all material respects in accordance with the BHCA and the FRB approvals issued thereunder, except to the extent that the FRB shall have specifically waived in writing the BHCA or any condition or requirement contained in the FRB approvals, and the Massachusetts Regulations and the Division approvals issued thereunder, except to the extent that the Division shall have specifically waived in writing the Massachusetts Regulations or any condition or requirement contained in the Division approvals, and, to such counsel’s knowledge, have satisfied all conditions precedent to the Conversion imposed upon the Company, the Mid-Tier Company, the MHC or the Bank by the FRB or the Division.

 

(xxiii)     Neither the Company nor the Bank is and, upon completion of the Conversion and the Offerings and the application of the net proceeds from the sale of the Securities, the Company will not be required to be registered as, an investment company under the Investment Company Act of 1940.

 

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EXHIBIT C TO AGENCY AGREEMENT

 

OPINION OF NUTTER, MCCLENNEN & FISH, LLP

 

At the Closing Time, Agent shall have received:

 

The favorable opinion, dated as of the Closing Time, of Nutter, McClennen & Fish, LLP, counsel for the Agent, in form and substance acceptable to the Agent to the effect that:

 

(i)          The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland; the Mid-Tier Company has been duly organized and is validly existing as a Massachusetts corporation; the MHC has been duly organized and is validly existing as a Massachusetts-chartered mutual holding company; and the Bank has been duly organized and is validly existing as a Massachusetts-chartered stock savings bank.

 

(ii)         The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share; upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Company will be within the range set forth in the Prospectus under “Capitalization” and, except for 100 shares of Common Stock issued to the Mid-Tier Company, which shares have been cancelled, no shares of Common Stock or preferred stock of the Company have been or will be issued and outstanding prior to the Closing Time.

 

(iii)        The authorized capital stock of the Bank consists of 500,000 shares of common stock, $1.00 par value per share. Upon consummation of the Conversion, all of the issued and outstanding capital stock of the Bank will be duly authorized and validly issued and fully paid and non-assessable, and all such capital stock will be owned beneficially and of record by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity.

 

(iv)        The Securities have been duly and validly authorized for issuance; the Exchange Shares have been duly and validly authorized for issuance; the Securities, when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, will be duly and validly issued and fully paid and non-assessable; the Exchange Shares, when issued, will be duly and validly issued and fully paid and non-assessable.

 

(v)         Except for subscription rights with respect to the Securities, the issuance of the Securities and the Exchange Shares is not subject to preemptive or other similar rights arising by operation of law or regulation or the articles of incorporation, charter or bylaws of the Company, the Mid-Tier Company, the MHC or the Bank.

 

(vi)        The Registration Statement has been declared effective by the Commission under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement, including any post-effective amendment thereto, has been issued under the Securities Act and no proceedings for such purpose have been initiated or, to such counsel’s knowledge, threatened by the Commission.

 

(vii)       The Prospectus, the Information Statement and any supplemental sales literature have been cleared by the Division, and we have been advised by the Division’s staff that no order

 

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suspending such clearance of the Prospectus or the Information Statement has been issued by the Division and that no proceedings for such purpose have been initiated or threatened by the Division.

 

(viii)      At the time the Registration Statement became effective, the Registration Statement complied as to form in all material respects with the requirements of the Securities Act and the Securities Act Regulations; it being understood, however, that (a) no opinion need be rendered with respect to the financial statements, the notes thereto, or other tabular, financial, statistical and appraisal data included in, or omitted from, the Registration Statement and (b) in passing upon the compliance as to form of the Registration Statement, such counsel may assume that the statements made therein are correct and complete.

 

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EXHIBIT D TO AGENCY AGREEMENT

 

FORM OF LOCK-UP LETTER

 

, 2019

 

Sandler O’Neill & Partners, L.P.

1251 Avenue of the Americas

6th Floor

New York, New York 10020

 

Re:Proposed Public Offering by Provident Bancorp, Inc.

 

The undersigned understands that Sandler O’Neill & Partners, L.P. (Sandler O’Neill), proposes to enter into (1) an Agency Agreement (“Agency Agreement”) with Provident Bancorp, Inc., a newly formed Maryland corporation (the “Company”), Provident Bancorp, Inc., a Massachusetts corporation and “mid-tier” holding company (the “Mid-Tier Company”), Provident Bancorp, a Massachusetts-chartered mutual holding company (the “MHC”), and The Provident Bank, a Massachusetts-chartered stock savings bank (the “Bank”), and (2), if applicable, an Underwriting Agreement (as defined in the Agency Agreement), as the representative of the several underwriters (the “Underwriters”) who will be set forth in Schedule I to the Underwriting Agreement, providing for the offer and sale in a community, subscription, syndicated and, if applicable, a firm commitment underwritten public offering (collectively, the “Offering”) of up to of up to 13,225,000 shares of the Company’s common stock, par value $0.01 per share (the “Stock”).

 

In recognition of the benefit that the Offering will confer upon the undersigned, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with Sandler O’Neill that, during the period beginning on the date of the final prospectus relating to the subscription offering and ending 90 days after the Closing Time (as such term is defined in the Agency Agreement) (the “Restricted Period”), the undersigned will not, without the prior written consent of Sandler O’Neill, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company’s Stock, the common stock of the Mid-Tier Company (“Mid-Tier Stock”) or any securities convertible into or exchangeable or exercisable for Stock or Mid-Tier Stock, whether now owned or hereafter acquired, including any Exchange Shares (as defined in the Agency Agreement), by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing, (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Stock or Mid-Tier Stock, whether any such swap or transaction is to be settled by delivery of Stock, Mid-Tier Stock or other securities, in cash or otherwise or (iii) publicly announce an intention to do any of the foregoing. If either (i) during the period that begins on the date that is fifteen (15) calendar days plus three (3) business days before the last day of the Restricted Period and ends on the last day of the Restricted Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period, the restrictions set forth herein will continue to apply until the expiration of the date that is fifteen (15) calendar days plus three (3) business days after the date on which the earnings release is issued or the material news or event related to the Company occurs. The Company shall promptly notify Sandler O’Neill of any earnings releases, news or events that may give rise to an extension of the Restricted Period.

 

D-1 

 

 

Notwithstanding the foregoing, the undersigned may transfer the undersigned’s shares of Stock and Mid-Tier Stock (i) as a bona fide gift or gifts, provided that the donee or donees agree in writing to be bound by the restrictions set forth herein, (ii) to any trust or family limited partnership for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided that the trustee of the trust or general partner of the family limited partnership, as the case may be, agrees in writing to be bound by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, (iii) pledged in a bona fide transaction outstanding as of the date hereof to a lender to the undersigned, as disclosed in writing to Sandler O’Neill, (iv) pursuant to the exercise, other than a cashless exercise through a broker, by the undersigned of stock options that have been granted by the Mid-Tier Company prior to, and are outstanding as of, the date of the Agency Agreement, where the Stock or Mid-Tier Stock received upon any such exercise is held by the undersigned, individually or as fiduciary, in accordance with the terms of this Lock-Up Agreement, (v) the withholding of Stock or Mid-Tier Stock to satisfy tax withholding obligations upon the vesting of restricted stock, or (vi) with the prior written consent of Sandler O’Neill. For purposes of this Lock-Up Agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin.

 

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s and the Mid-Tier Company’s transfer agent and registrar against the transfer of the undersigned’s Stock or Mid-Tier Stock, to the extent applicable, except in compliance with this Lock-Up Agreement. In furtherance of the foregoing, the Company and its transfer agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Agreement.

 

In addition, the undersigned agrees that, without the prior written consent of Sandler O’Neill, the undersigned will not, during the Restricted Period, make any demand for or exercise any right with respect to, the registration of any shares of Stock or Mid-Tier Stock or any security convertible into or exercisable or exchangeable for Stock or Mid-Tier Stock.

 

The undersigned represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement. The undersigned understands that the Company and Sandler O’Neill are relying upon this Lock-Up Agreement in proceeding toward consummation of the Offering. The undersigned further understands that this Lock-Up Agreement is irrevocable and agrees that the provisions of this Lock-Up Agreement shall be binding also upon the successors, assigns, heirs and personal representatives of the undersigned. The undersigned further understands and acknowledges that any waiver of the provisions of this Lock-Up Agreement by Sandler O’Neill may require prior public disclosure in advance of the effectiveness of such waiver.

 

The undersigned understands that, if the Agency Agreement is not entered into or does not become effective, or if the Agency Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Stock to be sold thereunder, the undersigned shall be released from all obligations under this Lock-up Agreement.

 

This Lock-up Agreement shall be governed by and construed in accordance with the laws of the State of New York.

 

[The next page is the signature page]

 

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[SIGNATURE PAGE – LOCK-UP AGREEMENT]

 

  Very truly yours,
     
  Signature:  
     
  Print Name:  

 

 

 

 

EXHIBIT E TO AGENCY AGREEMENT

 

OFFICERS AND DIRECTORS OF PROVIDENT PARTIES

 

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EX-2 3 tv525519_ex2.htm EXHIBIT 2

 

Exhibit 2 

 

PROVIDENT BANCORP

 

PLAN OF CONVERSION

 

Adopted by the Board of Trustees
on June 5, 2019

 

Amended July 11, 2019

 

 

 

 

TABLE OF CONTENTS

 

 ARTICLE 1. INTRODUCTION—BUSINESS PURPOSE 1
     
ARTICLE 2. DEFINITIONS 3
     
ARTICLE 3. GENERAL PROCEDURE FOR CONVERSION 11
3.1. Preconditions to Conversion 11
3.2. Submission of Plan to Commissioner and FRB 11
3.3. Special Meeting of Corporators to Approve the Plan 11
3.4. Completion of Conversion and Offering 12
3.5. Bank Articles of Organization and Bylaws 12
3.6. Conversion Procedures 12
3.7. Conversion to Stock Holding Company 13
3.8. Offer and Sale of Holding Company Common Stock 13
     
ARTICLE 4. [RESERVED] 14
     
ARTICLE 5. SHARES TO BE OFFERED 14
5.1. Holding Company Common Stock 14
5.2. Independent Valuation, Purchase Price and Number of Shares 14
     
ARTICLE 6. SUBSCRIPTION RIGHTS AND ORDERS FOR COMMON STOCK 16
6.1. Distribution of Prospectus 16
6.2. Order Forms 16
6.3. Undelivered, Defective, Early or Late Order Form; Insufficient Payment 17
6.4. Payment for Stock 17
     
ARTICLE 7. STOCK PURCHASE PRIORITIES AND OFFERING ALTERNATIVES 18
7.1. Priorities for Offering 18
7.2. Certain Determinations 18
7.3. Minimum Purchase; No Fractional Shares 19
7.4. Overview of Priorities 19
7.5. Priorities For Subscription Offering 19
7.6. Priorities for Direct Community Offering 21
7.7. Syndicated Community Offering or Firm Commitment Underwritten Offering 22
     
ARTICLE 8. ADDITIONAL LIMITATIONS ON PURCHASES 23
8.1. General 23
8.2. Individual Maximum Purchase Limit 23
8.3. Group Maximum Purchase Limit 24
8.4. Purchases by Officers, Directors, Trustees and Corporators 24
8.5. Special Rule for Tax-Qualified Employee Plans 24
8.6. Illegal Purchases 25
8.7. Rejection of Orders 25
8.8. Subscribers in Non-Qualified States or in Foreign Countries 25

 

i 

 

 

8.9. No Offer to Transfer Shares 25
8.10. Confirmation by Purchasers 25
     
ARTICLE 9. POST OFFERING MATTERS 26
9.1. Stock Purchases After the Conversion 26
9.2. Resales of Stock by Management Persons 26
9.3. Stock Certificates 26
9.4. Restriction on Financing Stock Purchases 26
9.5. Stock Benefit Plans 26
9.6. Market for Holding Company Common Stock 28
9.7. Liquidation Accounts 28
9.8. Repurchase of Stock 31
9.9. Conversion Expenses 32
9.10. Public Inspection of Conversion Application 32
9.11. Enforcement of Terms and Conditions 32
9.12. Voting Rights in Converted Stock Holding Company 32
9.13. Restrictions on Acquisition of Bank and Stock Holding Company 32
     
ARTICLE 10. MISCELLANEOUS 33
10.1. Interpretation of Plan 33
10.2. Amendment or Termination of the Plan 34

 

EXHIBITS

 

Exhibit 1.1 Form of Agreement of Merger between Provident Bancorp and Provident Bancorp, Inc., a Massachusetts corporation
   
Exhibit 1.2 Form of Agreement of Merger between Provident Bancorp, Inc., a Massachusetts corporation and Provident Bancorp, Inc., a Maryland corporation

 

ii 

 

 

PROVIDENT BANCORP

 

PLAN OF CONVERSION

 

ARTICLE 1.

Introduction—Business Purpose

 

This Plan of Conversion (the “Plan”) provides for the conversion and reorganization of Provident Bancorp, a Massachusetts-chartered mutual holding company (the “MHC”), into the capital stock form of organization and all steps incident or necessary thereto (the “Conversion”). The MHC currently owns 52.3% of the common stock of Provident Bancorp, Inc., a Massachusetts corporation (the “Mid-Tier Holding Company”), which owns 100% of the common stock of The Provident Bank (the “Bank”). The Bank is a Massachusetts-chartered savings bank headquartered in Amesbury, Massachusetts. Capitalized terms used but not defined in this Article 1 shall have the respective meanings set forth in Article 2 hereof.

 

The Plan, which has been adopted by the Board of Trustees of the MHC, the Board of Directors of the Mid-Tier Holding Company and the Board of Directors of the Bank, is to be carried out under the laws of the Commonwealth of Massachusetts, applicable Regulations of the Massachusetts Division of Banks (the “Division”) and the Board of Governors of the Federal Reserve System (the “FRB”), and other applicable laws and regulations. The Board of Trustees of the MHC currently contemplates that, following the Conversion, all of the capital stock of the Bank will be held by a Maryland corporation (the “Stock Holding Company”) and that the Stock Holding Company will issue and sell shares of its common stock (the “Holding Company Common Stock”) in a Subscription Offering upon the terms and conditions set forth herein to Eligible Account Holders, Supplemental Eligible Account Holders (if any), Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and Employees, Officers, Directors, Trustees or Corporators of the MHC or the Bank, according to the respective priorities set forth in the Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering. Alternatively, any shares not subscribed for in the Subscription Offering and any Direct Community Offering may be offered for sale in a Firm Commitment Underwritten Offering, or in any other manner permitted by the Bank Regulators. All sales of Holding Company Common Stock in a Direct Community Offering, in a Syndicated Community Offering, in a Firm Commitment Underwritten Offering, or in any other manner permitted by the Bank Regulators, will be at the sole discretion of the Board of Trustees of the MHC and the Board of Directors of the Stock Holding Company. As part of the Conversion, each Minority Stockholder will receive Holding Company Common Stock in exchange for Minority Shares.

 

The Plan is subject to the approval of various regulatory agencies, and must be approved by a majority of the total votes of the MHC’s Corporators and a majority of the MHC’s Independent Corporators (who shall constitute not less than 60% of all Corporators) eligible to be cast at the annual meeting or at a special meeting called for such purpose. This Plan also must be approved by at least (i) two-thirds of the total votes eligible to be cast by Stockholders at the Meeting of Stockholders, and (ii) a majority of the total votes eligible to be cast by Minority Stockholders at the Meeting of Stockholders.

 

 1 

 

 

The Conversion is to be effectuated as follows, or in any other manner that is consistent with the purposes of the Plan and applicable laws and regulations. The Mid-Tier Holding Company will establish the Stock Holding Company as a first-tier stock holding company subsidiary. The MHC will merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity pursuant to the Agreement and Plan of Merger attached hereto as Exhibit 1.1 (the “MHC Merger”). As part of the MHC Merger, shares of Mid-Tier Holding Company common stock held by the MHC will be canceled and all persons holding liquidation rights in the MHC will constructively receive liquidation rights in the Mid-Tier Holding Company in exchange for their liquidation rights in the MHC. Immediately after the MHC Merger, the Mid-Tier Holding Company will merge with the Stock Holding Company, with the Stock Holding Company as the resulting entity (the “Mid-Tier Merger”), pursuant to the Agreement and Plan of Merger attached hereto as Exhibit 1.2, whereby the Bank will become the wholly owned subsidiary of the Stock Holding Company. As part of the Mid-Tier Merger, the liquidation rights held by persons in the Mid-Tier Holding Company pursuant to the MHC Merger will automatically, without further action on the part of such persons, be exchanged for an interest in the Stock Holding Company Liquidation Account. Immediately after the Mid-Tier Merger, the Stock Holding Company will offer for sale shares of Holding Company Common Stock in the Offering (the “Offering Shares”). The Stock Holding Company will contribute at least 50% of the net proceeds of the Offering to the Bank in constructive exchange for additional shares of common stock of the Bank and in exchange for the Bank Liquidation Account.

 

The foregoing is subject to modification as necessary to address tax or regulatory considerations. Upon the Conversion, Eligible Account Holders and the Supplemental Eligible Account Holders (if a Supplemental Eligibility Record Date is established) will be granted interests in the liquidation account to be established by the Bank and the Stock Holding Company pursuant to Section 9.7 hereof.

 

The primary purposes of the Conversion are to: (1) enhance the Bank’s regulatory capital position; (2) transition the Bank’s organization to a stock holding company structure, which gives the Stock Holding Company greater flexibility to access the capital markets compared to the Bank’s existing mutual holding company structure; (3) improve the liquidity of the existing shares of common stock; (4) facilitate the Stock Holding Company’s ability to pay dividends to its public stockholders; and (5) facilitate future mergers and acquisitions. In addition, the Board of Trustees and senior management believe that the Conversion will be beneficial to the population within the Bank’s primary market area. The Conversion will provide local customers and other residents with an additional opportunity to become equity owners of the Bank, and thereby participate in possible stock price appreciation and cash dividends, which is consistent with the objective of being a locally-owned financial institution serving local financial needs. The Board of Trustees and management believe that, through local stock ownership, current customers and non-customers who purchase Holding Company Common Stock will seek to enhance the financial success of the Bank through consolidation of their banking business and increased referrals to the Bank.

 

 2 

 

 

The Bank became a stock-form subsidiary of the Mid-Tier Holding Company when the Bank reorganized into the two-tier mutual holding company structure in 2011. Accordingly, the Conversion will not affect the corporate existence of the Bank. The Bank’s business and operations will not be affected or interrupted by the Conversion, and the Bank will continue as the same legal entity after the Conversion. The Conversion will have no impact on depositors, borrowers or other customers of the Bank. Upon the Conversion, each deposit account holder of the Bank will continue to hold exactly the same deposit account as the holder held immediately before the Conversion, and such deposit account holder shall have all of the same rights and privileges after the Conversion. All deposit accounts in the Bank following the Conversion will continue to be insured up to the legal maximum by the Deposit Insurance Fund of the FDIC and the Depositors Insurance Fund established by Massachusetts General Laws for amounts in excess of FDIC coverage limits, in the same manner as such deposit accounts were insured immediately before the Conversion. There will be no change in the Bank’s loans. The Conversion will not result in any reduction of the Bank’s reserves or net worth.

