Filed Pursuant to Rule No. 424(b)(3)
File No. 333-98241
[LOGO]
PROVIDENT FINANCIAL SERVICES, INC.
Proposed Holding Company for The Provident Bank
51,842,000 Shares of Common Stock
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The Provident Bank is converting from the mutual to the stock form of
organization. As part of the conversion, Provident Financial Services, Inc. is
offering shares of common stock. The Provident Bank will become a wholly-owned
subsidiary of Provident Financial Services, Inc. Applicable regulations require
Provident Financial Services, Inc. to sell its common stock in an aggregate
amount equal to the estimated pro forma market value of The Provident Bank as
determined by an independent appraiser. We expect that the common stock of
Provident Financial Services, Inc. will be listed on the New York Stock Exchange
under the symbol "PFS."
We are offering 51,842,000 shares of common stock, which may be increased
to up to 59,618,300 shares, on a best efforts basis. In addition, up to
1,920,000 shares of common stock will be contributed to a charitable foundation
established by The Provident Bank. We must sell a minimum of 38,318,000 shares
of common stock, including shares purchased by our directors and executive
officers, but excluding shares issued to the charitable foundation, to complete
this offering. Purchasers will not pay commissions in connection with the sale
of common stock in the offering. If we do not receive orders for the minimum
number of shares offered, the offering will be terminated. Directors and
executive officers intend to purchase 483,750 shares of common stock, or 1.07%
of the offering at the midpoint of the offering range. The offering period is
expected to expire on December 16, 2002. We may extend this expiration date
without notice to you, until January 30, 2003, unless regulators approve a later
date. Once submitted, orders are irrevocable unless the offering is terminated
or extended beyond January 30, 2003. If the offering is extended beyond January
30, 2003, subscribers will have the right to modify or rescind their purchase
orders.
The minimum number of shares that you may purchase is 25 shares. Funds
received prior to the completion of the offering will be held in a segregated
account at The Provident Bank and will bear interest at our passbook savings
rate, which is currently 1.39%. If the offering is terminated, subscribers will
have their funds returned promptly, without penalty, with interest at our
passbook savings rate.
Sandler O'Neill & Partners, L.P. will assist us in our selling efforts.
Sandler O'Neill & Partners, L.P. is not obligated to purchase any shares in the
offering.
This investment involves a degree of risk, including the possible loss of
principal. Please read the "Risk Factors" beginning on page 14.
TERMS OF THE OFFERING
Price: $10.00 per share
Adjusted
Minimum Maximum Maximum
------------ ------------ ------------
Number of shares ........................................................ 38,318,000 51,842,000 59,618,300
Gross proceeds .......................................................... $383,180,000 $518,420,000 $596,183,000
Estimated underwriting commissions and other expenses ................... $ 6,780,000 $ 8,024,000 $ 8,740,000
Estimated net proceeds to Provident Financial Services, Inc. ............ $376,400,000 $510,396,000 $587,443,000
Estimated net proceeds per share to Provident Financial Services, Inc. .. $ 9.82 $ 9.85 $ 9.85
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These securities are not deposits or savings accounts and are not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Commissioner of Banking
and Insurance of the State of New Jersey, the Federal Deposit Insurance
Corporation, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For assistance, please contact the conversion center at (866) 332-2002.
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Sandler O'Neill & Partners, L.P.
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November 12, 2002
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TABLE OF CONTENTS
SUMMARY......................................................................................1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA..............................................12
RISK FACTORS................................................................................14
RECENT DEVELOPMENTS.........................................................................23
FORWARD-LOOKING STATEMENTS..................................................................30
THE PROVIDENT BANK..........................................................................31
PROVIDENT FINANCIAL SERVICES, INC...........................................................31
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING.........................................31
OUR POLICY REGARDING DIVIDENDS..............................................................33
MARKET FOR THE COMMON STOCK.................................................................34
REGULATORY CAPITAL COMPLIANCE...............................................................35
CAPITALIZATION..............................................................................36
PRO FORMA DATA..............................................................................37
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE FOUNDATION...........43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......44
BUSINESS OF PROVIDENT FINANCIAL SERVICES, INC...............................................63
BUSINESS OF THE PROVIDENT BANK..............................................................64
FEDERAL AND STATE TAXATION..................................................................98
REGULATION.................................................................................100
MANAGEMENT.................................................................................119
THE CONVERSION AND OFFERING................................................................135
General.................................................................................135
Reasons for the Conversion..............................................................136
Effects of the Conversion...............................................................137
Federal and State Tax Consequences of the Conversion....................................139
Establishment of the Charitable Foundation..............................................143
The Stock Offering......................................................................147
How We Determined Stock Pricing and the Number of Shares to be Issued...................148
Subscription Offering and Subscription Rights...........................................152
Regulatory Conditions Imposed on the ESOP...............................................154
Direct Community Offering...............................................................155
Syndicated Community Offering...........................................................156
Public Offering Alternative.............................................................157
Procedure For Purchasing Shares.........................................................157
Restrictions on Transfer of Subscription Rights and Shares of Common Stock..............159
Plan of Distribution and Marketing Arrangements.........................................160
Limitations on Purchases of Common Stock................................................161
Restrictions on Sale of Stock by Directors and Officers.................................163
Interpretation, Amendment and Termination...............................................164
Conversion Center.......................................................................164
Participation by Management in the Offering.............................................165
RESTRICTIONS ON ACQUISITION OF PROVIDENT FINANCIAL SERVICES, INC. AND THE PROVIDENT BANK...166
DESCRIPTION OF CAPITAL STOCK...............................................................171
INDEMNIFICATION AND LIMITATIONS OF LIABILITY FOR DIRECTORS, OFFICERS AND EMPLOYEES........173
TRANSFER AGENT AND REGISTRAR...............................................................173
LEGAL AND TAX MATTERS......................................................................173
EXPERTS....................................................................................174
REGISTRATION REQUIREMENTS..................................................................174
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION................................................174
THE PROVIDENT BANK AND SUBSIDIARIES - CONSOLIDATED FINANCIAL STATEMENTS....................F-1
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. You should read this
entire prospectus carefully, including the consolidated financial statements of
The Provident Bank and the notes to the consolidated financial statements.
The Provident Bank
Originally established in 1839, we are a New Jersey chartered mutual
savings bank headquartered in Jersey City, New Jersey. We are a community- and
customer-oriented bank operating 49 full-service branch offices in the New
Jersey counties of Hudson, Bergen, Essex, Mercer, Middlesex, Monmouth, Morris,
Ocean, Somerset and Union, which we consider our primary market area. As part of
our "Customer-Centric Strategy," we emphasize personal service and customer
convenience in serving the financial needs of the individuals, families and
businesses residing in our markets. We attract deposits from the general public
in the areas surrounding our banking offices and use those funds, together with
funds generated from operations and borrowings, to originate commercial real
estate loans, residential mortgage loans, mortgage warehouse loans, commercial
business loans and consumer loans. We also invest in mortgage-backed securities
and other permissible investments. At June 30, 2002, we had total assets of
$3.07 billion, total net loans of $1.92 billion, total deposits of $2.53
billion, and equity of $310.6 million. On September 6, 2002, The Provident Bank
completed its acquisition and assumption of approximately $21.8 million in
deposits of two full-service branch offices located in Brick, New Jersey from
another financial institution. The Provident Bank consolidated its pre-existing
branch office in Brick, New Jersey with one of the acquired offices. Our mailing
address is 830 Bergen Avenue, Jersey City, New Jersey 07306-4599, and our
telephone number is (201) 333-1000.
The following are highlights of The Provident Bank's operations:
. Diversified Loan Portfolio. In order to improve asset yields and
reduce our exposure to interest rate risk, we have diversified our
loan portfolio by emphasizing the origination of commercial mortgage,
commercial business and mortgage warehouse loans. These loans
generally have adjustable interest rates that initially are higher
than the rates applicable to one- to four-family residential mortgage
loans. However, these loans also generally have a higher risk of loss
than single-family residential mortgage loans. Residential mortgage
loans as a percentage of our loan portfolio have declined from 56.5%
at December 31, 1997 to 38.4% at June 30, 2002.
. Asset Quality. As of June 30, 2002, non-performing assets were $4.8
million or 0.15% of total assets compared to $6.5 million or 0.32% of
total assets at December 31, 1997. Our asset quality reflects our
focus on underwriting criteria and aggressive collection and charge
off efforts. However, the increased levels of commercial mortgage,
commercial business and mortgage warehouse loans, the limited
seasoning of these portfolios and the relatively large credit
concentrations, increase our credit risk.
. Emphasis on Relationship Banking and Core Deposits. We have emphasized
growth in core deposit accounts, such as checking and savings
accounts, and expanding customer relationships. Core deposit accounts
totaled $1.44 billion at June 30, 2002, representing 57.0% of total
deposits. We have also focused on increasing the number of households
and businesses served and the number of bank products per customer
through our commitment to our brand promise -- "Hassle-Free Banking
for Busy People." At June 30, 2002, we had a banking relationship with
approximately 120,400 households/businesses in our market areas.
. Increasing Non-Interest Income. Our emphasis on transaction accounts
and expanded products and services has enabled us to increase
non-interest income. A primary source of our non-interest income is
derived from fees on our core deposit accounts. Non-interest income
increased to $12.0 million for the six months ended June 30, 2002 and
$21.2 million for the year ended December 31, 2001, compared to $12.1
million for the year ended December 31, 1997. We have also focused on
expanding our products and services to generate additional
non-interest income. In addition to offering investment products and
estate management and trust services, we entered into a joint venture
in 2001 to sell title insurance and we acquired a mortgage banking
company in July, 2001.
. Expense Management. During 2001, we hired a significant number of
lending and marketing professionals as part of our business strategy
of increasing business lending and deposit relationships and
developing and implementing our Customer Relationship Management
strategy. Non-interest expense to average assets increased to 3.02%
for the six months ended June 30, 2002 from 2.94% for the year ended
December 31, 2001. We are currently reviewing our current business
operations and processes to evaluate outsourcing opportunities for
operations that are not part of our core-banking activities.
. Managing Interest Rate Risk. Although our liabilities are more
sensitive to changes in interest rates than our assets, we seek to
manage our exposure to interest rate risk by emphasizing the
origination and retention of adjustable rate and shorter term loans.
In addition, we use our investments in securities to manage interest
rate risk. At December 31, 2001, 62.4% of our loan portfolio had a
term to maturity of one year or less or had an adjustable interest
rate. Moreover, at June 30, 2002, our securities portfolio totaled
$838.6 million and had an average expected life of 3.19 years
(excluding equity securities).
. Expansion of Retail Banking Franchise. During the last several years,
The Provident Bank has expanded its retail banking franchise by
acquiring branches and a whole bank. We have also closed branch
offices that did not meet our performance criteria. We anticipate
continued expansion through the establishment of two to four de novo
branch offices annually during the next three years, although no
assurance can be given that we will be able to establish these
branches as intended. We will consider other expansion opportunities
that may
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arise and that complement or enhance our market presence, although we
currently have no specific arrangements or understandings regarding
any specific acquisition transaction.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management Strategy."
Provident Financial Services, Inc.
Provident Financial Services, Inc. is a Delaware corporation organized by
The Provident Bank in connection with the conversion. Provident Financial
Services, Inc. will be the holding company for The Provident Bank following the
conversion. It has not engaged in any business to date. Upon completion of the
conversion, we will own all of the common stock of The Provident Bank. See
"Business of Provident Financial Services, Inc."
The Conversion and Stock Offering
The conversion involves a series of transactions by which we will convert
from our current status as a mutual savings bank to a stock savings bank.
Following the conversion, The Provident Bank will become a subsidiary of
Provident Financial Services, Inc. As a stock savings bank, we intend to
continue our current business strategies, and we will continue to be subject to
the regulation and supervision of the New Jersey Department of Banking and
Insurance and the Federal Deposit Insurance Corporation. As part of the
conversion, Provident Financial Services, Inc. is offering 51,842,000 shares of
its common stock for sale to the public, which offering may be increased to
59,618,300. In addition we will contribute cash and up to 1,920,000 shares of
common stock to a charitable foundation established by The Provident Bank.
The conversion to a stock savings bank, and the additional capital
resources that will result from the sale of common stock to the public, are
intended to provide the following benefits:
. greater flexibility to structure and finance the expansion of our
operations, including the potential acquisition of other financial
institutions;
. greater flexibility to diversify into other financial services;
. greater flexibility to raise additional capital and to issue capital
stock;
. additional resources to develop and enhance The Provident Bank's
technology and delivery channels; and
. better capital management tools, including the ability to pay
dividends and repurchase shares of our common stock.
In addition, the conversion will enable us to retain and attract qualified
personnel by establishing stock benefit plans for management and employees,
including a stock option plan, recognition and retention plan and an employee
stock ownership plan.
3
The Board of Managers of The Provident Bank unanimously approved the
conversion as being in the best interests of The Provident Bank, our depositors
and the communities we serve.
Terms of the Offering
We are offering between 38,318,000 and 51,842,000 shares of common stock of
Provident Financial Services, Inc. for sale to qualifying depositors, The
Provident Bank Employee Stock Ownership Plan, which we refer to as the ESOP, our
employees, officers and directors, and possibly to the public. The maximum
number of shares that we sell in the offering may increase by up to 15%, to
59,618,300 shares, as a result of regulatory considerations, demand for the
shares in the offering, or positive changes in financial markets in general and
with respect to financial institution stocks in particular. The increase in the
offering range may also occur to fill the purchase order of our ESOP. If the
ESOP's subscription is not filled in its entirety, it may purchase shares in the
open market. Unless the number of shares to be sold is increased to more than
59,618,300 shares or the offering is extended beyond January 30, 2003, you will
not have the opportunity to change or cancel your stock order. The offering
price is $10.00 per share. All investors will pay the same purchase price per
share of common stock in the offering. Sandler O'Neill & Partners, L.P., our
financial and marketing advisor in connection with the conversion, will use its
best efforts to assist us in selling our stock. Sandler O'Neill & Partners, L.P.
is not obligated to purchase any shares in the offering.
Who May Order Stock in the Offering
We are offering the shares of common stock of Provident Financial Services,
Inc. in a "subscription offering" in the order of priority listed below:
(1) Depositors with accounts at The Provident Bank with aggregate balances
of at least $50 on March 31, 2001;
(2) The Provident Bank Employee Stock Ownership Plan, which will provide
retirement benefits to our employees;
(3) Depositors with accounts at The Provident Bank with aggregate balances
of at least $50 on September 30, 2002; and
(4) Officers, employees and directors of The Provident Bank who are not
depositors entitled to purchase shares in categories (1) or (3) above.
Our directors and executive officers intend to purchase 483,750 shares of
common stock, or 1.07% of the offering at the midpoint of the offering range.
The shares of common stock not purchased in the subscription offering will be
offered in a "direct community offering," with preference to natural persons
residing in the State of New Jersey. Shares may also be offered to the general
public. The direct community offering, if any, may commence concurrently with,
during or promptly after the subscription offering. We also may offer shares of
common stock not purchased in the subscription offering or the direct community
offering through a syndicate of brokers in a "syndicated community offering"
managed by Sandler O'Neill & Partners, L.P.
4
or in an underwritten public offering. We have the right to accept or reject
orders received in the direct community offering and the syndicated community
offering at our sole discretion.
How We Determined the Offering Range and the $10.00 Price Per Share
The offering range is based on an independent valuation prepared by RP
Financial, LC, an appraisal firm experienced in appraisals of financial
institutions. RP Financial will receive a fee of $100,000 for preparing the
independent appraisal.
The appraisal incorporated an analysis of a peer group of publicly-traded
financial institutions that RP Financial considered to be comparable to
Provident Financial Services, Inc. This analysis included an evaluation of the
average and median price-to-earnings and price-to-book value ratios indicated by
the market prices of the peer companies. RP Financial applied the peer group's
pricing ratios, as adjusted for certain qualitative valuation factors to account
for differences between Provident Financial Services, Inc. and the peer group,
to Provident Financial Services, Inc.'s pro forma earnings and book value to
derive the estimated pro forma market value of Provident Financial Services,
Inc. RP Financial defines the estimated pro forma market value as the price at
which our common stock, immediately upon completion of the conversion, would
change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable knowledge of relevant
facts.
RP Financial has estimated that as of October 18, 2002 the pro forma market
value of Provident Financial Services, Inc. ranged from a minimum of
$383,180,000 to a maximum of $518,420,000, with a midpoint of $450,800,000.
Based on this valuation and the $10.00 per share price, the number of shares of
common stock being sold by Provident Financial Services, Inc. will range from
38,318,000 shares to 51,842,000 shares. The $10.00 price per share was selected
primarily because $10.00 is the price per share most commonly used in stock
offerings involving conversions of mutual savings banks. In addition, we will
establish a charitable foundation with an initial contribution valued at 6% of
the offering, subject to a maximum contribution of $24,000,000. The contribution
will be in the form of shares of common stock (up to 1,920,000 shares) and cash,
with common stock representing 80% of the contribution and the balance in cash.
The shares of common stock contributed to the charitable foundation will not be
included in determining whether the minimum number of shares of common stock
(38,318,000) has been sold in order to complete the offering. The establishment
of the charitable foundation has the effect of reducing the valuation of
Provident Financial Services, Inc. See "Comparison of Valuation and Pro Forma
Information With and Without the Foundation" and "Risk Factors--The Contribution
of Shares and Cash to the Charitable Foundation Will Dilute Your Ownership
Interests and Adversely Impact Net Income."
The following table presents a summary of selected pricing ratios for the
peer group companies and the resulting pricing ratios for Provident Financial
Services, Inc. Compared to the median pricing ratios of the peer group,
Provident Financial Services, Inc.'s pro forma pricing ratios at the maximum of
the offering range indicated a premium of 26.2% on a price-to-earnings basis and
a discount of 54.8% on a price-to-book value basis and 54.4% on a
price-to-tangible book value basis. The estimated appraised value and the
resulting discounts took into consideration the potential financial impact of
the conversion.
5
Price to earnings Price to book Price to tangible
multiple (1) value ratio book value ratio
----------------- ------------- -----------------
Provident Financial Services, Inc.
Pro forma data based on financial data as of
September 30, 2002
Maximum number of shares ...................... 19.00x 69.63% 71.76%
Minimum number of shares ...................... 14.51x 61.39% 63.61%
Valuation of peer group companies as of
October 18, 2002
Averages ...................................... 15.77x 148.18% 157.88%
Medians ....................................... 15.06x 153.96% 157.42%
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(1) Based on trailing twelve month earnings.
The independent appraisal does not indicate market value. Do not assume or
expect that the valuation of Provident Financial Services, Inc., as indicated
above, means that the common stock will trade at or above the $10.00 purchase
price after the conversion.
The independent appraisal will be updated before we complete the offering
and conversion. Any changes in the appraisal would be subject to regulatory
approval. The estimated pro forma market value of Provident Financial Services,
Inc. may be increased by up to 15%, to up to $596,183,000. If this occurs, the
maximum number of shares sold to depositors and the public, and purchased by our
ESOP, will increase. See "Pro Forma Data."
Limits on Your Purchase of the Common Stock
The minimum purchase is $250 (25 shares). No individual, or group of
individuals through a single account, may purchase more than $520,000 (52,000
shares). If any of the following persons purchase stock, their purchases when
combined with your purchases cannot exceed $700,000 (70,000 shares):
. your parents, spouse, sisters, brothers, children or anyone married to
any of these persons;
. accounts registered to the same address;
. companies, trusts or other entities in which you have a financial
interest or hold a management position; or
. other persons who may be acting together with you.
We may increase or decrease the purchase limitations at any time. The ESOP
is authorized to purchase up to 8% of the shares sold in the offering without
regard to these purchase limitations. For example, the ESOP may purchase
3,065,440 and 4,147,360 shares of common stock, respectively, at the minimum and
maximum of the offering range. For additional information on these purchase
limitations see "The Conversion and Offering--Limitations on Purchases of Common
Stock."
6
How You May Pay for Your Shares
In the subscription offering and the direct community offering you may pay
for your shares only by:
(1) personal check, bank check or money order; or
(2) authorizing us to withdraw money from your deposit account(s)
maintained with The Provident Bank.
The Provident Bank cannot lend funds to anyone for the purpose of
purchasing shares.
You May Not Sell or Transfer Your Subscription Rights
If you order stock in the subscription offering, you will be required to
state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your subscription rights. Any
transfer of subscription rights is prohibited by law. We intend to take legal
action, including reporting persons to federal or state regulatory agencies,
against anyone who we believe sells or gives away his or her subscription
rights. We will not accept your order if we have reason to believe that you sold
or transferred your subscription rights. In addition, joint stock registration
will be allowed only if the qualifying account is a joint account, and then the
stock registration must be identical to the account registration.
Deadline for Orders of Common Stock
If you wish to purchase shares, a properly completed stock order form,
together with payment for the shares, must be received by The Provident Bank no
later than 3:00 p.m., New Jersey time, on December 16, 2002, unless we extend
this deadline. You may submit your order form by mail using the return envelope
provided, by overnight courier to the indicated address on the order form, or by
bringing your order form to one of our full-service branch offices. Once
submitted, your order is irrevocable unless the offering is terminated or
extended beyond January 30, 2003.
Termination of the Offering
The subscription offering will expire at 3:00 p.m., New Jersey time, on
December 16, 2002. We expect that the direct community offering would expire at
the same time. We may extend this expiration date without notice to you, until
January 30, 2003, unless bank regulators approve a later date. If the
subscription offering and/or community offerings extend beyond January 30, 2003,
we will resolicit subscriptions before proceeding with the offerings. All
further extensions, in the aggregate, may not last beyond January 7, 2005.
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 38,318,000 shares of common stock,
we may take several steps in order to sell the minimum number of shares in the
offering. Specifically, we may increase the purchase limitations and we may seek
regulatory approval to extend the
7
offering beyond the January 30, 2003 expiration date, provided that any such
extension will require us to resolicit subscriptions received in the offering.
See "The Conversion and Offering--Limitations on Purchases of Common Stock."
Our Contribution of Stock and Cash to the Charitable Foundation
To further our commitment to our local community, we intend to establish a
charitable foundation as part of the conversion. We will make an initial
contribution to the foundation in an aggregate amount equal to 6% of the gross
proceeds received in the offering, up to a maximum contribution of $24,000,000.
The contribution will be in the form of shares of common stock (80% of the
contribution) and cash (20% of the contribution). As a result of the
contribution of cash and stock to the charitable foundation, Provident Financial
Services, Inc. will record a pre-tax expense of up to $24,000,000. The
foundation will be dedicated exclusively to supporting charitable causes and
community development activities.
The contribution of these additional shares of common stock and cash to the
foundation will:
. dilute the voting interests of purchasers of Provident Financial
Services, Inc. common stock in this offering to the extent of the
contribution of the common stock;
. result in an expense, and a reduction in earnings, equal to the full
amount of the contribution to the foundation, offset in part by a
corresponding tax benefit, during the quarter in which the
contribution is made; and
. reduce our pro forma market value and, accordingly, the number of
shares that we otherwise would have offered.
See "Risk Factors--The Contribution of Shares and Cash to the Charitable
Foundation Will Dilute Your Ownership Interests and Adversely Impact Net
Income," "Comparison of Valuation and Pro Forma Information With and Without the
Foundation" and "The Conversion and Offering--Establishment of the Charitable
Foundation."
Market for the Common Stock
We expect to receive approval for the common stock of Provident Financial
Services, Inc. to be listed on the New York Stock Exchange under the symbol
"PFS". See "Market for the Common Stock."
How We Intend to Use the Proceeds We Raise from the Offering
Assuming we sell 51,842,000 shares in the offering, we intend to distribute
the net proceeds as follows:
. $255.2 million will be invested in The Provident Bank in exchange for
100% of the outstanding shares of The Provident Bank; and
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. $255.2 million will be retained by Provident Financial Services, Inc.,
of which $41.5 million will be loaned by Provident Financial Services,
Inc. to the ESOP to fund its purchase of common stock and $20.7
million will be used to fund the acquisition of shares in the open
market for our recognition and retention plan, subject to shareholder
approval.
We intend to use the net proceeds retained from the offering to invest in
securities, to finance the possible acquisition of other financial institutions
and other financial service businesses, to pay dividends and for other general
corporate purposes, including possibly the repurchase of shares of our common
stock. The Provident Bank may use the proceeds it receives to make loans, to
purchase securities, to expand its retail banking franchise internally or
through acquisitions, to enhance its technology and delivery channels and for
general corporate purposes. See "How We Intend to Use the Proceeds from the
Offering." We currently have no specific arrangements or understandings
regarding any specific acquisition transaction.
Our Policy Regarding Dividends
We will consider the payment of a cash dividend no earlier than the
completion of the first calendar quarter of 2003. With the additional capital
that is being raised in the conversion, Provident Financial Services, Inc. will
have a significant dividend paying capacity. However, we do not guarantee that
we will pay dividends during such quarter or at any time in the future. For a
discussion of Provident Financial Services, Inc.'s anticipated dividend policy,
including restrictions on its ability to pay dividends, see "Our Policy
Regarding Dividends."
Our Directors, Officers and Employees Will Receive Additional Compensation and
Benefit Programs After the Conversion
In order to align the interests of our directors, officers and employees
more closely to our stockholders' interests, we intend to establish certain
benefit plans that use our common stock as compensation. Accordingly, we are
adding new benefit plans for our officers and employees at no cost to them,
including an employee stock ownership plan. We also plan to adopt a stock option
plan and a recognition and retention plan no earlier than six months following
the conversion, subject to shareholder approval. We also plan to enter into
employment agreements with Paul M. Pantozzi, our Chairman, Chief Executive
Officer and President, Kevin J. Ward, our Executive Vice President and Chief
Operating Officer, and Glenn H. Shell, our Executive Vice President, Customer
Management Group, and change in control agreements with certain of our executive
officers. The new benefit plans will increase our future compensation costs,
thereby reducing our earnings, and our new employment agreements and change in
control agreements may make it more expensive to acquire us. Additionally,
stockholders will experience a reduction in ownership interest if newly issued
shares are used to fund stock options and the recognition and retention plan.
See "Risk Factors--Our Stock Benefit Plans Will Increase Our Costs, Which Will
Reduce Our Income and Stockholders' Equity" and "Management-Future Stock Benefit
Plans."
9
The following table summarizes the benefits that our directors, officers
and employees may receive as a result of the conversion, at the midpoint of the
offering range:
Value of Shares Pro Forma
Based on Aggregate Book
Individuals Eligible to % of Shares Midpoint of Value of Shares
Plan Receive Awards Issued(1) Offering Range at Midpoint (2)
- ------------------------------ ----------------------- ----------- --------------- ---------------
Employee stock ownership plan All employees 8% $36,064,000 $52,617,376
Recognition and retention plan Directors and officers 4% $18,032,000 $26,308,688
Stock option plan Directors, officers and 10% (3) (3)
employees
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(1) Does not include shares contributed to the foundation.
(2) Based on pro forma stockholders' equity per share multiplied by the number
of shares to be issued to the Employee Stock Ownership Plan and Recognition
and Retention Plan, respectively, at the midpoint of the offering. See "Pro
Forma Data."
(3) Stock options will be granted with a per share exercise price at least
equal to the market price of our common stock on the date of grant. The
value of a stock option will depend upon increases, if any, in the price of
our stock during the life of the stock option.
We Believe that Subscription Rights Have No Value, But the Internal Revenue
Service May Disagree
Luse Gorman Pomerenk & Schick, P.C., counsel to The Provident Bank,
believes that it is more likely than not (greater than a 50% likelihood) that
the fair market value for tax purposes of the nontransferable subscription
rights to purchase common stock is zero. The reason for uncertainty is that
since 1993 the Internal Revenue Service has specifically declined to issue
rulings on whether nontransferable subscription rights have value. If the
Internal Revenue Service were to determine that nontransferable subscription
rights have value, recipients who exercise subscription rights may recognize
income in an amount equal to such value, and we could recognize gain on such
distribution. However, counsel has noted that the subscription rights will be
granted at no cost to recipients, will be legally nontransferable 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. Counsel also noted that the Internal Revenue Service has
not in the past reached a different conclusion with respect to the value of
nontransferable subscription rights in a mutual to stock conversion.
Accordingly, counsel is of the opinion that it is more likely than not that
eligible account holders and supplemental eligible account holders will not
recognize gain or loss upon the distribution or exercise of the subscription
rights. See "The Conversion and Offering--Federal and State Tax Consequences of
the Conversion."
We have received an opinion from our federal income tax counsel, Luse
Gorman Pomerenk & Schick, P.C., that, under federal income tax law and
regulation, the conversion will not be a taxable event for us. We also have
received an opinion from KPMG LLP that the conversion should not be a taxable
event for us under New Jersey income tax laws. These opinions, however, are not
binding on the Internal Revenue Service or the State of New Jersey. The full
texts of the opinions are filed as exhibits to the Registration Statement of
which this document is a part, and copies may be obtained from the SEC. See
"Where You Can Obtain Additional Information."
10
How You May Obtain Additional Information Regarding the Conversion
If you have any questions regarding the conversion, please call the
conversion center at (866) 332-2002, Monday through Friday between 10:00 a.m.
and 4:00 p.m., New Jersey time. The conversion center will be closed for bank
holidays.
11
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below at or for each of the periods
presented is derived in part from the consolidated financial statements of The
Provident Bank. The information presented as of June 30, 2002, and for the six
months ended June 30, 2002 and 2001 is unaudited, but in the opinion of
management, contains all adjustments (none of which were other than normal
recurring entries) necessary for a fair presentation of the results for these
periods. The following information is only a summary, and you should read it in
conjunction with our consolidated financial statements and notes beginning on
page F-1.
At June 30, At December 31,
----------- --------------------------------------------------------------
2002 2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Financial Condition Data:
Total assets ....................... $3,066,277 $2,869,717 $2,641,579 $2,578,249 $2,454,586 $2,060,205
Loans, net(1)....................... 1,919,729 1,994,636 1,954,992 1,876,433 1,680,091 1,399,575
Investment securities(2)............ 110,131 112,951 124,059 162,680 233,099 290,776
Securities available for sale....... 728,509 494,716 335,039 361,832 317,464 198,287
Deposits............................ 2,526,611 2,341,723 2,168,336 2,096,604 2,056,053 1,764,080
Borrowings.......................... 194,925 195,767 179,903 216,641 146,620 70,192
Equity.............................. 310,568 292,130 263,072 236,664 224,019 203,651
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------ ----------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
------- ------- -------- -------- -------- -------- --------
(In thousands)
Selected Operations Data:
Interest income............................ $88,272 $90,727 $180,979 $179,520 $166,046 $149,983 $140,026
Interest expense........................... 32,093 45,317 84,523 89,690 77,244 70,890 66,589
------- ------- -------- -------- -------- -------- --------
Net interest income........................ 56,179 45,410 96,456 89,830 88,802 79,093 73,437
Provision for loan losses.................. 1,200 1,200 1,900 2,060 2,100 1,950 2,350
------- ------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................. 54,979 44,210 94,556 87,770 86,702 77,143 71,087
------- ------- -------- -------- -------- -------- --------
Non-interest income........................ 11,978 10,423 21,236 18,276 15,688 15,005 12,186
------- ------- -------- -------- -------- -------- --------
Non-interest expenses...................... 44,626 38,116 80,629 75,865 71,853 60,985 52,735
------- ------- -------- -------- -------- -------- --------
Income before income tax expense and
the cumulative effect of a change in
accounting principle.................... 22,331 16,517 35,163 30,181 30,537 31,163 30,538
Income tax expense......................... 6,786 5,127 11,083 9,283 10,907 11,465 11,484
------- ------- -------- -------- -------- -------- --------
Income before the cumulative effect of
a change in accounting principle........ 15,545 11,390 24,080 20,898 19,630 19,698 19,054
------- ------- -------- -------- -------- -------- --------
Cumulative effect of change in
accounting principle (3)................ (519) -- -- -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income................................. $15,026 $11,390 $ 24,080 $ 20,898 $ 19,630 $ 19,698 $ 19,054
======= ======= ======== ======== ======== ======== ========
- ----------
(1) Loans are shown net of allowance for loan losses, deferred fees and
unearned discount.
(2) Investment securities are held to maturity.
(3) In accordance with FASB Statement No. 142, we performed a goodwill
impairment test on the goodwill associated with the purchase of Provident
Mortgage Company. It was determined that the goodwill was impaired and a
charge of $519,000 was recorded as a cumulative effect of a change in
accounting principle.
12
At or For
the Six Months
Ended June 30, At or For the Year Ended December 31,
----------------- ------------------------------------------
2002(1) 2001(1) 2001 2000 1999 1998 1997
------- ------- ------ ------ ------ ------ ------
Selected Financial and Other Data(2)
Performance Ratios:
Return on average assets ................. 1.02% 0.84% 0.88% 0.80% 0.80% 0.92% 0.96%
Return on average equity ................. 10.24 8.44 8.70 8.37 8.53 9.19 9.88
Interest rate spread information:
Average during period ................. 3.74 3.12 3.29 3.20 3.43 3.41 3.47
End of period ......................... 3.99 3.18 3.85 3.05 3.55 3.72 3.51
Net interest margin(3) ................... 4.09 3.64 3.79 3.70 3.87 3.88 3.90
Average interest-earning assets to
average interest-bearing liabilities .. 1.15 1.14 1.15 1.14 1.13 1.14 1.13
Non-interest income to average total
assets ................................ 0.81 0.78 0.77 0.70 0.64 0.70 0.61
Non-interest expenses to average
total assets .......................... 3.02 2.81 2.94 2.90 2.92 2.84 2.66
Efficiency ratio(4) ...................... 65.48 68.27 68.51 70.18 68.77 64.81 61.59
Asset Quality Ratios:
Non-performing loans to total loans ...... 0.24% 0.23% 0.40% 0.48% 0.43% 0.33% 0.43%
Non-performing assets to total assets .... 0.15 0.17 0.28 0.37 0.31 0.23 0.32
Allowance for loan losses to
non-performing loans .................. 474.56 457.70 271.02 213.06 233.93 316.94 247.63
Allowance for loan losses to total
loans ................................. 1.13 1.06 1.09 1.02 0.99 1.02 1.06
Capital Ratios:
Leverage capital(5) ...................... 9.39% 9.31% 9.41% 9.12% 8.47% 8.23% 9.64%
Total risk based capital(5) .............. 14.93 13.89 14.15 14.38 13.96 13.27 16.75
Average equity to average assets ......... 9.92 10.05 10.10 9.56 9.34 9.97 9.72
Other Data:
Number of full-service offices(6) ........ 48 47 48 49 52 49 41
Full time equivalent employees ........... 689 668 688 613 604 604 515
- ----------
(1) Ratios for six month periods have been annualized.
(2) Averages presented are daily averages.
(3) Net interest income divided by average interest-earning assets.
(4) Represents the ratio of non-interest expense divided by the sum of net
interest income and non-interest income.
(5) Leverage capital ratios are presented as a percentage of tangible assets.
Risk-based capital ratios are presented as a percentage of risk-weighted
assets.
(6) On September 6, 2002, The Provident Bank completed its acquisition and
assumption of approximately $21.8 million in deposits of two additional
full-service branches in Brick, New Jersey, from another financial
institution. The Provident Bank consolidated a pre-existing branch office
in Brick, New Jersey with one of the acquired branch offices, resulting in
The Provident Bank operating 49 branch offices.
13
RISK FACTORS
- --------------------------------------------------------------------------------
You shuold consider carefully the following risk factors in evaluating an
investment in the common stock
- --------------------------------------------------------------------------------
Our Commercial Real Estate, Multi-Family, Mortgage Warehouse and Commercial
Loans Expose Us to Increased Lending Risks
We have significantly increased our construction loans, commercial mortgage
loans, mortgage warehouse loans and commercial loans. Our strategy is to
continue to grow our portfolios of these types of loans. These loans are
generally regarded to have a higher risk of default and loss than single-family
residential mortgage loans. Our construction loans have increased from an
aggregate of $16.3 million or 1.2% of our total loan portfolio at December 31,
1997 to $92.9 million or 4.8% of our total loan portfolio at June 30, 2002,
while our commercial loans have increased from an aggregate of $51.8 million or
3.7% of our total loan portfolio at December 31, 1997 to $152.0 million or 7.9%
of our total loan portfolio at June 30, 2002. Our commercial mortgage loans have
increased from $197.1 million or 14.1% of our total loan portfolio at December
31, 1997 to $422.6 million or 22.0% of our total loan portfolio at June 30,
2002, while our mortgage warehouse loans have increased from $36.1 million at
December 31, 1997 or 2.6% of our total loan portfolio to $147.0 million or 7.7%
of our total loan portfolio at June 30, 2002. At the same time, while the dollar
amount of our single-family residential mortgage loans has remained relatively
level in recent years, the percentage of our single-family residential mortgage
loans in our portfolio has significantly decreased. Single-family residential
mortgage loans have decreased from 56.5% of our total loan portfolio at December
31, 1997 to 38.4% at June 30, 2002.
Construction loans, commercial mortgage loans, multi-family mortgage loans,
mortgage warehouse loans, marine loans and commercial loans all generally have a
higher risk of loss than single-family residential mortgage loans, because
repayment of the loans often depends on the successful operation of a business
or of the underlying property. In addition, our construction loans, commercial
mortgage loans, multi-family mortgage loans, mortgage warehouse loans and
commercial loans have significantly larger average loan balances compared to our
single-family residential mortgage loans. Also, many of our borrowers of these
types of loans have more than one loan outstanding with us. Consequently, any
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 one single-family residential mortgage loan.
Additionally, mortgage warehouse lending subjects The Provident Bank to risk of
fraud. Such fraud may consist of a mortgage warehouse borrower pledging the same
collateral to more than one mortgage warehouse line. Detection of such fraud is
generally very difficult. During the quarter ended September 30, 2002, we
recorded an $11.1 million provision for loan losses due to the reclassification
of a $20.6 million mortgage warehouse line to a mortgage warehouse borrower that
has ceased doing business under allegations of fraud. The remainder of the line
has been included in non-performing loans. See "Recent Developments."
In addition, at June 30, 2002, the aggregate principal balance of loans to
our fifty largest lending relationships was $380.1 million, or 19.8% of our
total loan portfolio. At June 30, 2002, the average loan size for a construction
loan was $1.3 million, for a commercial real estate loan
14
was $1.2 million, for a multi-family loan was $529,000, for a mortgage warehouse
loan was $5.9 million, and for a commercial loan was $145,000, compared to an
average loan size of $108,000 for a single-family residential mortgage loan.
Our Continuing Concentration of Loans in Our Primary Market Area May Increase
Our Risk
Our success depends primarily on the general economic conditions in
northern-central New Jersey. Unlike larger banks that are more geographically
diversified, we provide banking and financial services to customers primarily in
northern-central New Jersey. The local economic conditions in northern-central
New Jersey have a significant impact on our commercial, real estate, mortgage
warehouse and construction loans, the ability of the borrowers to repay these
loans and the value of the collateral securing these loans. A significant
decline in general economic conditions caused by inflation, recession,
unemployment or other factors beyond our control would impact these local
economic conditions and could negatively affect the financial results of our
banking operations. Additionally, because we have a significant amount of real
estate loans, decreases in real estate values may also have a negative effect on
the ability of many of our borrowers to make timely repayments of their loans,
which would have an adverse impact on our earnings.
We target our business development and marketing strategy for loans to
serve primarily the banking and financial services needs of small- to
medium-sized businesses in northern-central New Jersey. These small-to
medium-sized businesses generally have fewer financial resources in terms of
capital or borrowing capacity than larger entities. If general economic
conditions negatively impact these businesses, our results of operations and
financial condition may be adversely affected.
If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses,
Our Earnings Could Decrease
Our loan customers may not repay their loans according to the terms of the
loans, and the collateral securing the payment of these loans may be
insufficient to pay any remaining loan balance. We may experience significant
loan losses, which could have a material adverse effect on our operating
results. We make various assumptions and judgments about the collectibility of
our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for
loan losses, we rely on our loan quality reviews, our experience and our
evaluation of economic conditions, among other factors. If our assumptions prove
to be incorrect, our allowance for loan losses may not be sufficient to cover
losses inherent in our loan portfolio, resulting in additions to our allowance.
Material additions to our allowance would materially decrease our net income.
Our emphasis on continued diversification of our loan portfolio through the
origination of construction loans, commercial mortgage loans, mortgage warehouse
loans and commercial loans has been one of the more significant factors we have
taken into account in evaluating our allowance for loan losses and provision for
loan losses. In the event we were to further increase the amount of such types
of loans in our portfolio, we may determine to make additional or increased
provisions for loans losses, which could adversely affect our earnings.
15
In addition, bank 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. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities could have a material
adverse effect on our results of operations and financial condition.
Changes in Interest Rates Could Adversely Affect Our Results of Operations and
Financial Condition
Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are affected
substantially by our net interest income, which is the difference between the
interest income earned on our interest-earning assets and the interest expense
paid on our interest-bearing liabilities. Changes in interest rates could have
an adverse affect on net interest income because, as a general matter, our
interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates generally would result in
a decrease in our average interest rate spread and net interest income, which
would have a negative effect on our profitability. In the event of an immediate
and sustained 200 basis point increase in interest rates, we are projecting that
our net interest income would decrease 20.37% or $23.6 million.
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At June 30,
2002, our available for sale securities portfolio totaled $728.5 million.
Unrealized gains and losses on securities available for sale are reported as a
separate component of equity. Decreases in the fair value of securities
available for sale resulting from increases in interest rates therefore could
have an adverse effect on stockholders' equity.
We are also subject to prepayment and reinvestment risk relating to
interest rate movements. Changes in interest rates can affect the average life
of loans and mortgage related securities. Decreases in interest rates can result
in increased prepayments of loans and mortgage related securities, as borrowers
refinance to reduce borrowing costs. Under these circumstances, we are subject
to reinvestment risk to the extent that we are unable to reinvest such
prepayments at rates that are comparable to the rates on existing loans or
securities.
We Operate in a Highly Regulated Environment and May be Adversely Affected by
Changes in Laws and Regulations
We are subject to extensive regulation, supervision and examination by the
New Jersey Department of Banking and Insurance, our chartering authority, and by
the Federal Deposit Insurance Corporation, as insurer of our deposits. As a bank
holding company, Provident Financial Services, Inc. also will be subject to
regulation and oversight by the Board of Governors of the Federal Reserve
System. Such regulation and supervision govern the activities in which a bank
and its holding company may engage and are intended primarily for the protection
of the insurance fund and depositors. These regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on our operations, the
classification of our assets and the adequacy of our allowance for loan losses.
Any change in such regulation and oversight, whether in the form
16
of regulatory policy, regulations, or legislation, could have a material impact
on The Provident Bank, Provident Financial Services, Inc., and our operations.
We May Enter Into An Agreement With The FDIC Regarding Compliance With Federal
Banking Regulations; The Failure To Comply May Restrict Our Activities
The FDIC recently conducted an examination relating to our compliance with
various federal banking regulations, which examination was unrelated to safety
and soundness. The FDIC noted weaknesses and failures relating to our compliance
with the reporting requirements of the Home Mortgage Disclosure Act. The Home
Mortgage Disclosure Act imposes on financial institutions reporting obligations
relating to home purchase and home improvement loans originated or purchased, or
for which the financial institution receives applications. This loan data is
used by regulatory agencies to help determine whether a financial institution is
serving the housing needs of the communities it serves, to assist public
officials in the distribution of public sector investments where it is needed,
and to assist federal bank regulators in identifying possible discriminatory
lending patterns.
We have taken action and implemented procedures to redress the FDIC's
concerns and findings, including the refiling with the FDIC of our Home Mortgage
Disclosure Act data for 2000 and 2001. The FDIC has not issued a final report of
examination nor assigned us a compliance rating, but we anticipate that the FDIC
will require us to implement corrective actions and may also require a written
agreement with The Provident Bank to ensure that corrective actions are taken
and continue in the future. If we are required to enter into a written agreement
with the FDIC and in the future fail to comply with any such agreement, we could
be subject to further regulatory action, including restrictions on our ability
to expand through bank and branch acquisitions, and possible monetary penalties.
In connection with the recent compliance examination, the FDIC has informed
The Provident Bank that the FDIC has made a preliminary finding that it has the
reason to believe The Provident Bank has violated fair lending laws, including
the Equal Credit Opportunity Act and its implementing regulation, Regulation B
of the Federal Reserve Board. The Equal Credit Opportunity Act and Regulation B
promote the availability of credit to all creditworthy applicants without regard
to race, color, religion, national origin, sex, marital status or age.
Regulation B also requires creditors to notify applicants of actions taken on
their loan applications, to report credit history in the names of both spouses
on an account, to collect information about each applicant's race or other
personal characteristics in applications for certain dwelling-related loans, and
to provide applicants with copies of appraisal reports used in credit
transactions. This finding by the FDIC is preliminary and subject to further
review by the FDIC.
The Provident Bank has responded in writing to the FDIC that The Provident
Bank does not agree with the FDIC's finding and has provided detailed
information to the FDIC in support of its position. Although we believe no
further enforcement action will result from the FDIC's review of this matter, we
cannot assure you that we will not be subject to further enforcement action,
which may include referring this matter to the Department of Justice for further
review and enforcement. The Attorney General of the United States may, on a
referral to the Department of Justice from the FDIC, commence a civil action to
obtain appropriate relief that
17
may include actual and punitive damages and injunctive relief, as well as the
imposition of civil money penalties.
Strong Competition Within Our Market Area May Limit Our Growth and Profitability
Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. In particular, over the past decade, New Jersey has
experienced the effects of substantial banking consolidation. In the early
1990's, certain out-of-state banks acquired New Jersey financial institutions
and, later in the decade, such acquirers became subject to mergers themselves.
In the northern New Jersey market, for example, large out-of-state competitors
have grown significantly. There are also a number of strong locally-based
competitors in our market. Many of these competitors (whether regional or
national institutions) have substantially greater resources and lending limits
than we do, and may offer certain services that we do not or cannot provide. Our
profitability depends upon our continued ability to successfully compete in our
market area.
Adoption of State Tax Legislation May Have a Negative Impact on Our Net Income
The New Jersey State Legislature enacted the Business Tax Reform Act in
July 2002 which will affect The Provident Bank's net income in 2002 and beyond.
The changes to the state tax code include, among other things, an increase in
the income tax rate for companies like The Provident Bank to 9% from 3% and the
establishment of alternative minimum tax assessments based on the gross receipts
or gross profits for each applicable reporting entity. The legislation is
retroactive to January 1, 2002. We are exploring strategies to mitigate the
effect of the changes to the state tax code; however, we cannot assure you that
such strategies will be implemented or, if implemented, will be effective.
The Future Price of the Common Stock May be Less Than the Purchase Price in the
Offering
We cannot assure you that if you purchase common stock in the offering you
will later be able to sell it at or above the purchase price. The final
aggregate purchase price of the common stock in the conversion will be based on
an independent appraisal. The 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 valuation is based on estimates and projections of a
number of matters, all of which are subject to change from time to time.
There is No Guarantee That an Active Trading Market for Our Common Stock Will
Develop, Which may Hinder Your Ability to Sell Your Stock
We have never issued stock. Accordingly, there is no current trading market
for our common stock. Consequently, we cannot assure or guarantee that an active
trading market for our common stock will develop or that, if developed, will
continue. An active and orderly trading market will depend on the existence, and
individual decisions, of willing buyers and sellers at any given time. We will
not have any control over these factors. If an active trading
18
market does not develop or is sporadic, this may hurt the market value of our
common stock and make it difficult to buy or sell shares on short notice.
Our Return on Equity Will be Low Compared to Other Companies. This Could Lower
the Trading Price of Our Common Stock
Net income divided by average equity, known as "return on equity," is a
ratio many investors use to compare the performance of a financial institution
to its peers. We expect our return on equity to decrease as compared to our
performance in recent years until we are able to leverage our increased equity
from the offering. Our return on equity also will be reduced due to the costs of
being a public company, added expenses associated with our employee stock
ownership plan, and, later on, our recognition and retention plan, assuming this
plan is approved by our stockholders. Until we can increase our net interest
income and non-interest income, we expect our return on equity to be below the
industry average, which may negatively affect the value of our common stock.
Following conversion, our return on equity is projected to be significantly
lower than our peer group due to the projected higher pro forma capital levels
resulting from the infusion of conversion proceeds. At the midpoint, pro forma
return on equity is estimated to be 4.55% compared to the comparable peer group
return on equity of 9.98%.
Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income
and Stockholders' Equity
We anticipate that our employee stock ownership plan will purchase 8% of
the common stock sold in the offering with funds borrowed from Provident
Financial Services, Inc. The cost of acquiring the employee stock ownership plan
shares will be between $30,654,000 at the minimum of the offering range and
$47,695,000 at the adjusted maximum of the offering range. This cost may be
greater if the employee stock ownership plan purchases the shares in the open
market following completion of the conversion because depositors subscribe for
all shares in the offering. We will record annual employee stock ownership plan
expenses in an amount equal to the fair value of shares committed to be released
to employees. If shares of common stock appreciate in value over time,
compensation expense relating to the employee stock ownership plan will
increase.
We also intend to implement a recognition and retention plan after the
conversion. Under this plan, our officers and directors could be awarded, at no
cost to them, shares of common stock in an aggregate amount equal to 4% of the
shares sold in the offering. The recognition and retention plan cannot be
implemented until at least six months after the conversion, and if it is adopted
within 12 months after the conversion, it is subject to regulatory restrictions.
The recognition and retention plan must be approved by our shareholders.
Assuming the shares of common stock to be awarded under the plan are repurchased
in the open market and cost the same as the purchase price in the offering, the
reduction to stockholders' equity from the plan would be between $15,327,200 at
the minimum of the offering range and $23,847,320 at the adjusted maximum of the
offering range. If shares of our common stock appreciate in value over time, the
net after-tax expense relating to the recognition and retention plan will
increase. In the event that a portion of the shares used to (i) fund the
recognition and retention plan or (ii) satisfy the exercise of options from our
stock option plan, is obtained from authorized but unissued shares, the issuance
of additional shares will decrease our net income per share and stockholders'
equity per share.
19
The Implementation of Stock-Based Benefit Plans May Dilute Your Ownership
Interest
We intend to adopt a stock option plan and a recognition and retention plan
following the conversion. These stock benefit plans will be funded through
either open market purchases, if permitted, or from the issuance of authorized
but unissued shares. Stockholders will experience a reduction in ownership
interest in the event newly issued shares are used to fund stock options and
awards made under these plans.
The Contribution of Shares and Cash to the Charitable Foundation Will Dilute
Your Ownership Interests and Adversely Impact Net Income
We intend to establish a charitable foundation in connection with the
conversion. We will make a contribution to the foundation valued at 6% of the
gross proceeds received in the offering. The form of the contribution will be
80% common stock and 20% cash. The maximum amount of this initial contribution
will be $24,000,000. As a result of the contribution of cash and stock to the
charitable foundation, we will record a pre-tax expense of up to $24,000,000.
Persons purchasing shares in the offering will have their ownership and voting
interests in Provident Financial Services, Inc. diluted by up to 4.58% and 3.57%
at the minimum and maximum of the offering range, respectively, due to the
issuance of additional shares of common stock to the foundation.
The aggregate contribution will also have an adverse impact on our reported
net income for the quarter and year in which the contribution to the foundation
is made. The after-tax expense of the contribution will reduce net income to be
reported by us in 2003 by approximately $15,120,000 at the maximum of the
offering range. We believe that our contribution to the charitable foundation
should be deductible for federal income tax purposes. If the contribution is not
deductible, we would not receive any tax benefit from the contribution.
Our Ability to Grow May be Limited if We Cannot Make Acquisitions
In an effort to fully deploy the capital we raise in the offering, we
intend to continue to expand our banking franchise, internally and by acquiring
other financial institutions or branches and other financial services providers.
Our business plan contemplates opening 6 to 12 de novo branches over the next
three years, although there are no specific plans for such branches at this
time. Our ability to grow through selective acquisitions of other financial
institutions or branches will depend on successfully identifying, acquiring and
integrating such institutions or branches. We cannot assure prospective
purchasers of common stock that we will be able to generate internal growth or
identify attractive acquisition candidates, make acquisitions on favorable terms
or successfully integrate any acquired institutions or branches into Provident
Financial Services, Inc. We currently have no specific plans, arrangements or
understandings regarding any such acquisitions.
We Have Broad Discretion in Using the Proceeds of the Offering. Our Failure to
Effectively Utilize Such Proceeds Could Reduce Our Profits
We intend to contribute approximately 50% of the net proceeds of the
offering to The Provident Bank. Provident Financial Services, Inc. will use a
portion of the net proceeds to fund
20
the ESOP and may use the remaining net proceeds as a possible source of funds to
finance the acquisition of other financial institutions or financial services
companies, pay dividends to stockholders, repurchase common stock, purchase
investment securities, or for other general corporate purposes. The Provident
Bank may use the proceeds it receives to establish or acquire new branches,
acquire financial institutions or financial services companies, fund new loans,
purchase investment securities, enhance our technology and delivery channels and
for general corporate purposes. We have not, however, allocated specific amounts
of proceeds for any of these purposes and we will have significant flexibility
in determining the amounts of net proceeds we apply to different uses and the
timing of such applications. Our failure to utilize these funds effectively
could reduce our profits.
Our Stock Value May Suffer Due to Our Ability to Impede Potential Takeovers
Provisions in our corporate documents and in Delaware corporate law, as
well as certain banking regulations, make it difficult and expensive for an
outsider to pursue a tender offer, change in control or takeover attempt that
our Board of Directors opposes. For example, our corporate documents require a
supermajority vote of stockholders to amend or repeal specific sections of
Provident Financial Services, Inc.'s certificate of incorporation and bylaws. As
a result, you may not have an opportunity to participate in this type of
transaction, and the trading price of our common stock may not rise to the level
of other institutions that are more vulnerable to hostile takeovers.
These provisions also will make it more difficult for an outsider to remove
our current Board of Directors or management. See "Restrictions on Acquisition
of Provident Financial Services, Inc." for a description of anti-takeover
provisions in our corporate documents and under Delaware law and federal banking
regulations.
Potential Voting Control by Management and Employees Could Make a Takeover
Attempt More Difficult to Achieve
The shares of common stock that our directors and officers intend to
purchase in the conversion, when combined with the shares that may be awarded to
participants under our employee stock ownership plan and other stock benefit
plans, could result in management and employees controlling a significant
percentage of our common stock. It is expected that the executive officers and
directors as a group will purchase 483,750 shares in the offering, representing
1.07% of the shares offered at the midpoint of the offering range. When combined
with our employee stock ownership plan and our other stock benefit plans,
assuming they are implemented as proposed, our directors, officers and employees
could control up to 22.1% of the outstanding shares of our common stock on a
fully diluted basis. If these individuals were to act together, they could have
significant influence over the outcome of any stockholder vote. This voting
power may discourage takeover attempts that other stockholders may desire.
Once Submitted, Your Purchase Order May Not be Revoked Unless the Stock Offering
is Terminated or Extended Beyond January 30, 2003
Funds submitted in connection with a purchase of common stock in the
offering will be held by Provident Financial Services, Inc. until the
termination or completion of the conversion, including any extension of the
expiration date. Because completion of the conversion will be
21
subject to an update of the independent appraisal prepared by RP Financial,
among other factors, there may be one or more delays in the completion of the
conversion. Orders submitted in the offering are irrevocable, and subscribers
will have no access to subscription funds unless the stock offering is
terminated, or extended beyond January 30, 2003 or the number of shares to be
sold in the offering is increased to more than 59,618,300 shares.