 

ARTICLE 2.

Definitions

 

As used in the Plan, the terms set forth below have the following meanings:

 

Acting in Concert. The term “Acting in Concert” means Persons seeking to combine or pool their voting or other interests (such as subscription rights) 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 the Board of Trustees of the MHC or Officers delegated by such Board and may be based on any evidence upon which the Board or such delegate(s) chooses to rely, including, without limitation, joint account relationships or the fact that such Persons have filed joint Schedules 13D with the SEC with respect to other companies; provided, however, that the determination of whether a group is Acting in Concert remains subject to review by the Division. Persons living at the same address, whether or not related, will be deemed to be Acting in Concert unless otherwise determined by the Board or such delegate(s). Trustees and Corporators of the MHC and Directors of the Mid-Tier Holding Company, the Stock Holding Company and the Bank shall not be deemed to be Acting in Concert solely as a result of their membership on any such board or boards.

 

Affiliate. An “Affiliate” of, or a Person “Affiliated” with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified.

 

Application. The application, including a copy of the Plan, submitted by the MHC to the Commissioner for approval of the Conversion.

 

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Associate. The term “Associate,” when used to indicate a relationship with any Person, means: (a) any corporation or organization (other than the Bank, the Stock Holding Company, the Mid-Tier Holding Company, the MHC or a majority-owned subsidiary of any thereof) of which such Person is an Officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; or (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a Director or Trustee or Officer of the MHC, the Stock Holding Company, the Mid-Tier Holding Company, or the Bank, or any subsidiary thereof; provided, however, that any Employee Plan shall not be deemed to be an Associate of any Corporator, Director, Trustee or Officer of the MHC, the Mid-Tier Holding Company, the Stock Holding Company or the Bank, and provided that, for purposes of aggregating total shares that may be held by Officers and Directors, the term “Associate” does not include any Tax-Qualified Employee Plan. When used to refer to a Person other than a Corporator, Officer, Trustee or Director of the Bank, the MHC, the Mid-Tier Holding Company or the Stock Holding Company, the MHC in its sole discretion may determine the Persons that are Associates of other Persons. Trustees and Corporators of the MHC and Directors of the Stock Holding Company, the Mid-Tier Holding Company and the Bank shall not be deemed to be Associates solely as a result of their membership on such board or boards.

 

Bank. The Provident Bank.

 

Bank Liquidation Account. The account established in the Bank representing the liquidation interests received by Eligible Account Holders and Supplemental Eligible Account Holders (if any) in connection with the Conversion.

 

Bank Regulators. The Commissioner, the FRB and other bank regulatory agencies, if any, responsible for reviewing and approving the Conversion, including the ownership of the Bank by the Stock Holding Company and the mergers required to effect the Conversion.

 

BHCA. The Bank Holding Company Act of 1956, as amended.

 

Code. The Internal Revenue Code of 1986, as amended.

 

Commissioner. The Commissioner of Banks of the Commonwealth of Massachusetts.

 

Community Offering. A Direct Community Offering and/or a Syndicated Community Offering.

 

Control (including the terms “controlling”, “controlled by”, and “under common control with”). The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

 

Conversion. The Conversion of the MHC to stock form pursuant to the Plan, and all steps incident or necessary thereto.

 

Conversion Shares. The Offering Shares and the Exchange Shares.

 

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Corporator. A corporator, as defined in Title 209, Section 33.02 of the Code of Massachusetts Regulations, of the MHC.

 

Demand Account. Non-interest-bearing demand deposits that are subject to check or to withdrawal or transfer on negotiable or transferable order to the Bank and that are permitted to be issued by statute, regulation, or otherwise and are payable on demand.

 

Deposit Account. Any withdrawable deposit account offered by the Bank, including, without limitation, savings accounts, NOW account deposits, certificates of deposit, demand deposits, Keogh Plans, SEPs and Individual Retirement Accounts for which the Bank acts as custodian or trustee, and such other types of deposit accounts as may then have been authorized by Massachusetts or federal law and regulations, but not including repurchase agreements, savings bank life insurance policies, certain escrow accounts, or trust department accounts held separately from deposit accounts in accordance with Section 4 of Chapter 167G of the Massachusetts General Laws.

 

Direct Community Offering. The offering for sale directly by the Stock Holding Company of Holding Company Common Stock (a) to the Local Community, as provided in Exhibit 7.6 of the Plan, with preference given to natural persons residing in the Local Community, and then (b) to the public at large. The Direct Community Offering may be conducted simultaneously with the Subscription Offering.

 

Directors. The directors of the Bank, the Mid-Tier Holding Company and/or the Stock Holding Company, as the context may dictate.

 

Division. The Division of Banks of the Commonwealth of Massachusetts.

 

Eligibility Record Date. May 31, 2018, the date for determining who qualifies as an Eligible Account Holder.

 

Eligible Account Holder. Any Person holding a Qualifying Deposit on the Eligibility Record Date.

 

Employee. All Persons who are employed by the Bank, the Mid-Tier Holding Company or the MHC. The term “Employee” does not include a Trustee, Director or Officer.

 

Employee Plan. Any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Benefit Plan.

 

ESOP. The employee stock ownership plan established by the Bank.

 

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Estimated Valuation Range. The range of the estimated consolidated pro forma market value of the Stock Holding Company, which shall also be equal to the range of the estimated pro forma market value of the aggregate Conversion Shares to be issued in the Conversion. The Estimated Valuation Range shall be based on the Independent Valuation determined by the Independent Appraiser prior to the Subscription Offering, as it may be amended from time to time thereafter. The Independent Valuation of the pro forma market value of the Stock Holding Company established by the Independent Appraiser shall form the midpoint of the Estimated Valuation Range. The maximum of the Estimated Valuation Range may vary as much as 15% above the midpoint of the Estimated Valuation Range (the “Maximum of the Estimated Valuation Range”) and 15% below the midpoint of the Estimated Valuation Range. The Maximum of the Estimated Valuation Range may be increased by up to 15% subsequent to the commencement of the Offering to reflect changes in demand for the Holding Company Common Stock or changes in market conditions.

 

Exchange Act. The Securities Exchange Act of 1934, as amended.

 

Exchange Offering. The offering of Holding Company Common Stock to Minority Stockholders in exchange for Minority Shares.

 

Exchange Ratio. The rate at which shares of Holding Company Common Stock are exchanged for Minority Shares upon consummation of the Conversion. The Exchange Ratio (which shall be rounded to four decimal places) shall be determined such that as of the closing of the Conversion the rate will result in the Minority Stockholders owning in the aggregate the same percentage of the outstanding shares of Holding Company Common Stock immediately upon completion of the Conversion as the percentage of Mid-Tier Holding Company common stock owned by them in the aggregate immediately prior to the consummation of the Conversion before giving effect to (a) cash in lieu of any fractional shares and (b) any shares of Offering Shares purchased by Minority Stockholders in the Offering.

 

Exchange Shares. The shares of Holding Company Common Stock issued to Minority Stockholders in the Exchange Offering.

 

FDIC. The Federal Deposit Insurance Corporation.

 

Firm Commitment Underwritten Offering. The offering, at the sole discretion of the Stock Holding Company, of Offering Shares not subscribed for in the Subscription Offering and any Direct Community Offering, to members of the general public through one or more underwriters. A Firm Commitment Underwritten Offering may occur following the Subscription Offering and the Direct Community Offering, if any.

 

FRB. The Board of Governors of the Federal Reserve System.

 

FRB Applications. The FRB Conversion Application to be submitted to the FRB by the MHC and the Holding Company Application to be submitted to the FRB by the Stock Holding Company.

 

FRB Conversion Application. The FRB Conversion Application seeking the FRB’s prior approval of, or non-objection to, the MHC’s conversion from mutual to stock form.

 

Group Maximum Purchase Limit. The limitation on the purchase of shares of Holding Company Common Stock established by Section 8.3 hereof, as such limit may be increased pursuant to said Section 8.3.

 

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Holding Company Application. The Holding Company Application on Form FR Y-3 for the FRB’s prior approval of the Stock Holding Company’s acquisition of the Bank.

 

Holding Company Common Stock. The shares of common stock to be issued by the Stock Holding Company in the Conversion.

 

Independent Appraiser. The appraiser retained by the MHC to prepare an independent appraisal of the pro forma market value of the Conversion Shares.

 

Independent Corporator.  A Corporator who is not an Employee, Officer or Trustee of the MHC or the Mid-Tier Holding Company, or an Employee, Officer, Director, or “significant borrower” of the Bank, as determined by the Commissioner.

 

Independent Valuation.  The independent valuation of the pro forma market value of the Conversion Shares, as determined by the Independent Appraiser.

 

Individual Maximum Purchase Limit.  The limitation on the purchase of shares of Holding Company Common Stock established by Section 8.2 hereof, as such limit may be increased pursuant to said Section 8.2.

 

Information Statement.  The information statement required to be sent to the Corporators in connection with the Special Meeting of Corporators.

 

Local Community.  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.

 

Majority Ownership Interest. A fraction, the numerator of which is equal to the number of shares of Mid–Tier Holding Company common stock owned by the MHC immediately prior to the completion of the Conversion, and the denominator of which is equal to the total number of shares of Mid–Tier Holding Company common stock issued and outstanding immediately prior to the completion of the Conversion.

 

Marketing Agent.  The broker-dealer responsible for managing the Offering and sale of the Holding Company Common Stock.

 

Market Maker.  A broker-dealer (i.e., any Person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security: (a)(i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system, or (ii) furnishes bona fide competitive bid and offers quotations on request; and (b) is ready, willing and able to effect transactions in reasonable quantities at the dealer’s quoted prices with other brokers or dealers.

 

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Meeting of Stockholders. The special or annual meeting of stockholders of the Mid-Tier Holding Company and any adjournments thereof held to consider and vote upon this Plan.

 

MHC. Provident Bancorp, the Massachusetts-chartered mutual holding company for the Bank.

 

Mid-Tier Holding Company. Provident Bancorp, Inc., the Massachusetts corporation which owns 100% of the common stock of the Bank.

 

Minority Shares. Any outstanding common stock of the Mid-Tier Holding Company, or shares of common stock of the Mid-Tier Holding Company issuable upon the exercise of options or grant of stock awards, owned by persons other than the Mutual Holding Company.

 

Minority Stockholder. Any owner of Minority Shares.

 

Non-Tax-Qualified Employee Benefit Plan.  Any defined benefit plan or defined contribution plan which is not qualified under Section 401 of the Code.

 

Offering.  The Subscription Offering, the Direct Community Offering, if any, the Syndicated Community Offering, if any, and the Firm Commitment Underwritten Offering, if any. The term “Offering” does not include Holding Company Common Stock issued in the Exchange Offering.

 

Offering Range. The range of the number of shares of Holding Company Common Stock offered for sale in the Offering. The Offering Range will be equal to the Estimated Valuation Range multiplied by the Majority Ownership Interest divided by the Subscription Price.

 

Offering Shares. Shares of Holding Company Common Stock offered and sold in the Offering. Offering Shares do not include Exchange Shares.

 

Officer.  The Chairman of the Board, the President, any officer of the level of vice president or above, the Clerk, the Secretary and the Treasurer of an entity.

 

Order Form. Any form (together with any cover letter and acknowledgments) sent to any Participant or Person containing among other things a description of the alternatives available to such Person under this Plan and by which any such Person may make elections regarding subscriptions for Offering Shares.

 

Participant. Any Eligible Account Holder, Supplemental Eligible Account Holder, Tax-Qualified Employee Plan, or any Employee, Officer, Director, Trustee or Corporator of the MHC, the Mid-Tier Holding Company or the Bank.

 

Person.  An individual, corporation, partnership, association, joint-stock company, trust (including Individual Retirement Accounts, SEPs and Keogh Accounts), unincorporated organization, government entity or political subdivision thereof or any other entity.

 

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Plan.  This Plan of Conversion as it may hereafter be amended in accordance with its terms.

 

Qualifying Deposit.  The aggregate balances of all Deposit Accounts of an Eligible Account Holder as of the close of business on the Eligibility Record Date or of a Supplemental Eligible Account Holder (if any) as of the close of business on the Supplemental Eligibility Record Date (if required), as the case may be, provided that, in either case, such aggregate balance is not less than $50. In determining the aggregate balance, any Deposit Account having a negative balance on the Eligibility Record Date or Supplemental Eligibility Record Date shall be disregarded.

 

Range Maximum.  The number of Offering Shares that is 15% above the midpoint of the Offering Range.

 

Range Minimum.  The number of Offering Shares that is 15% below the midpoint of the Offering Range.

 

Regulations.  The regulations of the Division regarding mutual-to-stock conversions of mutual holding companies and the regulations of the FRB (to the extent deemed applicable by the FRB).

 

Resident. 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. To the extent the Person is a corporation or other business entity, the principal place of business or headquarters of such Person must be in the Local Community. To the extent a Person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, circumstances of the trustee shall be examined for purposes of this definition. The MHC may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a Person is a resident. In all cases, however, such a determination shall be in the sole discretion of the MHC. A Participant must be a “resident” of the Local Community for purposes of determining whether such Person “resides”, or is “residing”, in the Local Community as such term is used in this Plan.

 

Savings Account. Any withdrawable account, except a Demand Account, a tax and loan account, a note account, a United States Treasury general account, or a United States Treasury time deposit-open account.

 

SEC.  The Securities and Exchange Commission.

 

Special Meeting of Corporators.  The Special Meeting of Corporators called for the purpose of voting on the Plan, which may be the Annual Meeting of Corporators.

 

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Stock Holding Company. The stock-form holding company that will (a) be a Maryland corporation known as Provident Bancorp, Inc., (b) issue Holding Company Common Stock in the Conversion and (c) own 100% of the common stock of the Bank upon consummation of the Conversion.

 

Stock Holding Company Liquidation Account.  The account established by the Stock Holding Company representing the liquidation interests received by Eligible Account Holders and Supplemental Eligible Account Holders (if any) in connection with the Conversion in exchange for their interests in the MHC immediately prior to the Conversion.

 

Stockholder. Any owner of the outstanding common stock of the Mid-Tier Holding Company, including the MHC.

 

Subscription Offering. The offering of Holding Company Common Stock for subscription by Persons holding subscription rights pursuant to the Plan.

 

Subscription Price. The price per Offering Share to be paid by Participants and others in the Offering. The Subscription Price will be determined by the Board of Trustees of the MHC and the Board of Directors of the Stock Holding Company and fixed prior to the commencement of the Subscription Offering.

 

Supplemental Eligible Account Holder.  Any Person (other than Officers, Directors, Trustees, or Corporators of the MHC and the Bank and their Associates) holding a Qualifying Deposit on the Supplemental Eligibility Record Date (if established).

 

Supplemental Eligibility Record Date. If the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to approval of the Application by the Commissioner, a supplemental record date shall be established for determining who qualifies as a Supplemental Eligible Account Holder. If required, the Supplemental Eligibility Record Date shall be August 31, 2018.

 

Syndicated Community Offering. The offering, at the sole discretion of the Holding Company, of Offering Shares not subscribed for in the Subscription Offering and the Direct Community Offering, to members of the general public through a syndicate of broker-dealers.

 

Tax-Qualified Employee Plan.  Any defined benefit plan or defined contribution plan (including the ESOP, any stock bonus plan, profit-sharing plan, 401(k) plan or other plan) of the Bank, the Stock Holding Company, the MHC or any of their Affiliates, which, with its related trusts, meets the requirements to be qualified under Section 401 of the Code.

 

Trustees. The trustees of the MHC.

 

Voting Record Date. The date fixed by the Board of Directors of the Mid-Tier Holding Company for determining eligibility to vote at the Meeting of Stockholders.

 

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ARTICLE 3.

General Procedure for Conversion

 

3.1.          Preconditions to Conversion.  The Conversion is expressly conditioned upon prior occurrence of the following:

 

3.1.1    Approval of the Plan by the affirmative vote of a majority of the total votes of the MHC’s Corporators and a majority of the MHC’s Independent Corporators (who shall constitute not less than 60% of all Corporators) eligible to be cast at the annual meeting or at a special meeting called for such purpose.

 

3.1.2    Approval of the Plan by (i) two-thirds of the total votes eligible to be cast by Stockholders at the Meeting of Stockholders, and (ii) a majority of the total votes eligible to be cast by Minority Stockholders at the Meeting of Stockholders.

 

3.1.3    Issuance of the Exchange Shares.

 

3.1.4    Prior receipt of the private letter rulings or opinions of counsel set forth in Section 3.2 of this Plan.

 

3.1.5    Approval by the Commissioner of the Application, including the Plan.

 

3.1.6    Approval by the FRB of the FRB Applications.

 

3.2.         Submission of Plan to Commissioner and FRB.  Upon approval by at least two-thirds of all Trustees of the MHC, the Plan will be submitted to the Commissioner as part of the Application, and to the FRB as part of the FRB Applications, together with a copy of the proposed Information Statement and all other material required by the Regulations, for approval or non-objection, as applicable, by the Commissioner and the FRB. The MHC must also receive either private letter rulings from the Internal Revenue Service and the Massachusetts Department of Revenue or opinions of its counsel as to the federal income tax consequences of the Conversion and of its tax accountants as to the Massachusetts income tax consequences of the Conversion, in either case substantially to the effect that the Conversion will not result in a taxable reorganization of the MHC, the Mid-Tier Holding Company, the Bank, the Stock Holding Company or (provided the subscription rights have no value) the Bank’s depositors under the Code, or Massachusetts law. Upon a determination by the Commissioner that the Application is complete, the MHC will publish and post public announcements and notices of the Application as required by the Commissioner and the Regulations. The MHC, the Mid-Tier Holding Company and the Stock Holding Company will also publish any notice required in connection with the Holding Company Application and any other applications required to complete the Conversion.

 

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3.3.         Special Meeting of Corporators to Approve the Plan.  Following approval of the Plan by the Commissioner, the Special Meeting of Corporators shall be scheduled in accordance with the MHC’s Bylaws. The Plan (as may be revised in response to comments received from the Commissioner and the FRB), and any information required pursuant to the Regulations, will be submitted to the Corporators for their consideration and approval at the Special Meeting of Corporators. The MHC will mail to each Corporator a copy of the Information Statement not less than seven (7) days before the Special Meeting of Corporators. Following approval of the Plan by the Corporators, the MHC intends to take such steps as may be appropriate pursuant to applicable laws and regulations to effect the Conversion.

 

3.4.         Completion of Conversion and Offering.  The Board of Trustees of the MHC, and the Boards of Directors of the Mid-Tier Holding Company, the Stock Holding Company and the Bank will take all necessary steps to complete the Conversion and the Offering, including the timely filing of all necessary applications to appropriate regulatory authorities, and the filing with the SEC of a registration statement to register the sale and/or issuance of Conversion Shares and preliminary proxy materials, applications and other information in connection with the solicitation of Stockholder approval of this Plan.