We Believe That Subscription Rights Have No Value For Tax Purposes, But the
Internal Revenue Service May Disagree
Our Federal tax counsel, Luse Gorman Pomerenk & Schick, P.C., believes that
it is more likely than not that the nontransferable subscription rights to
purchase common stock have no value. However, this opinion is not binding on the
Internal Revenue Service. If the Internal Revenue Service determines that your
subscription rights have ascertainable value, you could be taxed for an amount
equal to the value of those rights. Additionally, we could recognize a gain for
tax purposes.
22
RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and other
information of The Provident Bank and subsidiaries as of September 30, 2002 and
December 31, 2001 and for the three and nine month periods ended September 30,
2002 and 2001. The selected financial data as of December 31, 2001 has been
derived from the audited consolidated financial statements and notes of The
Provident Bank and subsidiaries beginning on page F-1 of this document. The
selected financial and operating data as of September 30, 2002 and for the three
and nine month periods ended September 30, 2002 and 2001, have been derived in
part from unaudited consolidated financial statements of The Provident Bank and
subsidiaries, which in the opinion of management include all adjustments
necessary for the fair presentation of such information. The results of
operations for the three and nine month periods ended September 30, 2002 are not
necessarily indicative of the results of operations which may be expected for
the year ending December 31, 2002.
At September 30, At December 31,
2002 2001
---------------- ---------------
(In thousands)
Selected Financial Data:
Total Assets............................... $3,162,258 $2,869,717
Loans, net (1)............................. 1,972,055 1,994,636
Investment securities (2).................. 120,295 112,951
Securities available for sale.............. 780,341 494,716
Deposits................................... 2,591,826 2,341,723
Borrowings................................. 216,666 195,767
Equity..................................... 319,859 292,130
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------- ------- -------- --------
Selected Operating Data:
Interest income ................................. $45,028 $45,536 $133,300 $136,263
Interest expense ................................ 16,039 20,996 48,132 66,313
Net interest income ............................. 28,989 24,540 85,168 69,950
Provision for loan losses ....................... 11,050 400 12,250 1,600
Net interest income after provision for loan
losses .......................................... 17,939 24,140 72,918 68,350
Non-interest income ............................. 5,722 4,744 17,700 15,167
Non-interest expense ............................ 20,993 20,172 65,619 58,288
Income before income tax expense (benefit) and
before the cumulative effect of change in
accounting principle ......................... 2,668 8,712 24,999 25,229
Income tax (benefit) expense .................... (983) 2,850 5,803 7,977
Income before the cumulative effect of change
in accounting principle ...................... 3,651 5,862 19,196 17,252
Cumulative effect of change in accounting
principle (3) ................................... -- -- (519) --
Net income ...................................... 3,651 5,862 18,677 17,252
- ----------
(1) Loans are shown net of allowance for loan losses, deferred fees and
unearned discount.
(2) Investment securities are held to maturity.
(3) In accordance with FASB Statement No. 142, we performed a goodwill
impairment test on the goodwill associated with the purchase of Provident
Mortgage Company. It was determined that the goodwill was impaired and a
charge of $519,000 was recorded as a cumulative effect of a change in
accounting principle.
23
At or For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
2002 (1) 2001 (1) 2002 (1) 2001 (1)
-------- -------- -------- --------
Selected Financial and Other Data (2)
Performance Ratios:
Return on average assets ........................ 0.47% 0.85% 0.83% 0.85%
Return on average equity ........................ 4.65 8.33 8.29 8.43
Interest rate spread information:
Average during period ........................ 3.60 3.38 3.66 3.14
End of period ................................ 3.62 3.63 3.75 3.61
Net interest margin (3) ...................... 3.98 3.88 4.03 3.68
Average interest-earning assets to average:
Interest-bearing liabilities ................. 117.05 115.12 116.41 115.57
Non-interest income to average total assets .. 0.74 0.68 0.78 0.75
Non-interest expenses to average total ....... 2.70 2.91 2.91 2.87
assets
Efficiency ratio (4) ......................... 60.48 68.89 63.79 68.48
Asset Quality Ratios:
Non-performing loans to total loans ............. 0.64 0.29 0.64 .29
Non-performing assets to total assets ........... 0.41 0.21 0.41 .21
Allowance for loan losses to non-performing ..... 166.94 372.13 166.94 372.13
loans
Allowance for loan losses to total loans ........ 1.07 1.09 1.07 1.09
Capital Ratios:
Leverage capital (5) ............................ 9.22 9.36 9.22 9.36
Total risk based capital (5) .................... 14.50 14.69 14.50 14.69
Average equity to average assets ................ 10.10% 10.17% 9.98% 10.07%
Other Data:
Number of full service offices (6) .............. 49 48 49 48
Full time equivalent employees .................. 675 660 675 660
- ----------
(1) Ratios for the three and nine month periods have been annualized.
(2) Averages presented are daily averages.
(3) Net interest income divided by average interest-earning assets.
(4) Represents the ratio of non-interest expense divided by the sum of net
interest income and non-interest income.
(5) Leverage capital ratios are presented as a percentage of tangible assets.
Risk-based capital ratios are presented as a percentage of risk-weighted
assets.
(6) On September 6, 2002, The Provident Bank completed its acquisition and
assumption of approximately $21.8 million in deposits of two additional
full service branches in Brick, New Jersey, from another financial
institution. The Provident Bank consolidated a pre-existing branch office
in Brick, New Jersey with one of the acquired branch offices, resulting in
The Provident Bank operating 49 branch offices.
Management's Discussion and Analysis of Recent Developments
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Total assets increased by $292.5 million, or 10.2% to $3.16 billion at
September 30, 2002 compared to $2.87 billion at December 31, 2001. This increase
was primarily due to an increase in the investment portfolio.
Net loans decreased $22.6 million or 1.13% to $1.97 billion at September
30, 2002 from $1.99 billion at December 31, 2001. Residential real estate loans
decreased $98.2 million or 12.4% to $697.2 million at September 30, 2002 from
$795.4 million at December 31, 2001. This decrease was primarily attributable to
declines in long-term interest rates which resulted in high levels of refinance
and repayment activity. Residential real estate loan repayments totaled $210.2
million for the nine-month period ended September 30, 2002 compared to $168.7
million for the six months ended June 30, 2002 and $245.7 million for the year
ended December 31, 2001. Residential mortgage loan originations for the nine
months ended September 30, 2002 were $202.7 million compared to $215.9 million
for the year ended December 31, 2001. Sales of long term fixed rate mortgages
totaled $64.0 million for the nine-month period ended September 30, 2002
compared to $43.3 million for the six months ended June 30, 2002 and $80.7
million
24
for the year ended December 31, 2001. Commercial real estate loans increased
$18.4 million or 4.47% at September 30, 2002 to $430.7 million compared to
$412.3 million at December 31, 2001. Construction loans increased $21.8 million
or 27.1% to $102.6 million at September 30, 2002 compared to $80.7 million at
December 31, 2001. Commercial loans increased $23.7 million or 16.8% to $165.2
million at September 30, 2002 compared to $141.5 million at December 31, 2001.
Consumer loans decreased $35.3 million or 11.0% to $286.9 million at September
30, 2002 from $322.2 million at December 31, 2001.
Non-performing loans totaled $12.8 million at September 30, 2002 compared
to $8.1 million at December 31, 2001. This increase in non-performing loans was
attributable primarily to an increase of $8.7 million in mortgage warehouse
lines that were classified as non-performing in September 2002. In September
2002, management learned of an investigation by the Federal Bureau of
Investigation into alleged fraudulent activity involving one of our mortgage
warehouse borrowers. The borrower's business operations have ceased and, upon
our application, a permanent receiver has been appointed by the courts. Based on
management's assessment of the known facts, at September 30, 2002 the
outstanding mortgage warehouse line of $20.6 million was reclassified into the
following categories: $7.3 million as substandard, $1.5 million as doubtful and
$11.8 million as a loss, which correspond to The Provident Bank's three lowest
ratings when it assigns a risk rating to a loan. See "Business of The Provident
Bank--Lending Activities--Allowance for Loan Losses" for a description of the
methodology used by The Provident Bank in assigning risk ratings to loans in its
loan portfolio. Non-performing loans as a percentage of total loans increased to
0.64% at September 30, 2002 from 0.40% at December 31, 2001.
The investment portfolio increased $293.0 million or 48.2% to $900.6
million at September 30, 2002 compared to $607.7 million at December 31, 2001.
The largest portion of this increase was in the available for sale portfolio
which increased $285.6 million or 57.7% to $780.3 million at September 30, 2002
from $494.7 million at December 31, 2001. Available for sale U.S. Agency
collateralized mortgage obligations increased $212.9 million or 66.3% during the
period. Available for sale corporate and other securities increased $57.5
million or 54.4% during the period. The increase in investment securities was
attributable to increases in loan and mortgage backed securities principal
prepayments and deposit inflows.
Total deposits increased $250.1 million or 10.7% to $2.59 billion at
September 30, 2002 from $2.34 billion at December 31, 2001. Core deposits
increased $220.4 million or 17.1% during the period. Savings accounts increased
$115.0 million or 15.5% during the period and demand deposit accounts increased
$105.4 million or 19.3% during the period. Continued volatility in the financial
markets and competitive pricing has contributed to the increase in deposits.
Federal Home Loan Bank borrowings increased $18.3 million or 12.6% to
$163.0 million at September 30, 2002 from $144.7 million at December 31, 2001.
Retail repurchase agreements increased $2.6 million or 5.1% during the period.
Total equity increased $27.7 million or 9.5% to $319.9 million at September
30, 2002 from $292.1 million at December 31, 2001. Retained earnings increased
$18.7 million or 7.5% during the nine month period. After tax unrealized gains
on investment securities increased $9.1 million or 197.0% during the nine month
period. Yields in the two and five year maturity sector
25
of the Treasury yield curve have fallen approximately 134 and 174 basis points,
respectively, since year end 2001, resulting in an increase in the value of the
investment portfolio.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and September 30, 2001
General. Net income for the three months ended September 30, 2002 was $3.7
million, a decrease of $2.2 million or 37.7% compared to net income of $5.9
million for the three months ended September 30, 2001. This decrease in net
income was attributable to an $11.1 million charge to operations for the
provision for loan losses resulting from a $20.6 million mortgage warehouse loan
of which $11.8 million was classified as loss. Return on average assets was
0.47% for the three months ended September 30, 2002 compared to 0.85% for the
three months ended September 30, 2001. Return on average equity was 4.65% for
the three months ended September 30, 2002 compared to 8.33% for the three months
ended September 30, 2001.
Net Interest Income. Net interest income for the three month period was
$29.0 million, an increase of $4.4 million or 18.1% over net interest income of
$24.6 million for the three month period ended September 30, 2001. The net
interest rate spread, the difference between the yield on average interest
earning assets and the cost of average interest bearing liabilities, for the
three month period ended September 30, 2002 and September 30, 2001 was 3.60% and
3.38% respectively. The net interest margin for the three month period ended
September 30, 2002 was 3.98% compared to 3.88% for the three month period ended
September 30, 2001.
Interest income declined $508,000 or 1.1% for the three month period ended
September 30, 2002 to $45.0 million compared to $45.5 million for the three
month period ended September 30, 2001. This decrease was attributable to cash
flows from deposits and principal repayments on loans and investments that are
being reinvested at lower interest rates. The average yield on interest earning
assets decreased to 6.17% for the three month period ending September 30, 2002
from 7.20% for the comparative period in 2001.
Interest expense decreased $5.0 million or 23.6% to $16.0 million for the
three-month period ended September 30, 2002 from $21.0 million for the
comparable period. This decrease was attributable to the decline in short-term
interest rates. The cost of our interest bearing liabilities decreased to 2.57%
for the three months ended September 30, 2002 from 3.82% for the three months
ended September 30, 2001.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, evaluation of
real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect a borrower's ability to repay the loan and
the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or events change. Management
assesses the allowance for loan losses on a quarterly basis and makes provision
for loan losses in order to maintain the adequacy of the allowance. Due to the
reclassification of the $20.6 million mortgage warehouse line to a mortgage
warehouse borrower that has ceased doing business under allegations of fraud,
the loan loss provision for the quarter
26
ended September 30, 2002 was $11.1 million, an increase of $10.7 million from
the provision of $400,000 for the quarter ended September 30, 2001. In
accordance with our lending policies, on September 30, 2002, a charge of $11.8
million was taken against the allowance for loan losses. The allowance for loan
losses was $21.3 million or 1.07% of total loans at September 30, 2002 compared
to $21.6 million or 1.09% at September 30, 2001. Net charge offs for the three
months ended September 30, 2002 were $11.7 million compared to a net recovery of
$179,000 for the three months ended September 30, 2001.
Non-Interest Income. Non-interest income consists primarily of fee income
on deposit accounts, loan servicing fee income and increases in the cash
surrender value of bank owned life insurance. Non-interest income increased
$978,000 or 20.6% to $5.7 million for the three months ended September 30, 2002
compared to $4.7 million for the three months ended September 30, 2001. This
increase was attributable to an increase of $434,000 in net gains on loan sales,
an increase of $254,000 in miscellaneous retail fees and an increase of $209,000
in net profits on the sale of other assets.
Non-Interest Expense. Non-interest expense increased $821,000 or 4.07% to
$21.0 million for the three month period ended September 30, 2002 compared to
$20.2 million for the three months ended September 30, 2001. This increase was
attributable to a $1.4 million increase in salaries and benefits, and a $441,000
increase in consulting expense which was offset by a $381,000 decrease in data
processing expense and a $766,000 decrease in advertising and promotion expense.
Income Tax Expense. Income tax expense decreased $3.8 million to a net
benefit of $983,000 for the three month period ended September 30, 2002 compared
to $2.9 million for the three month period ended September 30, 2001. The
decrease in income tax expense is attributable to lower taxable income as a
result of the charge off of a portion of the $20.6 million mortgage warehouse
line to a mortgage warehouse borrower that has ceased doing business under
allegations of fraud. Additionally, an adjustment to deferred tax assets for
state taxes to reflect the current New Jersey corporate business tax rate of 9%
from the previous rate of 3% resulted in a tax benefit of $1.0 million.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
September 30, 2001
General. Net income for the nine months ended September 30, 2002 was $18.7
million, an increase of $1.4 million or 8.3% compared to net income of $17.3
million for the nine months ended September 30, 2001. The increase in net income
was attributable to increases in net interest income and other non-interest
income that was offset by a $12.3 million charge to operations for the provision
for loan losses and a goodwill impairment charge of $519,000 as a cumulative
effect of a change in accounting principle. Return on average assets for the
nine months ended September 30, 2002 was 0.83% compared to 0.85% for the nine
months ended September 30, 2001. Return on average equity was 8.29% for the nine
months ended September 30, 2002 compared to 8.43% for the nine months ended
September 30, 2001.
Net Interest Income. Net interest income for the nine months ended
September 30, 2002 was $85.2 million, an increase of $15.2 million or 21.8% over
net interest income of $70.0 million for the nine months period ended September
30, 2001. The net interest rate spread, the
27
difference between the yield on average interest earning assets and the cost of
average interest bearing liabilities, for the nine-month period ended September
30, 2002 and September 30, 2001 was 3.66% and 3.14% respectively. The net
interest margin for the nine month period ended September 30, 2002 was 4.03%
compared to 3.68% for the nine month period ended September 30, 2001.
Interest income decreased $3.0 million or 2.2% for the nine-month period
ended September 30, 2002 to $133.3 million compared to $136.3 million for the
nine month period ended September 30, 2001. This decrease was attributable to
the reinvestment of cash flows from deposits and loan repayments at lower
current interest rates. The yield on interest earning assets decreased to 6.31%
for the nine month period ending September 30, 2002 from 7.17% for the
comparative period in 2001.
Interest expense decreased $18.2 million or 27.4% to $48.1 million for the
nine months ended September 30, 2002 compared to $66.3 million for the nine
months ended September 30, 2001. This decline was attributable to the decline in
interest rates during the period. The cost of interest bearing liabilities
decreased to 2.65% for the nine months ended September 30, 2002 from 4.03% for
the nine months ended September 30, 2001.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, evaluation of
real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect a borrower's ability to repay the loan and
the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or events change. Management
assesses the allowance for loan losses on a quarterly basis and makes provision
for loan losses in order to maintain the adequacy of the allowance. Due to the
reclassification of the $20.6 million mortgage warehouse line to a mortgage
warehouse borrower that has ceased doing business under allegations of fraud,
the loan loss provision for the nine months ended September 30, 2002 was $12.3
million, an increase of $10.7 million from the provision of $1.6 million for the
nine month period ended September 30, 2001. In accordance with our lending
policies, on September 30, 2002, a charge of $11.8 million was taken against the
allowance for loan losses. The allowance for loan losses was $21.3 million or
1.07% of total loans at September 30, 2002 compared to $21.6 million or 1.09% of
total loans at September 30, 2001. Net charge offs for the nine months ended
September 30, 2002 were $12.8 million compared to net charge offs of $159,000
for the nine months ended September 30, 2001. The allowance for loan losses as a
percentage of non-performing loans was 166.94% at September 30, 2002 compared to
372.13% at September 30, 2001.
Non-Interest Income. Non-interest income consists mainly of fee income on
deposit accounts, loan servicing fee income and increases in the cash surrender
value of bank owned life insurance. Non-interest income increased $2.5 million
or 16.7% to $17.7 million for the nine months ended September 30, 2002 compared
to $15.2 million for the nine months ended September 30, 2001. This increase was
attributable to a $334,000 increase in net gains on loan sales, an increase of
$473,000 in net gains on the sale of other assets, an increase of $578,000 in
miscellaneous fees and an increase of $885,000 in realized gains on securities.
28
Non-Interest Expense. Non-interest expense increased $7.3 million or 12.6%
to $65.6 million for the nine months ended September 30, 2002 compared to $58.3
million for the nine months ended September 30, 2001. The increase in
non-interest expense was primarily attributable to increases of $3.2 million in
salaries and commissions, $2.1 million in benefit expenses and $1.4 million in
consulting expenses related to employee training and education programs and the
implementation of a customer relationship management system.
Income Tax Expense. Income tax expense decreased $2.2 million or 27.3% to
$5.8 million for the nine months ended September 30, 2002 resulting in an
effective tax rate of 23.2%, compared to $8.0 million for the nine months ended
September 30, 2001 resulting in an effective tax rate of 31.6%. The decrease in
income tax expense was attributable to lower taxable income as a result of the
charge off of uncollectable loans. Additionally, an adjustment to deferred tax
assets for state taxes to reflect the current New Jersey corporate business tax
rate of 9% from the previous rate of 3% resulted in a tax benefit of $1.0
million.
29
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements include:
. statements of our goals, intentions and expectations;
. statements regarding our business plans and prospects and growth and
operating strategies;
. statements regarding the asset quality of our loan and investment
portfolios; and
. estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
. significantly increased competition among depository and other
financial institutions;
. inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
. general economic conditions, either nationally or in our market areas,
that are worse than expected;
. adverse changes in the securities markets;
. legislative or regulatory changes that adversely affect our business;
. our ability to enter new markets successfully and capitalize on growth
opportunities;
. changes in consumer spending, borrowing and savings habits;
. changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies and the Financial Accounting Standards Board;
and
. changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We discuss these uncertainties and others in "Risk Factors"
beginning on page 14.
30
THE PROVIDENT BANK
Established in 1839, we are a New Jersey chartered savings bank,
headquartered in Jersey City, New Jersey. Our deposits are insured by the FDIC,
primarily through the Bank Insurance Fund. We are examined and regulated by the
New Jersey Department of Banking and Insurance and the FDIC.
We are a community- and customer-oriented bank providing retail and small
business customers with a wide range of financial products and services. We
operate through our executive offices and 49 retail banking offices located in
Hudson, Bergen, Essex, Mercer, Middlesex, Monmouth, Morris, Ocean, Somerset and
Union Counties, New Jersey. At June 30, 2002, we had total assets of $3.07
billion, net loans of $1.92 billion, total deposits of $2.53 billion and equity
of $310.6 million.
The Provident Bank's executive offices are located at 830 Bergen Avenue,
Jersey City, New Jersey, and its telephone number is (201) 333-1000. For further
information on our operations and financial condition, see "Business of The
Provident Bank."
PROVIDENT FINANCIAL SERVICES, INC.
Provident Financial Services, Inc. is a Delaware corporation organized for
the purpose of serving as the holding company of The Provident Bank following
the conversion. Provident Financial Services, Inc. has not engaged in any
business to date. Provident Financial Services, Inc. will be a bank holding
company registered with the Board of Governors of the Federal Reserve System.
Upon completion of the conversion, Provident Financial Services, Inc. will have
no significant assets other than shares of common stock of The Provident Bank
and an amount equal to 50% of the net proceeds of the offering, including the
loan to the ESOP. Provident Financial Services, Inc. will have no significant
liabilities immediately after the conversion. Provident Financial Services,
Inc.'s executive offices are located at 830 Bergen Avenue, Jersey City, New
Jersey, and its telephone number is (201) 333-1000.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds will depend on the total number of shares of common stock
sold in the offering, which in turn will depend on RP Financial's appraisal as
well as regulatory and market considerations, and the expenses incurred in
connection with the offering. Although we will not be able to determine the
actual net proceeds from the sale of the common stock until we complete the
offering, we estimate the net proceeds will be between $376.4 million and $510.4
million, or $587.4 million if the offering is increased by 15%.
31
Provident Financial Services, Inc. intends to distribute the net proceeds
from the offering as follows:
59,618,300 Shares
38,318,000 Shares 51,842,000 Shares (Adjusted
(Minimum) (Maximum) Maximum)
----------------- ----------------- -----------------
(In thousands)
Gross proceeds .............................. $ 383,180 $ 518,420 $ 596,183
Less: expenses .............................. (6,780) (8,024) (8,740)
--------- --------- ---------
Estimated net proceeds ...................... $ 376,400 $ 510,396 $ 587,443
Less:
Net proceeds to The Provident Bank ....... (188,200) (255,198) (293,722)
Loan to our employee stock ownership plan (30,654) (41,474) (47,695)
Purchase of shares for recognition and
retention plan ........................ (15,327) (20,737) (23,847)
--------- --------- ---------
Net cash proceeds retained by Provident
Financial Services ....................... $ 142,219 $ 192,987 $ 222,179
========= ========= =========
The net proceeds may vary because total expenses relating to the conversion
may be more or less than our estimates. For example, our expenses would increase
if a syndicated community offering is used to sell shares not purchased in the
subscription offering and community offering. The net proceeds will also vary if
the number of shares to be sold in the offering is adjusted to reflect a change
in the estimated pro forma market value of Provident Financial Services, Inc.
and The Provident Bank or if our ESOP purchases shares in the open market at an
average cost that is higher or lower than $10.00 per share offering price.
Payments for shares 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.
We are undertaking the conversion and offering at this time in order to
have the capital resources available to expand and diversify our business. For
further information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management Strategy." The offering proceeds
will increase our capital and the amount of funds available to us for lending
and investment. The proceeds will also give us greater flexibility to diversify
operations, enhance our technology and delivery systems and expand the products
and services we offer.
Provident Financial Services, Inc.'s Intended Use of the Proceeds it Retains
From the Offering
Assuming we sell 51,842,000 shares in the offering, we intend to distribute
the net proceeds as follows:
. $255.2 million will be invested in The Provident Bank in exchange for
100% of the outstanding shares of The Provident Bank; and
. $255.2 million will be retained by Provident Financial Services, Inc.,
of which $41.5 million will be loaned by Provident Financial Services,
Inc. to the ESOP to fund its purchase of common stock and $20.7
million will be used to fund the acquisition of shares in the open
market for our recognition and retention plan, subject to shareholder
approval.
32
We intend to use the net cash proceeds retained from the offering to invest
in securities, to finance the possible acquisition of other financial
institutions and other financial service businesses, to pay dividends and for
other general corporate purposes, including possibly the repurchase of shares of
common stock. We currently have no specific arrangements or understandings
regarding any specific acquisition transaction.
Following the conversion, we also may implement a dividend and/or a stock
repurchase program. However, under current regulations, we may not repurchase
shares of common stock during the first year following the conversion, except
when extraordinary circumstances exist and with prior regulatory approval.
The Provident Bank May Use the Proceeds it Receives from the Offering:
. to fund new loans;
. to expand our retail banking franchise, by establishing or acquiring
new branches or by acquiring other financial institutions, or other
financial services companies, although we currently have no specific
agreements or understandings regarding any specific acquisition
transaction;
. to enhance our technology and delivery channels;
. to invest in securities; and
. for general corporate purposes.
OUR POLICY REGARDING DIVIDENDS
Provident Financial Services, Inc. will consider the payment of a cash
dividend no earlier than the completion of the first calendar quarter of 2003.
With the additional capital that is being raised in the conversion, Provident
Financial Services, Inc. will have a significant dividend paying capacity. The
payment of dividends, if any, and the amount of any such dividend, will be
subject to the determination of our Board of Directors, which will take into
account, among other factors, our financial condition, results of operations,
tax considerations, industry standards, economic conditions and regulatory
restrictions that affect the payment of dividends by The Provident Bank to
Provident Financial Services, Inc. We cannot guarantee that we will pay
dividends or that, if paid, we will not reduce or eliminate dividends in the
future.
The Provident Bank will provide a future source of funds for the payment of
dividends by Provident Financial Services, Inc. The Provident Bank will not be
permitted to pay cash dividends to Provident Financial Services, Inc. if its
surplus and reserves would thereby be reduced below the amount required for the
liquidation account or applicable regulatory capital requirements. See "The
Conversion and Offering--Effects of the Conversion--Liquidation Account" and
"Regulation--Federal Banking Regulation--Capital Requirements." Under New Jersey
law, The Provident Bank may not pay a cash dividend unless, after the payment of
such dividend, its capital stock will not be impaired and either it will have a
statutory surplus of not less than 50% of its capital stock, or the payment of
such dividend will not reduce its statutory surplus. The Provident Bank's
certificate of incorporation requires a capital surplus of $6.0 million, which
is unavailable for the payment of dividends.
33
Any payment of dividends by The Provident Bank to Provident Financial
Services, Inc., which would be deemed to be drawn out of The Provident Banks'
bad debt reserves component of equity, 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 bad debt reserves component of equity for such distribution.
However, dividends paid out of The Provident Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to be drawn out of The Provident Bank's bad debt reserves component
of equity and, therefore, will not be included in The Provident Bank's income.
The Provident Bank does not intend to make any distribution to Provident
Financial Services, Inc. that would create a tax liability.
Provident Financial Services, Inc. is subject to the requirements of
Delaware law that generally limits dividends to an amount equal to the
difference between the amount by which total assets exceed total liabilities and
the amount equal to the aggregate par value of the outstanding shares of capital
stock. If there is no difference between these amounts, dividends are limited to
net income for the current and/or immediately preceding year.
MARKET FOR THE COMMON STOCK
Provident Financial Services, Inc. has not yet commenced operations and has
never issued capital stock. The Provident Bank, as a mutual institution, has
never issued capital stock. Provident Financial Services, Inc. expects to
receive approval to have its common stock listed on the New York Stock Exchange
under the symbol "PFS" subject to the completion of the offering and compliance
with certain conditions.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control. The
number of active buyers and sellers of the common stock at any particular time
may be limited. Under such circumstances, you could have difficulty selling your
shares on short notice, and, therefore, you should not view the common stock as
a short-term investment. We cannot assure you that an active trading market for
the common stock will develop or that, if it develops, it will continue. Nor can
we assure you that, if you purchase shares, you will be able to sell them at or
above $10.00 per share.
34
REGULATORY CAPITAL COMPLIANCE
At June 30, 2002, The Provident Bank exceeded all applicable regulatory
capital requirements. Set forth below is a summary of our capital under
accounting principles accepted in the United States of America, as of June 30,
2002, and our compliance with the applicable regulatory capital standards, on a
historical and pro forma basis assuming that the indicated number of shares were
sold as of such date and receipt by The Provident Bank of 50% of the net
proceeds. The capital table below does not reflect the capital requirements that
will be applicable to Provident Financial Services, Inc. as a registered bank
holding company. For a discussion of the applicable regulatory capital
requirements, see "Regulation--Federal Banking Regulation--Capital
Requirements."
Historical at
June 30, 2002
--------------------
Percent
of
Amount Assets(2)
-------- ---------
(Dollars in thousands)
GAAP capital ................. $310,568 10.13%
======== =====
Leverage capital:
Capital level(3) .......... $279,979 9.39%
Requirement(4) ............ 119,217 4.00
-------- -----
Excess ................. $160,762 5.39%
======== =====
Risk-based capital:
Tier 1 capital level(3) ... $279,979 13.84%
Requirement(5) ............ 80,914 4.00
-------- -----
Excess ................. $199,065 9.84%
======== =====
Total capital level(3) .... $301,937 14.93%
Requirement(5) ............ 161,827 8.00
-------- -----
Excess ................. $140,110 6.93%
======== =====
Pro Forma at June 30, 2002, Based Upon the Sale at $10.00 per Share
-----------------------------------------------------------------------------------------
59,618,300
38,318,000 45,080,000 51,842,000 Shares
Shares Shares Shares (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(1)
-------------------- -------------------- -------------------- --------------------
Percent Percent Percent Percent
of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
GAAP capital ................. $454,969 14.04% $480,773 14.69% $506,779 15.34% $536,688 16.07%
======== ===== ======== ===== ======== ===== ======== =====
Leverage capital:
Capital level(3) .......... $424,380 13.45% $450,184 14.13% $476,190 14.80% $506,099 15.55%
Requirement(4) ............ 126,219 4.00 127,468 4.00 128,724 4.00 130,169 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess ................. $298,161 9.45% $322,716 10.13% $347,466 10.80% $375,930 11.55%
======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital:
Tier 1 capital level(3) ... $424,380 20.62% $450,184 21.81% $476,190 23.00% $506,099 24.36%
Requirement(5) ............ 82,314 4.00 82,564 4.00 82,815 4.00 83,104 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess ................. $342,066 16.62% $367,620 17.81% $393,375 19.00% $422,995 20.36%
======== ===== ======== ===== ======== ===== ======== =====
Total capital level(3) .... $446,338 21.69% $472,142 22.87% $498,148 24.06% $528,057 25.42%
Requirement(5) ............ 164,628 8.00 165,128 8.00 165,630 8.00 166,208 8.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess ................. $281,710 13.69% $307,014 14.87% $332,518 16.06% $361,849 17.42%
======== ===== ======== ===== ======== ===== ======== =====
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated valuation range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market conditions or general financial and economic conditions
following the commencement of the offering.
(2) Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(3) Pro forma capital levels assume receipt by The Provident Bank of 50% of the
estimated net proceeds from the offering or $188.2 million, $221.7 million,
$255.2 million or $293.7 million at the minimum, midpoint, maximum and
maximum adjusted, of the estimated price range, respectively. These levels
also assume funding of the recognition and a retention plan equal to 4% of
the common stock sold in the offering through purchases in the open market,
or $15.3 million, $18.0 million, $20.7 million or $23.8 million at the
minimum, midpoint, maximum and maximum adjusted, of the estimated price
range, respectively, the repayment of Provident Financial Services, Inc.'s
loan to the ESOP to enable the ESOP to purchase 8% of the common stock sold
in the offering, or $30.7 million, $36.1 million, $41.5 million or $47.7
million at the minimum, midpoint, maximum and maximum adjusted, of the
estimated price range, respectively, and the cash contribution to the
foundation in the amount of $4.6 million, $4.8 million, $4.8 million or
$4.8 million at the minimum, midpoint, maximum and maximum adjusted, of the
estimated price range, respectively.
(4) The current leverage capital requirement is 4% of total adjusted assets for
banks that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth. The
current leverage capital ratio applicable to all other banks is 5%.
(5) Assumes net proceeds are initially invested in assets that carry a
risk-weighting equal to 20%.
35
CAPITALIZATION
The following table presents our historical capitalization at June 30,
2002, and the pro forma consolidated capitalization of Provident Financial
Services, Inc. after giving effect to the conversion, including the contribution
of shares to the foundation, based upon the sale of the number of shares
indicated in the table and the other assumptions set forth under "Pro Forma
Data."
Pro Forma Based Upon the Sale at $10.00 per Share
--------------------------------------------------
59,618,300
38,318,000 45,080,000 51,842,000 Shares
Shares Shares Shares (Adjusted
Bank Historical (Minimum) (Midpoint) (Maximum) Maximum)(1)
--------------- ---------- ---------- ---------- -----------
(In thousands)
Deposits(2) ................................. $2,526,611 $2,526,611 $2,526,611 $2,526,611 $2,526,611
Borrowings .................................. 194,925 194,925 194,925 194,925 194,925
---------- ---------- ---------- ---------- ----------
Total deposits and borrowings ............... $2,721,536 $2,721,536 $2,721,536 $2,721,536 $2,721,536
========== ========== ========== ========== ==========
Stockholders' equity
Preferred stock, $0.01 par value,
50,000,000 shares authorized; none to
be issued ............................. $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value,
200,000,000 shares authorized, shares
to be issued as reflected(3) .......... -- 4,016 4,700 5,376 6,154
Additional paid-in capital(3) ............ -- 390,777 457,898 524,220 600,489
Retained earnings(4) ..................... 302,561 302,561 302,561 302,561 302,561
Less:
Expense of contribution to foundation .... -- (22,991) (24,000) (24,000) (24,000)
Plus:
Tax benefit of contribution to
foundation(5) ......................... -- 8,507 8,880 8,880 8,880
Accumulated other comprehensive income ... 8,007 8,007 8,007 8,007 8,007
Less:
Common stock acquired by the ESOP(6) ..... -- (30,654) (36,064) (41,474) (47,695)
Common stock acquired by the recognition
and retention plan(7) ................. -- (15,327) (18,032) (20,737) (23,847)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity .................. $ 310,568 $ 644,896 $ 703,950 $ 762,833 $ 830,549
========== ========== ========== ========== ==========
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated valuation range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock, which would reduce pro forma deposits by the amount of such
withdrawals.
(3) Includes shares to be issued to depositors and the public in the offering
net of appliance expenses as well as shares to be contributed to the
foundation. No effect has been given to the issuance of additional shares
of common stock pursuant to the stock option plan to be adopted by
Provident Financial Services, Inc. and presented for approval of
stockholders following the offering. The stock option plan would provide
for the grant of stock options to purchase a number of shares of common
stock equal to 10% of the shares of common stock sold in the offering.
(4) The retained earnings of The Provident Bank will be substantially
restricted after the offering.
(5) Represents the tax effect of the contribution to the foundation based on a
37% tax rate. The realization of the deferred tax benefit is limited
annually to a maximum deduction for charitable contributions equal to 10%
of Provident Financial Services, Inc.'s annual taxable income, subject to
the ability of Provident Financial Services, Inc. to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made.
(6) Assumes that the ESOP will purchase 8% of the shares sold in the offering
and that the funds used to acquire the ESOP shares will be borrowed from
Provident Financial Services, Inc. The common stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Pro Forma Data" for
further information regarding the ESOP purchase.
(7) Assumes that, subsequent to the offering, an amount equal to 4% of the
shares of common stock sold in the offering is purchased by the recognition
and retention plan through open market purchases at $10.00 per share. The
actual purchase price per share may be more or less than $10.00. The common
stock to be purchased by the recognition and retention plan is reflected as
a reduction to stockholders' equity. See "Pro Forma Data" for further
information regarding the purchase of shares by the recognition and
retention plan.
36
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the common
stock until the offering is completed. However, we estimate that net proceeds
will be between $376.4 million and $510.4 million, or $587.4 million if the
offering range is increased by 15%, based upon the following assumptions:
. we will sell all shares of common stock in the subscription offering;
. 483,750 shares of common stock will be purchased by our directors and
executive officers, and their associates;
. our ESOP will purchase 8% of the shares of common stock sold in the
offering with a loan from Provident Financial Services, Inc. The loan
will be repaid in substantially equal principal payments over a period
of 30 years;
. we will make a contribution to the charitable foundation valued at a
maximum of $24.0 million, consisting of shares of common stock (80% of
contribution) and cash (20% of contribution);
. we will pay Sandler O'Neill & Partners, L.P. fees and expenses of
approximately $4,721,000 at the maximum offering range. No fee will be
paid with respect to shares of common stock contributed to the
charitable foundation and shares purchased by the ESOP and by our
directors, officers and employees, and their immediate families; and
. total expenses, excluding fees and expenses paid to Sandler O'Neill &
Partners, L.P., will be approximately $3.3 million.
We calculated the pro forma consolidated net income and stockholders'
equity of Provident Financial Services, Inc. for the six months ended June 30,
2002 and for the year ended December 31, 2001, as if the common stock had been
sold at the beginning of those periods and the net proceeds had been invested at
2.06% for the six months ended June 30, 2002 and at 2.06% for the year ended
December 31, 2001. We chose these yields because they represent the yields on
one-year U.S. Government securities for the corresponding periods. We believe
these rates more accurately reflect pro forma reinvestment rates than the
arithmetic average method, which assumes reinvestment of the net proceeds at a
rate equal to the average of the yield on interest-earning assets and the cost
of deposits for these periods. We assumed a tax rate of 37.0% for both periods.
This results in an annualized after-tax yield of 1.30% for the six months ended
June 30, 2002 and 1.30% for the year ended December 31, 2001.
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. We adjusted these
figures to give effect to the shares purchased by the ESOP. We computed per
share amounts for each period as if the common stock was outstanding at the
beginning of the periods, but we did not adjust per share historical or pro
forma stockholders' equity to reflect the earnings on the estimated net
proceeds.
The pro forma tables do not reflect the possible issuance of additional
shares, up to 10% of the shares sold in the offering, pursuant to our proposed
stock option plan. The pro forma
37
tables give effect to the implementation of a recognition and retention plan.
Subject to the receipt of stockholder approval, the recognition and retention
plan would acquire an amount of common stock equal to 4% of the shares of common
stock sold in the offering. In preparing the table below, we assumed that
stockholder approval has been obtained and that the recognition and retention
plan purchases in the open market a number of shares equal to 4% of the shares
sold in the offering at the same price for which they were sold in the stock
offering. We assume that shares of stock are granted under the plan in awards
that vest over five years.
As discussed under "How We Intend to Use the Proceeds from the Offering,"
Provident Financial Services, Inc. intends to invest 50% of the net proceeds
from the offering in The Provident Bank in exchange for 100% of The Provident
Bank's outstanding common stock, make a loan to the ESOP, fund the acquisition
of shares in the open market for the recognition and retention plan, subject to
shareholder approval, and retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
. shares to be reserved for issuance under a stock option plan that we
intend to establish no earlier than six months after the conversion;
. withdrawals from deposit accounts for the purpose of purchasing common
stock in the offering;
. our results of operations after the conversion; or
. changes in the market price of the common stock after the conversion.
The following pro forma information may not represent the financial effects
of the conversion at the date on which the conversion actually occurs and you
should not use the table to indicate future results of operations. Pro forma
stockholders' equity represents the difference between the stated amount of
assets and liabilities of The Provident Bank computed in accordance with
generally accepted accounting principles. We did not increase or decrease
stockholders' equity to reflect the difference between the carrying value of
loans and other assets and their market value. Pro forma stockholders' equity is
not intended to represent the fair market value of the common stock and may be
different than amounts that would be available for distribution to stockholders
if we liquidated.
38
At or For the Six Months Ended June 30, 2002
-------------------------------------------------------------------------
59,618,300
38,318,000 45,080,000 51,842,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 per share
$10.00 per share $10.00 per share $10.00 per share (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(8)
---------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share amounts)
Gross proceeds ............................... $383,180 $450,800 $518,420 $596,183
Plus: shares contributed to foundation ...... 18,393 19,200 19,200 19,200
-------- -------- -------- --------
Pro forma market capitalization .............. $401,573 $470,000 $537,620 $615,383
======== ======== ======== ========
Gross proceeds ............................... $383,180 $450,800 $518,420 $596,183
Less: offering expenses and commissions ..... (6,780) (7,402) (8,024) (8,740)
-------- -------- -------- --------
Estimated net proceeds ....................... 376,400 443,398 510,396 587,443
Less: cash contribution to foundation ....... (4,598) (4,800) (4,800) (4,800)
Less: common stock purchased by ESOP(1) ..... (30,654) (36,064) (41,474) (47,695)
Less: common stock purchased by
recognition and retention plan(2) ......... (15,327) (18,032) (20,737) (23,847)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ....... $325,821 $384,502 $443,385 $511,101
======== ======== ======== ========
Consolidated net income(3):
Historical ................................ $ 15,026 $ 15,026 $ 15,026 $ 15,026
Plus: Pro forma income on net
proceeds, as adjusted .................. 2,114 2,495 2,877 3,317
Less: Pro forma ESOP adjustment(1) ....... (322) (379) (435) (501)
Less: Pro forma recognition and
retention plan adjustment(2) ........... (966) (1,136) (1,306) (1,502)
-------- -------- -------- --------
Pro forma net income(3) ................... $ 15,852 $ 16,006 $ 16,162 $ 16,340
======== ======== ======== ========
Per share net income(3):
Historical ................................ $ 0.40 $ 0.35 $ 0.30 $ 0.26
Plus: Pro forma income on net
proceeds, as adjusted .................. 0.06 0.06 0.06 0.06
Less: Pro forma ESOP adjustment(1) ....... (0.01) (0.01) (0.01) (0.01)
Less: Pro forma recognition and
retention plan adjustment(2) ........... (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net income per share(3)(4) ...... $ 0.42 $ 0.37 $ 0.32 $ 0.28
======== ======== ======== ========
Stockholders' equity:
Historical ................................ $310,568 $310,568 $310,568 $310,568
Estimated net proceeds .................... 376,400 443,398 510,396 587,443
Plus: shares contributed to foundation ... 18,393 19,200 19,200 19,200
Less: shares contributed to foundation ... (18,393) (19,200) (19,200) (19,200)
Less: cash contributed to foundation ..... (4,598) (4,800) (4,800) (4,800)
Plus: tax benefit of contribution to
foundation ............................. 8,507 8,880 8,880 8,880
Less: common stock acquired by ESOP(1) ... (30,654) (36,064) (41,474) (47,695)
Less: common stock acquired by
recognition and retention plan(2) ...... (15,327) (18,032) (20,737) (23,847)
-------- -------- -------- --------
Pro forma stockholders' equity (4)(5) .... $644,896 $703,950 $762,833 $830,549
======== ======== ======== ========
Stockholders' equity per share(6):
Historical ................................ $ 7.73 $ 6.61 $ 5.78 $ 5.05
Estimated net proceeds .................... 9.37 9.43 9.49 9.55
Plus: shares contributed to foundation ... 0.46 0.41 0.36 0.31
Less: shares contributed to foundation ... (0.46) (0.41) (0.36) (0.31)
Less: cash contributed to foundation ..... (0.11) (0.10) (0.09) (0.08)
Plus: tax benefit of contribution to
foundation ............................. 0.21 0.19 0.17 0.14
Less: common stock acquired by ESOP(1) ... (0.76) (0.77) (0.77) (0.78)
Less: common stock acquired by
recognition and retention plan(2) ...... (0.38) (0.38) (0.39) (0.39)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(5) ............................ $ 16.06 $ 14.98 $ 14.19 $ 13.49
======== ======== ======== ========
Offering price to pro forma net income
per share(7) .............................. 11.90x 13.51x 15.63x 17.86x
======== ======== ======== ========
Offering price as a percentage of pro
forma stockholders' equity per share(6) ... 62.27% 66.76% 70.47% 74.13%
======== ======== ======== ========
Offering price as a percentage of pro
forma tangible stockholders' equity
per share(9) .............................. 64.53% 68.98% 72.63% 76.21%
======== ======== ======== ========
(footnotes on following page)
39
- ----------
(1) It is assumed that 8% of the shares sold in the offering will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have been
borrowed by the ESOP from Provident Financial Services, Inc. The amount to
be borrowed is reflected as a reduction to stockholders' equity. The Bank
intends to make annual contributions to the ESOP in an amount at least
equal to the principal and interest requirement of the debt. Our total
annual payment of the ESOP debt is based upon 30 equal annual installments
of principal, with an assumed interest rate at 4.75%. The pro forma net
income assumes: (i) that the contribution to the ESOP is equivalent to the
debt service requirement for the six months ended June 30, 2002, and was
made at the end of the period; (ii) that 51,091, 60,107, 69,123 and 79,491
shares at the minimum, midpoint, maximum and adjusted maximum of the
estimated valuation range, respectively, were committed to be released
during the six months ended June 30, 2002, at an average fair value of
$10.00 per share in accordance with Statement of Position, which we refer
to as SOP, 93-6; and (iii) only the ESOP shares committed to be released
were considered outstanding for purposes of the net income per share
calculations.
(2) Gives effect to the recognition and retention plan expected to be adopted
by Provident Financial Services, Inc. following the offering. This plan
intends to acquire a number of shares of common stock equal to 4% of the
shares of common stock sold in the offering or 1,532,720, 1,803,200,
2,073,680 and 2,384,732 shares of common stock at the minimum, midpoint,
maximum and adjusted maximum of the estimated valuation range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of common stock or treasury stock of
Provident Financial Services, Inc., if any. Funds used by the recognition
and retention plan to purchase the shares will be contributed to the plan
by The Provident Bank. In calculating the pro forma effect of the
recognition and retention plan, it is assumed that the shares were acquired
by the recognition and retention plan at the beginning of the period
presented in open market purchases at $10.00 per share and that 20% of the
amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of common stock to the
recognition and retention plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
3.85%.
(3) Does not give effect to the non-recurring expense that will be recognized
in 2002 as a result of the establishment of the foundation. Provident
Financial Services, Inc. will recognize an after-tax expense of
$14,484,204, $15,120,000, $15,120,000 and $15,120,000, at the minimum,
midpoint, maximum and adjusted maximum of the estimated valuation range,
respectively, related to the contribution to the foundation. Per share net
income data is based on 37,142,915, 43,453,707, 49,683,763 and 56,848,327
shares outstanding at the minimum, midpoint, maximum and adjusted maximum
of the estimated valuation range, respectively, which represents shares
issued in the conversion, shares contributed to the foundation and shares
to be allocated or distributed under the ESOP and recognition and retention
plan for the period presented.
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan expected to be adopted by Provident
Financial Services, Inc. following the conversion. Under the stock option
plan, an amount equal to 10% of the common stock sold in the offering, or
3,831,800, 4,508,000, 5,184,200 and 5,961,830 shares at the minimum,
midpoint, maximum and adjusted maximum of the estimated valuation range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of common
stock pursuant to the exercise of options under the stock option plan will
result in the dilution of existing stockholders' interests by approximately
9.09%.
(5) The retained earnings of The Provident Bank will continue to be
substantially restricted after the conversion.
(6) Stockholders' equity per share data is based upon 40,157,264, 47,000,000,
53,762,000 and 61,538,300 shares outstanding at the minimum, midpoint,
maximum and adjusted maximum of the estimated valuation range,
respectively, representing shares issued in the conversion, (including the
shares purchased by the ESOP in the conversion, shares to be acquired by
the recognition and retention plan, and shares contributed to the
foundation) and assumes the recognition and retention plan is funded by
shares purchased in the open market.
(7) Based on pro forma net income for the six months ended June 30, 2002 that
has been annualized.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated valuation range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the offering.
(9) Equity is adjusted to exclude $22,654,000 of goodwill and core deposit
intangibles as of June 30, 2002.
40
At or For the Year Ended December 31, 2001
-------------------------------------------------------------------------
59,618,300
38,318,000 45,080,000 51,842,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 per share
$10.00 per share $10.00 per share $10.00 per share (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(7)
---------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share amounts)
Gross proceeds................................... $383,180 $450,800 $518,420 $596,183
Plus: shares contributed to foundation........... 18,393 19,200 19,200 19,200
-------- -------- -------- --------
Pro forma market capitalization.................. $401,573 $470,000 $537,620 $615,383
======== ======== ======== ========
Gross proceeds................................... $383,180 $450,800 $518,420 $596,183
Less: offering expenses and commissions.......... (6,780) (7,402) (8,024) (8,740)
-------- -------- -------- --------
Estimated net proceeds........................... 376,400 443,398 510,396 587,443
Less: cash contribution to foundation............ (4,598) (4,800) (4,800) (4,800)
Less: common stock purchased by ESOP(1).......... (30,654) (36,064) (41,474) (47,695)
Less: common stock purchased by
recognition and retention plan(2)....... (15,327) (18,032) (20,737) (23,847)
-------- -------- -------- --------
Estimated net proceeds, as adjusted.............. $325,821 $384,502 $443,385 $511,101
======== ======== ======== ========
Consolidated net income(3):
Historical.................................... $ 24,080 $ 24,080 $ 24,080 $ 24,080
Plus: Pro forma income on net
proceeds, as adjusted................ 4,229 4,990 5,754 6,633
Less: Pro forma ESOP adjustment(1)............ (644) (757) (871) (1,002)
Less: Pro forma recognition and
retention plan adjustment(2)......... (1,931) (2,272) (2,613) (3,005)
-------- -------- -------- --------
Pro forma net income(3)....................... $ 25,734 $ 26,041 $ 26,350 $ 26,706
======== ======== ======== ========
Per share net income(3):
Historical.................................... $ 0.65 $ 0.55 $ 0.48 $ 0.42
Plus: Pro forma income on net
proceeds, as adjusted................ 0.11 0.11 0.12 0.12
Less: Pro forma ESOP adjustment(1)............ (0.02) (0.02) (0.02) (0.02)
Less: Pro forma recognition and ..............
retention plan adjustment(2)......... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income per share(3)(4).......... $ 0.69 $ 0.59 $ 0.53 $ 0.47
======== ======== ======== ========
Stockholders' equity:
Historical.................................... $292,130 $292,130 $292,130 $292,130
Estimated net proceeds........................ 376,400 443,398 510,396 587,443
Plus: shares contributed to foundation........ 18,393 19,200 19,200 19,200
Less: shares contributed to foundation........ (18,393) (19,200) (19,200) (19,200)
Less: cash contributed to foundation.......... (4,598) (4,800) (4,800) (4,800)
Plus: tax benefit of contribution to
foundation........................... 8,507 8,880 8,880 8,880
Less: common stock acquired by ESOP(1)........ (30,654) (36,064) (41,474) (47,695)
Less: common stock acquired by
recognition and retention plan(2).... (15,327) (18,032) (20,737) (23,847)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(5).......... $626,458 $685,512 $744,395 $812,111
======== ======== ======== ========
Stockholders' equity per share(6):
Historical.................................... $ 7.27 $ 6.22 $ 5.43 $ 4.75
Estimated net proceeds........................ 9.37 9.43 9.49 9.55
Plus: shares contributed to foundation........ 0.46 0.41 0.36 0.31
Less: shares contributed to foundation........ (0.46) (0.41) (0.36) (0.31)
Less: cash contributed to foundation.......... (0.11) (0.10) (0.09) (0.08)
Plus: tax benefit of contribution to
foundation........................... 0.21 0.19 0.17 0.14
Less: common stock acquired by ESOP(1)........ (0.76) (0.77) (0.77) (0.78)
Less: common stock acquired by
recognition and retention plan(2).... (0.38) (0.38) (0.39) (0.39)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(5)................................ $ 15.60 $ 14.59 $ 13.84 $ 13.19
======== ======== ======== ========
Offering price to pro forma net income
per share..................................... 14.49x 16.95x 18.87x 21.28x
======== ======== ======== ========
Offering price as a percentage of pro
forma stockholders' equity per share(6)....... 64.10% 68.54% 72.25% 75.82%
======== ======== ======== ========
Offering price as a percentage of pro
forma tangible stockholders' equity
per share(8).................................. 66.63% 71.00% 74.64% 78.10%
======== ======== ======== ========
(footnotes on following page)
41
- ---------
(1) It is assumed that 8% of the shares sold in the offering will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have been
borrowed by the ESOP from Provident Financial Services, Inc. The amount to
be borrowed is reflected as a reduction of stockholders' equity. The Bank
intends to make annual contributions to the ESOP in an amount at least
equal to the principal and interest requirement of the debt. Our total
annual payment of the ESOP debt is based upon thirty equal annual
installments of principal, with an assumed interest rate at 4.75%. The pro
forma net income assumes: (i) that our contribution to the ESOP is
equivalent to the debt service requirement for the year ended December 31,
2001, and was made at the end of the period; (ii) that 102,181, 120,213,
138,245 and 158,982 shares at the minimum, midpoint, maximum and adjusted
maximum of the estimated valuation range, respectively, were committed to
be released during the year ended December 31, 2000, at an average fair
value of $10.00 per share in accordance with SOP 93-6; and (iii) only the
ESOP shares committed to be released were considered outstanding for
proposes of the net income per share calculations.
(2) Gives effect to the recognition and retention plan expected to be adopted
by Provident Financial Services, Inc. following the offering. This plan
intends to acquire a number of shares of common stock equal to 4% of the
shares of common stock sold in the offering, or 1,532,72 0, 1,803,200,
2,073,680 and 2,384,732 shares of common stock at the minimum, midpoint,
maximum and adjusted maximum of the estimated valuation range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of common stock or treasury stock of
Provident Financial Services, Inc., if any. Funds used by the recognition
and retention plan to purchase the shares will be contributed to the plan
by The Provident Bank. In calculating the pro forma effect of the
recognition and retention plan, it is assumed that the shares were acquired
by the recognition and retention plan at the beginning of the period
presented in open market purchases at $10.00 per share and that 20% of the
amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of common stock to the
recognition and retention plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
3.85%.
(3) Does not give effect to the non-recurring expense that will be recognized
in 2002 as a result of the establishment of the foundation. Provident
Financial Services, Inc. will recognize an after-tax expense of
$14,484,204, $15,120,000, $15,120,000 and $15,120,000 at the minimum,
midpoint, maximum and adjusted maximum of the estimated valuation range,
respectively, related to the contribution to the foundation. Per share net
income data is based on 37,194,005, 43,513,813, 49,752,885 and 56,927,818
shares outstanding at the minimum, midpoint, maximum and adjusted maximum
of the estimated valuation range, respectively, which represents shares
issued in the conversion, shares contributed to the foundation and shares
to be allocated or distributed under the ESOP and recognition and retention
plan for the period presented.
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan expected to be adopted by Provident
Financial Services, Inc. following the offering. Under the stock option
plan, an amount equal to 10% of the common stock sold in the conversion, or
3,831,800, 4,508,000, 5,184,200 and 5,961,830 shares at the minimum,
midpoint, maximum and adjusted maximum of the estimated valuation range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of common
stock pursuant to the exercise of options under the stock option plan will
result in the dilution of existing stockholders' interests by approximately
9.09%.
(5) The retained earnings of The Provident Bank will continue to be
substantially restricted after the conversion.
(6) Stockholders' equity per share data is based upon 40,157,264, 47,000,000,
53,762,000 and 61,538,300 shares outstanding at the minimum, midpoint,
maximum and adjusted maximum of the estimated valuation range,
respectively, representing shares issued in the conversion, (including the
shares purchased by the ESOP in the conversion, shares to be acquires by
the recognition and retention plan, and shares contributed to the
foundation) and assumes the recognition and retention plan is funded by
shares in the open market.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated valuation range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the offering.
(8) Equity is adjusted to exclude $23,743,000 of goodwill and core deposit
intangibles as of December 31, 2001.
42
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE FOUNDATION
As reflected in the table below, if the charitable foundation was not
established and funded as part of the conversion, RP Financial estimates that
the pro forma valuation of Provident Financial Services, Inc. would be greater,
and as a result a greater number of shares of common stock would be issued in
the offering. At the minimum, midpoint and maximum of the valuation range, the
pro forma valuation of Provident Financial Services, Inc. is $401.6 million,
$470.0 million and $537.6 million with the foundation, as compared with $412.3
million, $485.0 million and $557.8 million, respectively, without the
foundation. There is no assurance that in the event the foundation was not
formed that the appraisal prepared at that time would conclude that the pro
forma market value of Provident Financial Services, Inc. would be the same as
that estimated in the table below. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and adjusted
maximum of the estimated valuation range, assuming the conversion was completed
at June 30, 2002, with and without the foundation.