 

3.5.         Bank Articles of Organization and Bylaws. The current Articles of Organization and Bylaws of the Bank are to be amended to add the Bank Liquidation Account.

 

3.6.         Conversion Procedures.  

 

3.6.1   The Conversion will be effected in any manner selected by the Board of Trustees of the MHC that is consistent with the purposes of this Plan and applicable laws and regulations. The choice of which method to use to effect the Conversion will be made by the Board of Trustees of the MHC immediately prior to the consummation of the Conversion, subject to any applicable approvals required of Bank Regulators.

 

3.6.2   Approval of the Plan by the Board of Trustees and Corporators of the MHC shall also constitute (a) approval of the formation of the Stock Holding Company as set forth herein, (b) approval by the MHC (on its own behalf and as the sole shareholder of the Mid-Tier Holding Company) of a combination, by merger or otherwise, as provided herein, of the MHC with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company being the surviving entity and whereby the existing outstanding shares of capital stock of the Mid-Tier Holding Company held by the MHC will be canceled and all persons holding liquidation rights in the MHC will constructively receive liquidation rights in the Mid-Tier Holding Company in exchange for their liquidation rights in the MHC, (c) approval by the Mid-Tier Holding Company of the combination, by merger or otherwise, of the Mid-Tier Holding Company with and into the Stock Holding Company with the Stock Holding Company being the surviving entity and whereby (i) the existing outstanding shares of capital stock of the Stock Holding Company held by the Mid-Tier Holding Company will be canceled, (ii) the former holders of liquidation rights in the MHC who constructively received liquidation rights in the Mid-Tier Holding Company will receive an interest in the Liquidation Account in the Stock Holding Company in exchange for their constructive liquidation rights in the Mid-Tier Holding Company, and (iii) each of the Minority Shares shall be converted into and become the right to receive Holding Company Common Stock based upon the Exchange Ratio, (d) approval by the Bank to constructively issue additional shares of common stock to the Stock Holding Company and to establish the Bank Liquidation Account in exchange for a portion of the net proceeds of the Offering, and (e) approval of any other of the transactions that are necessary to implement the Plan.

 

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3.6.3   As part of the Conversion, each of the Minority Shares outstanding immediately prior to consummation of the Conversion shall automatically, without further action on the part of the holders thereof, be converted into and become the right to receive Holding Company Common Stock based upon the Exchange Ratio. The basis for exchange of Minority Shares for Holding Company Common Stock shall be fair and reasonable. Options to purchase shares of Mid-Tier Holding Company common stock which are outstanding immediately prior to the consummation of the Conversion shall be converted into options to purchase shares of Holding Company 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 so that the aggregate exercise price remains unchanged, and with the duration of the option remaining unchanged.

 

3.7.         Conversion to Stock Holding Company.  Upon the consummation of the Conversion, the Stock Holding Company will be authorized to exercise any and all powers, rights and privileges, and will be subject to all limitations applicable to bank holding companies under applicable laws and regulations. The Officers of the Mid-Tier Holding Company immediately prior to the Conversion shall be the Officers of the Stock Holding Company immediately following the Conversion, in each case to serve until their terms of office expire and until their successors are elected and qualified. The Stock Holding Company will own 100% of the common stock of the Bank upon consummation of the Conversion in exchange for a portion of the net proceeds received from the sale of the Offering Shares and in exchange for the establishment of the Bank Liquidation Account.

 

3.8.         Offer and Sale of Holding Company Common Stock.    

 

3.8.1  Subject to approval of the Plan by the Corporators, and the receipt of all required regulatory approvals, the Holding Company Common Stock will be offered for sale in a Subscription Offering simultaneously to Eligible Account Holders, Supplemental Eligible Account Holders (if any), and any Tax-Qualified Employee Benefit Plans in the manner set forth in Article 7 hereof. The Subscription Offering period will run for no less than twenty (20) but no more than forty-five (45) days from the date of distribution of the Subscription Offering materials, unless extended by the MHC with the approval of the Commissioner and the FRB, if required. If feasible, any Offering Shares remaining may then be sold to the general public through a Direct Community Offering as provided in Article 7 hereof, which may be held either subsequent to or concurrently with the Subscription Offering.

 

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3.8.2   If feasible, any Offering Shares remaining unsold after completion of the Subscription Offering and any Direct Community Offering may, in the sole discretion of the Stock Holding Company, be sold in a Syndicated Community Offering or a Firm Commitment Underwritten Offering, or in any manner receiving the required approval of the Bank Regulators and other applicable regulatory agencies that will achieve a widespread distribution of the Holding Company Common Stock. The issuance of Holding Company Common Stock in the Subscription Offering and any Direct Community Offering will be consummated simultaneously on the date the sale of Holding Company Common Stock is consummated in any Syndicated Community Offering or Firm Commitment Underwritten Offering, and only if the required minimum number of shares of Holding Company Common Stock has been issued. The sale of all shares of Holding Company Common Stock to be sold pursuant to the Plan must be completed within forty-five (45) days after expiration of the Subscription Offering; subject to the extension of such forty-five (45) day period by the Stock Holding Company with the approval of the Commissioner and the FRB, if required. The Stock Holding Company may seek one or more extensions of such forty-five (45) day period if necessary to complete the sale of all shares of Holding Company Common Stock. If all available shares of Holding Company Common Stock are sold in the Subscription Offering and any Direct Community Offering, there will be no Syndicated Community Offering or Firm Commitment Underwritten Offering and the Conversion will be consummated upon completion of the Subscription Offering or the Direct Community Offering, as the case may be.

 

ARTICLE 4.

[Reserved]

 

ARTICLE 5.
Shares to be Offered

 

5.1.         Holding Company Common Stock.  The Conversion Shares, when issued in accordance with this Plan, shall be fully paid and nonassessable. The total number of shares of Holding Company Common Stock authorized under the Stock Holding Company’s Articles of Incorporation will exceed the number of Conversion Shares issued. HOLDING COMPANY COMMON STOCK WILL NOT BE COVERED BY DEPOSIT INSURANCE.

 

5.2.         Independent Valuation, Purchase Price and Number of Shares.   

 

5.2.1    Independent Valuation.  An Independent Appraiser shall be employed by the MHC to provide it with an Independent Valuation, which value shall be included in the prospectus (as described in Section 6.1 hereof) filed with the Commissioner, the FRB and the SEC. The Trustees of the MHC shall review the methodology and reasonableness of the Independent Valuation. The Independent Valuation will be made by a written report to the MHC, contain the factors upon which the Independent Valuation was made and conform to procedures adopted by the Commissioner and the FRB. The Independent Valuation of the pro forma market value of the Conversion Shares established by the Independent Appraiser shall form the midpoint of the Estimated Valuation Range. The maximum of the Estimated Valuation Range may vary as much as 15% above the midpoint of the Estimated Valuation Range (“Range Maximum”) and 15% below the midpoint of the Estimated Valuation Range (“Range Minimum”). The Independent Appraiser shall also present to the MHC at the close of the Subscription Offering a valuation of the pro forma market value of the Conversion Shares.

 

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5.2.2    Subscription Price. All shares sold in the Offering will be sold at a uniform price per share (the “Subscription Price”), preliminarily set at $10.00 per share, which price will be definitively determined before the commencement of the Offering. If there is a Syndicated Community Offering or Firm Commitment Underwritten Offering, the price per share at which the Holding Company Common Stock is sold in such Syndicated Community Offering or Firm Commitment Underwritten Offering shall be equal to the per share purchase price of the shares sold in the Subscription Offering and the Direct Community Offering.

 

5.2.3    Number of Shares. The Offering Range of Offering Shares to be offered for sale in the Offering will be determined by the Boards of Trustees of the MHC and the Board of Directors of the Stock Holding Company immediately before the commencement of the Subscription Offering based on the Independent Valuation, the Estimated Valuation Range and the Subscription Price. The Independent Valuation, and such number of shares, shall be subject to adjustment thereafter if necessitated by market or financial conditions, with the approval of the Commissioner and the FRB, if necessary. In particular, the total number of shares may be increased by up to 15% above the Range Maximum if the Independent Valuation is increased subsequent to the commencement of the Subscription Offering to reflect changes in market and financial conditions or demand for the Holding Company Common Stock, provided that the resulting aggregate purchase price is not more than 15% above the Range Maximum.

 

5.2.4    Increase or Decrease in Number of Shares.  The Offering Range may be increased or decreased by the Stock Holding Company, subject to the following provisions. In the event that the number of Offering Shares ordered is below the Range Minimum, or materially above the Range Maximum, resolicitation of purchasers may be required, provided, however, that a resolicitation will not be required if the number of shares increases by up to 15% above the Range Maximum. Any such resolicitation shall be effected in such manner and within such time as the Stock Holding Company shall establish, with the approval of the Commissioner and the FRB, if required.

 

5.2.5    Confirmation of Valuation.  Notwithstanding the foregoing, no shares of Holding Company Common Stock will be issued unless, prior to the consummation of the Offering, the Independent Appraiser confirms to the MHC, the Stock Holding Company, the Commissioner and the FRB (if required), that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate number of Conversion Shares sold in the Offering multiplied by the Subscription Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the Stock Holding Company. An increase in the aggregate value of the Offering Shares by up to 15% above the Range Maximum would not be deemed to be material. If such confirmation is not received, the Stock Holding Company may cancel the Offering and the Exchange Offering, extend the Offering and establish a new Subscription Price and/or Estimated Valuation Range, extend, reopen or hold a new Offering and Exchange Offering, or take such other action as the Commissioner and the FRB may permit.

 

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ARTICLE 6.

Subscription Rights and Orders for Common Stock

 

6.1.         Distribution of Prospectus.  The Offering shall be conducted in compliance with the Regulations and applicable SEC regulations. As soon as practicable after the Stock Holding Company’s registration statement (including the prospectus therein) have been declared effective and/or approved for use by the SEC and the Commissioner (and the FRB if required), copies of the prospectus and Order Forms will be distributed to all eligible Participants in the Subscription Offering at their last known addresses appearing on the records of the Bank and the MHC for the purpose of subscribing for shares of Holding Company Common Stock in the Subscription Offering. Prospectuses and Order Forms will also be made available (if and when a Direct Community Offering is held) for use by Persons to whom shares of Holding Company Common Stock are offered in the Direct Community Offering.

 

6.2.         Order Forms.  Each Order Form will be preceded or accompanied by the prospectus describing the Stock Holding Company, the Bank, the Holding Company Common Stock and the Subscription and Community Offerings. Each Order Form will contain, among other things, the following:

 

6.2.1   A specified date by which all Order Forms must be received by the Stock Holding Company, which date shall be not less than 20 nor more than 45 days following the date on which the Order Forms are first mailed by the Stock Holding Company, and which date will constitute the expiration of the Subscription Offering, unless extended;

 

6.2.2   The Subscription Price per share for shares of Holding Company Common Stock to be sold in the Offering;

 

6.2.3   A description of the minimum and maximum number of shares of Holding Company Common Stock that may be subscribed for pursuant to the exercise of subscription rights or otherwise purchased in the Offering;

 

6.2.4   Instructions as to how the recipient of the Order Form is to indicate thereon the number of shares of Holding Company Common Stock for which such Person elects to subscribe and the available alternative methods of payment therefor;

 

6.2.5   An acknowledgment that the recipient of the Order Form has received a copy of the prospectus before execution of the Order Form;

 

6.2.6   A statement indicating the consequences of failing to properly complete and return the Order Form, including a statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Stock Holding Company within the Subscription Offering period such properly completed and executed Order Form, together with a payment in the full amount of the purchase price as specified in the Order Form (including, if the MHC so permits, by authorization of withdrawal from a Savings Account or certificate of deposit at the Bank) for the shares of Holding Company Common Stock for which the recipient elects to subscribe in the Subscription Offering; and

 

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6.2.7   A statement to the effect that the executed Order Form, once received by the Stock Holding Company, may not be modified or amended by the subscriber without the consent of the Stock Holding Company.

 

Notwithstanding the above, the Stock Holding Company reserves the right in its sole discretion to accept or reject orders received on photocopied or faxed Order Forms.

 

6.3.         Undelivered, Defective, Early or Late Order Form; Insufficient Payment.  In the event Order Forms (a) are not delivered for any reason or are returned undelivered to the Stock Holding Company by the United States Postal Service, (b) are not received by the Stock Holding Company or are received by the Stock Holding Company after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment for the shares of Holding Company Common Stock subscribed for (including cases in which Savings Accounts or certificates of deposit from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a “no mail” order placed in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed Order Form within the time period specified thereon; provided, however, that the Stock Holding Company may, but will not be required to, waive any immaterial irregularity on any Order Form or require the submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as the Stock Holding Company may specify, and all interpretations by the MHC and the Stock Holding Company of terms and conditions of this Plan and of the Order Forms will be final, subject and approval of the Commissioner.

 

6.4.         Payment for Stock. 

 

6.4.1   All payments for Holding Company Common Stock subscribed for or ordered in the Offering must be delivered in full to the Stock Holding Company, together with a properly completed and executed Order Form (except in the case of the Firm Commitment Underwritten Offering in which case an Order Form may or may not be required in connection with subscriptions), on or before the expiration date specified on the Order Form, unless such date is extended by the MHC and the Stock Holding Company; provided, further, that if any Employee Plan subscribes for shares during the Subscription Offering, such plans will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Holding Company Common Stock subscribed for by such plans at the Subscription Price immediately prior to consummation of the Offering, provided, further, that, in the case of the ESOP, there is in force from the time of its subscription until the consummation of the Offering a loan commitment to lend to the ESOP, at such time, the aggregated Subscription Price of the shares for which it subscribed. Payment for Holding Company Common Stock may also be made by a participant in an Employee Plan (including the Bank’s 401(k) plan) causing funds held for such participant’s benefit by an Employee Plan to be paid over for such purchase to the extent that such plan allows participants or any related trust established for the benefit of such participants to direct that some or all of their individual accounts or sub-accounts be invested in Holding Company Common Stock.

 

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6.4.2   Payment for Holding Company Common Stock shall be made either by personal check, bank draft or money order, or if a purchaser has a Savings Account or certificate of deposit in the Bank (and if the MHC has elected to permit such withdrawals from the type of Savings Account or certificate of deposit maintained by such Person), such purchaser may pay for the shares subscribed for by authorizing the Bank to make a withdrawal from the purchaser’s Savings Account or certificate of deposit at the Bank in an amount equal to the aggregate purchase price of such shares. No wire transfers will be accepted without prior approval from the MHC. Any authorized withdrawal from a Savings Account or a certificate of deposit shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate of deposit, and the remaining balance does not meet the applicable minimum balance requirements, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the passbook rate. Funds for which a withdrawal is authorized will remain in the purchaser’s Deposit Account but may not be used by the purchaser pending consummation of the Conversion or expiration of the 45-day period (or such longer period as may be approved by the Commissioner) following termination of the Subscription Offering, whichever occurs first. Upon consummation of the Conversion, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Subscription Price. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect. Interest on checks, money orders and bank drafts will be paid by the Bank at the Bank’s passbook rate. Such interest will be paid from the date payment is received by the Bank until consummation or termination of the Conversion. If for any reason the Conversion is not consummated, all payments made by subscribers in the Conversion will be refunded to them with interest. In case of amounts authorized for withdrawal from Savings Accounts or certificates of deposit, refunds will be made by canceling the authorization for withdrawal.

 

ARTICLE 7.
Stock Purchase Priorities and Offering Alternatives

 

7.1.         Priorities for Offering.  All purchase priorities established by this Article 7 shall be subject to the purchase limitations set forth in, and shall be subject to adjustment as provided in, Article 8 of the Plan. In addition to the priorities set forth in this Article 7, the MHC may establish other priorities for the purchase of Holding Company Common Stock, subject to the approval of the Commissioner and of the FRB, if required. The priorities for the purchase of shares in the Conversion are set forth in the following Sections.

 

7.2.         Certain Determinations.  All interpretations or determinations of whether prospective purchasers are “residents,” “Associates,” or “Acting in Concert,” or whether any purchase conflicts with the purchase limitations in the Plan or otherwise violates any provision of the Plan, and any other interpretations of any and all other provisions of the Plan shall be made by and at the sole discretion of the Stock Holding Company, and may be based on whatever evidence the Stock Holding Company may choose to use in making any such determination. Such determination shall be conclusive, final and binding on all Persons and the Stock Holding Company may take any remedial action, including without limitation rejecting the purchase or referring the matter to the Commissioner for action, as in its sole discretion the Stock Holding Company may deem appropriate.

 

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7.3.         Minimum Purchase; No Fractional Shares.  The minimum purchase by any Person shall be 25 shares (to the extent that shares of Holding Company Common Stock are available for purchase); provided, however, that the aggregate purchase price for any minimum share purchase shall not exceed $500. No fractional shares will be allocated or issued.

 

7.4.         Overview of Priorities.  In descending order of priority, the opportunity to purchase Holding Company Common Stock shall be given in the Subscription Offering to: (a) Eligible Account Holders; (b) Supplemental Eligible Account Holders, if a Supplemental Eligibility Record Date is established; (c) Tax-Qualified Employee Plans; and (d) Employees, Officers, Directors, Trustees and Corporators of the MHC or the Bank. Any shares of Holding Company Common Stock that are not subscribed for in the Subscription Offering may be offered for sale, at the discretion of the Stock Holding Company, in a Direct Community Offering and/or a Syndicated Community Offering on terms and conditions and procedures satisfactory to the Stock Holding Company. Alternatively, if feasible, any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale in a Firm Commitment Underwritten Offering subject to such terms, conditions and procedures as may be determined by the MHC and the Stock Holding Company.

 

7.5.         Priorities For Subscription Offering.    

 

7.5.1    First Priority: Eligible Account Holders.  Subject to approval of the Plan by the Corporators and the receipt of approval from the Commissioner, and the FRB if necessary, to offer the Holding Company Common Stock for sale, each Eligible Account Holder shall receive, without payment therefor, nontransferable subscription rights on a first priority basis to subscribe for a number of shares of Holding Company Common Stock equal to the greater of (a) the quotient obtained by dividing the Individual Maximum Purchase Limit (as such term is defined in Section 8.2 hereof) by the per share Subscription Price, (b) one-tenth of one percent (0.10%) of the shares offered in the Conversion, or (c) 15 times the product (rounded down to the nearest whole number) obtained by multiplying (1) the total number of shares of Holding Company Common Stock to be sold in the Offering by (2) a fraction, of which the numerator is the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders. If there are insufficient shares available to satisfy all subscriptions of Eligible Account Holders, shares will be allocated to Eligible Account Holders so as to permit each such subscribing Eligible Account Holder to purchase a number of shares of Holding Company Common Stock sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares of Holding Company Common Stock will be allocated to remaining subscribing Eligible Account Holders whose subscriptions remain unfilled in the same proportion that each such subscriber’s Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. Unless the Bank Regulators permit otherwise, subscription rights to purchase Holding Company Common Stock received by Officers, Directors, Trustees and Corporators of the MHC, the Mid-Tier Holding Company and the Bank and the Associates of such persons that are based on their increased deposits in the Bank in the one year preceding the Eligibility Record Date shall be subordinated to the subscription rights of other Eligible Account Holders. To ensure proper allocation of stock, each Eligible Account Holder must list on his or her subscription Order Form all Deposit Accounts in which he or she had an ownership interest as of the Eligibility Record Date.

 

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7.5.2    Second Priority: Supplemental Eligible Account Holders.  To the extent there are shares remaining after satisfaction of subscriptions by Eligible Account Holders, and if a Supplemental Eligibility Record Date is established, each Supplemental Eligible Account Holder shall receive non-transferable subscription rights to subscribe for a number of shares of Holding Company Common Stock equal to the greater of (a) the quotient obtained by dividing the Individual Maximum Purchase Limit by the per share Subscription Price, (b) one-tenth of one percent (0.10%) of the shares offered in the Conversion, or (c) 15 times the product (rounded down to the nearest whole number) obtained by multiplying (1) the total number of shares of Holding Company Common Stock to be sold in the Offering by (2) a fraction, of which the numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders. In the event Supplemental Eligible Account Holders subscribe for a number of shares of Holding Company Common Stock which, when added to the shares subscribed for by Eligible Account Holders, exceed available shares, the available shares of Holding Company Common Stock will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each subscribing Supplemental Eligible Account Holder to purchase a number of shares of Holding Company Common Stock sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated to each subscribing Supplemental Eligible Account Holder whose subscription remains unfilled in the same proportion that such subscriber’s Qualifying Deposit on the Supplemental Eligibility Record Date bears to the total amount of Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.

 

7.5.3    Third Priority: Tax-Qualified Employee Plans.  To the extent there are shares remaining after satisfaction of subscriptions by Eligible Account Holders and Supplemental Eligible Account Holders, if any, the Tax-Qualified Employee Plans shall be given the opportunity to purchase in the aggregate up to 10% of the Holding Company Common Stock issued in the Conversion. In the event that the total number of shares of Holding Company Common Stock offered in the Conversion is increased to an amount greater than the Range Maximum, the Tax-Qualified Employee Plans shall have a priority right to purchase any such shares exceeding the Range Maximum (up to the aggregate of 10% of Holding Company Common Stock to be issued in the Conversion). The Employee Plans shall not be deemed to be Associates or Affiliates of or Persons Acting in Concert with any Director, Trustee, Officer or Corporator of the MHC, the Stock Holding Company or the Bank. Alternatively, if permitted by the Bank Regulators, the Tax-Qualified Employee Plans may purchase all or a portion of such shares in the open market after the completion of the Conversion.

 

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7.5.4.   Fourth Priority: Employees, Officers, Directors, Trustees and Corporators. To the extent there are shares remaining after satisfaction of subscriptions by Eligible Account Holders, Supplemental Eligible Account Holders, if any, and any Tax-Qualified Employee Plans, each Employee, Officer, Director, Trustee and Corporator of the MHC or the Bank shall receive non-transferable subscription rights to subscribe for Offering Shares offered in the Conversion in an amount equal to the Individual Maximum Purchase Limit; provided, however, that shares purchased under this Section 7.5.4 shall be aggregated with shares purchased under the preceding priority categories for purposes of the Individual Maximum Purchase Limit. The aggregate number of Offering Shares that may be purchased by Employees, Officers, Directors, Trustees and Corporators in the Conversion shall be limited to 25% of the total number of Offering Shares sold in the Offering (including shares purchased by Employees, Officers, Directors, Trustees and Corporators under this Section 7.5.4 and under the preceding priority categories, but not including shares purchased by the ESOP). In the event that Employees, Officers, Directors, Trustees and Corporators subscribe under this Section 7.5.4 for more Offering Shares than are available for purchase by them, the Offering Shares available for purchase will be allocated by the Stock Holding Company among such subscribing Persons on an equitable basis, such as by giving weight to the period of service, compensation and position of the individual subscriber and the amount of the order.

 

7.6.Priorities for Direct Community Offering.

 

7.6.1     Any shares of Holding Company Common Stock not subscribed for in the Subscription Offering may be offered for sale in a Direct Community Offering. This will involve an offering of all unsubscribed shares of Holding Company Common Stock directly to the general public. The Direct Community Offering, if any, shall commence concurrently with, during or promptly after the Subscription Offering. The Stock Holding Company may use broker-dealers or an investment banking firm or firms on a best efforts basis to assist in selling the unsubscribed shares in the Subscription and Direct Community Offering. The Stock Holding Company may pay a commission or other fee to such broker-dealers or investment banking firms as to the shares sold in the Subscription and Direct Community Offering and may also reimburse such firm or firms for reasonable expenses incurred in connection with the sale. The Holding Company Common Stock will be offered and sold in the Direct Community Offering in accordance with the Regulations, so as to achieve the widest distribution of the Holding Company Common Stock. In making the Direct Community Offering, first preference will be given to natural persons (including trusts of natural persons) residing in the Local Community. No Person may subscribe for or purchase more than the Individual Maximum Purchase Limit of Holding Company Common Stock in the Direct Community Offering. The Stock Holding Company, in its sole discretion, may reject subscriptions, in whole or in part, received from any Person under this Section 7.6.

 

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7.6.2    In the event of an oversubscription for shares in the Direct Community Offering, available shares will be allocated (to the extent shares remain available) first to cover orders of natural Persons residing in the Local Community and second to the general public, so that each such Person may receive 100 shares, and thereafter, on a pro rata basis to such Persons based on the amount of their respective subscriptions or on such other reasonable basis as may be determined by the Stock Holding Company. If oversubscription does not occur among natural Persons residing in the Local Community, orders accepted in the Direct Community Offering shall be filled up to a maximum not to exceed 2% of the Holding Company Common Stock, and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled or all shares are allocated.  The Bank may use deposit or loan records or such other evidence provided to it to determine whether a Person is a Resident of the Local Community. In all cases, however, such a determination shall be in the sole discretion of the Stock Holding Company.

 

7.6.3    If:

 

(i)  aggregate subscriptions for shares totaling at least the Range Minimum are not received in the Subscription Offering and Direct Community Offering, and the Stock Holding Company, in its sole discretion, determines that neither a Syndicated Community Offering nor a Firm Commitment Underwritten Offering is in the best interests of the Stock Holding Company; or

 

(ii)  aggregate subscriptions and orders totaling at least the Range Minimum are not received in the Subscription Offering, Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering;

 

then the Stock Holding Company may, in its sole discretion, apply unsubscribed / unordered Holding Company Common Stock in any manner that facilitates the completion of the Conversion; subject to any applicable approvals required of Bank Regulators.

 

7.7.Syndicated Community Offering or Firm Commitment Underwritten Offering.

 

7.7.1    Any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale to the general public by a selling group of broker-dealers in a Syndicated Community Offering, subject to terms, conditions and procedures as may be determined by the Stock Holding Company in a manner that is intended to achieve the widest distribution of the Holding Company Common Stock subject to the rights of the Stock Holding Company to accept or reject in whole or in part all orders in the Syndicated Community Offering. No Person may purchase in the Syndicated Community Offering more than the Individual Maximum Purchase Limit of Holding Company Common Stock. It is expected that any Syndicated Community Offering will commence as soon as practicable after termination of the Direct Community Offering, if any. The Syndicated Community Offering shall be completed within 45 days after the expiration of the Subscription Offering, unless such period is extended as provided herein. The commission in the Syndicated Community Offering shall be determined by a marketing agreement between the Stock Holding Company and the Marketing Agent. Such agreement shall be filed with the FRB (if required), the Division and the SEC.

 

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7.7.2    Alternatively, if feasible, any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale in a Firm Commitment Underwritten Offering subject to such terms, conditions and procedures as may be determined by the MHC and the Stock Holding Company, subject to the right of the Stock Holding Company to accept or reject in whole or in part any orders in the Firm Commitment Underwritten Offering. Provided the Subscription Offering has begun, the Holding Company may begin the Firm Commitment Underwritten Offering at any time.

 

7.7.3    If for any reason a Syndicated Community Offering or Firm Commitment Underwritten Offering of unsubscribed shares of Holding Company Common Stock cannot be effected or is not deemed to be advisable, and any shares remain unsold after the Subscription Offering and the Direct Community Offering, if any, the Stock Holding Company may seek to make other arrangements for the sale of the remaining shares in order to meet the Range Minimum. Such other arrangements will be subject to the approval of the Commissioner and the FRB, if required, and to compliance with applicable state and federal securities laws.

 

ARTICLE 8.
Additional Limitations on Purchases

 

8.1.          General.  Purchases of Holding Company Common Stock in the Conversion will be subject to the purchase limitations set forth in this Article 8.

 

8.2.          Individual Maximum Purchase Limit.  This Section 8.2 sets forth the “Individual Maximum Purchase Limit.” No Person, through one or more qualifying Deposit Accounts, or Persons exercising subscription rights through a single qualifying Deposit Account held jointly, may purchase in the Offering (including the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering) more than $500,000 of Holding Company Common Stock, except that: (a) the Stock Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, (i) increase such Individual Maximum Purchase Limit to up to 5% of the number of shares of Holding Company Common Stock offered in the Offering or (ii) decrease such Individual Maximum Purchase Limit to no less than one-tenth of one percent (0.10%) of the number of shares of Holding Company Common Stock offered in the Conversion; and (b) Tax-Qualified Employee Plans may purchase up to 10% of the Conversion Shares issued in the Conversion (including shares issued in the event of an increase in the Range Maximum of 15%). If the Stock Holding Company increases the Individual Maximum Purchase Limit (as permitted by this Section 8.2), subscribers in the Subscription Offering who ordered the previously-effective maximum amount will be given the opportunity to increase their subscriptions up to the then applicable limit. Requests to purchase additional shares of Holding Company Common Stock under this provision will be determined by the Stock Holding Company, in its sole discretion. In the event that the Individual Maximum Purchase Limit is increased to 5% of the number of Offering Shares, such limitation may be further increased to 9.99% of the Offering Shares; provided, that orders for Holding Company Common Stock exceeding 5% of the Offering Shares shall not exceed in the aggregate 10% of the Offering Shares. Requests to purchase additional shares of the Holding Company Common Stock in the event that the purchase limitation is so increased will be determined by the Board of Directors of the Stock Holding Company in its sole discretion.

 

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8.3.          Group Maximum Purchase Limit.  This Section 8.3 sets forth the “Group Maximum Purchase Limit.” No Person and his or her Associates or group of Persons Acting in Concert, may purchase in the Offering (including the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering) more than $1,500,000 of Holding Company Common Stock, except that: (a) the Stock Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, (i) increase such Group Maximum Purchase Limit to up to 5% of the number of shares of Holding Company Common Stock offered in the Offering or (ii) decrease such Group Maximum Purchase Limit to no less than one-tenth of one percent (0.10%) of the number of shares of Holding Company Common Stock offered in the Conversion; and (b) Tax-Qualified Employee Plans may purchase up to 10% of the Conversion Shares issued in the Conversion. Notwithstanding the foregoing, in the event that the Stock Holding Company increases the Individual Maximum Purchase Limit (as permitted by Section 8.2) to a number that is in excess of the Group Maximum Purchase Limit established by this Section 8.3, the Group Maximum Purchase Limit shall automatically be increased so as to be equal to the Individual Maximum Purchase Limit, as adjusted. The maximum number of shares of Holding Company Common Stock that may be subscribed for or purchased in all categories of the Offering by any Person or Participant together with any Associate or group or Persons Acting in Concert, combined with Exchange Shares received by any such Person or Participant together with any Associate or group of Persons Acting in Concert, shall not exceed 9.9% of the Conversion Shares; provided, that this limitation shall not apply to the Employee Plans.

 

8.4.          Purchases by Officers, Directors, Trustees and Corporators.  The aggregate number of shares of Holding Company Common Stock to be purchased in the Offering by Officers, Directors, Trustees and Corporators of the MHC and the Bank (and their Associates) shall not exceed 25% of the total number of shares of Offering Shares.

 

8.5.          Special Rule for Tax-Qualified Employee Plans.  Shares of Holding Company Common Stock purchased by any individual participant (“Plan Participant”) in a Tax-Qualified Employee Plan using funds therein pursuant to the exercise of subscription rights granted to such Participant in his individual capacity as an Eligible Account Holder or Supplemental Eligible Account Holder (if any) shall not be deemed to be purchases by a Tax-Qualified Employee Plan for purposes of calculating the maximum amount of Holding Company Common Stock that Tax-Qualified Employee Plans may purchase pursuant to this Plan, if the individual Plan Participant controls or directs the investment authority with respect to such account or subaccount.

 

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8.6.          Illegal Purchases.  Notwithstanding any other provision of the Plan, no Person shall be entitled to purchase any Holding Company Common Stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of the Financial Industry Regulatory Authority. The Stock Holding Company and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished.

 

8.7.          Rejection of Orders.  The Stock Holding Company has the right in its sole discretion to reject any order submitted by a Person whose representations the Stock Holding Company believes to be false or who it otherwise believes, either alone or Acting in Concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of the Plan.

 

8.8           Subscribers in Non-Qualified States or in Foreign Countries.  The Stock Holding Company will make reasonable efforts to comply with the securities laws of any state in the United States in which its depositors reside, and will only offer and sell the Holding Company Common Stock in states in which the offers and sales comply with such states’ securities laws. However, no Person will be offered or allowed to purchase any Holding Company Common Stock under the Plan if he or she resides (a) in a foreign country or (b) 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 purchase shares under the Plan reside in such state; (ii) the offer or sale of shares of Holding Company Common Stock to such Persons would require the Stock Holding Company or its Employees to register, under the securities laws of such state, as a broker or dealer or to register or otherwise qualify its securities for sale in such state; or (iii) such registration or qualification would be impracticable for reasons of cost or otherwise.

 

8.9.          No Offer to Transfer Shares.  Before the consummation of the Conversion, no Person shall offer to transfer, or enter into any agreement or understanding to transfer the legal or beneficial ownership of any subscription rights or shares of Holding Company Common Stock, except pursuant to the Plan. The following shall not constitute impermissible transfers under this Plan. Any Person having subscription rights in his individual capacity as an Eligible Account Holder or Supplemental Eligible Account Holder (if any) may exercise such subscription rights by causing a tax-qualified plan to make such purchase using funds allocated to such Person in such tax-qualified plan if such individual plan participant controls or directs the investment authority with respect to such account or subaccount. A tax-qualified plan that maintains an Eligible Deposit Account in the Bank as trustee for or for the benefit of a Person who controls or directs the investment authority with respect to such account or subaccount (“Beneficiary”) may, in exercising its subscription rights, direct that the Holding Company Common Stock be issued in the name of such individual Beneficiary in his or her individual capacity.

 

8.10.         Confirmation by Purchasers.  Each Person ordering Holding Company Common Stock in the Conversion will be deemed to confirm that such purchase does not conflict with the purchase limitations in the Plan.

 

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ARTICLE 9.
Post Offering Matters

 

9.1.          Stock Purchases After the Conversion.  For a period of three years after the Conversion, no Officer or Director of the Stock Holding Company or the Bank, or his or her Associates, may purchase, without the prior written approval of the Commissioner and the FRB, if required, any Holding Company Common Stock except from a broker-dealer registered with the SEC, provided that the foregoing shall not apply to (a) negotiated transactions involving more than 1% of the outstanding Holding Company Common Stock, or (b) purchases of stock made by and held by or otherwise made pursuant to any Employee Plan of the Bank or the Stock Holding Company even if such stock is attributable to Officers, Directors or their Associates.

 

9.2.          Resales of Stock by Management Persons.  Holding Company Common Stock purchased in the Conversion by Officers, Directors, Trustees and Corporators of the Bank, the Mid-Tier Holding Company, the Stock Holding Company or the MHC may not be resold for a period of at least one year following the date of purchase, except in the case of death or substantial disability, as determined by the Commissioner, of such person, or upon the written approval of the Commissioner.

 

9.3.          Stock Certificates.   Shares of Holding Company Common Stock will be issued in book entry form. Stock certificates will not be issued. Appropriate instructions shall be issued to the Stock Holding Company’s transfer agent with respect to applicable restrictions on transfers of stock set forth in Section ‎9.2. Any shares of stock issued as a stock dividend, stock split or otherwise with respect to such restricted stock shall be subject to the same restrictions as apply to the restricted stock.

 

9.4.          Restriction on Financing Stock Purchases.  The Stock Holding Company and the Bank will not knowingly make any loans or grant any lines of credit for the purpose of purchasing Holding Company Common Stock in the Conversion; provided, however, that the Stock Holding Company, or a subsidiary thereof, may loan funds to the ESOP for the purchase of up to 10% of the Conversion Shares issued in the Conversion.

 

9.5.Stock Benefit Plans.

 

9.5.1    As a result of the Conversion, the Holding Company shall be deemed to have ratified and approved all employee stock benefit plans maintained by the Bank and the Mid-Tier Holding Company and shall have agreed to issue (and reserve for issuance) Holding Company Common Stock in lieu of common stock of the Mid-Tier Holding Company pursuant to the terms of such benefit plans. Upon consummation of the Conversion, the Mid-Tier Holding Company common stock held by such benefit plans shall be converted into Holding Company Common Stock based upon the Exchange Ratio. Also upon consummation of the Conversion, (i) all rights to purchase, sell or receive Mid-Tier Holding Company common stock and all rights to elect to make payment in Mid-Tier Holding Company common stock under any agreement between the Bank or the Mid-Tier Holding Company and any Director, Officer or Employee thereof or under any plan or program of the Bank or the Mid-Tier Holding Company, shall automatically, by operation of law, be converted into and shall become an identical right to purchase, sell or receive Holding Company Common Stock and an identical right to make payment in Holding Company Common Stock under any such agreement between the Bank or the Mid-Tier Holding Company and any Director, Officer or Employee thereof or under such plan or program of the Bank, and (ii) rights outstanding under all stock option plans shall be assumed by the Holding Company and thereafter shall be rights only for shares of Holding Company Common Stock, with each such right being for a number of shares of Holding Company Common Stock based upon the Exchange Ratio and the number of shares of Mid-Tier Holding Company common stock that were available thereunder immediately prior to consummation of the Conversion, with the price adjusted to reflect the Exchange Ratio but with no change in any other term or condition of such right.