Minimum Midpoint
----------------------- -----------------------
With Without With Without
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount....................... $ 383,180 $ 412,250 $ 450,800 $ 485,000
Pro forma market capitalization................. 401,573 412,250 470,000 485,000
Total assets.................................... 3,400,605 3,422,009 3,459,659 3,485,360
Total liabilities............................... 2,755,709 2,755,709 2,755,709 2,755,709
Pro forma stockholders' equity.................. 644,896 666,300 703,950 729,651
Pro forma net income............................ 15,852 15,949 16,006 16,116
Pro forma stockholders' equity per share........ 16.06 16.16 14.98 15.04
Pro forma net income per share.................. 0.42 0.42 0.37 0.36
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............ 62.27% 61.88% 66.76% 66.49%
Offering price to pro forma net income per
share..................................... 11.90x 11.90x 13.51x 13.89x
Pro forma financial ratios:
Return on assets............................. 0.93% 0.93% 0.93% 0.92%
Return on equity............................. 4.92 4.79 4.55 4.42
Equity/assets................................ 18.96 19.47 20.35 20.93
Maximum Adjusted Maximum
----------------------- -----------------------
With Without With Without
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount....................... $ 518,420 $ 557,750 596,183 641,413
Pro forma market capitalization................. 537,620 557,750 615,383 641,413
Total assets.................................... 3,518,542 3,548,711 3,586,258 3,621,564
Total liabilities............................... 2,755,709 2,755,709 2,755,709 2,755,709
Pro forma stockholders' equity.................. 762,833 793,002 830,549 865,855
Pro forma net income............................ 16,162 16,282 16,340 16,474
Pro forma stockholders' equity per share........ 14.19 14.22 13.49 13.50
Pro forma net income per share.................. 0.32 0.31 0.28 0.27
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............ 70.47% 70.32% 74.13% 74.07%
Offering price to pro forma net income per
share..................................... 15.63x 16.13x 17.86x 18.52x
Pro forma financial ratios:
Return on assets............................. 0.92% 0.92% 0.91% 0.91%
Return on equity............................. 4.24 4.11 3.93 3.81
Equity/assets................................ 21.68 22.35 23.16 23.91
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Provident Financial Services, Inc. was formed by us in connection with our
conversion and has not yet commenced operations. Provident Financial Services,
Inc.'s results of operations will be dependent on the results of operations of
The Provident Bank, which will be a wholly-owned subsidiary. The Provident
Bank's results of operations are primarily dependent upon its net interest
income. Net interest income is the difference between interest income earned on
loans and investments and interest expense paid on deposits and borrowings.
Results of operations are also affected by provisions for loan losses, fees
collected on deposit accounts, investment and loan sales, loan servicing income,
income accrued on the cash surrender value of bank owned life insurance and
income from our products and services. Non-interest expense consists mainly of
salary and benefits expense, net occupancy expense, data processing expense,
advertising and promotion expense and other operating expenses. Results of
operations are also impacted by changes in interest rates, economic conditions,
competition and changes in government policies, accounting changes and
regulatory actions.
Following the completion of the conversion, non-interest expenses can be
expected to increase as a result of the increase in costs associated with
managing a public company, increased compensation expenses associated with
adopting and funding our employee stock ownership plan and the recognition and
retention plan, if approved by the stockholders, and the costs of funding the
charitable foundation.
Assuming that the adjusted maximum number of shares are sold in the
offering: (i) the contribution to the charitable foundation will be
approximately $24.0 million, all of which will be expensed in the quarter during
which the conversion is completed; (ii) the ESOP will acquire 4,769,464 shares
with a $47.7 million loan that is expected to be repaid over 30 years, resulting
in an annual expense (pre-tax) of approximately $1.6 million (assuming that the
common stock maintains a value of $10 per share); and (iii) the recognition and
retention plan would award 4% of shares sold, or 2,384,732 shares to eligible
participants, which would be expensed as the awards vest. Assuming all shares
are awarded under the recognition and retention plan at a price of $10 per
share, and that the awards are subject to a five-year vesting period, the
corresponding annual expense (pre-tax) associated with shares awarded under the
recognition and retention plan would be approximately $4.8 million.
The actual expense that will be recorded for the ESOP will be determined by
the market value of the shares released to employees over the term of the loan.
Accordingly, increases in the stock price above $10 per share will increase the
ESOP expense. Further, the actual expense of the recognition and retention plan
will be determined by the fair market value of the stock on the grant date,
which might be greater than $10 per share.
Critical Accounting Policies and Use of Estimates
The calculation of the allowance for loan losses is a critical accounting
policy of The Provident Bank. Provisions for loan losses will continue to be
based upon our assessment of the
44
overall loan portfolio and the underlying collateral, trends in non-performing
loans, current economic conditions and other relevant factors in order to
maintain the allowance for loan losses at adequate levels to provide for
estimated losses. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate which is subject to
significant judgment and short-term change.
Management Strategy
It is our goal to achieve and maintain strong financial results and grow
profitably by offering high quality products and delivering outstanding customer
service to our individual and business customers within the market areas where
we have branch offices. We believe that what sets us apart from our competitors
is our commitment to personalized, responsive customer service and our focus on
our "Customer-Centric Strategy." In order to attain our financial goals, our
strategy is to continue to expand our core deposit accounts and to improve asset
yield by continuing to diversify our lending portfolio. Growth in core deposit
accounts and other retail products and services will contribute to increases in
non-interest income. As part of our strategy to diversify and increase
non-interest income, we have added complementary products and services through
Provident Mortgage Company, a mortgage banking company that specializes in FHA
and VA loans, and Provident Title, LLC, a title insurance agency. Controlling
expenses and expanding our franchise through selective acquisition or de novo
branching are an integral part of our business strategy.
Our business strategy focuses on the following areas:
Loan Portfolio Diversification. As part of our strategy to improve the
yield on the loan portfolio and reduce exposure to interest rate risk, our
business plan focuses on maintaining a diversified loan portfolio to reduce the
percentage of retail loans and increase the percentage of commercial loans that
are in portfolio. Most of our commercial real estate loans have interest rates
that reset in five years and are subject to prepayment penalties if the loan is
paid off before maturity. Construction loans and mortgage warehouse loans are
priced at a spread over the prime rate or the federal funds rate and they change
when the federal funds rate or prime rate changes.
Asset Quality. As of June 30, 2002, non-performing assets were $4.8 million
or 0.15% of total assets compared to $6.5 million or 0.32% of total assets at
December 31, 1997. Our asset quality reflects our focus on underwriting criteria
and aggressive collection and charge off efforts.
Increase Core Deposits. Our focus is to improve our net interest margin by
acquiring and maintaining a stable, low cost funding base. Our business strategy
focuses on acquiring and retaining core deposit accounts, such as checking and
savings accounts and expanding customer relationships.
Net Interest Margin. Our net interest margin has benefited from the decline
in market interest rates and there has been a significant reduction in interest
rates paid on time deposits. Our goal to improve asset yield led to a
diversification of the lending portfolio to reflect a greater balance between
mortgage and consumer lending and commercial real estate and other
45
commercial loans. Net interest margin for the six months ended June 30, 2002 has
improved to 4.09% compared to 3.79% for the year ended December 31, 2001.
Non-Interest Revenue. Our continuing emphasis on expanding non-interest
income resulted in fee income increasing to $8.4 million for the six months
ended June 30, 2002 compared to $7.9 million for the six months ended June 30,
2001. The majority of our fee income from deposit accounts is derived from core
deposit accounts. We have also focused on expanding our products and services to
generate additional non-interest income. In addition to offering investment
products and estate management and trust services, we entered into a joint
venture in 2001 to sell title insurance and we acquired a mortgage banking
company in July, 2001.
Non-Interest Expense. During 2001, a significant number of lending and
marketing professionals were hired as part of our business strategy to increase
business lending and deposit relationships and to develop and implement our
Customer Relationship Management strategy. Non-interest expense to average
assets increased to 3.02% for the six months ended June 30, 2002 compared to
2.94% for the year ended December 31, 2001. A review of current business
operations and processes is currently underway to evaluate outsourcing
opportunities for processes that are not considered to be core-banking
activities.
Investment Portfolio Strategy. Our investment strategy is to maximize the
return on the investment portfolio consistent with guidelines that have been
established for liquidity, safety, duration, and diversification. The
composition of the portfolio is diversified among U.S. Treasury and Agency
securities, mortgage-backed securities, corporate securities and tax exempt
municipal securities. Securities purchased for the investment portfolio have a
minimum credit rating of A by Moody's or Standard and Poor's. As of June 30,
2002, 83.7% of all investment securities in our portfolio were rated AAA.
Interest Rate Risk Management. We use several measures to manage and
monitor interest rate risk. Short term interest rate risk is managed by
analyzing the changes in net interest income over a 12 to 24 month time horizon.
In order to limit exposures to changes in interest rates, generally all twenty
and thirty year fixed-rate residential mortgages are sold at origination. The
reallocation of the lending portfolio to include more adjustable rate loans such
as mortgage warehouse loans, and commercial real estate and construction loans
in addition to adjustable rate mortgage loans reduces our exposure to the
volatility that results from changes in interest rates.
In 2001, the Federal Reserve Bank reduced interest rates eleven times,
resulting in a decline in the Federal Funds rate to 1.75% from 6.50%. The
reduction in short term rates led to a steepening of the yield curve. The
combination of lower short-term rates and a steeper yield curve contributed to
an improvement in our net interest spread and net interest margin. The reduction
of short-term market rates has resulted in a lower cost of funds. Long-term
rates have also declined and this has resulted in increases in cash flows from
prepayments, which have been reinvested at lower rates.
Measuring the economic value of equity gives us an indication of the
exposure of the net present value of equity to changes in interest rates over a
longer time horizon. Economic value
46
of equity is an assessment of the present value of expected future cash flows on
assets minus the expected cash flows on liabilities, plus or minus the present
value of the expected cash flows of any off balance sheet instruments. As of
June 30, 2002, an immediate and sustained increase in interest rates of 200
basis points would result in a reduction in the net present value of equity of
$84.7 million or a decrease of 15.96%. The ratio of the present value of equity
as a percentage of the present value of assets is projected to be 13.98% in that
scenario.
Expansion of Retail Banking Franchise. During the last several years, The
Provident Bank has expanded its retail banking franchise by acquiring branches
and a whole bank. We have also closed branch offices that did not meet our
performance criteria. We anticipate continued expansion through the
establishment of two to four de novo branch offices annually during the next
three years, although no assurance can be given that we will be able to
establish these branches as intended. We will consider other expansion
opportunities that may arise and that complement or enhance our market presence,
although we currently have no specific arrangements or understandings regarding
any specific acquisition transaction.
Management of Market Risk
Qualitative Analysis. Interest rate risk is the exposure of a bank's
current and future earnings and capital arising from adverse movements in
interest rates. Our most significant risk exposure is interest rate risk. The
guidelines of our interest rate risk policy seek to limit the exposure to
changes in interest rates that affect the underlying economic value of assets
and liabilities, earnings and capital. To minimize interest rate risk we
generally sell all twenty and thirty year fixed-rate mortgage loans at
origination. A majority of residential loans that are in portfolio are
adjustable rate mortgages. Commercial real estate loans generally have interest
rates that reset in five years and other commercial loans such as construction
loans, commercial lines of credit and mortgage warehouse loans reset with
changes in the prime rate or the federal funds rate. Investment securities
purchases generally have maturities of five years or less and mortgage-backed
securities have weighted average lives between three and five years.
The Asset/Liability Committee meets on a monthly basis to review the impact
of interest rate changes on net interest income, net interest margin, net income
and economic value of equity. Members of the Asset/Liability Committee include
our Chief Executive Officer and President and our Chief Operating Officer as
well as senior officers from our finance, lending and customer management
departments. The Asset/Liability Committee reviews a variety of strategies that
project changes in asset or liability mix and the impact of those changes on
projected net interest income and net income.
Our strategy for liabilities has been to maintain a stable core-funding
base by focusing on core deposit account acquisition and increasing products and
services per household. Our focus on core deposit accounts has led to a shift in
our funding base to less interest rate sensitive liabilities. Certificate of
deposit accounts as a percentage of total deposits have declined to 43.0% at
June 30, 2002 from 44.9% at December 31, 2001, 47.7% at December 31, 2000 and
48.3% at December 31, 1999. Certificate of deposit accounts are generally short
term. As of June 30, 2002, 84.5% of all time deposits had maturities of one year
or less compared to 83.8% at December 31, 2001 and 87.0% at December 31, 2000.
Our ability to retain maturing certificate of deposit accounts is the result of
our strategy to remain competitively priced within
47
our marketplace, typically within the upper quartile of rates offered by our
competitors. Our pricing strategy may vary depending upon our funding needs and
our ability to fund operations through alternative sources, primarily by
accessing our short-term lines of credit with the Federal Home Loan Bank during
periods of pricing dislocation.
Quantitative Analysis. We measure our sensitivity to changes in interest
rates through the use of balance sheet and income simulation models. The
analyses capture changes in net interest income using flat rates as a base, a
most likely rate forecast and rising and declining interest rate forecasts. We
measure changes in net interest income and net income for the forecast period,
generally twelve to twenty-four months, within our limits for acceptable change.
The following sets forth the result of our net interest income model as of
June 30, 2002.
Change in Net Interest Income
Interest Rates in ------------------------------------
Basis Points Amount ($) Change ($) Change (%)
(Rate Shock) ---------- ---------- ----------
- ----------------- (Dollars in thousands)
-100 $125,996 $ 10,083 8.70%
Static 115,913 -- --
+100 104,370 (11,543) (9.96)%
+200 92,306 (23,607) (20.37)%
+300 79,940 (35,973) (31.03)%
The above table indicates that as of June 30, 2002, in the event of an
immediate and sustained 200 basis point increase in interest rates, we would
experience a 20.37%, or $23.6 million decrease in net interest income. In the
event of a 100 basis point decrease in interest rates, we would experience a
8.7%, or $10.1 million increase in net interest income.
Another measure of interest rate sensitivity is to model changes in
economic value of equity through the use of immediate and sustained interest
rate shocks. The following table illustrates the result of our economic value of
equity model results as of June 30, 2002.
Present Value of Equity as
Percent of Present Value of
Present Value of Equity Assets
------------------------------ ---------------------------
Change in Dollar Dollar Percent Present Percent
Interest Rates Amount Change Change Value Ratio Change
- -------------- -------- --------- ------- ----------- -------
(Basis Points) (Dollars in thousands)
-100 $552,067 $ 21,592 4.07% 16.61% 3.10%
Static 530,475 -- -- 16.11% --
+100 489,121 (41,354) (7.80)% 15.09% (6.33)%
+200 445,803 (84,672) (15.96)% 13.98% (13.22)%
+300 399,684 (130,791) (24.66)% 12.75% (20.86)%
The above table indicates that as of June 30, 2002, in the event of an
immediate and sustained 200 basis point increase in interest rates, we would
experience a 15.96% or $84.7 million reduction in the present value of equity.
If rates were to decrease 100 basis points, we would experience a 4.07% or $21.6
million increase in our present value of equity.
Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurement. Modeling changes in net interest income requires
the making of certain assumptions regarding prepayment and deposit decay rates,
which may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. While we
48
believe such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates will approximate actual future loan
prepayment and deposit withdrawal activity. Moreover, the net interest income
table presented assumes 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 also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the net interest income table provides an indication of our interest
rate risk exposure at a particular point in time, such measurement is not
intended to and does 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.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned on such assets and
paid on such liabilities.
Average Balance Sheet. The following table sets forth certain information
at June 30, 2002, for the six months ended June 30, 2002 and 2001, and for the
years ended December 31, 2001, 2000 and 1999. For the periods indicated, the
total dollar amount of interest income from average interest-earning assets and
the resultant yields, as well as the interest expense on average
interest-bearing liabilities, is expressed both in dollars and rates. No tax
equivalent adjustments were made. Average balances are daily averages.
49
For the Six Months Ended June 30,
-----------------------------------
At June 30, 2002 2002
-------------------- -----------------------------------
Average Average
Outstanding Yield/ Outstanding Interest Yield/
Balance Rate Balance Earned/Paid Rate
----------- ------ ----------- ----------- -------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and short-term
investments........ ............... $ 70,406 1.64% $ 103,477 $ 890 1.72%
Investment securities (1)............. 110,131 4.53 113,982 2,693 4.72
Securities available for sale......... 728,509 5.26 596,917 16,540 5.54
Net loans (2)......................... 1,919,729 7.10 1,929,574 68,149 7.06
---------- ---------- -------
Total interest-earning assets... 2,828,775 6.30 2,743,950 88,272 6.43
---- ------- ----
Non-interest earning assets........... 237,502 215,883
---------- ----------
Total assets.................... $3,066,277 $2,959,833
========== ==========
Interest-bearing liabilities:
Savings deposits................... $ 823,530 1.81 $ 785,557 6,873 1.75
Money market accounts.............. 88,913 1.81 89,532 851 1.90
Interest bearing checking.......... 264,955 1.19 250,961 1,519 1.21
Time accounts...................... 1,087,081 3.23 1,065,741 18,741 3.52
Borrowings......................... 194,925 4.18 191,195 4,109 4.30
---------- ---- ---------- -------
Total interest-bearing
liabilities.................. 2,459,404 2.57 2,382,986 32,093 2.69
---- ------- ----
Non-interest bearing liabilities...... 296,305 283,348
---------- ----------
Total liabilities............... 2,755,709 2,666,334
Equity............................. 310,568 293,499
---------- ----------
Total liabilities and equity.... $3,066,277 $2,959,833
========== ==========
Net interest income................... $56,179
=======
Net interest rate spread.............. 3.73% 3.74%
==== ====
Net interest earning assets........... $ 369,371 $ 360,964
========== ==========
Net interest margin (3)............... 4.09%
====
Ratio of interest-earning assets
to total interest-bearing
liabilities..................... 1.15x 1.15x
========== ==========
For the Six Months Ended June 30,
-----------------------------------
2001
-----------------------------------
Average Average
Outstanding Interest Yield/
Balance Earned/Paid Rate
----------- ----------- --------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and short-term
investments........................ $ 24,233 $ 580 4.79%
Investment securities (1)............. 116,568 2,993 5.13
Securities available for sale......... 392,849 11,744 5.98
Net loans (2)......................... 1,958,118 75,410 7.70
---------- -------
Total interest-earning assets... 2,491,768 90,727 7.28
------- -----
Non-interest earning assets........... 191,891
----------
Total assets.................... $2,683,659
==========
Interest-bearing liabilities:
Savings deposits................... $ 664,881 8,241 2.48
Money market accounts.............. 72,665 831 2.29
Interest bearing checking.......... 202,893 1,561 1.54
Time accounts...................... 1,062,738 29,802 5.61
Borrowings......................... 177,178 4,882 5.51
---------- -------
Total interest-bearing
liabilities.................. 2,180,355 45,317 4.16
------- -----
Non-interest bearing liabilities......... 233,465
----------
Total liabilities............... 2,413,820
Equity............................. 269,839
----------
Total liabilities and equity.... $2,683,659
==========
Net interest income................... $45,410
=======
Net interest rate spread.............. 3.12%
=====
Net interest earning assets........... $ 311,413
==========
Net interest margin (3)............... 3.64%
======
Ratio of interest-earning assets
to total interest-bearing 1.14x
liabilities........................ ==========
(footnotes on following page)
50
For the Year Ended December 31,
-------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
Average Average Average Average
Outstanding Interest Yield/ Outstanding Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
----------- ----------- ------- ----------- ----------- -------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and
short-term investments...... $ 32,558 $ 1,114 3.42% $ 5,444 $ 325 5.97%
Investment securities (1)...... 112,659 5,784 5.13 140,926 7,589 5.39
Securities available
for sale.................... 437,147 25,337 5.80 351,439 21,577 6.14
Net loans(2)................... 1,961,612 148,744 7.58 1,933,075 150,029 7.76
---------- -------- ---------- --------
Total interest-earning
assets................... 2,543,976 180,979 7.11 2,430,884 179,520 7.39
-------- ---- -------- ----
Non-interest earning
assets...................... 196,863 182,705
---------- ----------
Total assets................ $2,740,839 $2,613,589
========== ==========
Interest-bearing liabilities:
Savings deposits............... $ 690,324 15,966 2.31 $ 633,128 16,143 2.55
Money market accounts.......... 72,735 1,612 2.22 83,738 1,975 2.36
Interest-bearing checking...... 213,441 3,091 1.45 195,258 2,932 1.50
Time accounts.................. 1,060,920 54,620 5.15 1,018,213 56,259 5.53
Borrowings..................... 176,688 9,234 5.23 210,144 12,381 5.89
---------- -------- ---------- --------
Total interest-bearing
liabilities.............. 2,214,108 84,523 3.82 2,140,481 89,690 4.19
-------- ---- -------- ----
Non-interest bearing
liabilities................. 249,913 223,339
---------- ----------
Total liabilities........... 2,464,021 2,363,820
Equity......................... 276,818 249,769
---------- ----------
Total liabilities
and equity............... $2,740,839 $2,613,589
========== ==========
Net interest income............ $ 96,456 $ 89,830
======== ========
Net interest rate spread...... 3.29% 3.20%
==== ====
Net interest earning assets.... $ 329,868 $ 290,403
========== ==========
Net interest margin (3)........ 3.79% 3.70%
==== ====
Ratio of interest-earning
assets to total interest-
bearing liabilities......... 1.15x 1.14x
========== ==========
For the Year Ended December 31,
-----------------------------------
1999
-----------------------------------
Average Average
Outstanding Interest Yield/
Balance Earned/Paid Rate
----------- ----------- -------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and
short-term investments...... $ 14,192 $ 745 5.25%
Investment securities (1)...... 192,925 10,693 5.54
Securities available
for sale.................... 373,052 22,199 5.95
Net loans(2)................... 1,715,404 132,409 7.72
---------- --------
Total interest-earning
assets................... 2,295,573 166,046 7.23
-------- ----
Non-interest earning
assets...................... 166,712
----------
Total assets................ $2,462,285
==========
Interest-bearing liabilities:
Savings deposits............... $ 615,449 14,488 2.35
Money market accounts.......... 102,771 2,469 2.40
Interest-bearing checking...... 186,100 2,880 1.55
Time accounts.................. 972,839 48,984 5.04
Borrowings..................... 154,132 8,423 5.46
---------- --------
Total interest-bearing
liabilities.............. 2,031,291 77,244 3.80
-------- ----
Non-interest bearing
liabilities................. 200,906
----------
Total liabilities........... 2,232,197
Equity......................... 230,088
----------
Total liabilities
and equity............... $2,462,285
==========
Net interest income............ $ 88,802
========
Net interest rate spread....... 3.43%
====
Net interest earning assets.... $ 264,282
==========
Net interest margin (3)........ 3.87%
====
Ratio of
interest-earning assets
to total interest-bearing
liabilities................. 1.13x
==========
- ----------
(1) Average outstanding balance amounts shown are amortized cost.
(2) Average outstanding balances shown net of the allowance for loan losses,
deferred loan fees and expenses, and loan premiums and discounts and
include non-accrual loans.
(3) Net interest income divided by average interest-earning assets.
51
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to: (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Six Months Ended June 30,
--------------------------------
2002 vs. 2001
--------------------------------
Increase/(Decrease)
Due to Total
------------------- Increase/
Volume Rate (Decrease)
------- --------- ----------
Interest-earning assets:
Federal funds sold and
short-term investments .. $ 1,502 $ (1,192) $ 310
Investment securities ...... (65) (235) (300)
Securities available for
sale .................... 7,215 (2,419) 4,796
Loans ...................... (1,086) (6,175) (7,261)
------- -------- --------
Total interest-earning
assets ............... 7,566 (10,021) (2,455)
------- -------- --------
Interest-bearing
liabilities:
Savings deposits ........... 3,178 (4,546) (1,368)
Money market accounts ...... 337 (317) 20
Interest-bearing checking .. 679 (721) (42)
Time accounts .............. 251 (11,312) (11,061)
Borrowings ................. 932 (1,705) (773)
------- -------- --------
Total interest-bearing
liabilities .......... 5,377 (18,601) (13,224)
------- -------- --------
Net interest income ........ $ 2,189 $ 8,580 $ 10,769
======= ======== ========
Year Ended December 31,
------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
-------------------------------- -------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
------------------- Increase/ ------------------ Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------- -------- ---------- -------- ------- ----------
(In thousands)
Interest-earning assets:
Federal funds sold and
short-term investments .. $ 982 $ (193) $ 789 $ (511) $ 91 $ (420)
Investment securities ...... (1,465) (340) (1,805) (2,808) (296) (3,104)
Securities available for
sale .................... 5,023 (1,262) 3,761 (1,312) 690 (622)
Loans ...................... 2,195 (3,480) (1,285) 16,890 731 17,621
------- ------- ------- -------- ------- -------
Total interest-earning
assets ............... 6,735 (5,275) 1,460 12,259 1,216 13,475
------- ------- ------- -------- ------- -------
Interest-bearing
liabilities:
Savings deposits ........... 1,392 (1,569) (177) 425 1,230 1,655
Money market accounts ...... (249) (114) (363) (450) (44) (494)
Interest-bearing checking .. 267 (107) 160 139 (87) 52
Time accounts .............. 2,298 (3,937) (1,639) 2,357 4,918 7,275
Borrowings ................. (1,841) (1,306) (3,147) 3,258 701 3,959
------- ------- ------- -------- ------- -------
Total interest-bearing
liabilities .......... 1,867 (7,033) (5,166) 5,729 6,718 12,447
------- ------- ------- -------- ------- -------
Net interest income ........ $ 4,868 $ 1,758 $ 6,626 $ 6,530 $(5,502) $ 1,028
======= ======= ======= ======== ======= =======
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Total assets increased by $196.6 million or 6.8% to $3.07 billion at June
30, 2002 compared to $2.87 billion at December 31, 2001. This increase is due to
an increase in securities and short-term investments.
Net loans decreased $74.9 million or 3.8% to $1.92 billion from $1.99
billion at December 31, 2001. Residential real estate loans decreased $57.6
million or 7.2% to $737.8 million at June 30, 2002 from $795.4 million at
December 31, 2001. This decrease is due to continued high levels of refinance
and prepayment activity resulting from lower interest rates and $43.3 million in
fixed-rate loan sales for the six month period ended June 30, 2002. Prepayments
of residential real estate loans for the six month period ended June 30, 2002
totaled $168.7 million compared to prepayments in the amount of $245.7 million
for the year ended December 31, 2001. Residential mortgage loan originations for
the six months ended June 30, 2002 were $154.2 million compared to $215.9
million in residential mortgage loans originated for the year ended December 31,
2001. Commercial real estate and construction loans increased $22.5 million or
4.6% to $515.5 million at June 30, 2002 compared to $493.0 million at December
31, 2001. Commercial real estate loan originations totaled $76.2 million for the
six months ended June 30, 2002 compared to $90.3 million for the year ended
December 31, 2001.
52
Competitive factors have kept interest rates stable, resulting in lower
refinance activity in the fixed commercial real estate portfolio. Commercial
loans increased $10.5 million or 7.4% to $152.0 million during the period and
consumer loans decreased $28.0 million or 8.7% to $294.2 million at June 30,
2002 compared to $322.2 million at December 31, 2001. Repayments in the consumer
loan portfolio for the six month period ended June 30, 2002 totaled $90.9
million compared to repayments in the amount of $112.7 million for the year
ended December 31, 2001, causing the decline in the consumer loan portfolio.