 

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9.5.2    The Board of Directors of the Bank and/or the Stock Holding Company are permitted under the Regulations, and may decide, to adopt one or more stock benefit plans for the benefit of the Employees, Officers and Directors of the Bank and Stock Holding Company, including an ESOP, stock award plans and stock option plans, which will be authorized to purchase Holding Company Common Stock and grant options for Holding Company Common Stock. However, only the Tax-Qualified Employee Plans will be permitted to purchase Holding Company Common Stock in the Conversion subject to the purchase priorities set forth in the Plan. Pursuant to the Regulations, the Stock Holding Company may authorize the Tax-Qualified Employee Plans, including the ESOP, to purchase up to 10% of the Holding Company Common Stock to be issued in the Conversion. The Bank or the Stock Holding Company may make scheduled discretionary contributions to one or more Tax-Qualified Employee Plans to purchase Holding Company Common Stock or to purchase issued and outstanding shares of Holding Company Common Stock or authorized but unissued shares of Holding Company Common Stock subsequent to the completion of the Conversion; provided, however, that such contributions do not cause the Bank to fail to meet any of its regulatory capital requirements. This Plan specifically authorizes the grant and issuance by the Stock Holding Company of (i) awards of Holding Company Common Stock after the Conversion pursuant to one or more stock recognition and award plans in an amount equal to up to 4% of the number of shares of Holding Company Common Stock issued in the Conversion, (ii) options to purchase a number of shares of Holding Company Common Stock in an amount equal to up to 10% of the number of shares of Holding Company Common Stock issued in the Conversion, and shares of Holding Company Common Stock issuable upon exercise of such options, and (iii) at the closing of the Conversion or at any time thereafter, Holding Company Common Stock in an amount equal to 8% of the number of shares of Holding Company Common Stock issued in the Conversion to the ESOP and an amount equal to up to 2% of the number of shares of Holding Company Common Stock issued in the Conversion to the Bank’s 401(k) plan. Shares awarded to the Tax Qualified Employee Plans or pursuant to the stock recognition and award plans, and shares issued upon exercise of options may be authorized but unissued shares of the Holding Company Common Stock, or shares of Holding Company Common Stock purchased by the Stock Holding Company or such plans in the open market. Such limitations shall only apply if the stock recognition and award plans or stock option plans are adopted one year or less following the completion of the Offering. No stock recognition and award plans or stock option plans have yet been adopted by the Board of the Stock Holding Company, and no such plans will be submitted for the approval of the Stock Holding Company’s stockholders at a meeting held earlier than six months after completion of the Conversion.

 

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9.6.          Market for Holding Company Common Stock.  If at the close of the Conversion the Stock Holding Company has more than 300 shareholders of any class of stock, the Stock Holding Company shall use its best efforts to:

 

9.6.1    Encourage and assist a Market Maker to establish and maintain a market for that class of stock;

 

9.6.2    List that class of stock on a national or regional securities exchange, including the Nasdaq Stock Market; and

 

9.6.3    Register the Holding Company Common Stock with the SEC pursuant to the Exchange Act, and undertake not to deregister such Holding Company Common Stock for a period of three years thereafter.

 

9.7.Liquidation Accounts.

 

9.7.1     The Bank shall, at the time of the Conversion, in exchange for at least 50% of the net proceeds of the Offering, establish a Bank Liquidation Account in an amount equal to the MHC’s total equity as set forth in the latest consolidated statement of financial condition contained in the final Prospectus distributed in connection with the Conversion. The function of the Bank Liquidation Account is to establish a priority on liquidation for Eligible Account Holders and Supplemental Eligible Account Holders (if any). Following the Conversion, the Bank Liquidation Account will be maintained for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders (if any) who continue to maintain Deposit Accounts with the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall, with respect to each Deposit Account, hold a related inchoate interest in a portion of the Bank Liquidation Account balance, in relation to each Deposit Account balance at the Eligibility Record Date or Supplemental Eligibility Record Date (if established), as the case may be, or to such balance as it may be subsequently reduced, as hereinafter provided. The initial Bank Liquidation Account balance shall not be increased, and shall be subject to downward adjustment to the extent of any downward adjustment of any subaccount balance of any Eligible Account Holder or Supplemental Eligible Account Holder (if any) in accordance with 209 CMR 33.05(12). In addition, the Stock Holding Company shall, at the time of the merger of the Mid-Tier Holding Company into the Stock Holding Company, also establish a Stock Holding Company Liquidation Account in an amount equal to the product of (i) the Majority Ownership Interest and (ii) the Mid-Tier Holding Company’s total equity as set forth in the latest consolidated statement of financial condition contained in the final Prospectus distributed in connection with the Conversion, plus the value of the net assets of the MHC as reflected in the latest statement of financial condition of the MHC prior to the effective date of the Conversion (excluding its ownership of Mid-Tier Holding Company common stock). The Stock Holding Company Liquidation Account also shall be maintained for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders (if any) who continue to maintain their Deposit Accounts at the Bank. Except as otherwise provided in this Section 9.7, the existence of the Stock Holding Company Liquidation Account shall not operate to restrict the use or application of any of the net worth accounts of the Stock Holding Company.

 

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9.7.2    In the unlikely event of a complete liquidation of (i) the Bank or (ii) the Bank and the Stock Holding Company (and only in such event), following all liquidation payments to creditors (including those to depositors to the extent of their Deposit Accounts) each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be entitled to receive a liquidating distribution from the Stock Holding Company Liquidation Account, in the amount of the then-adjusted subaccount balances for his or her Deposit Accounts then held, before any liquidating distribution may be made to any holders of the Stock Holding Company’s capital stock. No merger, consolidation, reorganization, or purchase of bulk assets with assumption of Deposit Accounts and other liabilities, or similar transactions in which the Stock Holding Company and/or the Bank is not the surviving institution, shall be deemed to be a complete liquidation for this purpose. In such transactions, the Stock Holding Company Liquidation Account shall be assumed by the surviving holding company or institution.

 

9.7.3    In the unlikely event of a complete liquidation of (i) the Bank or (ii) the Bank and the Stock Holding Company (and only in such event), following all liquidation payments to creditors of the Bank (including those to depositors to the extent of their Deposit Accounts), at a time when the Bank has a positive net worth and the Stock Holding Company does not have sufficient assets (other than the stock of the Bank) at the time of liquidation to fund the obligations under the Stock Holding Company Liquidation Account, the Bank with respect to the Bank Liquidation Account shall immediately pay directly to each Eligible Account Holder and Supplemental Eligible Account Holder (if any) an amount necessary to fund the Stock Holding Company’s remaining obligation under the Stock Holding Company Liquidation Account, before any liquidation distribution may be made to any holders of the Bank’s capital stock and without making such amount subject to the Stock Holding Company’s creditors. Each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be entitled to receive a distribution from the Stock Holding Company Liquidation Account, in the amount of the then adjusted subaccount balance for his Deposit Account then held, before any distribution may be made to any holders of the Stock Holding Company’s capital stock.

 

9.7.4     In the event of a complete liquidation of the Stock Holding Company where the Bank is not also completely liquidating, or in the event of a sale or other disposition of the Stock Holding Company apart from the Bank, each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be treated as surrendering such Person’s rights to the Stock Holding Company Liquidation Account and receiving from the Stock Holding Company an equivalent interest in the Bank Liquidation Account. Each such holder’s interest in the Bank Liquidation Account shall be subject to the same rights and terms as if the Bank Liquidation Account were the Stock Holding Company Liquidation Account (except that the Stock Holding Company shall cease to exist).

 

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9.7.5    The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder (if any) shall be determined by multiplying the opening balance in the Bank Liquidation Account by a fraction, the numerator of which is the amount of such Eligible Account Holder’s or Supplemental Eligible Account Holder’s Qualifying Deposit and the denominator of which is the total amount of all Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders. For Deposit Accounts in existence on both dates, separate subaccounts shall be determined on the basis of the Qualifying Deposits in such Deposit Accounts on such record dates. Such initial subaccount balance shall not be increased by additional Deposits, but shall be subject to downward adjustment as described below. The initial subaccount balance in the Stock Holding Company Liquidation Account for a Deposit Account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder (if any) shall be determined in the same manner as their interest in the Bank Liquidation Account is determined.

 

9.7.6     If, at the close of business on the last day of any period for which the Stock Holding Company has prepared audited financial statements subsequent to the effective date of the Conversion, the deposit balance in the Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder (if any) is less than the lesser of: (a) the balance in the Deposit Account at the close of business on the last day of any period for which the Stock Holding Company has prepared audited financial statements subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date if established), or (b) the amount in such Deposit Account as of the Eligibility Record Date or Supplemental Eligibility Record Date (if established), then the subaccount balance for such Deposit Account shall be adjusted by reducing such subaccount balance, in an amount proportionate to the reduction in the balance of such Deposit Account. In the event of such downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related Deposit Account. If any such Deposit Account is closed, the related subaccount shall be reduced to zero. For purposes of this Section 9.7, a time account shall be deemed to be closed upon its maturity date regardless of any renewal thereof. A distribution of each subaccount balance in the Stock Holding Company Liquidation Account may be made only in the event of a complete liquidation of the Stock Holding Company subsequent to the Conversion and only out of funds available for such purpose after payment of all creditors.

 

9.7.7    The creation and maintenance of the Stock Holding Company Liquidation Account shall not operate to restrict the use or application of any of the equity accounts of the Stock Holding Company or the Bank, except that neither the Stock Holding Company nor the Bank shall declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its net worth to be reduced below (i) the amount required for the Stock Holding Company Liquidation Account or the Bank Liquidation Account, as applicable, or (ii) the regulatory capital requirements of the Stock Holding Company (to the extent applicable) or the Bank. Neither the Stock Holding Company nor the Bank shall be required to set aside funds in connection with its obligations hereunder relating to the Liquidation Account or the Bank Liquidation Account, as applicable. Eligible Account Holders and Supplemental Eligible Account Holders (if any) do not retain any voting rights in either the Stock Holding Company or the Bank based on their liquidation subaccounts.

 

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9.7.8    The amount of the Stock Holding Company Liquidation Account shall equal at all times the amount of the Bank Liquidation Account, and in no event will any Eligible Account Holder or Supplemental Eligible Account Holder (if any) be entitled to a distribution exceeding such holder’s subaccount balance in the Stock Holding Company Liquidation Account or Bank Liquidation Account. A distribution to an Eligible Account Holder or Supplemental Eligible Account Holder (if any) from the Stock Holding Company Liquidation Account will extinguish the right of the Eligible Account Holder or Supplemental Eligible Account Holder (if any) to receive a distribution from the Bank Liquidation Account.

 

9.7.9     For the three-year period following the completion of the Conversion, the Stock Holding Company will not without prior approval of the Commissioner and the FRB: (i) sell or liquidate the Stock Holding Company, or (ii) cause the Bank to be sold or liquidated. Upon the written request of the FRB and, if necessary, the Commissioner, the Stock Holding Company shall, or upon the prior written approval of the FRB and, if necessary, the Commissioner, the Stock Holding Company may, at any time after two years from the completion of the Conversion, transfer the Stock Holding Company Liquidation Account to the Bank, at which time the Stock Holding Company Liquidation Account shall be assumed by the Bank and the interests of Eligible Account Holders and Supplemental Eligible Account Holders (if any) will be solely and exclusively established in the Bank Liquidation Account. In the event such transfer occurs, the Stock Holding Company shall be deemed to have transferred the Stock Holding Company Liquidation Account to the Bank and such Liquidation Account shall be subsumed into the Bank Liquidation Account and shall not be subject in any manner or amount to the claims of the Stock Holding Company’s creditors. Approval of the Plan by the Corporators shall constitute approval of the transactions described herein.

 

9.8.          Repurchase of Stock.  Based upon facts and circumstances following the Conversion and subject to applicable regulatory and accounting requirements, the Board of Directors of the Stock Holding Company may determine to repurchase stock in the future. Such facts and circumstances may include but not be limited to: (a) market and economic factors such as the price at which the Holding Company Common Stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and the opportunity to improve the Stock Holding Company’s return on equity; (b) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or the purchase of shares by the ESOP in the event the ESOP is unable to acquire shares in the Subscription Offering, or to fund any stock plans adopted after the consummation of the Conversion; and (c) any other circumstances in which repurchases would be in the best interests of the Stock Holding Company and its shareholders.

 

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9.9.          Conversion Expenses.  The Regulations require that the expenses of the Conversion must be reasonable. The MHC will use its best efforts to assure that the expenses incurred by the MHC and the Stock Holding Company in effecting the Conversion will be reasonable.

 

9.10.         Public Inspection of Conversion Application.  The MHC and the Bank will maintain a copy of the non-confidential portion of the Application in the main banking office of the Bank and such copy will be available for public inspection.

 

9.11.         Enforcement of Terms and Conditions.    Each of the MHC and the Stock Holding Company shall have the right to take all such action as they, in its sole discretion, may deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in the Plan and the terms, conditions and representations contained in the Order Forms, including, but not limited to, the right to require any subscriber or purchaser to provide evidence, in a form satisfactory to the MHC and the Stock Holding Company, of such Person’s eligibility to subscribe for or purchase shares of the Holding Company Common Stock under the terms of the Plan and the absolute right (subject only to any necessary regulatory approvals or concurrence) to reject, limit or revoke acceptance of any subscription or order and to delay, terminate or refuse to consummate any sale of Holding Company Common Stock that it believes might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons, and the MHC, the Stock Holding Company, the Bank and their Board of Trustees, Board of Directors, Officers, Employees, Corporators and agents shall be free from any liability to any Person on account of any such action.

 

9.12.        Voting Rights in Converted Stock Holding Company.  Following the Conversion, the holders of the capital stock of the Stock Holding Company shall have exclusive voting rights in the Stock Holding Company.

 

9.13.Restrictions on Acquisition of Bank and Stock Holding Company.

 

9.13.1   The Articles of Organization of the Bank may contain a provision stipulating that no person, except the Holding Company, for a period of three years following the closing date of the Conversion, may directly or indirectly acquire or offer to acquire the beneficial ownership of more than 10% of any class of equity security of the Bank, without the prior written approval of the Commissioner. In addition, such Articles of Organization may also provide that for a period of three years following the closing date of the Conversion, shares beneficially owned in violation of the above-described Articles of Organization provision shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to stockholders for a vote.

 

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9.13.2   For a period of three years from the date of consummation of the Conversion, no person, other than the Stock Holding Company, shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Bank without the prior written consent of the FRB. Nothing in this Plan shall prohibit the Stock Holding Company from taking actions permitted under 12 C.F.R. 239.63(f).

 

9.13.3   The Articles of Incorporation of the Stock Holding Company may contain a provision stipulating that in no event shall any record owner of any outstanding shares of Holding Company Common Stock who beneficially owns in excess of 10% of such outstanding shares be entitled or permitted to any vote with respect to any shares held in excess of 10%. In addition, the Articles of Incorporation and Bylaws of the Stock Holding Company may contain, in addition to any other permissible provisions, provisions which provide for, or prohibit, as the case may be, staggered terms of the directors, noncumulative voting for directors, limitations on the calling of special meetings, a fair price provision for certain business combinations and certain notice requirements.

 

9.13.4For the purposes of this Section 9.13:

 

(1)the term “person” includes an individual, a firm, a corporation or other entity;

 

(2)the term “offer” includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value;

 

(3)the term “acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise; and

 

(4)the term “security” includes non-transferable subscription rights issued pursuant to a plan of conversion as well as a “security” as defined in 15 U.S.C. § 77b(a)(1).

 

ARTICLE 10.
Miscellaneous

 

10.1.          Interpretation of Plan. All interpretations of the Plan and application of its provisions to particular circumstances by the MHC and Stock Holding Company shall be final, subject to the authority of the Commissioner and the FRB. When a reference is made in this Plan to Sections or Exhibits, such reference shall be to a Section of or Exhibit to the Plan unless otherwise indicated. The recitals hereto constitute an integral part of the Plan. References to Sections include subsections, which are part of the related Section (e.g., a section numbered “Section 5.5.1” would be part of “Section 5.5” and references to “Section 5.5” would also refer to material contained in the subsection described as “Section 5.5.1”). The table of contents and headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Whenever the words “include”, “includes” or “including” are used in the Plan, they shall be deemed to be followed by the words “without limitation”.

 

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10.2.          Amendment or Termination of the Plan.  If deemed necessary or desirable, the terms of the Plan may be substantively amended by a majority vote of the members of the Board of Trustees as a result of comments from regulatory authorities at any time prior to approval of the Plan by the Commissioner and the FRB and at any time thereafter with the concurrence of the Commissioner and the FRB. If amendments to the Plan are made after the Special Meeting of Corporators, no further approval of the Corporators will be necessary unless otherwise required by the Commissioner or the FRB. The Plan may be terminated by the Board of Trustees in its sole discretion, at any time prior to the Special Meeting of Corporators and at any time thereafter with the concurrence of the Commissioner and the FRB. The Plan will terminate if the sale of all shares of Holding Company Common Stock is not completed within twenty-four months from the date of approval of the Plan by the Board of Trustees.

 

Dated: June 5, 2019, as amended July 11, 2019

 

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Exhibit 1.1

 

FORM OF

AGREEMENT OF MERGER BETWEEN

PROVIDENT BANCORP

AND provident Bancorp, Inc.,

A MASSACHUSETTS CORPORATION

 

THIS AGREEMENT OF MERGER (the “MHC Merger Agreement”) dated as of __________________, 2019, is made by and between Provident Bancorp, a Massachusetts mutual holding company (the “MHC”), and Provident Bancorp, Inc., a Massachusetts corporation (the “Mid-Tier Holding Company”). Capitalized terms have the respective meanings given them in the Plan of Conversion (the “Plan”) of the MHC, unless otherwise defined herein.

 

RECITALS:

 

1.          The MHC is a Massachusetts mutual holding company that owns __________________% of the common stock of the Mid-Tier Holding Company.

 

2.          The Mid-Tier Holding Company is a Massachusetts corporation that owns 100% of the common stock of The Provident Bank, a Massachusetts-chartered savings bank.

 

3.          The board of directors of the Mid-Tier Holding Company and the board of Trustees of the MHC have approved this MHC Merger Agreement whereby the MHC shall merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting corporation (the “MHC Merger”), and have authorized the execution and delivery of this MHC Merger Agreement.

 

NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, the parties hereto have agreed as follows:

 

1.          Merger. At and on the Effective Date of the MHC Merger, the MHC will merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity (“Resulting Corporation”) whereby the shares of Mid-Tier Holding Company common stock held by the MHC will be canceled and persons having liquidation interests in the MHC will constructively receive liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the MHC.

 

2.          Effective Date. The MHC Merger shall not be effective until and unless: (i) the Plan is approved by the Division of Banks of the Commonwealth of Massachusetts and the Board of Governors of the Federal Reserve System; (ii) the Plan is approved by a majority of the total votes of the MHC’s Corporators and a majority of the MHC’s Independent Corporators (who shall constitute not less than 60% of all Corporators) eligible to be cast at the Special Meeting of Corporators; (iii) the Plan and this MHC Merger Agreement are approved by two-thirds of the votes eligible to be case by the Stockholders of the Mid-Tier Holding Company and a majority of the votes eligible to be cast by Minority Stockholders; and (iv) the Articles of Merger shall have been filed with the Secretary of the Commonwealth of Massachusetts with respect to the MHC Merger. Approval of the Plan by the MHC’s Corporators shall constitute approval of this MHC Merger Agreement by the MHC’s Corporators.

 

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3.          Name. The name of the Resulting Corporation shall be Provident Bancorp, Inc.