The investment portfolio increased $230.9 million or 38.0% to $838.6
million at June 30, 2002 compared to $607.7 million at December 31, 2001. The
largest increase was in the available for sale portfolio, which increased $233.8
million or 47.3% to $728.5 million at June 30, 2002 from $494.7 million at
December 31, 2001. Available for sale U.S. Agency collateralized mortgage
obligations increased $131.6 million or 47.7% during the period. Available for
sale Corporate and other securities increased $65.3 million or 61.8% to $171.0
million for the period ended June 30, 2002 compared to $105.7 million at
December 31, 2001. The increase in the corporate and other securities category
is attributable to an increase of $43.5 million in corporate issued
mortgage-backed securities to $48.9 million at June 30, 2002 from $5.4 million
at December 31, 2001. The increase in investment securities is attributable to
increases in cash flows from prepayments and increases in deposits. Our
investment management strategy is to maximize the return on the portfolio
consistent with our guidelines for liquidity, safety, duration and
diversification. In periods of decreasing interest rates, our strategy is to
purchase collateralized mortgage obligations that are well-structured and have
principal lock out periods ranging from three to five years, reducing our
reinvestment risk.
Total deposits increased $184.9 million or 7.9% to $2.53 billion at June
30, 2002 compared to $2.34 billion at December 31, 2001. Core deposit accounts
increased $150.3 million or 11.7% during the period. Savings account deposits
increased $89.0 million or 12.0% during the period and demand deposit accounts
increased $69.4 million or 12.7% during the period. The increase in deposits is
attributable to the continued focus on sales training and our business strategy
to increase core deposits. Competitive pricing on deposit accounts and continued
volatility in the financial markets have also contributed to deposit inflows.
Federal Home Loan Bank borrowings increased $7.5 million or 5.2% to $152.1
million at June 30, 2002 compared to $144.7 million at December 31, 2001. Retail
repurchase agreements decreased $8.3 million or 16.3% to $42.8 million at June
30, 2002 from $51.1 million at December 31, 2001.
Total equity increased $18.4 million or 6.3% to $310.6 million at June 30,
2002 compared to $292.1 million at December 31, 2001. Retained earnings
increased $15.0 million or 5.2% to $302.6 million. After tax unrealized gains on
investment securities increased $3.4 million or 74.3%. Interest rates in the
three to five year sector of the yield curve have declined approximately 30
basis points since year end 2001, resulting in an increase in the value of the
investment portfolio.
53
Comparison of Operating Results for the Six Months Ended June 30, 2002 and June
30, 2001
General. Net income for the six months ended June 30, 2002 was $15.0
million, an increase of $3.6 million or 32% over net income of $11.4 million for
the six months ended June 30, 2001. Return on average assets was 1.02% for the
period ended June 30, 2002 compared to 0.84% for the period ended June 30, 2001.
Return on average equity was 10.24% for the period ended June 30, 2002 compared
to 8.44% for the period ended June 30, 2001.
Net Interest Income. Net interest income for the first six months of 2002
was $56.2 million, an increase of $10.8 million or 24% over net interest income
of $45.4 million for the first six months of 2001. The net interest rate spread,
the difference between the yield on average interest earning assets and the cost
of average interest bearing liabilities, for the six months ended June 30, 2002
and June 30, 2001 was 3.74% and 3.12%, respectively. The net interest margin for
the six months ended June 30, 2002 was 4.09% compared to 3.64% for the six month
period ending June 30, 2001.
Interest income declined by $2.5 million or 2.7% for the six months ended
June 30, 2002 to $88.3 million compared to $90.7 million for the six months
ended June 30, 2001, primarily as a result of the decline in prevailing market
interest rates and loan balances. Retail loans, consisting of residential
mortgage and consumer loans, decreased 7.7% for the period ending June 30, 2002,
while commercial loan balances increased 7.4% during the period. The yield on
short-term loans tied to indexes such as the prime rate and the federal funds
rate have decreased significantly. Loan origination volume, while increasing in
2001 and the first six months of 2002, has not kept pace with the increases in
cash flow from loan prepayments and deposit inflows. Excess cash flows have been
reinvested in lower yielding investment securities. The composition of interest
earning assets has changed significantly. The yield on interest earning assets
decreased to 6.43% from 7.28% for the comparative period. The average balance of
loans decreased to $1.93 billion at June 30, 2002 from $1.96 billion at June 30,
2001. The average balance of securities increased to $710.9 million from $509.4
million and the average balance of federal funds sold and short term investments
increased to $103.5 million from $24.2 million. The increase in short term
investments reflects the reinvestment of excess cash flows from prepayments and
deposit inflows. The balance of average interest bearing liabilities increased
to $2.38 billion from $2.18 billion, the balance of average non-interest bearing
liabilities increased to $283.3 million from $233.5 million and the average of
total borrowings increased from $177.2 million to $191.2 million during the
comparative period.
Interest expense decreased $13.2 million or 29.2% to $32.1 million for the
period ended June 30, 2002 from $45.3 million. This decrease is attributable to
the significant decline in short term interest rates. The cost of interest
bearing liabilities declined to 2.69% at June 30, 2002 from 4.16% at June 30,
2001. The Federal Funds rate declined 225 basis points from June 2001 to June
2002 and interest rates on deposits continued to decline. The average rate paid
on time deposits declined to 3.52% at June 30, 2002 from 5.61% at June 30, 2001.
The improvement in net interest margin is attributable to the decline in our
cost of funds.
Provision For Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers
54
necessary to absorb probable incurred credit losses in the loan portfolio. In
determining the level of the allowance for loan losses, management considers
past and current loss experience, evaluations of real estate collateral, current
economic conditions, volume and type of lending, adverse situations that may
affect the borrower's ability to repay the loan and the levels of non-performing
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates as more information becomes
available or later events change. Management assesses the allowance for loan
losses on a quarterly basis and makes provisions for loan losses in order to
maintain the adequacy of the allowance. Our emphasis on continued
diversification of our loan portfolio through the origination of construction
loans, commercial mortgage loans, mortgage warehouse loans and commercial loans
has been one of the more significant factors we have taken into account in
evaluating our allowance for loan losses and provision for loan losses. In the
event we were to further increase the amount of such types of loans in our
portfolio, we may determine to make additional or increased provisions for loan
losses, which could adversely affect our earnings. See "Business of The
Provident Bank--Asset Quality--Allowance for Loan Losses."
Based on management's assessment of the above factors, the provision for
loan losses for the six months ended June 30, 2002 was $1.2 million, no change
from a provision of $1.2 million for the six months ended June 30, 2001. The
allowance for loan losses was $22.0 million or 1.13% of total loans at June 30,
2002 compared to an allowance of $21.0 million or 1.06% of total loans at June
30, 2001. Although total loans declined during the six months ended June 30,
2002, the provision for loan losses remained unchanged due to the increase in
net charge offs from $353,000 for the six months ended June 30, 2001 as compared
to $1.2 million for the comparable period in 2002. The increase in net charge
offs is attributable to the determination by management as to the
uncollectibility of certain loans in the portfolio. There were no significant
changes in the concentration of the loan portfolio for the six months ended June
30, 2002. Due to the net charge offs noted above, the quality of the loan
portfolio improved slightly at June 30, 2002. There were no significant changes
in the method or assumptions used in determining the provision for loan losses
for the six months ended June 30, 2002.
Non-Interest Income. Non-interest income consists mainly of fee income on
deposit accounts, loan servicing fee income and increases in the cash surrender
value of bank owned life insurance.
Non-interest income increased $1.6 million or 14.9% to $12.0 million for
the six months ended June 30, 2002 compared to $10.4 million for the six months
ended June 30, 2001. This increase was primarily attributable to income recorded
in the amount of $959,000, related to the receipt of stock as the result of an
insurance company demutualization. Fee income increased $459,000 or 5.8% to $8.4
million for the six months ended June 30, 2002 compared to $7.9 million for the
six months ended June 30, 2001 due primarily to increased fee income on deposit
accounts, particularly transaction accounts. A gain of $192,000 was recorded on
the sale of a bank owned property and fee income associated with Provident
Title, LLC was $124,000. Provident Title commenced operations in October 2001.
Non-Interest Expense. Non-interest expense increased $6.5 million or 17.1%
to $44.6 million for the six months ended June 30, 2002 compared to $38.1
million for the six months
55
ended June 30, 2001. Salaries and employee benefits increased $4.0 million or
20.6% to $23.2 million at June 30, 2002 compared to $19.2 million at June 30,
2001. During 2001, a significant number of lending and marketing professionals
were hired as part of our strategy to increase business lending and deposit
relationships and to develop and implement our Customer Relationship Management
strategy. Expenses associated with the amortization of mortgage servicing rights
increased $299,000 or 35.3% to $1.1 million at June 30, 2002 compared to
$846,000 at June 30, 2001. The increase in mortgage servicing rights
amortization is attributable to lower interest rates and a higher volume of
residential mortgage loan prepayments. For the comparative period consulting
expenses increased $504,000 due to the design and implementation of our Customer
Relationship Management system (which assists us in leveraging customer
relationships), advertising and promotion increased $457,000 due to an increase
in core account, internet banking and loan product advertising. Education
expenses increased $318,000 due to our ongoing commitment to sales training,
management training and the implementation of a tuition disbursement program to
encourage employees to obtain college degrees.
Income Tax Expense. Income tax expense increased $1.7 million or 32.4% to
$6.8 million at June 30, 2002 resulting in an effective tax rate of 30.4%,
compared to income tax expense of $5.1 million at June 30, 2001 resulting in an
effective tax rate of 31.0%. The increase in income tax expense is attributable
to a 32.1% increase in net income before taxes during this period.
Change In Accounting Principle. In accordance with FASB Statement No. 142,
we performed a goodwill impairment test on the goodwill associated with the
purchase of Provident Mortgage Company. It was determined that the goodwill was
impaired and we recorded a charge of $519,000 as a cumulative effect of a change
in accounting principle.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
Total assets increased $228.1 million or 8.6% to $2.87 billion at December
31, 2001 from $2.64 billion at December 31, 2000.
Net loans increased by $39.6 million or 2.0% to $1.99 billion at December
31, 2001 compared to $1.95 billion at December 31, 2000. Residential mortgage
loans decreased $110.4 million or 12.2% to $795.4 million compared to $905.8
million at December 31, 2000. Factors that contributed to the decline in
residential mortgage balances included a sharp increase in prepayment activity
caused by mortgage refinancing at lower interest rates and the sale of $36.0
million in adjustable rate mortgage loans. Consumer loans, consisting mainly of
home equity and marine loans, decreased $6.6 million or 2.0% to $322.2 million
at December 31, 2002 from $328.8 million at December 31, 2000. This portfolio
had an increase in prepayment activity due to a significant decline in interest
rates. Commercial real estate, multi family, and construction loans increased
$36.9 million or 6.7% to $588.5 million from $551.6 million at December 31,
2000. Competitive pricing and an increase in construction lending and loans on
office, industrial and retail properties contributed to the increase. Mortgage
warehouse loans increased $101.0 million or 150.8% to $167.9 million at December
31, 2001 from $66.9 million at December 31, 2000. Mortgage warehouse loan volume
increased in line with significant
56
increases in fixed-rate lending activity. Commercial loans increased $20.0
million or 16.4% to $141.5 million at December 31, 2001, compared to $121.5
million at December 31, 2000.
Investment securities held to maturity decreased $11.1 million or 9.0% to
$113.0 million at December 31, 2001 from $124.1 million at December 31, 2000.
Securities available for sale increased $159.7 million or 47.7% to $494.7
million at December 31, 2001 compared to $335.0 million at December 31, 2000.
The increase in available for sale securities resulted from increases in cash
flows from the loan portfolios, increases in deposits and the reinvestment of
proceeds from the sale of $36.0 million in ARM loans. As part of a balance sheet
management strategy, we sold a portion of high coupon adjustable rate mortgages
that were likely to refinance and we invested the proceeds in U.S. Agency
collateralized mortgage obligations with principal lock out periods ranging from
three to five years. The strategy was implemented to maintain asset yield in a
declining interest rate environment and to minimize reinvestment risk.
Total deposits increased $173.4 million or 8.0% to $2.34 billion at the end
of December 31, 2001 compared to $2.17 billion at December 31, 2000. All deposit
categories increased during the period with the most significant increases in
core accounts. Interest bearing checking deposits and non-interest bearing
checking deposits increased 16.9% and 9.7%, respectively. Savings deposits
increased $96.1 million or 14.9% to $742.5 million at December 31, 2001 from
$646.5 million at December 31, 2000 and interest-bearing DDA accounts increased
$34.9 million or 16.9% to $241.2 million at December 31, 2001 from $206.4
million at December 31, 2000.
Total borrowings increased $15.9 million or 8.8% to $195.8 million at
December 31, 2001 compared to $179.9 million at December 31, 2000. Federal Home
Loan Bank borrowings increased $5.4 million or 3.9% to $144.7 million from
$139.2 million.
Total equity increased $29.1 million or 11.0% to $292.1 million at December
31, 2001 from $263.1 million at December 31, 2000. This increase is attributable
to an increase in retained earnings of $24.0 million and an increase of $5.0
million in net unrealized gains (after tax) on available for sale securities, as
a result of a decrease in interest rates.
Comparison of Operating Results for the Years Ended December 31, 2001 and
December 31, 2000
General. Net income for the year ended December 31, 2001 was $24.1 million,
an increase of $3.2 million from December 31, 2000. Return on average assets for
the year ended December 31, 2001 was 0.88% compared to 0.80% for the year ended
December 31, 2000. Return on average equity for the year ended December 31, 2001
was 8.70% compared to 8.37% for the year ended December 31, 2000.
Net Interest Income. Net interest income increased $6.7 million or 7.4% to
$96.5 million at December 31, 2001 from $89.8 million at December 31, 2000. Our
average interest rate spread improved 9 basis points to 3.29% for the year ended
December 31, 2001 from 3.20% at December 31, 2000. Net interest margin improved
9 basis points to 3.79% at December 31, 2001 from 3.70% at December 31, 2000.
The improvement in net interest margin was
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attributable primarily to a significant decline in interest expense as well as a
slight increase in interest income.
Interest income increased $1.5 million or 0.81% to $181.0 million at
December 31, 2001 from $179.5 million at December 31, 2000. Average interest
earning assets increased $113.1 million or 4.7% to $2.54 billion in 2001
compared to $2.43 billion in 2000. Average outstanding loan balances increased
$28.5 million or 1.5% to $1.96 billion in 2001 from $1.93 billion in 2000. The
average balance of securities increased $57.4 million or 11.7% to $549.8 million
in 2001 compared to $492.4 million in 2000. Average federal funds sold and
short-term investment balances increased $27.2 million to $32.6 million from
$5.4 million in 2000. The yield on interest earning assets decreased 28 basis
points to 7.11% in 2001 from 7.39% in 2000. Interest expense decreased $5.2
million or 5.8% to $84.5 million in 2001 compared to $89.7 million in 2000,
reflecting the rapid decline in interest rates during the year. The balance of
average interest-bearing liabilities increased to $2.21 billion for the year
ended December 31, 2001 from $2.14 billion for the year ended December 31, 2000
and the balance of average non-interest bearing liabilities increased to $249.9
million from $223.3 million during the comparative period. Rates paid on
interest bearing liabilities decreased 37 basis points to 3.82% in 2001 from
4.19% in 2000. Average outstanding borrowings decreased $33.5 million or 15.9%
to $176.7 million for the year ended December 31, 2001 compared to $210.1
million for the year ended December 31, 2000. The average rate paid on
borrowings decreased to 5.23% for the year ended December 31, 2001 from 5.89%
for the year ended December 31, 2000.
Provision For Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, evaluations of
real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect the borrower's ability to repay the loan and
the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or later events change.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses in order to maintain the adequacy of the allowance.
Our emphasis on continued diversification of our loan portfolio through the
origination of construction loans, commercial mortgage loans, mortgage warehouse
loans and commercial loans has been one of the more significant factors we have
taken into account in evaluating our allowance for loan losses and provision for
loan losses. In the event we were to further increase the amount of such types
of loans in our portfolio, we may determine to make additional or increased
provisions for loan losses, which could adversely affect our earnings. See
"Business of The Provident Bank--Asset Quality--Allowance for Loan Losses."
Based on management's assessment of the above factors, the provision for
loan losses was $1.9 million in 2001 compared to $2.1 million in 2000. The
allowance for loan losses was $21.9 million or 1.09% of total loans at December
31, 2001 compared to $20.2 million or 1.02% of total loans at December 31, 2000.
Although there was a slight change in the concentration of the loan portfolio,
as residential mortgages declined during 2001 and commercial mortgages,
construction, mortgage warehouse and commercial loans increased, it did not have
a significant
58
impact on the provision for loan losses as these factors were offset by the
increase in asset quality and reduced level of net charge offs.
At December 31, 2001, non-performing loans amounted to $8.1 million as
compared to $9.5 million at December 31, 2000. There were no significant changes
in the method or assumptions used in determining the provision for loan losses
for the year ended December 31, 2001.
Non-Interest Income. Non-interest income consists of fees on retail
accounts, investment services, loan servicing fees and increases in the cash
surrender value of bank owned life insurance. Non-interest income increased $2.9
million or 16.2% to $21.2 million at December 31, 2001 from $18.3 million at
December 31, 2000. This increase was attributable to an increase of $904,000 in
fees on deposit accounts pursuant to our strategy to increase core deposit
growth, and an increase of $722,000 in the cash surrender value of bank owned
life insurance. Gains on sales of loans, which is a component of non-interest
income, increased by $1.4 million to $1.7 million as a result of $80.7 million
in residential loan sales.
Non-Interest Expense. Non-interest expense increased $4.7 million or 6.3%
to $80.6 million at December 31, 2001 from $75.9 million at the end of December
31, 2000. This increase was the result of an increase of $5.8 million or 16.8%
in salaries and benefits as a result of a significant number of lending and
marketing professionals that were hired in 2001 as part of our strategy to
increase business lending and deposit relationships and customer relationship
management, an increase of $730,000 or 25.3% in marketing and advertising
expense and an increase of $453,000 or 3.9% in net occupancy expense offset in
part by a $3.7 million reduction in other operating expense at December 31,
2001. In 2000, we recorded a charge of $3.7 million related to the settlement of
outstanding litigation.
Income Tax Expense. Income tax expense increased $1.8 million or 19.4% to
$11.1 million on net income before taxes of $35.2 million in 2001, resulting in
an effective tax rate of 31.5% compared to income tax expense of $9.3 million on
net income before taxes of $30.2 million in 2000, resulting in an effective tax
rate of 30.8%.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General. Net income increased $1.3 million or 6.5% to $20.9 million for the
year ended December 31, 2000 compared to $19.6 for the year ended December 31,
1999. Return on average assets and return on average equity was 0.80% and 8.37%,
respectively, for the year ended December 31, 2000 compared to 0.80% and 8.53%
for the year ended December 31, 1999.
Net Interest Income. Net interest income increased $1.0 million or 1.2% to
$89.8 million at December 31, 2000 from $88.8 million at December 31, 1999. Net
interest margin decreased 17 basis points to 3.70% at December 31, 2000 from
3.87% at December 31, 1999. Increases in short term interest rates resulted in
increases in our cost of funds and compression of the net interest margin.
Interest income increased $13.5 million or 8.1% to $179.5 million at December
31, 2000 compared to $166.0 million at December 31, 1999. Average interest
earning assets increased $135.3 million or 5.9% to $2.43 billion at December 31,
2000 compared to $2.30 billion at December 31, 1999. Average outstanding loan
balances increased
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$217.7 million or 12.7% to $1.93 billion in 2000 compared to $1.72 billion in
1999. The average balance of securities decreased $73.6 million or 13.0% to
$492.4 million in 2000 compared to $566.0 million in 1999. The decrease is the
result of funding strong loan activity with cash flows and maturities from the
securities portfolio. Average federal funds sold and short-term investments
decreased $8.8 million or 61.6% to $5.4 million in 2000 compared to $14.2
million in 1999. The average yield on earning assets increased to 7.39% at
December 31, 2000 from 7.23% at December 31, 1999. Interest expense increased
$12.5 million or 16.1% to $89.7 million at December 31, 2000 from $77.2 million
at December 31, 1999. The average rate paid on interest bearing liabilities
increased to 4.19% at December 31, 2000 from 3.80% at December 31, 1999. Average
outstanding balances on borrowings increased $56.0 million or 36.3% to $210.1
million for the year ended December 31, 2000 from $154.1 million for the year
ended December 31, 1999. The average rate paid on borrowings increased to 5.89%
at December 31, 2000 from 5.46% at December 31, 1999.
Provision For Loan Losses. We establish provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level management considers necessary to absorb probable incurred credit losses
in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, evaluations of
real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect the borrower's ability to repay the loan and
the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or later events change.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses in order to maintain the adequacy of the allowance.
Our emphasis on continued diversification of our loan portfolio through the
origination of construction loans, commercial mortgage loans, mortgage warehouse
loans and commercial loans has been one of the more significant factors we have
taken into account in evaluating our allowance for loan losses and provision for
loan losses. In the event we were to further increase the amount of such types
of loans in our portfolio, we may determine to make additional or increased
provisions for loan losses, which could adversely affect our earnings. See
"Business of The Provident Bank--Asset Quality--Allowance for Loan Losses."
Based on management's assessment of the above factors, the provision for
loan losses was $2.1 million in 2000 compared to $2.1 million in 1999. The
allowance for loan losses was $20.2 million or 1.02% of total loans at December
31, 2000 compared to $18.8 million or 0.99% of total loans at December 31, 1999.
Although the balance of loans increased during 2000 as compared to 1999, the
provision remained at $2.1 million for 2000 due to the slight reduction in net
charge offs for 2000 as compared to 1999. Non-performing loans increased to $9.5
million at December 31, 2000 as compared to $8.0 million at December 31, 1999.
However, this did not have a significant impact on the provision for loan losses
as the increase in non-performing loans did not result in an increase in net
charge offs for the period. Although there was a slight change in the
concentration of the loan portfolio, as mortgage warehouse and commercial loans
comprised a greater percentage of the loan portfolio in 2000 as compared to
1999, it did not have a significant impact on the provision for loan losses as
these factors were offset by the continued low levels of net charge offs during
2000.
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Non-Interest Income. Non-interest income consists of fees from deposit
accounts, investment services, loan-servicing fees and increases in the cash
surrender value of bank owned life insurance. Non-interest income increased $2.6
million to $18.3 million or 16.5% from $15.7 million at December 31, 1999. The
increase in non-interest income is attributable to a $2.0 million increase in
the cash surrender value of bank owned life insurance that was purchased in
February 2000. The purchase of bank owned life insurance is a financing
transaction that allows the bank to offset employee benefit plan expense. We
also received a $1.0 million dollar merger termination fee from Ridgewood
Savings Bank. Fees on deposit accounts increased $326,000 or 4.4% in 2000 to
$7.8 million from $7.5 million in 1999.
Non-Interest Expense. Non-interest expense increased $4.0 million or 5.6%
to $75.9 million at December 31, 2000 compared to $71.9 million at December 31,
1999. This increase was attributable to a charge in the amount of $3.7 million
related to a settlement of a litigation matter.
Income Tax Expense. Income tax expense decreased $1.6 million or 14.9% to
$9.3 million on net income before taxes of $30.2 million resulting in an
effective tax rate of 30.8% at December 31, 2000, compared to income tax expense
of $10.9 million on net income before taxes of $30.5 million, resulting in an
effective tax rate of 35.7%. The improvement in the effective tax rate is
attributable to the tax free earnings on bank owned life insurance and the
deduction for dividend income received from PSB Funding Corporation, The
Provident Bank's majority owned real estate investment trust subsidiary.
Liquidity and Capital Resources
Liquidity refers to our ability to generate adequate amounts of cash to
meet our financial obligations to our borrowers and depositors, to fund loan and
securities purchases, deposit withdrawals and operating expenses. Sources of
funds include scheduled amortization of loans, loan prepayments, scheduled
maturities of investments, cash flows from mortgage-backed securities and the
ability to borrow funds from the Federal Home Loan Bank of New York and approved
broker dealers. We have a $100 million line of credit with the Federal Home Loan
Bank of New York. As of June 30, 2002, we had no outstanding borrowings against
our line of credit. We have also established an overnight line of credit and a
one month overnight repricing line of credit with the Federal Home Loan Bank of
New York, each in the amount of $50 million, neither of which was drawn on at
June 30, 2002. These lines are renewable annually and we are charged a $500
maintenance fee for these lines.
Cash flows from loan payments and maturing investment securities are a
fairly predictable source of funds. Changes in interest rates, local economic
conditions and the competitive marketplace can influence loan prepayments,
prepayments on mortgage-backed securities and deposit flows. As of June 30,
2002, loan prepayments, excluding mortgage warehouse activity, totaled $410.2
million compared to $572.9 million for the year ended December 31, 2001.
One- to four-family residential loans, commercial real estate loans,
multi-family loans and commercial and small business loans are our primary
investments. Purchasing securities for the investment portfolio is a secondary
use of funds and the investment portfolio is structured to
61
complement and facilitate our lending activities and ensure adequate liquidity.
Loan originations, excluding mortgage warehouse loans, for the six months ended
June 30, 2002 totaled $399.5 million. Loan originations, excluding mortgage
warehouse loans, for the year ended December 31, 2001 were $593.3 million.
Purchases for the investment portfolio totaled $355.5 million for the six
months ended June 30, 2002 compared to $323.2 million for the year ended
December 31, 2001.
At June 30, 2002, The Provident Bank had outstanding loan commitments to
borrowers of $129.1 million. Undisbursed mortgage warehouse loans were $72.0
million at June 30, 2002. Undisbursed home equity lines and personal credit
lines were $48.7 million at June 30, 2002. Total deposits increased $184.9
million during the six months ended June 30, 2002 and increased $173.4 million
for the year ended 2001. Deposit inflows are affected by changes in interest
rates, competitive pricing and product offerings in our marketplace and local
economic and other factors. Certificate of deposit accounts that are scheduled
to mature within one year totaled $918.3 million at June 30, 2002. Based on our
current pricing strategy and customer retention experience we expect to retain a
significant share of these accounts. We manage our liquidity on a daily basis
and we expect to have sufficient funds to meet all of our funding requirements.
As of June 30,2002, The Provident Bank exceeded all regulatory capital
requirements. Our leverage (Tier 1) capital ratio was 9.39% at June 30, 2002.
FDIC regulations currently require banks to maintain a minimum leverage ratio of
Tier 1 capital to adjusted total assets of 4.0%. Our total risk based capital
ratio was 14.93% at June 30, 2002. Under current regulations the minimum
required ratio of total capital to risk-weighted assets is 8.0%. A bank is
considered to be well capitalized if it has a leverage (Tier 1) capital ratio of
at least 5.0% and a risk based capital ratio of at least 10.0%. As of June 30,
2002, The Provident Bank exceeded the well capitalized capital requirements.
Bank Owned Life Insurance is a tax-advantaged financing transaction that is
used to offset employee benefit plan costs. Policies are purchased insuring
officers of the bank using a single premium method of payment. The Provident
Bank is the owner and beneficiary of the policies and we record tax-free income
through cash surrender value accumulation. We have minimized our credit exposure
by choosing carriers that are highly rated. The investment in Bank Owned Life
Insurance has no significant impact on our capital and liquidity.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires that all business combinations be accounted for under the purchase
method. Use of the pooling-of-interests method is no longer permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. This pronouncement will have no effect on our
financial statements unless we enter into a business combination transaction.
On July 20, 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142. Statement No. 142 also requires that
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intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Provident Bank adopted Statement No. 142
effective January 1, 2002. As of December 31, 2001, The Provident Bank had
goodwill in the amount of $20.0 million as a result of the acquisition of
financial institutions for which the amortization ceased upon the adoption of
Statement No. 142 and $519,000 resulting from the acquisition of a mortgage
banking company in 2001. At June 30, 2002, The Provident Bank determined that
the carrying amount of $519,000 of goodwill related to the acquisition of the
mortgage company was impaired, and recognized the impairment charge as a
cumulative effect of a change in accounting principle in accordance with
Statement No. 142. In addition, at December 31, 2001, The Provident Bank had
$3.3 million in intangible assets with definite useful lives that continued to
be amortized upon the adoption of SFAS No. 142.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of the Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The initial adoption of this
standard did not have a significant impact on our financial statements.
BUSINESS OF PROVIDENT FINANCIAL SERVICES, INC.
Provident Financial Services, Inc. is incorporated in the State of
Delaware. We have not engaged in any business to date. Upon completion of the
conversion, we will own all of the issued and outstanding stock of The Provident
Bank. We will retain up to 50% of the net proceeds from the offering and invest
50% of the remaining net proceeds in The Provident Bank as additional capital in
exchange for 100% of the outstanding common stock of The Provident Bank.
Provident Financial Services, Inc. will use a portion of its net proceeds to
make a loan to the ESOP. At a later date, we may use the net proceeds to pay
dividends to stockholders and may repurchase shares of common stock, subject to
regulatory limitations. We will invest our initial capital as discussed in "How
We Intend to Use the Proceeds from the Offering."
In the future, Provident Financial Services, Inc., as the holding company
of The Provident Bank, will be authorized to pursue other business activities
permitted by applicable laws and regulations for bank holding companies, which
may include the acquisition of banking and financial services companies. See
"Regulation--Holding Company Regulation--Permitted Activities" for a discussion
of the activities that are permitted for bank holding companies. We may also
borrow funds for reinvestment in The Provident Bank. We currently have no
specific arrangements or understandings regarding any specific acquisition
transaction.
Our cash flow will depend on earnings from the investment of the net
proceeds we retain, and any dividends received from The Provident Bank.
Initially, Provident Financial Services, Inc. will neither own nor lease any
property, but will instead use the premises, equipment and furniture of The
Provident Bank. At the present time, we intend to employ only persons who are
officers of The Provident Bank to serve as officers of Provident Financial
Services, Inc. We will
63
however, use the support staff of The Provident Bank from time to time. These
persons will not be separately compensated by Provident Financial Services, Inc.
Provident Financial Services, Inc. may hire additional employees, as
appropriate, to the extent it expands its business in the future.
BUSINESS OF THE PROVIDENT BANK
General
The Provident Bank is a community- and customer-oriented bank that offers
deposits from the general public in the areas surrounding its 49 full-service
banking offices and uses those funds, together with funds generated from
operations and borrowings, to originate commercial real estate loans,
residential mortgage loans, mortgage warehouse loans, commercial business loans,
construction loans and consumer loans. As part of our "Customer-Centric
Strategy," we have focused on increasing the number of households and businesses
served and the number of bank products per customer. We emphasize personal
service and customer convenience in serving the financial needs of the
individuals, families and businesses residing in our markets by delivering on
our brand promise -- "Hassle-Free Banking for Busy People."
Although The Provident Bank generally holds the loans it originates for
investment, we also sell loans, primarily long-term fixed-rate residential
mortgages, in the secondary market while generally retaining the servicing
rights. We also invest in mortgage-backed securities, debt and equity securities
and other permissible investments. The Provident Bank's primary sources of funds
are deposits, principal and interest payments on loans and investments and
advances from the Federal Home Loan Bank of New York. Our revenues are derived
primarily from the generation of interest and fees on loans originated and from
interest and dividends on investments. To a lesser extent revenue is also
derived from fees and charges on deposit accounts and fees for the delivery of a
variety of financial services to our customers.
Market Area
We are headquartered in Jersey City, which is located in Hudson County, New
Jersey. In addition to our banking offices throughout Hudson County, we operate
offices in nine additional counties in northern and central New Jersey, namely,
Bergen, Essex, Mercer, Middlesex, Monmouth, Morris, Ocean, Somerset and Union.
The Provident Bank's lending activities, though concentrated in the communities
surrounding its offices, extend throughout the State of New Jersey.
The Provident Bank's 10-county primary market area includes a mix of urban
and suburban communities. Hudson County is an urban area situated across the
Hudson River from New York City. Extensive development of new office space has
been a primary source of economic growth in Hudson County. The Provident Bank's
ten-county market area has a diversified mix of industries including
pharmaceutical and other manufacturing companies, network communications,
insurance and financial services, and retail. Major employers in the area
include several prominent companies such as AT&T, Prudential Insurance Co. and
Johnson & Johnson. New Jersey has the highest population density of any state in
the United States, and our ten-county market area has a population of 5.8
million, which is 69.0% of the state's total
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population. Population growth in our market area between 1990 and 2000 was 9.6%
compared to the state average of 8.6% and the national average of 13.10%. Median
household income in our market area is among the highest in the United States at
$51,500, compared to $47,900 for New Jersey as a whole and $37,000 nationally.
Within its ten-county market area The Provident Bank has an approximate
1.7% share of bank deposits as of June 30, 2001, the latest date for which
statistics are available, and an approximate 1.4% deposit share of the New
Jersey market statewide. Our market share in each of Hudson and Essex Counties
was in excess of 4.0% at that period. Of the 180 FDIC insured institutions
operating within New Jersey as of June 30, 2001, The Provident Bank was 15th in
total deposits within the state.
Because of the diversity of industries in The Provident Bank's market area
and, to a lesser extent, because of its proximity to the New York City financial
markets, the area's economy can be significantly affected by changes in national
and international economies. While the growth rate of New Jersey's gross
domestic product over the last several years has been less than the national
rate, the state's overall unemployment rate has been significantly below the
national average. This gap has recently narrowed, particularly in the
manufacturing sector, due to the recent recession.
Competition
We face intense competition within our market both in originating loans and
attracting deposits. The Northern and Central New Jersey market area has a high
concentration of financial institutions, including large money center and
regional banks, community banks, credit unions, investment brokerage firms and
insurance companies. We face direct competition for loans from each of these
institutions as well as from the mortgage companies, mortgage brokers and other
loan origination firms operating in our market area. The Provident Bank's most
direct competition for deposits has come from the several commercial banks and
savings banks in our market area, especially large regional banks which have
obtained a major share of the available deposit market due in part to
acquisitions and consolidations. Many of these banks have substantially greater
financial resources than The Provident Bank and offer services, such as private
banking, that we do not provide. In addition, we face significant competition
for deposits from the mutual fund industry and from investors' direct purchase
of short-term money market securities and other corporate and government
securities.
The Provident Bank expects to compete in this environment by maintaining a
diversified product line, including mutual funds, annuities and other investment
services made available through our investment subsidiary. Relationships with
our customers are built and maintained through The Provident Bank's branch
network, its deployment of branch and off-site ATMs, and continuing development
of its telephone and web-based banking services.
Future Acquisition and Expansion Activity
Both nationally and in the New York/New Jersey metropolitan area, the
banking industry is undergoing a period of consolidation marked by mergers and
acquisitions. We may from time-to-time be presented with other financial
opportunities to acquire other financial institutions
65
or bank branches that could expand and strengthen our market position. If such
an opportunity arises, we may from time to time engage in discussions or
negotiations and we may conduct a business investigation of a target
institution. We anticipate expanding our branch office network by establishing
two to four de novo branch offices annually during the next three years,
although there can be no assurance that we will be able to expand our branch
office network as intended.
Lending Activities
General. Historically, our principal lending activity has been the
origination of fixed-rate and adjustable-rate mortgage loans collateralized by
one- to four-family residential real estate located within our primary market
area. Since 1997, we have taken a more balanced approach to the composition of
our loan portfolio by increasing our emphasis on originating commercial real
estate loans, commercial business loans and mortgage warehouse loans. A
substantial majority of our borrowers are located in the State of New Jersey.
Residential mortgage loans are primarily underwritten to standards that
allow the sale of the loans to the secondary markets, primarily to Fannie Mae
and Freddie Mac. To manage interest rate risk, we generally sell the 20 year and
30 year fixed-rate residential mortgages that we originate. We retain the
majority of the originated adjustable rate mortgages for our portfolio. See
"--Residential Mortgage Lending."
The Provident Bank originates commercial real estate loans that are secured
by income-producing properties such as multi-family residences, office
buildings, and retail and industrial properties. In order to limit exposure to
interest rate risk, The Provident Bank adjusts the rate following the initial
five-year period in the majority of the real estate loans it originates. See
"--Commercial Real Estate Loans."
We provide construction loans for both single family and condominium
projects intended for sale and projects that will be retained as investments of
the borrower. The Provident Bank underwrites most construction loans for a term
of three years or less. The majority of these loans are underwritten on a
floating rate basis. The Provident Bank recognizes that there is higher risk in
construction lending than permanent lending. As such, we take certain
precautions to mitigate this risk, including the retention of an outside
engineering firm to review all construction advances made against work in place
and a limitation on how and when loan proceeds are advanced. In most cases, for
the single family/condominium projects we manage our exposure against houses or
units that are not under contract. Similarly, commercial construction loans
usually have commitments for significant pre-leasing, or funds are held back
until the leases are finalized. See "--Commercial Construction Loans."
The Provident Bank originates consumer loans that are secured in most cases
by the individual's assets. Home equity loans and home equity lines of credit
that are primarily secured by a second mortgage lien on the borrower's residence
comprise the largest category of our consumer loan portfolio. Our consumer loan
portfolio also includes marine loans that are secured by a first lien on
recreation boats. The marine loans we finance are generated by boat dealers
located on the Atlantic Coast of the United States. To a lesser extent, The
Provident Bank originates personal unsecured loans, primarily as an
accommodation to customers. All
66
loans, whether originated directly or purchased, are underwritten to The
Provident Bank's lending standards. See "--Consumer Loans."
Commercial loans are loans to businesses of varying size and type to
borrowers in our market. The Provident Bank's underwriting standards for
commercial loans less than $150,000, utilize an industry recognized automated
credit scoring system. The Provident Bank lends to established businesses, and
the loans are generally secured by business assets such as equipment,
receivables, inventory, real estate or marketable securities. On occasion we
make unsecured commercial loans. Most commercial loans are made on a floating
interest rate basis and fixed interest rates are rarely offered for more than
five years. See "--Commercial Business Loans."
The Provident Bank provides lines of credit for working capital to mortgage
bankers conducting business primarily in New Jersey. These loans are secured by
mortgages originated by the mortgage banker with the proceeds of our warehouse
loan that will be sold to a recognized lender under a firm takeout commitment.
Mortgage warehouse loans are made on a floating interest rate basis tied to the
prime rate, federal funds or similar index. See "Recent Developments" and
"--Mortgage Warehouse Loans."
67
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of our loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and premiums and allowances for losses) as of the dates indicated.
At December 31,
------------------------------------------------------------------
At June 30, 2002 2001 2000 1999
-------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Residential
mortgage loans ........ $ 737,821 38.43% $ 795,442 39.88% $ 905,825 46.33% $ 884,680 47.15%
Commercial
mortgage loans ........ 422,569 22.01 412,280 20.67 380,237 19.45 387,435 20.64
Multi-family
mortgage loans ........ 94,158 4.90 95,456 4.78 95,387 4.88 96,476 5.14
Construction loans ....... 92,898 4.84 80,717 4.05 75,980 3.89 69,946 3.73
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total mortgage
loans .............. 1,347,446 70.18 1,383,895 69.38 1,457,429 74.55 1,438,537 76.66
---------- ------ ---------- ------ ---------- ------ ---------- ------
Mortgage
warehouse loans ....... 146,994 7.66 167,905 8.42 66,949 3.42 47,719 2.54
Commercial loans ......... 151,999 7.92 141,491 7.09 121,540 6.22 85,357 4.55
Consumer loans ........... 294,176 15.32 322,219 16.15 328,831 16.82 324,431 17.29
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other
loans .............. 593,169 30.90 631,615 31.66 517,320 26.46 457,507 24.38
---------- ------ ---------- ------ ---------- ------ ---------- ------
Premium on
purchased loans ....... 2,266 0.12 2,566 0.13 3,264 0.17 2,925 0.16
Less net deferred
fees .................. (1,194) (0.06) (1,531) (0.07) (2,823) (0.15) (3,742) (0.20)
Less: Allowance
Loan Loss ............. (21,958) (1.14) (21,909) (1.10) (20,198) (1.03) (18,794) (1.00)
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans, net ...... $1,919,729 100.00% $1,994,636 100.00% $1,954,992 100.00% $1,876,433 100.00%
========== ====== ========== ====== ========== ====== ========== ======
At December 31,
-------------------------------------------
1998 1997
-------------------- --------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
(Dollars in thousands)
Residential
mortgage loans ........ $ 843,210 50.19% $ 791,216 56.53%
Commercial
mortgage loans ........ 300,478 17.88 197,061 14.08
Multi-family
mortgage loans ........ 88,598 5.27 65,494 4.68
Construction loans ....... 25,510 1.52 16,298 1.16
---------- ------ ---------- ------
Total mortgage
loans .............. 1,257,796 74.86 1,070,069 76.45
---------- ------ ---------- ------
Mortgage
warehouse loans ....... 85,477 5.09 36,131 2.58
Commercial loans ......... 68,556 4.08 51,804 3.70
Consumer loans ........... 287,531 17.11 257,884 18.43
---------- ------ ---------- ------
Total other
loans .............. 441,564 26.28 345,819 24.71
---------- ------ ---------- ------
Premium on
purchased loans ....... 1,109 0.07 1,527 0.11
Less net deferred
fees .................. (2,997) (0.18) (2,804) (0.20)
Less: Allowance
Loan Loss ............. (17,381) (1.03) (15,036) (1.07)
---------- ------ ---------- ------
Total loans, net ...... $1,680,091 100.00% $1,399,575 100.00%
========== ====== ========== ======
68
Loan Maturity Schedule. The following table sets forth certain information
as of December 31, 2001, regarding the maturities of loans in our loan
portfolio. Demand loans having no stated schedule of repayment and no stated
maturity, and overdrafts are reported as due in one year or less.
One Three Ten
Through Through Five Through Beyond
Within Three Five Through Twenty Twenty
One Year Years Years Ten Years Years Years Total
-------- -------- -------- --------- -------- ------- ----------
(In thousands)
Residential mortgage loans.... $125,014 $134,439 $106,270 $202,931 $163,059 $63,729 $ 795,442
Commercial mortgage loans..... 20,274 111,172 134,647 133,060 10,930 2,197 412,280
Multi-family mortgage loans... 9,639 24,153 27,143 30,409 3,229 883 95,456
Construction loans............ 59,150 21,567 -- -- -- -- 80,717
-------- -------- -------- -------- -------- ------- ----------
Total mortgage loans....... 214,077 291,331 268,060 366,400 177,218 66,809 1,383,895
Mortgage warehouse loans...... 167,905 -- -- -- -- -- 167,905
Commercial loans.............. 44,565 31,471 20,269 29,600 14,300 1,286 141,491
Consumer loans................ 49,945 18,486 23,234 59,184 171,370 -- 322,219
-------- -------- -------- -------- -------- ------- ----------
Total loans................ $476,492 $341,288 $311,563 $455,184 $362,888 $68,095 $2,015,510
======== ======== ======== ======== ======== ======= ==========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2001, the dollar amount of all fixed-rate and adjustment-rate loans
due after December 31, 2002. Adjustable and floating rate loans are included
based on contractual maturities.
Due After December 31, 2002
----------------------------------
Fixed Adjustable Total
-------- ---------- ----------
(In thousands)
Residential mortgage loans................. $327,072 $343,356 $ 670,428
Commercial mortgage loans.................. 87,813 304,194 392,007
Multi-family mortgage loans................ 21,749 64,068 85,817
Construction loans......................... -- 21,566 21,566
-------- -------- ----------
Total mortgage loans.................... 436,634 733,184 1,169,818
-------- -------- ----------
Mortgage warehouse loans................... -- -- --
Commercial loans........................... 48,492 48,434 96,926
Consumer loans............................. 272,274 -- 272,274
-------- -------- ----------
Total loans............................. $757,400 $781,618 $1,539,018
======== ======== ==========
Residential Mortgage Lending. A principal lending activity of The Provident
Bank is to originate loans secured by first mortgages on one- to four-family
residences in the State of New Jersey. We originate residential mortgages
primarily through commissioned mortgage representatives and our branch offices.
The Provident Bank originates both fixed-rate and adjustable-rate mortgages.
Residential lending, while declining as a percentage of the loan portfolio,
represents the largest single component of our total portfolio. As of June 30,
2002, $737.8 million or 38.43% of the total portfolio consisted of one- to
four-family real estate loans. Of the one- to four-family loans at that date,
41% were fixed-rate and 59% were adjustable rate loans.
The Provident Bank originates fixed-rate fully amortizing residential
mortgage loans, with the principal and interest due each month that have
maturities ranging from 10 to 30 years. We also originate fixed-rate residential
mortgage loans with maturities of 15, 20 and 30 years
69
that require the payment of principal and interest on a biweekly basis.
Fixed-rate jumbo residential mortgage loans (loans over the maximum that one of
the government-sponsored agencies will purchase) are originated with maturities
of up to 30 years. Adjustable rate mortgage loans are offered with a fixed-rate
period of 1, 3, 5, 7 or 10 years prior to the first annual interest rate
adjustment. The standard adjustment formula is the one-year constant maturity
Treasury rate plus 2 3/4%, adjusting annually with a 2% maximum annual
adjustment and a 6% maximum adjustment over the life of the loan.
The residential mortgage portfolio is primarily underwritten to Federal
Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage
Association (Fannie Mae) standards. The Provident Bank's standard loan to value
ratio is 80%. However, working through mortgage insurance companies, we
underwrite loans for sale to Freddie Mac or Fannie Mae programs that will
finance up to 100% of the value of the residence. Generally all fixed-rate loans
with terms of 20 years or more, as well as loans with a loan to value ratio of
97% or more, are sold into the secondary market with servicing rights retained.
Fixed-rate residential mortgage loans retained in our portfolio generally
include loans with a term of 15 years or less and biweekly payment loans with a
term of 20 years or less. We retain the majority of the originated adjustable
rate mortgages for our portfolio.
The percentage of loans sold into the secondary market will vary depending
upon interest rates and our strategies for reducing our exposure to interest
rate risk. In 2000, when long term fixed mortgage rates were significantly
higher than current rates, we sold approximately 16.5% of residential real
estate loans that we originated. In 2000, a majority of residential real estate
loans that we originated were adjustable rate mortgages. In 2001, approximately
$80.7 million or 37.3% of residential real estate loans originated were sold
into the secondary market. Of the total amount of loans sold, long term fixed
rate mortgages accounted for $44.7 million. Approximately $36.0 million in
adjustable rate mortgages with initial fixed rate periods of five years prior to
the first annual interest rate adjustment were sold as part of our strategy to
reduce our reinvestment risk associated with falling interest rates. The
portfolio of five year adjustable rate mortgages that were sold were high coupon
mortgages that were subject to above average prepayment risk. The proceeds from
the sale of five year adjustable rate mortgages were reinvested in
mortgage-backed securities that were structured so that we would not receive
principal payments for at least three years. Generally it is our policy to
retain all adjustable-rate mortgages and 10 and 15 year fixed-rate loans in
portfolio and sell all 20 and 30 year fixed rate mortgages. For loans that are
sold, they are sold without recourse and we usually retain servicing on these
loans.
The retention of adjustable rate mortgages, as opposed to longer term,
fixed-rate residential mortgage loans, in our loan portfolio helps reduce our
exposure to interest rate risk. However, adjustable rate mortgages generally
pose credit risks different from the credit risks inherent in fixed-rate loans
primarily because as interest rates rise, the underlying debt service payments
of the borrowers rise, thereby increasing the potential for default. In order to
minimize this risk, borrowers of one- to four-family one year adjustable-rate
loans are qualified at the maximum rate which would be in effect after the first
interest rate adjustment, if that rate is higher than the initial rate. We
believe that these risks, which have not had a material adverse
70
effect on The Provident Bank to date, generally are less onerous than the
interest rate risks associated with holding 20-30 year fixed-rate loans in our
loan portfolio.
The Provident Bank has for many years offered discounted rates for low- to
moderate-income individuals. Loans originated in this category over the last
five years have totaled $54.0 million. We also offer a special rate program for
first time homebuyers and this activity has totaled over $83.0 million for the
past five years.
Commercial Real Estate Loans. The Provident Bank originates loans secured
by mortgages on various commercial income producing properties, including office
buildings, retail and industrial properties. We have increased our emphasis on
commercial real estate lending. Commercial real estate and construction loans
have increased to 26.85% of the portfolio at June 30, 2002 from 15.24% at
December 31, 1997. A substantial majority of our commercial real estate loans
are secured by properties located in the State of New Jersey.
The Provident Bank originates adjustable rate loans and loans with fixed
interest rates for a period that is generally five or fewer years, which then
adjust after the initial period. Typically the loans are written for maturities
of 10 years or less and have an amortization schedule of 20 or 25 years. As a
result, the typical amortization schedule will result in a substantial principal
payment upon maturity. We generally underwrite commercial real estate loans to a
75% advance against either the appraised value of the property, or its purchase
price (for loans to fund the acquisition of real estate), whichever is less. We
generally require minimum debt service coverage of 1.20 times. There is a
potential risk that the borrower may be unable to pay off or refinance the
outstanding balance at the loan maturity date. The Provident Bank typically
lends to experienced owners or developers who have knowledge and contacts in the
commercial real estate market.
Among the reasons for our continued emphasis on commercial real estate
lending is our desire to invest in assets bearing interest rates which are
generally higher than interest rates on residential mortgage loans, and are more
rate sensitive to changes in market interest rates. Commercial real estate
loans, however, entail significant additional credit risk as compared with one-
to four-family residential mortgage lending, as they typically involve larger
loan balances concentrated with single borrowers or groups of related borrowers.
In addition, the payment experience on commercial real estate loans secured by
income producing properties is typically dependent on the successful operation
of the related real estate project and thus may be more significantly impacted
by adverse conditions in the real estate market or in the economy generally.
The Provident Bank performs more extensive diligence in underwriting
commercial real estate loans than loans secured by owner occupied one- to
four-family residential properties due to the larger loan amounts and the
riskier nature of such loans. We attempt to understand and control the risk in
several ways including inspection of all such properties and the review of the
overall financial condition of the borrower, which may include, for example, the
review of the rent rolls and the verification of income. For commercial real
estate secured loans in excess of $750,000 and for all other commercial real
estate loans where it is appropriate, we employ environmental experts to inspect
the property and ascertain any environmental risks.
71
The Provident Bank requires a full independent appraisal for commercial
real estate. The appraiser must be selected from The Provident Bank's approved
list. The Provident Bank also employs an independent review appraiser to verify
that the appraisal meets our standards. The underwriting guidelines provide that
generally the loan to value ratio shall not exceed 75% of the appraised value
and the debt service coverage should be at least 1.20 times. In addition,
financial statements are required annually and reviewed by us. The Provident
Bank's policy also requires that a property inspection of commercial mortgages
over $1,000,000 be completed at least every 18 months.
Our largest commercial real estate loan at June 30, 2002 was a $12 million
loan secured by an office/research building in Cranbury, New Jersey. The
building was fully leased and the loan was performing in accordance with its
terms and conditions as of June 30, 2002.
Multi-family Lending. The Provident Bank underwrites loans secured by
apartment buildings that have five or more units. We classify multi-family
lending as a component of the commercial real estate lending portfolio. The
underwriting standards and procedures that are used to underwrite commercial
real estate loans are used to underwrite multi-family loans.
Mortgage Warehouse Loans. The Provident Bank's mortgage warehouse financing
provides the interim financing that allows the mortgage banker to fund
residential mortgage loans until the loan is delivered for sale to the ultimate
permanent investor of the mortgage loan. We lend to mortgage bankers that
underwrite loans insured by the Federal Housing Administration (FHA), loans
guaranteed by the Veterans Administration (VA), and other residential loans.
Each advance under a mortgage warehouse line is secured by the underlying
mortgage loan financed by the advance and by the purchase commitment of the
investor (which, in most cases, is a bank, other larger mortgage companies or
government agency). The underlying mortgage loans are underwritten by the
mortgage banker to the guidelines of the ultimate investor. Loans to mortgage
warehousing customers are made on a floating rate basis tied to the prime rate,
federal funds or similar indices and the maximum advance is generally 98% of the
value of the underlying loan. We generally require current audited annual
financial statements, periodic interim financial statements prepared by the
borrower, net worth covenants and a maximum leverage ratio of 22:1 (assuming
full usage of all of the prospective borrower's outstanding lines of credit) as
part of our underwriting criteria. In addition, we generally require personal
guarantees on these loans, based upon a review of the guarantor's current
financial statements and tax returns. The Provident Bank will also conduct
credit and reference checks on prospective borrowers. Once we provide the
financing, we actively monitor the credit by having frequent communications with
the borrower, reviewing the activity on these loans on a daily basis and
preparing monthly reports on such activity, hiring outside specialized firms on
a periodic basis to conduct reviews of the operations of the mortgage banker and
keeping apprised of developments in this market. In addition to the financial
strength of the borrower and the guarantors, The Provident Bank's analysis
includes the number of days that mortgage loans remain under the line of credit
before delivery to the ultimate investor and the types of loans that are
originated. Our largest mortgage banking relationship was $30 million,
consisting of a $20 million mortgage warehouse line of credit and a $10 million
unsecured line of credit. Each of these credit relationships was performing in
accordance with its terms and conditions as of June 30, 2002.
72
During the quarter ended September 30, 2002, we recorded an $11.1 million
provision for loan losses due to the reclassification of a $20.6 million
mortgage warehouse line to a mortgage warehouse borrower that has ceased doing
business under allegations of fraud. See "Recent Developments."
Commercial Loans. The Provident Bank underwrites commercial loans to
corporations, partnerships and other businesses. The majority of our commercial
loan customers are local businesses with revenues of less than $50.0 million.
The Provident Bank offers commercial loans for equipment purchases, lines of
credit or letters of credit as well as loans where the borrower is the sole
occupant of the property. Most commercial loans are originated on a floating
rate basis and the majority of fixed-rate commercial loans are fully amortized
over a five-year period.
The Provident Bank also underwrites Small Business Administration
guaranteed loans and guaranteed or assisted loans through various state, county
and municipal programs. We typically utilize these governmental guarantees in
cases where the borrower requires additional credit support.
The underwriting of a commercial loan is based upon a review of the
financial statements of the prospective borrower and guarantors. In most cases
we obtain a general lien on accounts receivable and inventory, along with the
specific collateral such as real estate or equipment, as appropriate.
For commercial loans less than $150,000, we use an automated underwriting
system, which includes a nationally recognized credit scorecard to assist in our
decision-making process. For larger commercial loans a traditional approach of
reviewing all the financial information and collateral in greater detail by
seasoned lenders is utilized.
Commercial business loans generally bear higher interest rates than
residential loans, but they also involve a higher risk of default since their
repayment is generally dependent on the cash flow of the borrower's business. As
a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself and
the general economic environment. Our largest commercial loan was a $7.5 million
term loan, with an assignment of mortgage as collateral.
Construction Loans. Over the last five years The Provident Bank has
expanded its activities in commercial construction lending. Commercial
construction lending includes both new construction of residential and
commercial real estate projects and the reconstruction of existing structures.
Our commercial construction financing takes two forms: projects for sale
(single family/condominiums) and projects that are constructed for investment
purposes (rental property). We attempt to mitigate the speculative nature of
construction loans by generally requiring significant pre-leases on rental
properties and a percentage of the single-family residences or condominiums to
be under contract to support construction loan advances.
73
The Provident Bank underwrites most construction loans for a term of three
years or less. The majority of The Provident Bank's construction loans are
floating rate loans and we utilize a procedure to attempt to insure that the
maximum 75% loan to value ratio of the completed project is not exceeded. We
employ professional engineering firms to assist in the review of construction
cost estimates and make site inspections to determine if the work has been
completed prior to the advance of funds for the project.
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. Repayment of a construction loan is, to a
great degree, dependent upon the successful and timely completion of the
construction of the subject project and the successful marketing of the sale or
lease of the project. Construction delays or the financial impairment of the
builder may further impair the borrower's ability to repay the loan.