 

4.          Offices. The main office of the Resulting Corporation shall be 5 Market Street, Amesbury, Massachusetts 01913.

 

5.          Directors and Officers. The directors and officers of the Mid-Tier Holding Company immediately prior to the Effective Date shall be the directors and officers of the Resulting Corporation after the Effective Date.

 

6.          Rights and Duties of the Resulting Corporation. At the Effective Date, the MHC shall be merged with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the Resulting Corporation. The business of the Resulting Corporation shall be that of a Massachusetts corporation as provided in its Articles of Organization. All assets, rights, interests, privileges, powers, franchises and property (real, personal and mixed) of the Mid-Tier Holding Company and the MHC shall be transferred automatically to and vested in the Resulting Corporation by virtue of the MHC Merger without any deed or other document of transfer. The Resulting Corporation, without any order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy all of the properties, franchises and interests, including appointments, powers, designations, nominations and all other rights and interests as the agent or other fiduciary in the same manner and to the same extent as such rights, franchises, and interests and powers were held or enjoyed by the Mid-Tier Holding Company and the MHC. The Resulting Corporation shall be responsible for all of the liabilities, restrictions and duties of every kind and description of the Mid-Tier Holding Company and the MHC immediately prior to the MHC Merger, including liabilities for all debts, obligations and contracts of the Mid-Tier Holding Company and the MHC, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets, books of accounts or records of the Mid-Tier Holding Company or the MHC. All rights of creditors and other obligees and all liens on property of the Mid-Tier Holding Company and the MHC shall be preserved and shall not be released or impaired.

 

7.          Rights of Stockholders. At the Effective Date, the shares of Mid-Tier Holding Company common stock held by the MHC will be canceled and persons having liquidation interests in the MHC will constructively receive liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the MHC.

 

8.          Other Terms. The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to effect and consummate the terms of this MHC Merger Agreement and the Conversion.

 

[Signature page follows]

 

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IN WITNESS WHEREOF, the Mid-Tier Holding Company and the MHC have caused this MHC Merger Agreement to be executed as of the date first above written.

 

    Provident Bancorp
    (a Massachusetts mutual holding company)
ATTEST:    
     
    By:  
Kimberly Scholtz, Secretary     David P. Mansfield
      President and Chief Executive Officer

 

    Provident Bancorp, Inc.
  (a Massachusetts corporation)
ATTEST:      
       
    By:  
Kimberly Scholtz, Clerk     David P. Mansfield
      President and Chief Executive Officer

 

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Exhibit 1.2

 

form of

AGREEMENT OF MERGER BETWEEN

PROVIDENT Bancorp, Inc., a massachusetts corporation And

PROVIDENT BANCORP, INC., a maryland corporation

 

THIS AGREEMENT OF MERGER (the “Mid-Tier Merger Agreement”), dated as of __________________, 2019, is made by and between Provident Bancorp, Inc., a Massachusetts corporation (the “Mid-Tier Holding Company”), and Provident Bancorp, Inc., a Maryland corporation (the “Holding Company”). Capitalized terms have the respective meanings given them in the Plan of Conversion of Provident Bancorp (the “Plan”) unless otherwise defined herein.

 

RECITALS:

 

1.          The Mid-Tier Holding Company is a Massachusetts corporation that owns 100% of the common stock of The Provident Bank, a Massachusetts-chartered savings bank (the “Bank”).

 

2.          The Holding Company has been organized as a first-tier stock subsidiary of the Mid-Tier Holding Company.

 

3.          The boards of directors of the Mid-Tier Holding Company and the Holding Company have approved this Mid-Tier Merger Agreement whereby the Mid-Tier Holding Company will be merged with and into the Holding Company with the Holding Company as the resulting corporation (the “Mid-Tier Merger”), and have authorized the execution and delivery of this Mid-Tier Merger Agreement.

 

4.        Immediately prior to the Mid-Tier Merger, Provident Bancorp, a Massachusetts mutual holding company (the “MHC”) and the owner of __________________% of the capital stock of the Mid-Tier Holding Company, merged with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity (the “MHC Merger”), whereby the shares of Mid-Tier Holding Company held by the MHC were cancelled and persons having liquidation interests in the MHC constructively received liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the MHC.

 

5.          As a result of the Mid-Tier Merger, the Bank will become a wholly-owned subsidiary of the Holding Company.

 

NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, the parties hereto have agreed as follows:

 

1.          Merger. At and on the Effective Date of the Mid-Tier Merger, the Mid-Tier Holding Company will merge with and into the Holding Company with the Holding Company as the resulting corporation (the “Resulting Corporation”), whereby the Bank will become the wholly-owned subsidiary of the Holding Company. As part of the Mid-Tier Merger, persons who had liquidation interests in the MHC who constructively received liquidation interests in the Mid-Tier Holding Company as part of the MHC Merger will exchange the liquidation interests in the Mid-Tier Holding Company that they constructively received for interests in the Liquidation Account and the stockholders of the Mid-Tier Holding Company (Minority Stockholders immediately prior to the Conversion) will exchange their shares of Mid-Tier Holding Company Common Stock for Holding Company Common Stock in the Exchange Offering pursuant to the Exchange Ratio.

 

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2.          Effective Date. The Mid-Tier Merger shall not be effective until and unless: (i) the Plan is approved by the Division of Banks of the Commonwealth of Massachusetts and the Board of Governors of the Federal Reserve System; (ii) the Plan and this Mid-Tier Merger Agreement are approved by the Mid-Tier Holding Company as the sole stockholder of the Holding Company; (iii) the Plan and this Mid-Tier Merger Agreement are approved by two-thirds of the votes eligible to be case by the Stockholders of the Mid-Tier Holding Company and a majority of the votes eligible to be cast by Minority Stockholders; and (iv) Articles of Merger shall have been filed with the Secretary of the Commonwealth of Massachusetts and the [Maryland State Department of Assessments and Taxation] with respect to the Mid-Tier Merger.

 

3.          Name. The name of the Resulting Corporation shall be Provident Bancorp, Inc.

 

4.          Offices. The main office of the Resulting Corporation shall be 5 Market Street, Amesbury, Massachusetts 01913.

 

5.          Directors and Officers. The directors and officers of the Holding Company immediately prior to the Effective Date shall be the directors and officers of the Resulting Corporation after the Effective Date.

 

6.          Rights and Duties of the Resulting Corporation. At the Effective Date, the Mid-Tier Holding Company shall merge with the Holding Company, with the Holding Company as the Resulting Corporation. The business of the Resulting Corporation shall be that of a Maryland corporation as provided in its Articles of Incorporation. All assets, rights, interests, privileges, powers, franchises and property (real, personal and mixed) of the Mid-Tier Holding Company and the Holding Company shall be transferred automatically to and vested in the Resulting Corporation by virtue of the Mid-Tier Merger without any deed or other document of transfer. The Resulting Corporation, without any order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy all of the properties, franchises and interests, including appointments, powers, designations, nominations and all other rights and interests as the agent or other fiduciary in the same manner and to the same extent as such rights, franchises, and interests and powers were held or enjoyed by the Mid-Tier Holding Company and the Holding Company. The Resulting Corporation shall be responsible for all of the liabilities, restrictions and duties of every kind and description of the Mid-Tier Holding Company and the Holding Company immediately prior to the Mid-Tier Merger, including liabilities for all debts, obligations and contracts of the Mid-Tier Holding Company and the Holding Company, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets, books of accounts or records of the Mid-Tier Holding Company or the Holding Company. The stockholders of the Holding Company shall possess all voting rights with respect to the shares of stock of the Resulting Corporation. All rights of creditors and other obligees and all liens on property of the Mid-Tier Holding Company and the Holding Company shall be preserved and shall not be released or impaired.

 

 2 

 

 

7.          Rights of Stockholders. At the Effective Date, persons who had liquidation interests in the MHC who constructively received liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the MHC as part of the MHC Merger, will exchange their liquidation interests in the Mid-Tier Holding Company for interests in the Stock Holding Company Liquidation Account, and the stockholders of the Mid-Tier Holding Company (Minority Stockholders immediately prior to the Conversion) will exchange their shares of Mid-Tier Holding Company Common Stock for Holding Company Common Stock in the Exchange Offering pursuant to the Exchange Ratio.

 

8.          Other Terms. The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to effect and consummate the terms of this Mid-Tier Merger Agreement and the Conversion.

 

[Signature page follows]

 

 3 

 

 

IN WITNESS WHEREOF, the Mid-Tier Holding Company and the Holding Company have caused this Mid-Tier Merger Agreement to be executed as of the date first above written.

 

    Provident Bancorp, Inc.
    (a Massachusetts corporation)
ATTEST:    
       
    By:  
Kimberly Scholtz, Secretary     David P. Mansfield
      President and Chief Executive Officer
       
    Provident Bancorp, Inc.
  (a Maryland corporation)
ATTEST:      
       
    By:  
Kimberly Scholtz, Secretary     David P. Mansfield
      President and Chief Executive Officer

 

 4 

EX-8.1 4 tv525519_ex8-1.htm EXHIBIT 8.1

 

Exhibit 8.1

 

LUSE GORMAN, PC

A Professional Corporation

Attorneys at Law

 

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

 

Telephone (202) 274-2000

Facsimile (202) 362-2902

 

www.luselaw.com

 

June 24, 2019

 

Board of Trustees

Provident Bancorp

 

Boards of Directors

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

5 Market Street

Amesbury, Massachusetts 01913

 

Ladies and Gentlemen:

 

You have requested this firm’s opinion regarding the material federal income tax consequences that will result from the conversion of Provident Bancorp, a Massachusetts-chartered mutual holding company (the “Mutual Holding Company”), from the mutual holding company to the stock holding company form of organization (the “Conversion”), pursuant to the Plan of Conversion of Provident Bancorp, dated June 5, 2019 (the “Plan”), and the integrated transactions described below. Capitalized terms used but not defined herein shall have the same meaning as set forth in the Plan.

 

In rendering our opinion, we have made such investigations as we have deemed relevant or necessary for the purpose of this opinion. In our examination, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. We have further assumed the absence of adverse facts not apparent from the face of the instruments and documents we examined and we have relied upon the accuracy of the factual matters set forth in the Plan and the Registration Statement filed by Provident Bancorp, Inc., a Maryland stock corporation (the “Stock Holding Company”), with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, and the Application for Conversion filed by the Mutual Holding Company with the Massachusetts Commissioner of Banks (the “Commissioner”). In addition, we are relying on a letter from RP Financial, LC. to you, dated June 5, 2019, stating its belief as to certain valuation matters described below. Furthermore, we assume that each of the parties to the Conversion will comply with all reporting obligations with

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 2

 

respect to the Conversion required under the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations thereunder (the “Treasury Regulations”).

 

Our opinion is based upon the existing provisions of the Code, and the Treasury Regulations, and upon current Internal Revenue Service (“IRS”) published rulings and existing court decisions, any of which could be changed at any time. Any such changes may be retroactive and could significantly modify the statements and opinions expressed herein. Similarly, any change in the facts and assumptions stated below, upon which this opinion is based, could modify the conclusions herein. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof.

 

We opine only as to the matters we expressly set forth herein, and no opinions should be inferred as to any other matters or as to the tax treatment of the Conversion that we do not specifically address. We express no opinion as to other federal laws and regulations, or as to laws and regulations of other jurisdictions, or as to factual or legal matters other than as set forth herein.

 

For purposes of this opinion, we are relying on the representations as to factual matters provided to us by the Mutual Holding Company, The Provident Bank (the “Bank”), Mid-Tier Holding Company (as defined below) and the Stock Holding Company, as set forth in the certificates for each of those aforementioned entities and signed by authorized officers of each of the aforementioned entities, incorporated herein by reference.

 

Description of Proposed Conversion

 

Based upon our review of the documents described above, and in reliance upon such documents, we understand that the relevant facts are as follows. The Bank, a Massachusetts-chartered savings bank, is currently a wholly owned subsidiary of Provident Bancorp, Inc., a Massachusetts corporation (the “Mid-Tier Holding Company”), which is a subsidiary of the Mutual Holding Company. The Mutual Holding Company is a mutual holding company with no stockholders. The depositors of the Bank are considered to be the “owners” of the Mutual Holding Company and are entitled upon the complete liquidation of the Mutual Holding Company to any liquidation proceeds after the payment of creditors.

 

The Board of Trustees of the Mutual Holding Company, the Board of Directors of the Mid-Tier Holding Company, and the Board of Directors of the Bank adopted the Plan providing for the conversion of the Mutual Holding Company from a Massachusetts-chartered mutual holding company to the capital stock form of organization. As part of the Conversion, the Stock Holding Company will succeed to all the rights and obligations of the Mutual Holding Company and the

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 3

 

Mid-Tier Holding Company, and will offer for sale shares of its common stock (the “Holding Company Common Stock”) to Eligible Account Holders, Supplemental Eligible Account Holders (if any), Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and employees, officers, directors, trustees and corporators of the Mutual Holding Company or the Bank, according to the subscription priorities set forth in the Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering.

 

Pursuant to the Plan, the Conversion will be effected as follows and in such order as is necessary to consummate the Conversion:

 

(1)The Mid-Tier Holding Company will organize the Stock Holding Company as a Maryland-chartered first-tier stock holding company subsidiary.

 

(2)The Mutual Holding Company will merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity (the “MHC Merger”) whereby the shares of Mid-Tier Holding Company held by the Mutual Holding Company will be cancelled and the depositors of the Bank who hold liquidation interests in the Mutual Holding Company will constructively receive liquidation interests in Mid-Tier Holding Company in exchange for their liquidation interests in the Mutual Holding Company.

 

(3)Immediately after the MHC Merger, the Mid-Tier Holding Company will merge with the Stock Holding Company (the “Mid-Tier Merger”), with the Stock Holding Company as the resulting entity. As part of the Mid-Tier Merger, the liquidation interests in Mid-Tier Holding Company constructively received by the persons who held liquidation interests in the Mutual Holding Company will automatically, without further action on the part of the holders thereof, be exchanged for an interest in the Stock Holding Company Liquidation Account and the Minority Shares will automatically, without further action on the part of the holders thereof, be converted into and become the right to receive Holding Company Common Stock based on the Exchange Ratio.

 

(4)Immediately after the Mid-Tier Merger, the Stock Holding Company will offer for sale shares of Holding Company Common Stock in the Offering.

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 4

 

(5)The Stock Holding Company will contribute at least 50% of the net proceeds of the Offering to the Bank in constructive exchange for additional shares of common stock of the Bank and in exchange for the Bank Liquidation Account.

 

Following the Conversion, a Stock Holding Company Liquidation Account will be maintained by the Stock Holding Company for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their deposit accounts with the Bank. Pursuant to the Plan, the Stock Holding Company Liquidation Account will be equal to the Mutual Holding Company’s total equity as reflected in the latest statement of financial condition contained in the final Prospectus used in the Offering. The terms of the Stock Holding Company Liquidation Account and Bank Liquidation Account, which supports the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets, are described in the Plan.

 

As part of the Conversion, all of the then-outstanding shares of Mid-Tier Holding Company common stock owned by the Minority Stockholders will be converted into and become shares of Holding Company Common Stock pursuant to the Exchange Ratio in a manner that ensures that after the Conversion, Minority Stockholders will own in the aggregate the same percentage of Holding Company Common Stock as they held in Mid-Tier Holding Company common stock immediately prior to the Conversion, exclusive of Minority Stockholders’ purchases of additional shares of Holding Company Common Stock in the Offering and receipt of cash in lieu of fractional shares.

 

As a result of the Conversion and Offering, the Stock Holding Company will be a publicly-held corporation, will have registered the Holding Company Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended, and will become subject to the rules and regulations thereunder and file periodic reports and proxy statements with the SEC. The Bank will become a wholly-owned subsidiary of the Stock Holding Company and will continue to carry on its business and activities as conducted immediately prior to the Conversion.

 

The stockholders of the Stock Holding Company will be the former Minority Stockholders of the Mid-Tier Holding Company immediately prior to the Conversion, plus those persons who purchase shares of Holding Company Common Stock in the Offering. Nontransferable rights to subscribe for the Holding Company Common Stock have been granted, in order of priority, to Eligible Account Holders, Supplemental Eligible Account Holders, Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and employees, officers, directors, trustees or corporators of the Mid-Tier Holding Company or the Bank who are not eligible in the preceding categories, according to the subscription priorities set forth in the

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 5

 

Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering. Subscription rights are nontransferable.

 

Opinions

 

Based on the foregoing description of the Conversion, including the MHC Merger, and the Mid-Tier Merger, and subject to the qualifications and limitations set forth in this letter, we are of the opinion that:

 

1.          The MHC Merger will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(l)(A) of the Code.)

 

2.          The constructive exchange of the Eligible Account Holders and Supplemental Eligible Account Holders liquidation interests in the Mutual Holding Company for liquidation interests in the Mid-Tier Holding Company in the MHC Merger will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations. (cf. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54.)

 

3.          No gain or loss will be recognized by the Mutual Holding Company on the transfer of its assets to the Mid-Tier Holding Company and the Mid-Tier Holding Company’s assumption of its liabilities, if any, in constructive exchange for liquidation interests in the Mid-Tier Holding Company or on the constructive distribution of such liquidation interests to members of the Mutual Holding Company. (Section 361(a), 361(c) and 357(a) of the Code.)

 

4.          No gain or loss will be recognized by the Mid-Tier Holding Company upon the receipt of the assets of the Mutual Holding Company in the MHC Merger in exchange for the constructive transfer of liquidation interests in the Mid-Tier Holding Company to the members of the Mutual Holding Company. (Section 1032(a) of the Code.)

 

5.          Persons who have liquidation interests in the Mutual Holding Company will recognize no gain or loss upon the constructive receipt of liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the Mutual Holding Company. (Section 354(a) of the Code.)

 

6.          The basis of the assets of Mutual Holding Company (other than stock in the Mid-Tier Holding Company) to be received by the Mid-Tier Holding Company will be the same as the basis of such assets in the Mutual Holding Company immediately prior to the transfer. (Section 362(b) of the Code.)

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 6

 

7.          The holding period of the assets of the Mutual Holding Company transferred to the Mid-Tier Holding Company will include the holding period of those assets of the Mutual Holding Company. (Section 1223(2) of the Code.)

 

8.          The Mid-Tier Merger will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code and therefore will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Code. (Section 368(a)(1)(F) of the Code.)

 

9.          The Mid-Tier Holding Company will not recognize any gain or loss on the transfer of its assets to the Holding Company and the Stock Holding Company’s assumption of its liabilities in exchange for shares of Holding Company Common Stock or the distribution of such stock to Minority Stockholders and constructive distribution of interests in the Liquidation Account to the Eligible Account Holders and Supplemental Eligible Account Holders. (Sections 361(a), 361(c) and 357(a) of the Code.)

 

10.        No gain or loss will be recognized by the Stock Holding Company upon the receipt of the assets of Mid-Tier Holding Company in the Mid-Tier Merger. (Section 1032(a) of the Code.)

 

11.        The basis of the assets of the Mid-Tier Holding Company to be received by the Stock Holding Company will be the same as the basis of such assets in the Mid-Tier Holding Company immediately prior to the transfer. (Section 362(b) of the Code.)

 

12.        The holding period of the assets of the Mid-Tier Holding Company to be received by the Stock Holding Company will include the holding period of those assets in the Mid-Tier Holding Company immediately prior to the transfer. (Section 1223(2) of the Code.)

 

13.        Mid-Tier Holding Company shareholders will not recognize any gain or loss upon their exchange of Mid-Tier Holding Company common stock for Holding Company Common Stock (Section 354 of the Code.)

 

14.        Eligible Account Holders and Supplemental Eligible Account Holders will not recognize any gain or loss upon their constructive exchange of their liquidation interests in Mid-Tier Holding Company for the Stock Holding Company Liquidation Account in the Stock Holding Company. (Section 354 of the Code.)

 

15.        The constructive exchange of the Eligible Account Holders’ and Supplemental Eligible Account Holders’ liquidation interests in the Mid-Tier Holding Company for interests in a Stock Holding Company Liquidation Account established by the Stock Holding Company will

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 7

 

satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).

 

16.        The payment of cash to the Minority Stockholders in lieu of fractional shares of Holding Company Common Stock will be treated as though the fractional shares were distributed as part of the Mid-Tier Merger and then redeemed by the Stock Holding Company. The cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under Section 302(a) of the Code, with the result that such shareholders will have short-term or long-term capital gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares. (Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev. Proc. 77-41, 1977-2 C.B. 574.)

 

17.        It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Holding Company Common Stock is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders, employees, officers, directors, trustees and corporators in the Subscription Offering upon distribution to them of nontransferable subscription rights to purchase shares of Holding Company Common Stock. (Section 356(a) of the Code.) Eligible Account Holders and other purchasers in the Subscription Offering will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights. (Rev. Rul. 56-572, 1956-2 C.B. 182.)

 

18.       It is more likely than not that the fair market value of the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company 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 and Supplemental Eligible Account Holders upon the constructive distribution to them of such rights in the Bank Liquidation Account as of the effective date of the Mid-Tier Merger. (Section 356(a) of the Code.)

 

19.        Each shareholder’s aggregate basis in his or her Holding Company Common Stock (including fractional shares) received in the exchange will be the same as the aggregate basis of the Mid-Tier Holding Company common stock surrendered in exchange therefore. (Section 358(a) of the Code.)

 

20.        It is more likely than not that the basis of the Holding Company Common Stock purchased in the Offering by the exercise of the nontransferable subscription rights will be the purchase price thereof. (Section 1012 of the Code.)

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 8

 

21.       Each shareholder’s holding period in his or her Holding Company Common Stock received in the exchange will include the period during which the Mid-Tier Holding Company common stock surrendered was held, provided that the common stock surrendered is a capital asset in the hands of the shareholder on the date of the exchange. (Section 1223(1) of the Code.)

 

22.       The holding period of the Holding Company Common Stock purchased pursuant to the exercise of subscriptions rights shall commence on the date on which the right to acquire such stock was exercised. (Section 1223(5) of the Code.)

 

23.       No gain or loss will be recognized by Stock Holding Company on the receipt of money in exchange for Holding Company Common Stock sold in the Offering. (Section 1032 of the Code.)

 

Our opinions under paragraphs 17, 19 and 20 are based on the position that the subscription rights to purchase shares of Holding Company Common Stock received by Eligible Account Holders, Supplemental Eligible Account Holders, employees, officers, directors, trustees and corporators in the Subscription Offering have a fair market value of zero. We understand that the subscription rights will be granted at no cost to the recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of Holding Company Common Stock at the same price to be paid by members of the general public in any Community Offering. We also note that the IRS has not in the past concluded that subscription rights have value. In addition, we are relying on a letter from RP Financial, LC. to you stating its belief that subscription rights do not have any economic value at the time of distribution or at the time the rights are exercised in the Subscription Offering. Based on the foregoing, we believe it is more likely than not that the nontransferable subscription rights to purchase Holding Company Common Stock have no value.

 

If the subscription rights are subsequently found to have an economic value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Stock Holding Company and/or the Bank may be taxable on the distribution of the subscription rights.

 

Our opinion under paragraph 18 above is based on the position that the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets has a fair market value of zero. We understand that: (i) there is no history of any holder of a liquidation account receiving any payment attributable to a liquidation account; (ii) the interests in the Stock Holding Company Liquidation Account and Bank Liquidation Account are not transferable; (iii) the amounts due under the Stock Holding Company

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 9

 

Liquidation Account with respect to each Eligible Account Holder and Supplemental Eligible Account Holder are reduced as their deposits in the Bank are reduced as described in the Plan; and (iv) the Bank Liquidation Account payment obligation arises only if the Stock Holding Company lacks sufficient net assets to fund the Stock Holding Company Liquidation Account. We also note that the U.S. Supreme Court in Paulsen v. Commissioner, 469 U.S. 131 (1985) stated the following:

 

The right to participate in the net proceeds of a solvent liquidation is also not a significant part of the value of the shares. Referring to the possibility of a solvent liquidation of a mutual savings association, this Court observed: “It stretches the imagination very far to attribute any real value to such a remote contingency, and when coupled with the fact that it represents nothing which the depositor can readily transfer, any theoretical value reduces almost to the vanishing point.” Society for the Savings v. Bowers, 349 U.S. 143, 150 (1955).

 

In addition, we are relying on a letter from RP Financial, LC. to you dated June 5, 2019, stating its belief that the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets does not have any economic value at the time of the Conversion. Based on the foregoing, we believe it is more likely than not that such rights in the Bank Liquidation Account have no value.

 

If such rights in the Bank Liquidation Account are subsequently found to have an economic value, income may be recognized by each Eligible Account Holder and Supplemental Eligible Account Holder in the amount of the fair market value of their interest in the Bank Liquidation Account as of the effective date of the Conversion.

 

 

 

 

Boards of Trustees/Directors

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

Page 10

 

CONSENT

 

We hereby consent to the filing of the opinion as an exhibit to the Mutual Holding Company's Application for Conversion filed with the Commissioner and to the Stock Holding Company's Registration Statement on Form S-1 as filed with the SEC. We also consent to the references to our firm in the Prospectus contained in the Application for Conversion and Form S-1 under the captions “The Conversion; Plan of Distribution-Material Income Tax Consequences” and “Legal Matters.”

 

  Very truly yours,
   
  /s/ Luse Gorman, PC
   
  Luse Gorman, PC

 

 

 

EX-8.2 5 tv525519_ex8-2.htm EXHIBIT 8.2

 

Exhibit 8.2

 

 

June 24, 2019

 

Board of Trustees

Provident Bancorp

Boards of Directors

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

5 Market Street

Amesbury, Massachusetts 01913

 

Ladies and Gentlemen:

 

You have requested this firm’s opinion regarding certain material Massachusetts income and excise tax consequences of the proposed conversion of Provident Bancorp, a Massachusetts-chartered mutual holding company (Mutual Holding Company), from the mutual holding company to the stock holding company form of organization (Conversion), pursuant to the Plan of Conversion of Provident Bancorp, dated June 5, 2019 (Plan).

 

In connection therewith, we have examined the Plan, the Registration Statement filed by Provident Bancorp, Inc., a Maryland stock corporation (Stock Holding Company) with the Securities and Exchange Commission (SEC) under the Securities Act of 1933, as amended, and the Application for Conversion filed by the Mutual Holding Company with the Massachusetts Commissioner of Banks (Commissioner). Unless otherwise defined, all terms used herein have the meanings given to such terms in the Plan. In our review, we have assumed the genuineness of all signatures where due execution and delivery are requirements to the effectiveness thereof, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed, electronic files or photostatic copies and the authenticity of the originals of such copies. In rendering the opinion set forth below, we have relied on the opinion of Luse Gorman, PC, (Counsel) related to material Federal income tax consequences of the proposed Conversion (Federal Tax Opinion), without undertaking to verify the same by independent investigation. Furthermore, we assume that each of the parties to the Conversion will comply with all reporting obligations with respect to the Conversion required under the Internal Revenue Code of 1986, as amended (Code), and the regulations thereunder (Treasury Regulations).

 

In rendering our opinion, we have considered the applicable provisions of the Code, as amended, the Treasury Regulations, pertinent judicial authorities, interpretative rulings of the Internal Revenue Service and such other authorities as we have considered relevant any of which could be changed at any time. Any such changes may be retroactive and could significantly modify the statements and opinions expressed herein. Similarly, any change in the facts and assumptions stated below, upon which this opinion is based, could modify the conclusions herein. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof.

 

Additionally, the discussions and conclusions set forth below are based on Massachusetts General Law (MGL), the regulations promulgated thereunder and existing administrative and judicial interpretations thereof as of the date of this letter, all of which are subject to change.

 

 

 

 

Page 2

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

Our opinions are not binding on the Massachusetts Department of Revenue (Department) and there can be no assurance that the Department will not take a position contrary to any of the opinions expressed herein. Because the opinions expressed herein are based upon current tax law, future changes in Massachusetts tax laws, regulations, rulings or case law may affect the tax consequences relating to the Plan. However, we have no responsibility to update this opinion for events, transactions or circumstances occurring after the date of this letter.

 

For purposes of this opinion, we are relying on the representations as to factual matters provided to us by the Mutual Holding Company, The Provident Bank (Bank), Mid-Tier Holding Company (as defined below) and the Stock Holding Company, as set forth in the certificates for each of those aforementioned entities and signed by authorized officers of each of the aforementioned entities, incorporated herein by reference.

 

Statement of Facts/Description of the Proposed Transactions

 

Based upon our review of the documents described above, and in reliance upon such documents, we understand that the relevant facts are as follows. The Bank, a Massachusetts-chartered savings bank, is currently a wholly owned subsidiary of Provident Bancorp, Inc., a Massachusetts corporation (Mid-Tier Holding Company), which is a subsidiary of the Mutual Holding Company. The Mutual Holding Company is a mutual holding company with no stockholders. The depositors of the Bank are considered to be the “owners” of the Mutual Holding Company and are entitled upon the complete liquidation of the Mutual Holding Company to any liquidation proceeds after the payment of creditors.

 

The Board of Trustees of the Mutual Holding Company, the Board of Directors of the Mid-Tier Holding Company, and the Board of Directors of the Bank adopted the Plan providing for the conversion of the Mutual Holding Company from a Massachusetts-chartered mutual holding company to the capital stock form of organization. As part of the Conversion, the Stock Holding Company will succeed to all the rights and obligations of the Mutual Holding Company and the Mid-Tier Holding Company, and will offer for sale shares of its common stock (Holding Company Common Stock) to Eligible Account Holders, Supplemental Eligible Account Holders (if any), Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and employees, officers, directors, trustees and corporators of the Mutual Holding Company or the Bank, according to the subscription priorities set forth in the Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering.

 

Pursuant to the Plan, the Conversion will be effected as follows and in such order as is necessary to consummate the Conversion:

 

1)The Mid-Tier Holding Company will organize the Stock Holding Company as a Maryland-chartered first-tier stock holding company subsidiary.

 

2)The Mutual Holding Company will merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity (MHC Merger) whereby the shares of Mid-Tier Holding Company held by the Mutual Holding Company will be cancelled and the depositors of the Bank who hold liquidation interests in the Mutual Holding Company will constructively receive liquidation interests in Mid-Tier Holding Company in exchange for their liquidation interests in the Mutual Holding Company.

 

 

 

 

Page 3

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

3)Immediately after the MHC Merger, the Mid-Tier Holding Company will merge with the Stock Holding Company (Mid-Tier Merger), with the Stock Holding Company as the resulting entity. As part of the Mid-Tier Merger, the liquidation interests in Mid-Tier Holding Company constructively received by the persons who held liquidation interests in the Mutual Holding Company will automatically, without further action on the part of the holders thereof, be exchanged for an interest in the Stock Holding Company Liquidation Account and the Minority Shares will automatically, without further action on the part of the holders thereof, be converted into and become the right to receive Holding Company Common Stock based on the Exchange Ratio.

 

4)Immediately after the Mid-Tier Merger, the Stock Holding Company will offer for sale shares of Holding Company Common Stock in the Offering.

 

5)The Stock Holding Company will contribute at least 50% of the net proceeds of the Offering to the Bank in constructive exchange for additional shares of common stock of the Bank and in exchange for the Bank Liquidation Account.

 

Following the Conversion, a Stock Holding Company Liquidation Account will be maintained by the Stock Holding Company for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their deposit accounts with the Bank. Pursuant to the Plan, the Stock Holding Company Liquidation Account will be equal to the Mutual Holding Company’s total equity as reflected in the latest statement of financial condition contained in the final Prospectus used in the Offering. The terms of the Stock Holding Company Liquidation Account and Bank Liquidation Account, which supports the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets, are described in the Plan.

 

As part of the Conversion, all of the then-outstanding shares of Mid-Tier Holding Company common stock owned by the Minority Stockholders will be converted into and become shares of Holding Company Common Stock pursuant to the Exchange Ratio in a manner that ensures that after the Conversion, Minority Stockholders will own in the aggregate the same percentage of Holding Company Common Stock as they held in Mid-Tier Holding Company common stock immediately prior to the Conversion, exclusive of Minority Stockholders’ purchases of additional shares of Holding Company Common Stock in the Offering and receipt of cash in lieu of fractional shares.

 

As a result of the Conversion and Offering, the Stock Holding Company will be a publicly-held corporation, will have registered the Holding Company Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended, and will become subject to the rules and regulations thereunder and file periodic reports and proxy statements with the SEC. The Bank will become a wholly-owned subsidiary of the Stock Holding Company and will continue to carry on its business and activities as conducted immediately prior to the Conversion.

 

The stockholders of the Stock Holding Company will be the former Minority Stockholders of the Mid-Tier Holding Company immediately prior to the Conversion, plus those persons who purchase shares of Holding Company Common Stock in the Offering. Nontransferable rights to subscribe for the Holding Company Common Stock have been granted, in order of priority, to Eligible Account Holders, Supplemental Eligible Account Holders, Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and employees, officers, directors, trustees or corporators of the Mid-Tier Holding Company or the Bank who are not eligible in the preceding categories, according to the subscription priorities set forth in the Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the

 

 

 

 

Page 4

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering. Subscription rights are nontransferable.

 

Luse Gorman, PC Federal Opinion

 

Luse Gorman, PC has provided an opinion that addresses the material federal income tax consequences of the Conversion and reorganization. The opinion concluded, as follows:

 

1)The MHC Merger will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(l)(A) of the Code.)

 

2)The constructive exchange of the Eligible Account Holders and Supplemental Eligible Account Holders liquidation interests in the Mutual Holding Company for liquidation interests in the Mid-Tier Holding Company in the MHC Merger will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations. (cf. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54.)

 

3)No gain or loss will be recognized by the Mutual Holding Company on the transfer of its assets to the Mid-Tier Holding Company and the Mid-Tier Holding Company’s assumption of its liabilities, if any, in constructive exchange for liquidation interests in the Mid-Tier Holding Company or on the constructive distribution of such liquidation interests to members of the Mutual Holding Company. (Section 361(a), 361(c) and 357(a) of the Code.)

 

4)No gain or loss will be recognized by the Mid-Tier Holding Company upon the receipt of the assets of the Mutual Holding Company in the MHC Merger in exchange for the constructive transfer of liquidation interests in the Mid-Tier Holding Company to the members of the Mutual Holding Company. (Section 1032(a) of the Code.)

 

5)Persons who have liquidation interests in the Mutual Holding Company will recognize no gain or loss upon the constructive receipt of liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the Mutual Holding Company. (Section 354(a) of the Code.)

 

6)The basis of the assets of Mutual Holding Company (other than stock in the Mid-Tier Holding Company) to be received by the Mid-Tier Holding Company will be the same as the basis of such assets in the Mutual Holding Company immediately prior to the transfer. (Section 362(b) of the Code.)

 

7)The holding period of the assets of the Mutual Holding Company transferred to the Mid-Tier Holding Company will include the holding period of those assets of the Mutual Holding Company. (Section 1223(2) of the Code.)

 

8)The Mid-Tier Merger will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code and therefore will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Code. (Section 368(a)(1)(F) of the Code.)

 

9)The Mid-Tier Holding Company will not recognize any gain or loss on the transfer of its assets to the Holding Company and the Stock Holding Company’s assumption of its liabilities in exchange for shares of Holding Company Common Stock or the distribution of such stock to Minority Stockholders

 

 

 

 

Page 5

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

and constructive distribution of interests in the Liquidation Account to the Eligible Account Holders and Supplemental Eligible Account Holders. (Sections 361(a), 361(c) and 357(a) of the Code.)

 

10)No gain or loss will be recognized by the Stock Holding Company upon the receipt of the assets of Mid-Tier Holding Company in the Mid-Tier Merger. (Section 1032(a) of the Code.)

 

11)The basis of the assets of the Mid-Tier Holding Company to be received by the Stock Holding Company will be the same as the basis of such assets in the Mid-Tier Holding Company immediately prior to the transfer. (Section 362(b) of the Code.)

 

12)The holding period of the assets of the Mid-Tier Holding Company to be received by the Stock Holding Company will include the holding period of those assets in the Mid-Tier Holding Company immediately prior to the transfer. (Section 1223(2) of the Code.)

 

13)Mid-Tier Holding Company shareholders will not recognize any gain or loss upon their exchange of Mid-Tier Holding Company common stock for Holding Company Common Stock (Section 354 of the Code.)

 

14)Eligible Account Holders and Supplemental Eligible Account Holders will not recognize any gain or loss upon their constructive exchange of their liquidation interests in Mid-Tier Holding Company for the Stock Holding Company Liquidation Account in the Stock Holding Company. (Section 354 of the Code.)

 

15)The constructive exchange of the Eligible Account Holders’ and Supplemental Eligible Account Holders’ liquidation interests in the Mid-Tier Holding Company for interests in a Stock Holding Company Liquidation Account established by the Stock Holding Company will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).

 

16)The payment of cash to the Minority Stockholders in lieu of fractional shares of Holding Company Common Stock will be treated as though the fractional shares were distributed as part of the Mid-Tier Merger and then redeemed by the Stock Holding Company. The cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under Section 302(a) of the Code, with the result that such shareholders will have short-term or long-term capital gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares. (Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev. Proc. 77-41, 1977-2 C.B. 574.)

 

17)It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Holding Company Common Stock is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders, employees, officers, directors, trustees and corporators in the Subscription Offering upon distribution to them of nontransferable subscription rights to purchase shares of Holding Company Common Stock. (Section 356(a) of the Code.) Eligible Account Holders and other purchasers in the Subscription Offering will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights. (Rev. Rul. 56-572, 1956-2 C.B. 182.)

 

18)It is more likely than not that the fair market value of the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets is zero. Accordingly, it is more likely than not

 

 

 

 

Page 6

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

that no gain or loss will be recognized by Eligible Account Holders and Supplemental Eligible Account Holders upon the constructive distribution to them of such rights in the Bank Liquidation Account as of the effective date of the Mid-Tier Merger. (Section 356(a) of the Code.)

 

19)Each shareholder’s aggregate basis in his or her Holding Company Common Stock (including fractional shares) received in the exchange will be the same as the aggregate basis of the Mid-Tier Holding Company common stock surrendered in exchange therefore. (Section 358(a) of the Code.)

 

20)It is more likely than not that the basis of the Holding Company Common Stock purchased in the Offering by the exercise of the nontransferable subscription rights will be the purchase price thereof. (Section 1012 of the Code.)

 

21)Each shareholder’s holding period in his or her Holding Company Common Stock received in the exchange will include the period during which the Mid-Tier Holding Company common stock surrendered was held, provided that the common stock surrendered is a capital asset in the hands of the shareholder on the date of the exchange. (Section 1223(1) of the Code.)

 

22)The holding period of the Holding Company Common Stock purchased pursuant to the exercise of subscriptions rights shall commence on the date on which the right to acquire such stock was exercised. (Section 1223(5) of the Code.)

 

23)No gain or loss will be recognized by Stock Holding Company on the receipt of money in exchange for Holding Company Common Stock sold in the Offering. (Section 1032 of the Code.)

 

Counsel’s opinions under paragraphs 17, 19 and 20 are based on the position that the subscription rights to purchase shares of Holding Company Common Stock received by Eligible Account Holders, Supplemental Eligible Account Holders, employees, officers, directors, trustees and corporators in the Subscription Offering have a fair market value of zero. Counsel understands that the subscription rights will be granted at no cost to the recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of Holding Company Common Stock at the same price to be paid by members of the general public in any Community Offering. Counsel also notes that the IRS has not in the past concluded that subscription rights have value. In addition, Counsel is relying on a letter from RP Financial, LC. to you stating its belief that subscription rights do not have any economic value at the time of distribution or at the time the rights are exercised in the Subscription Offering. Based on the foregoing, Counsel believes it is more likely than not that the nontransferable subscription rights to purchase Holding Company Common Stock have no value.

 

If the subscription rights are subsequently found to have an economic value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Stock Holding Company and/or the Bank may be taxable on the distribution of the subscription rights.

 

Counsel’s opinion under paragraph 18 above is based on the position that the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets has a fair market value of zero. Counsel understands that: (i) there is no history of any holder of a liquidation account receiving any payment attributable to a liquidation account; (ii) the interests in the Stock Holding Company Liquidation Account and Bank Liquidation Account are not transferable; (iii) the amounts due under the Stock Holding Company Liquidation Account with respect to each Eligible Account Holder and Supplemental Eligible Account Holder are reduced as their deposits in the Bank are reduced as described in the Plan; and (iv) the Bank Liquidation

 

 

 

 

Page 7

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

Account payment obligation arises only if the Stock Holding Company lacks sufficient net assets to fund the Stock Holding Company Liquidation Account. Counsel also notes that the U.S. Supreme Court in Paulsen v. Commissioner, 469 U.S. 131 (1985) stated the following:

 

The right to participate in the net proceeds of a solvent liquidation is also not a significant part of the value of the shares. Referring to the possibility of a solvent liquidation of a mutual savings association, this Court observed: “It stretches the imagination very far to attribute any real value to such a remote contingency, and when coupled with the fact that it represents nothing which the depositor can readily transfer, any theoretical value reduces almost to the vanishing point.” Society for the Savings v. Bowers, 349 U.S. 143, 150 (1955).

 

In addition, Counsel is relying on a letter from RP Financial, LC. to you dated June 5, 2019, stating its belief that the benefit provided by the Bank Liquidation Account supporting the payment of the Stock Holding Company Liquidation Account in the event the Stock Holding Company lacks sufficient net assets does not have any economic value at the time of the Conversion. Based on the foregoing, Counsel believes it is more likely than not that such rights in the Bank Liquidation Account have no value.

 

If such rights in the Bank Liquidation Account are subsequently found to have an economic value, income may be recognized by each Eligible Account Holder and Supplemental Eligible Account Holder in the amount of the fair market value of their interest in the Bank Liquidation Account as of the effective date of the Conversion.

 

DISCUSSION RELATED TO MASSACHUSETTS INCOME AND EXCISE TAX CONSEQUENCES

 

Mutual Holding Company, Mid-Tier Holding Company and Bank are subject to the Massachusetts financial institution excise tax under MGL Chapter 63, Sections 1, 2, 2A and 7. At the effective time of the Conversion, Stock Holding Company and Bank will be subject to same.

 

Net income is defined in MGL Chapter 63 Section 1 as gross income less deductions allowed by the Internal Revenue Code, as amended and in effect for the taxable year, with enumerated modifications. Such modifications are not relevant to this Opinion.

 

OPINION

 

Accordingly, based upon the facts and representations stated herein and the existing law, it is the opinion of Baker Newman Noyes regarding the Massachusetts income and excise tax effects of the Plan that:

 

1)For purposes of Massachusetts General Laws, chapter 63, sections 1, 2 and 2A, no gross income, gain or loss will be recognized by the Mutual Holding Company, Mid-Tier Holding Company, Stock Holding Company or Bank as a result of the transactions contemplated by the Plan.

 

2)No gross income, gain or loss will be recognized by the Eligible Account Holders, persons who have liquidation interests in the Mutual Holding Company, persons who have liquidation interests in the Mid-Tier Holding Company, and other purchasers in the Subscription Offering as a result of the transactions contemplated by the Plan.

 

3)No gain or loss will be recognized by the Mid-Tier Holding Company shareholders upon their exchange of Mid-Tier Holding Company common stock for Holding Company Common Stock. (Section 354 and MGL Chapter 62, Section 2).

 

 

 

 

Page 8

Provident Bancorp

Provident Bancorp, Inc. (a Maryland corporation)

Provident Bancorp, Inc. (a Massachusetts corporation)

The Provident Bank

June 24, 2019

 

4)No gain or loss will be recognized by the Minority Stockholders upon their exchange of Mid-Tier Holding Company common stock for Holding Company Common Stock except to the extent of any cash received in lieu of a fractional share interest in Stock Holding Company. Minority Stockholders who receive cash in lieu of fractional shares of Holding Company Common Stock will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holder’s tax basis of the shares of Mid-Tier Holding Company allocable to the fractional share; such gain or loss will be capital gain or loss if such shares were held as a capital asset as of the date of the Mid-Tier Merger, and will be long-term gain or loss if such holder’s holding period in the shares of Mid-Tier Holding Company common stock is more than one year on the date of the Mid-Tier Merger (Section 354 and MGL Chapter 62, Section 2).

 

CONCLUSION

 

The opinions contained herein are rendered only with respect to the specific matters discussed herein and we express no opinion with respect to any other legal, Federal, state, or local tax aspect of these transactions. This opinion is not binding upon any tax authority including the Massachusetts Department of Revenue or any court and no assurance can be given that a position contrary to that expressed herein will not be asserted by a tax authority.

 

In rendering our opinions we are relying upon the relevant provisions of the Internal Revenue Code of 1986, as amended, Massachusetts General Laws and the regulations, judicial and administrative interpretations thereof, all as of the date of this letter.

 

However, all of the foregoing authorities are subject to change or modification which can be retroactive in effect and, therefore, could also affect our opinions. We undertake no responsibility to update our opinions for any subsequent change or modification.

 

This opinion is given solely for the benefit of Mutual Holding Company, Mid-Tier Holding Company, Stock Holding Company, Bank, Eligible Account Holders, Supplemental Eligible Account Holders, and other persons described in the Plan who will receive Subscription Rights, and may not be relied upon by any other party or entity or otherwise referred to in any document without our express written consent.

 

CONSENT

 

We hereby consent to the filing of the opinion as an exhibit to the Mutual Holding Company's Application for Conversion filed with the Commissioner and to the Stock Holding Company's Registration Statement on Form S-1 as filed with the SEC. We also consent to the references to our firm in the Prospectus contained in the Application for Conversion and Form S-1 under the caption “The Conversion and Offering-Material Income Tax Consequences” and “Legal Matters”.

 

Very truly yours,  
   
/s/ Baker Newman & Noyes LLC  
   
Baker Newman & Noyes LLC  

 

 

 

EX-23.2 6 tv525519_ex23-2.htm EXHIBIT 23.2

 

Exhibit 23.2

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the use in Pre-Effective Amendment No. 1 to Registration Statement No. 333-233018 on Form S-1 of our report dated March 14, 2019 relating to the consolidated financial statements of Provident Bancorp, Inc. appearing in the Prospectus and Proxy Statement/Prospectus, which are part of this Registration Statement.

 

We also consent to the reference to us under the caption “Experts” in the Prospectus and Proxy Statement/Prospectus.

 

/s/ Whittlesey PC

 

Hartford, Connecticut

July 23, 2019

 

 

 

 

 

EX-23.4 7 tv525519_ex23-4.htm EXHIBIT 23.4

 

Exhibit 23.4

 

RP® FINANCIAL, LC.
Advisory | Planning | Valuation

 

July 23, 2019

 

Boards of Trustees
Provident Bancorp
Board of Directors
Provident Bancorp, Inc.
The Provident Bank
5 Market Street

Amesbury, Massachusetts 01913

 

Members of the Boards of Trustees and Directors:

 

We hereby consent to the use of our firm’s name in the Registration Statement on Form S-1, and any amendments thereto, to be filed with the Securities and Exchange Commission. We also hereby consent to the inclusion of, summary of and references to our Valuation Appraisal Report and any Valuation Appraisal Report Updates in such filings including the prospectus of Provident Bancorp, Inc. We also consent to the reference to our firm under the heading “Experts” in the prospectus.

 

  Sincerely,
  RP® FINANCIAL, LC.
   
   

 

Washington Headquarters  
4250 North Fairfax Drive Telephone:  (703) 528-1700
Suite 600 Fax No.:  (703) 528-1788
Arlington, VA  22203 Toll-Free No.:  (866) 723-0594
www.rpfinancial.com E-Mail:  mail@rpfinancial.com

 

 

 

EX-99.7 8 tv525519_ex99-7.htm EXHIBIT 99.7

 

Exhibit 99.7

 

REVOCABLE PROXY

 

PROVIDENT BANCORP, INC.

SPECIAL MEETING OF STOCKHOLDERS

 

SEPTEMBER 25, 2019

 

The undersigned hereby appoints the proxy committee of the Board of Directors of Provident Bancorp, Inc., with full powers of substitution, to act as attorneys and proxies for the undersigned to vote all shares of common stock of Provident Bancorp, Inc. that the undersigned is entitled to vote at the Special Meeting of Stockholders (“Special Meeting”), to be held at the Blue Ocean Event Center, 4 Oceanfront North, Salisbury, Massachusetts, at 3:30 p.m., Eastern Time, on September 25, 2019. The proxy committee is authorized to cast all votes to which the undersigned is entitled as follows:

 

      FOR   AGAINST   ABSTAIN
1. The approval of a plan of conversion pursuant to which: (a) Provident Bancorp and Provident Bancorp, Inc., a Massachusetts corporation (“Old Provident”) 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 holding company for The Provident Bank; (c) the outstanding shares of Old Provident, 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, and, if necessary, a community offering and/or syndicated community offering or firm commitment underwritten public 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 reorganization; and

  ¨   ¨   ¨

 

Such other business as may properly come before the meeting.

 

The Board of Directors recommends a vote “FOR” each of the above-listed proposals.

 

 

THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED FOR ONE OR MORE PROPOSALS, THIS PROXY, IF SIGNED, WILL BE VOTED FOR THE UNVOTED PROPOSALS. IF ANY OTHER BUSINESS IS PRESENTED AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THE MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING.

 

 

 

 

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

 

Should the above-signed be present and elect to vote at the Special Meeting or at any adjournment thereof and after notification to the Secretary of Provident Bancorp, Inc. at the Special Meeting of the stockholder’s decision to terminate this proxy, then the power of said attorneys and proxies shall be deemed terminated and of no further force and effect. This proxy may also be revoked by sending written notice to the Secretary of Provident Bancorp, Inc. at the address set forth on the Notice of Special Meeting of Stockholders, or by the filing of a later-dated proxy prior to a vote being taken on a particular proposal at the Special Meeting.

 

The above-signed acknowledges receipt from Provident Bancorp, Inc. prior to the execution of this proxy of a Notice of Special Meeting and the proxy statement/prospectus dated _________, 2019.

 

Dated: _________________, 2019 ¨  Check Box if You Plan to Attend the Special Meeting

 

     
PRINT NAME OF STOCKHOLDER   PRINT NAME OF STOCKHOLDER
     
     
SIGNATURE OF STOCKHOLDER   SIGNATURE OF STOCKHOLDER

 

Please sign exactly as your name appears on this proxy card. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If shares are held jointly, each holder should sign, but only one holder is required to sign.

 

 

Please complete, sign and date this proxy card and return it promptly
in the enclosed postage-prepaid envelope.

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING

 

The Notice of Special Meeting of Stockholders, Proxy Statement/Prospectus and Proxy Card are available at www.cstproxy.com/theprovidentbank/sm2019.

 

 

 

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LUSE GORMAN, PC

ATTORNEYS AT LAW

5335 Wisconsin Avenue, NW, Suite 780

Washington, D.C. 20015

—————

Telephone (202) 274-2000

Facsimile (202) 362-2902

www.luselaw.com

 

WRITER’S DIRECT DIAL NUMBER   WRITER’S EMAIL
(202) 274-2007   nquint@luselaw.com

 

July 24, 2019

 

VIA EDGAR

 

Securities and Exchange Commission

Division of Corporation Finance

Office of Financial Services

100 F Street, N.E.

Washington, D.C. 20549-4720

 

Attn.:Jessica Livingston, Esq.

 

Re:Provident Bancorp, Inc. (Registration No. 333-233018)

Registration Statement on Form S-1

 

Dear Ms. Livingston:

 

On behalf of Provident Bancorp, Inc. (the “Company”) and in accordance with Rule 101 of Regulation S-T, we are hereby transmitting Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-1 (the “Amended S-1”). Set forth below are the comments from the Staff’s comment letter dated July 1, 2019, as well as the Company’s responses to those comments. The Amended S-1 has been blacklined to reflect changes from the original filing.

 

Summary, page 1

 

1.Please provide a summary of the risks related to your business and this offering.

 

Page 17 has been revised, as requested.

 

Business Strategy, page 3

 

2.In order to provide investors with a more balanced picture of your strategy, briefly discuss the relatively unseasoned nature of your commercial loan portfolio and the percentage of commercial loans in your loan portfolio.

 

 

 

 

LUSE GORMAN, PC

ATTORNEYS AT LAW

 

Securities and Exchange Commission

July 24, 2019

Page 2

 

Pages 3 and 4 have been revised, as requested.

 

Risk Factors

Risks Related to Our Business

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions., page 25

 

3.Please revise to clarify whether you have been subject to fines or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in the past.

 

Page 24 has been revised, as requested.

 

Customer or employee fraud subjects us to additional operational risks., page 26

 

4.Please disclose whether you have experienced any material financial losses from employee errors, misconduct or fraud.

 

Page 25 has been revised, as requested.

 

System failure or breaches of our network security could materially and adversely affect our business…. , page 26

 

5.Please clarify whether you have experienced any of the referenced types of breaches. Refer to CF Disclosure Guidance: Topic No. 2, Cybersecurity.

 

Page 25 has been revised, as requested.

 

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance., page 31

 

6.Please revise here or in a new risk factor to address the specific risks of unallocated proceeds and state clearly that management will have broad discretion over the use of proceeds.

 

The risk factor beginning on page 30 has been revised as requested.

 

 

 

 

LUSE GORMAN, PC

ATTORNEYS AT LAW

 

Securities and Exchange Commission

July 24, 2019

Page 3

 

Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock. , page 31

 

7.Revise this risk factor or the proceeding one on use of proceeds to disclose your current return on equity, your current equity position, and your expected equity position after the offering.

 

Page 31 has been revised, as requested.

 

Contractual Obligations and Off-Balance Sheet Arrangements, page 79

 

8.Please revise to provide tabular disclosure of all your contractual obligations consistent with the guidance in Item 303(a)(5) of Regulation S-K.

 

As discussed with the staff of the SEC, we respectfully request that the Company not be required to make the requested revision, as the Company is a “Smaller Reporting Company” and Item 303(c) of Regulation S-K provides that a smaller reporting company is not required to provide the information required by Item 303(a)%).

 

Share Exchange ratio for Current Stockholders, page 121

 

9.Revise to disclose the current book value per share as of the same date.

 

Footnote (2) on page 135 has been revised as requested.

 

The Conversion and Offering

Syndicated or Firm Commitment Underwritten Offering, page 129

 

10.Revise to clarify if these potential offerings must terminate by the latest extension date.

 

Page 142 has been revised, as requested.

 

Restrictions On Acquisition Of New Provident

Maryland Law and Articles of Incorporation and Bylaws of New Provident

Forum Selection for Certain Stockholder Lawsuit, page 149

 

11.We note the disclosure that the courts of the State of Maryland will be the sole and exclusive forum. Here or elsewhere, please expand your disclosure to describe the risks to shareholders, to clarify whether this provision is intended to apply to claims made under the U.S. federal securities laws and to include a more thorough description of the provision, including any uncertainty about enforceability.

 

 

 

 

LUSE GORMAN, PC

ATTORNEYS AT LAW

 

Securities and Exchange Commission

July 24, 2019

Page 4

 

A new risk factor has been added to page 33, which includes a description of the risks to shareholders, as well as a discussion about the possibility of unenforeability. The disclosure on page 162 has been expanded to include a description of the remaining language from the articles of incorporation with respect to the forum provision, and to indicate that the provision would apply to claims made under the U.S. federal securities laws.

 

General

 

12.Please provide us with all promotional material and sales literature. In this regard, please note that sales materials must set forth a balanced presentation of the risks and rewards to investors and should not contain any information or disclosure that is inconsistent with or not also provided in the prospectus. Please refer to Item 19.B of Securities Act Industry Guide 5.

 

The Company does not intend to use any promotional material or sales literature other than the marketing materials and the stock order form that were previously filed as Exhibits 99.4 and 99.5, respectively. We believe that this information includes a balanced presentation of risks (including a specific listing of all risk factors in the stock order form) and does not contain any information or disclosure that is inconsistent with or not also provided in the prospectus.

 

*   *   *   *   *

 

We trust the foregoing is responsive to the Staff’s comments. We request that the Staff advise the undersigned at (202) 274-2007 or Lawrence Spaccasi of this office at (202) 274-2037 as soon as possible if it has any further comments.

 

  Respectfully,
   
  /s/ Ned Quint
   
  Ned Quint

 

cc:Michael Clampitt, Esq.

Michael Volley, CPA

Amit Panda, CPA

David P. Mansfield, President and

Chief Executive Officer

Lawrence Spaccasi, Esq.