For all construction loans, we require an independent appraisal. For
construction loans in excess of $1.5 million, we require an independent
feasibility report to assist us in determining if the project is acceptable to
the market. The feasibility report reviews market rents, competing projects and
the absorption of new construction in a particular market for the type of
project to be financed. We also attempt to procure personal guarantees and
conduct environmental due diligence as appropriate.
The Provident Bank also attempts to control the risk of the construction
lending process by other means. For single family/condominium financings, The
Provident Bank generally requires payment for the release of a unit that exceeds
the amount of the loan advance attributable to such unit. On commercial
construction projects that the developer holds for rental, we typically hold
back funds for tenant improvements until a signed lease is executed.
Our largest construction loan as of June 30, 2002 was a commitment to loan
$17.5 million for a residential project in Lopatcong, New Jersey. As of June 30,
2002, $12 million of that loan was outstanding and the loan was performing in
accordance with its terms and conditions.
Consumer Loans. The Provident Bank offers a variety of consumer loans to
individuals. Home equity loans and home equity lines of credit constitute 51.1%
of the portfolio as of June 30, 2002. Marine loans comprised 35.0% of the
consumer loan portfolio as of June 30, 2002. The remainder of the consumer loan
portfolio includes personal loans and unsecured lines of credit, automobile
loans and recreational vehicle loans.
Interest rates on our home equity loans are fixed for a term not to exceed
15 years and the maximum loan amount is $350,000. A portion of the home equity
loan portfolio includes "first lien product loans," under which we have offered
special rates to borrowers who refinance first mortgage loans on the home equity
(first lien) basis. The Provident Bank's home equity lines are made at floating
interest rates and we provide lines of credit up to $250,000. The approved home
equity lines and utilization amounts as of June 30, 2002 were $45.7 million and
$28.9 million respectively.
74
The Provident Bank originates a majority of its home equity and automobile
loans directly. We also originate loans through established relationships with
brokers, using our underwriting standards. The Provident Bank purchases marine
loans from established boat dealers and brokers. The maximum loan for boats is
$750,000, with a maximum advance of 80% against the appraised value. All marine
loans are collateralized by a first lien on the vessel. Marine loans must be
secured by a recreational boat that is maintained on the Atlantic Coast of the
United States.
The Provident Bank's consumer loan portfolio contains other type of loans
such as loans on motorcycles, recreational vehicles and personal loans, which
represents 0.99% of the portfolio. Personal unsecured loans are originated
primarily as an accommodation to existing customers.
Consumer loans generally entail greater credit risk than residential
mortgage loans, particularly in the case of consumer loans that are unsecured or
that are secured by assets that tend to depreciate, such as automobiles, boats,
recreational vehicles and mobile homes. Collateral repossessed by us for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency may warrant further substantial
collection efforts against the borrower. In addition, consumer loan collections
are dependent on the borrower's continued financial stability, and this is more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
75
Loan Originations, Purchases, and Repayments. The following table sets
forth our loan origination, purchase and repayment activities for the periods
indicated.
Six Months Ended June 30, Year Ended December 31,
------------------------- ------------------------------------
2002 2001 2001 2000 1999
----------- ----------- ---------- ---------- ----------
(In thousands)
Originations:
Residential mortgage ........... $ 154,247 $ 70,501 $ 215,941 $ 153,383 $ 296,974
Commercial mortgage ............ 76,161 57,301 90,316 38,927 148,183
Multi-family mortgage .......... 4,560 8,523 13,893 11,409 13,477
Construction ................... 45,041 47,847 96,344 75,201 76,572
Commercial ..................... 56,604 30,897 70,760 36,242 28,450
Consumer ....................... 62,899 46,977 106,081 98,049 144,018
---------- -------- ---------- ---------- ----------
Subtotal of loans
originated .................. 399,512 262,046 593,335 413,211 707,674
Mortgage warehouse loans ....... 1,320,128 699,978 1,641,316 844,151 941,781
---------- -------- ---------- ---------- ----------
Total loans originated ...... 1,719,640 962,024 2,234,651 1,257,362 1,649,455
---------- -------- ---------- ---------- ----------
Loans sold or securitized ......... 43,256 60,110 80,652 25,264 46,396
Repayments:
Residential mortgage ........... 168,665 97,721 245,672 106,974 209,151
Commercial mortgage ............ 65,872 36,490 58,272 46,126 61,226
Multi-family mortgage .......... 5,858 7,225 13,824 12,498 5,599
Construction ................... 32,860 39,727 91,607 69,167 32,136
Commercial ..................... 46,096 25,152 50,809 59 11,649
Consumer ....................... 90,889 54,478 112,693 93,649 107,118
---------- -------- ---------- ---------- ----------
Subtotal of loan repayments.. 410,240 260,793 572,877 328,473 426,879
Mortgage warehouse loans ....... 1,341,039 630,746 1,540,360 824,921 979,539
---------- -------- ---------- ---------- ----------
Total repayments ............ 1,751,279 891,539 2,113,237 1,153,394 1,406,418
---------- -------- ---------- ---------- ----------
Total reductions ......... 1,794,535 951,649 2,193,889 1,178,658 1,452,814
---------- -------- ---------- ---------- ----------
Decrease other items, net
(1) ......................... (4,611) (5,558) (5,059) (7,896) (9,019)
---------- -------- ---------- ---------- ----------
Net increase (decrease)... $ (79,506) $ 4,817 $ 35,703 $ 70,808 $ 187,622
========== ======== ========== ========== ==========
- ----------
(1) Other items include charge-offs, deferred fees and expenses, and discounts
and premiums.
Loan Approval Procedures and Authority. The Provident Bank's Board of
Managers approves the Loan Policy and Procedures Manual on an annual basis as
well as on an interim basis as modifications are warranted. The loan policy sets
The Provident Bank's lending authority for each type of loan. The Provident
Bank's individual lending officers are assigned dollar authority limits based
upon their experience and expertise.
The largest individual lending authority is $1.5 million, which only our
Chief Executive Officer and President, Executive Vice President, Customer
Management Group and Chief Lending Officer have. Loans in excess of $1.5 million
or when combined with existing credits of the borrower or related borrowers
exceeds $1.5 million are presented to the Credit Committee. The Credit Committee
consists of six senior officers and requires a majority vote for approval of a
credit. The Credit Committee has a $5.0 million approval authority and the
Executive Committee of the Board of Managers has approval authority of up to
$12.0 million. The Provident Bank's Board of Managers approves all exposures
exceeding $12.0 million.
The Provident Bank has adopted a risk rating system as part of the risk
assessment of the loan portfolio. Our commercial real estate and commercial
lending officers are required to assign a risk rating to each loan in their
portfolio at origination. When the lender learns of important financial
developments, the risk rating is reviewed accordingly. Similarly, the Credit
76
Committee can adjust a risk rating. In addition, the Loan Review Department in
their periodic review of the loan portfolio may also change risk ratings. The
risk ratings play an important role in the establishment of the loan loss
provision and to confirm the adequacy of the allowance for loan losses.
Loans to One Borrower. The Provident Bank's regulatory limit on total loans
to any borrower or attributed to any one borrower is fifteen percent (15%) of
our unimpaired capital. As of June 30, 2002, our regulatory lending limit was
$48,689,000. Our internal policy limit on total loans to a borrower or related
borrowers that constitute a group exposure is $35.0 million. We review these
group exposures on a quarterly basis. We also set additional limits on size of
loans by loan type. At June 30, 2002, our largest client relationship with an
individual borrower and related entities (excluding mortgage warehouse loans)
was $28.2 million, consisting of a variety of construction and commercial loans
to a real estate developer based in the State of New Jersey. Each of these
credit relationships was performing in accordance with its terms and conditions
as of June 30, 2002. Our largest client relationship including mortgage
warehouse lending was $30 million to a mortgage banking client, consisting of a
$20 million mortgage warehouse line of credit and a $10 million unsecured line
of credit. Each of these credit relationships was performing in accordance with
its terms and conditions as of June 30, 2002.
As of June 30, 2002, The Provident Bank had $380.1 million in loans
outstanding to our 50 largest borrowers and their related entities. See "Risk
Factors--Our Continuing Concentration of Loans in Our Primary Market May
Increase Our Risk."
Asset Quality
General. One of our key objectives has been and continues to be to maintain
a high level of asset quality. In addition to maintaining sound credit standards
for new loan originations, we employ proactive collection and workout processes
in dealing with delinquent or problem loans. We actively market properties that
we may acquire through foreclosure or otherwise in the loan collection process.
Collection Procedures. In the case of residential mortgage and consumer
loans the collections personnel in our Special Loan Department are responsible
for collection activities from the fifteenth day of delinquency. Collection
efforts include automated notices of delinquency generated by our system,
telephone calls, letters and other notices to the delinquent borrower.
Foreclosure proceedings and other appropriate collection activities such as
repossession of collateral are commenced within at least 90 to 120 days after
the loan is delinquent. Periodic inspections of real estate and other collateral
are conducted throughout the collection process. The collection procedures for
Federal Housing Association (FHA) and Veteran's Administration (VA) one- to
four-family mortgage loans follow the collection guidelines outlined by those
agencies.
Real estate taken by foreclosure or in connection with a loan workout is
held as other real estate owned. We carry other real estate owned at its fair
market value less estimated selling costs. We attempt to sell the property at
foreclosure sale or as soon as practicable after the foreclosure sale through a
proactive marketing effort.
77
The collection procedures for commercial real estate and commercial loans
include our sending periodic late notices and letters to a borrower once a loan
is past due. We attempt to make direct contact with a borrower once a loan is 15
days past due, usually by telephone. The Chief Lending Officer reviews all
commercial real estate and commercial loan delinquencies on a weekly basis.
Delinquent commercial real estate and commercial loans will be transferred to
our Special Loan Department for further action if the delinquency is not cured
within a reasonable period of time, typically 30 to 90 days. Our Chief Lending
Officer has the authority to transfer performing commercial real estate or
commercial loans to the Special Loan Department if, in his opinion, a credit
problem exists or is likely to occur.
Loans deemed uncollectible are proposed for charge-off on a monthly basis.
The recommendation is then submitted to our Chief Lending Officer, Executive
Vice President - Customer Management Group and Chief Executive Officer for
approval.
Delinquent Loans and Non-performing Loans and Assets. Our policies require
that the Chief Lending Officer continuously monitor the status of the loan
portfolios and report to the Board of Managers on a monthly basis. These reports
include information on impaired loans, delinquent loans, criticized and
classified assets, and foreclosed real estate. An impaired loan is defined as a
loan for which it is probable, based on current information, that we will not
collect amounts due under the contractual terms of the loan agreement. We have
defined the population of impaired loans to be all commercial loans as well as
residential mortgage loans greater than $500,000. Impaired loans are
individually assessed to determine that each loan's carrying value is not in
excess of the fair value of the related collateral or the present value of the
expected future cash flows. At June 30, 2002, the impaired loan portfolio
totaled $1.4 million.
With the exception of first mortgage loans insured or guaranteed by the FHA
or VA or for which the borrower has obtained private mortgage insurance,
accruing income is stopped on loans when interest or principal payments are 90
days in arrears or earlier when the timely collectibility of such interest or
principal is doubtful. When accruing has stopped, loans are designated as
non-accrual loans and the outstanding interest previously credited is reversed.
A non-accrual loan is returned to accrual status when factors indicating
doubtful collection no longer exist and the loan has been brought current.
Federal and state regulations as well as our policy require that we utilize
an internal asset classification system as a means of reporting problem and
potential problem assets. Under our internal risk rating system, we currently
classify problem and potential problem assets as "substandard," "doubtful" or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that we will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose The Provident Bank to sufficient risk to
78
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention."
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When we classify one or more assets, or portions thereof, as
"substandard" or "doubtful," we determine that a specific allowance for loan
losses be established for loan losses in an amount deemed prudent by management.
When we classify one or more assets, or portions thereof, as "loss," we are
required either to establish a specific allowance for losses equal to 100% of
the amount of the asset so classified or to charge off such amount.
Our determination as to the classification of our assets and the amount of
our valuation allowances is subject to review by the FDIC and the New Jersey
Department of Banking and Insurance which can order the establishment of
additional general or specific loss allowances. The FDIC, in conjunction with
the other federal banking agencies, has adopted an interagency policy statement
on the allowance for loan and lease losses. The policy statement provides
guidance for financial institutions on both the responsibilities of management
for the assessment and establishment of adequate allowances and guidance for
banking agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. In July 2001, the SEC issued Staff Accounting
Bulleting, referred to as SAB, No. 102, "Selected Loan Loss Allowance
Methodology and Documentation Issues." The guidance contained in the SAB is
effective immediately and focuses on the documentation the SEC staff normally
expects registrants to prepare and maintain in support of the allowance for loan
and lease losses. Concurrent with the SEC's issuance of SAB No. 102, the federal
banking agencies, represented by the Federal Financial Institutions Examination
Council, referred to as FFIEC, issued an interagency policy statement entitled
"Allowance for Loan and Lease Losses Methodologies and Documentation for Bank
and Savings Institutions" (Policy Statement). The SAB and Policy Statement were
the result of an agreement between the SEC and the federal banking agencies in
March 1999 to provide guidance on allowance for loan and lease losses
methodologies and supporting documentation. There is no expected impact on
earnings, financial condition, or equity upon implementation of the SAB or FFIEC
pronouncement. We believe that our documentation relating to the allowance for
loan loss is consistent with these pronouncements. Although we believe that,
based on information currently available to us at this time, our allowance for
loans losses is adequate, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for loan losses may become
necessary.
We classify assets in accordance with the management guidelines described
above. At June 30, 2002, we had $14.9 million of assets classified as
"substandard" which consisted of $4.7 million in residential loans, $5.0 million
in commercial mortgage loans, $3.3 million in commercial loans, $1.0 million in
consumer loans and $906,000 in construction loans. At that
79
same date we had no loans classified as "doubtful" or "loss." In addition, as of
June 30, 2002 we had $577,000 of loans designated "special mention."
The following table sets forth delinquencies in our loan portfolio as of
the dates indicated.
At June 30, 2002 At December 31, 2001
------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Residential mortgage loans .... 25 $ 854 60 $3,604 27 $1,176 75 $4,171
Commercial mortgage loans ..... -- -- -- -- 1 188 2 345
Multi-family mortgage loans ... -- -- -- -- -- -- -- --
Construction loans ............ -- -- -- -- -- -- 4 1,071
-- ------ --- ------ -- ------ --- ------
Total mortgage loans ....... 25 854 60 3,604 28 1,364 81 5,587
Mortgage warehouse loans ...... -- -- -- -- -- -- -- --
Commercial loans .............. 1 48 -- -- 2 1,520 12 1,084
Multi-family mortgage loans ... -- -- -- -- -- -- -- --
Consumer loans ................ 30 582 55 1,023 34 444 82 1,413
-- ------ --- ------ -- ------ --- ------
Total loans ................ 56 $1,484 115 $4,627 64 $3,328 175 $8,084
== ====== === ====== == ====== === ======
At December 31, 2000 At December 31, 1999
------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Residential mortgage loans .... 27 $1,218 74 $2,413 41 $ 589 102 $3,466
Commercial mortgage loans ..... -- -- 2 144 3 2,684 1 146
Multi-family mortgage loans ... -- -- -- 25 -- -- -- --
Construction loans ............ -- -- 1 5,166 -- -- 1 1,195
-- ------ --- ------ -- ------ --- ------
Total mortgage loans ....... 27 1,218 77 7,748 44 3,273 104 4,807
Mortgage warehouse loans ...... -- -- -- -- -- -- -- --
Commercial loans .............. 2 138 3 274 1 90 2 1,641
Consumer loans ................ 30 377 60 1,458 34 653 57 1,586
-- ------ --- ------ -- ------ --- ------
Total loans ................ 59 $1,733 140 $9,480 79 $4,016 163 $8,034
== ====== === ====== == ====== === ======
80
Non-Accrual Loans and Non-Performing Assets. The following table sets
forth information regarding our non-accrual loans and other non-performing
assets. There were no troubled debt restructurings as defined in SFAS 15 at any
of the dates indicated.
At December 31,
At June 30, ------------------------------------------
2002 2001 2000 1999 1998 1997
----------- ------ ------ ------ ------ ------
(Dollars in thousands)
Non-accruing loans:
Residential mortgage loans ........ $3,604 $4,171 $2,413 $3,466 $3,673 $4,523
Commercial mortgage loans ......... -- 345 144 146 101 --
Multi-family mortgage loans ....... -- -- 25 -- -- --
Construction loans ................ -- 1,071 5,166 1,195 -- --
Mortgage warehouse loans .......... -- -- -- -- -- --
Commercial loans .................. -- 1,084 274 1,641 91 126
Consumer loans .................... 1,023 1,413 1,458 1,586 1,619 1,423
------ ------ ------ ------ ------ ------
Total non-accruing loans ....... 4,627 8,084 9,480 8,034 5,484 6,072
Accruing loans delinquent
90 days or more ................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total non-performing loans ..... 4,627 8,084 9,480 8,034 5,484 6,072
Other real estate owned .............. 123 -- 204 40 251 449
------ ------ ------ ------ ------ ------
Total non-performing assets .... $4,750 $8,084 $9,684 $8,074 $5,735 $6,521
====== ====== ====== ====== ====== ======
Total non-performing assets
as a percentage of
total assets ................ 0.15% 0.28% 0.37% 0.31% 0.23% 0.32%
====== ====== ====== ====== ====== ======
Total non-performing loans
to total loans .............. 0.24% 0.40% 0.48% 0.43% 0.33% 0.43%
====== ====== ====== ====== ====== ======
- ----------
(1) Loans generally are placed on non-accrual status when they become 90 days
or more past due or if they have been identified by us as presenting
uncertainty with respect to the collectibility of interest or principal.
If the non-accrual loans had performed in accordance with their original
terms, interest income would have increased by $209,000 during the six months
ended June 30, 2002. At June 30, 2002, there were no commitments to lend
additional funds to borrowers whose loans were on non-accrual status.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our evaluation of the probable incurred losses in our loan
portfolio. We maintain the allowance for loan losses through provisions for loan
losses that are charged to income. Charge-offs against the allowance for loan
losses are taken on loans where we determine that the collection of loan
principal is unlikely. Recoveries made on loans that have been charged-off are
credited to the allowance for loan losses.
Our evaluation of the adequacy of the allowance for loan losses includes
the review of all loans on which the collectibility of principal may not be
reasonably assured. For residential mortgage and consumer loans this is
determined primarily by delinquency and collateral values. For commercial real
estate and commercial loans an extensive review of financial performance,
payment history and collateral values is conducted on a quarterly basis.
As part of our evaluation of the adequacy of our allowance for loan losses,
each quarter we prepare a worksheet. This worksheet categorizes the entire loan
portfolio by certain risk characteristics such as loan type (residential
mortgage, commercial mortgage, construction, commercial, etc.) and loan risk
rating. The factors we consider in assessing loan risk ratings include the
following:
81
. results of the routine loan quality reviews by our Loan Review
Department of the Risk Management Group and by third parties retained
by the Loan Review Department;
. general economic and business conditions affecting our key lending
areas;
. credit quality trends (including trends in non-performing loans,
including anticipated trends based on market conditions);
. collateral values;
. loan volumes and concentrations;
. seasoning of the loan portfolio;
. specific industry conditions within portfolio segments;
. recent loss experience in particular segments of the loan portfolio;
and
. duration of the current business cycle.
When assigning a risk rating to a loan, management utilizes The Provident
Bank's internal risk rating system which is a nine point rating system. Loans
deemed to be "acceptable quality" are rated one through four, with a rating of
one established for loans with minimal risk. Loans that are deemed to be of
"questionable quality" are rated five (watch) or six (special mention). Loans
with adverse classifications (substandard, doubtful or loss) are rated seven,
eight or nine, respectively. Commercial mortgage, commercial, mortgage warehouse
and construction loans are rated individually and each lending officer is
responsible for risk rating loans in his or her portfolio. These risk ratings
are then reviewed by the department manager and/or the Chief Lending Officer and
by the Credit Administration Department. The risk ratings are then confirmed by
the Loan Review Department of the Risk Management Group and they are
periodically reviewed by the Credit Committee in the credit renewal or approval
process.
Each quarter the lending groups prepare the PEWS Reports (Provident Early
Warning System) for the Credit Administration Department. These reports review
all commercial loans, commercial mortgage loans and mortgage warehouse loans
that have been determined to involve above average risk (risk rating of five or
worse). The PEWS reports contain the reason for the risk rating assigned to each
loan, status of the loan and any current developments. These reports are
submitted to a committee chaired by the Chief Lending Officer. Each loan officer
reviews the loan and the corresponding PEWS report with the committee and the
risk rating is evaluated for appropriateness.
Based upon market conditions and The Provident Bank's historical experience
dealing with problem credits, the reserve for each risk rating by type of loan
is established based on estimates of probable losses in the loan portfolio. In
addition reserves are established for unused lines and anticipated closings and
projected growth. We use a five-year moving average of charge-off and recovery
experience as a tool to assist in the development of the loan loss factors in
determining the provision for loan losses.
82
The loss factors applied to each loan risk rating are inherently subjective
in nature. Loan loss factors are assigned to each of the risk rating categories.
Our methodology permits adjustments to the allowance for loan losses in the
event that, in management's judgment, significant conditions impacting the
credit quality and collectibility of the loan portfolio as of the evaluation
date otherwise are not adequately reflected in the analysis.
We establish the provision for loan losses after considering the allowance
for loan loss worksheet, the amount of the allowance for loan losses in relation
to the total loan balance, loan portfolio growth, loan delinquency trends and
peer group analysis. As a result of this process, management has established an
unallocated portion of the allowance for loan losses. The unallocated portion of
the allowance for loan losses is warranted based on factors such as the
geographic concentration of our loan portfolio and the losses inherent in
commercial lending, as these types of loans are typically riskier than
residential mortgages.
The Loan Review Department of the Risk Management Group also uses an
historic model from the early 1990's when there were severe problems in the New
Jersey commercial real estate markets. This tool applies the problem loan
reserve percentages from our own portfolio for these prior years to the current
portfolio. The Loan Review Department of the Risk Management Group continuously
reviews the risk ratings.
Based on the composition of our loan portfolio, we believe the primary
risks inherent in our portfolio are possible increases in interest rates, a
possible decline in the economy and a possible decline in real estate market
values. Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. The allowance for loan losses is maintained at a level
that represents management's best estimate of inherent losses in the loan
portfolio. There can be no assurance that the allowance for loan losses will be
adequate to cover all losses that may in fact be realized in the future or that
additional provisions for loan losses will be required.
83
Analysis of the Allowance for Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
Six Months Ended
June 30, Year Ended December 31,
----------------- -----------------------------------------------
2002 2001 2001 2000 1999 1998 1997
------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period .... $21,909 $20,198 $20,198 $18,794 $17,381 $15,036 $13,134
Charge offs:
Residential mortgage loans ..... 826 638 411 770 1,475 1,541 960
Commercial mortgage loans ...... -- -- 208 -- -- -- --
Multi-family mortgage loans .... -- -- -- -- -- -- --
Construction loans ............. -- -- -- -- -- -- --
Mortgage warehouse loans ....... -- -- -- -- -- -- --
Commercial loans ............... 948 -- 46 845 435 77 217
Consumer loans ................. -- 133 297 194 442 322 392
------- ------- ------- ------- ------- ------- -------
Total ....................... 1,774 771 962 1,809 2,352 1,940 1,569
------- ------- ------- ------- ------- ------- -------
Recoveries:
Residential mortgage loans ..... 257 59 256 315 313 480 991
Commercial mortgage loans ...... -- 149 168 289 350 -- --
Multi-family mortgage loans .... -- -- -- -- -- -- --
Construction loans ............. -- -- -- -- -- -- --
Mortgage warehouse loans ....... -- -- -- -- -- -- --
Commercial loans ............... 260 167 201 265 236 166 91
Consumer loans ................. 106 43 148 284 766 325 39
------- ------- ------- ------- ------- ------- -------
Total ....................... 623 418 773 1,153 1,665 971 1,121
------- ------- ------- ------- ------- ------- -------
Net charge-offs .................. 1,151 353 189 656 687 969 448
Provision for loan losses ........ 1,200 1,200 1,900 2,060 2,100 1,950 2,350
Acquisition-related allowance .... -- -- -- -- -- 1,364 --
------- ------- ------- ------- ------- ------- -------
Balance at end of period ......... $21,958 $21,045 $21,909 $20,198 $18,794 $17,381 $15,036
======= ======= ======= ======= ======= ======= =======
Ratio of net charge-offs
during the period to average
loans outstanding during the
period(1) ...................... 0.12% 0.04% 0.01% 0.03% 0.04% 0.06% 0.03%
======= ======= ======= ======= ======= ======= =======
Allowance for loan losses to
total loans .................... 1.13% 1.06% 1.09% 1.02% 0.99% 1.02% 1.06%
======= ======= ======= ======= ======= ======= =======
Allowance for loan losses to
non-performing loans ........... 474.56% 457.70% 319.84% 213.06% 233.93% 316.94% 247.63%
======= ======= ======= ======= ======= ======= =======
- ----------
(1) Annualized for six month period.
84
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated. This allocation is based on management's assessment, as of a given
point in time, of the risk characteristics of each of the component parts of the
total loan portfolio and is subject to changes as and when the risk factors of
each such component part change. The allocation is neither indicative of the
specific amounts or the loan categories in which future charge-offs may be taken
nor is it an indicator of future loss trends. The allocation of the allowance to
each category does not restrict the use of the allowance to absorb losses in any
category.
At December 31,
-------------------------------------------------
At June 30, 2002 2001 2000
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount of Loans in Amount of Loans in Amount of Loans in
Allowance Each Allowance Each Allowance Each
for Loan Category to for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans Losses Total Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Residential mortgage loans... $ 1,710 37.98% $ 1,598 39.43% $ 1,464 45.83%
Commercial mortgage loans.... 4,696 21.76 5,436 20.44 4,695 19.25
Multi-family mortgage
loans..................... 906 4.85 992 4.73 993 4.83
Construction loans........... 1,437 4.78 1,528 4.00 1,981 3.85
Mortgage warehouse loans..... 1,663 7.57 2,612 8.33 1,155 3.39
Commercial loans............. 2,067 7.83 2,281 7.02 1,744 6.15
Consumer loans............... 3,206 15.23 3,615 16.05 3,805 16.70
Unallocated.................. 6,273 -- 3,847 -- 4,361 --
------- ------ ------- ------ ------- ------
Total..................... $21,958 100.00% $21,909 100.00% $20,198 100.00%
======= ====== ======= ====== ======= =======
At December 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount of Loans in Amount of Loans in Amount of Loans in
Allowance Each Allowance Each Allowance Each
for Loan Category to for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans Losses Total Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Residential mortgage loans... $ 1,627 46.57% $ 2,329 49.51% $ 1,474 55.76%
Commercial mortgage loans.... 4,795 20.44 3,918 17.70 3,121 13.93
Multi-family mortgage
loans..................... 1,047 5.09 864 5.22 722 4.63
Construction loans........... 1,997 3.73 792 1.52 433 1.16
Mortgage warehouse loans..... 477 2.52 855 5.04 361 2.55
Commercial loans............. 1,675 4.50 1,171 4.04 1,294 3.66
Consumer loans............... 3,551 17.15 3,500 16.97 2,855 18.31
Unallocated.................. 3,625 -- 3,952 -- 4,776 --
------- ------ ------- ------ ------- ------
Total..................... $18,794 100.00% $17,381 100.00% $15,036 100.00%
======= ====== ======= ====== ======= ======
Investment Activities
General. Our investment policy is approved annually by the Board of
Managers. The Chief Financial Officer and the Treasurer are authorized by the
Board to implement the investment policy and establish investment strategies.
The Chief Financial Officer, Treasurer and Assistant Treasurer are authorized to
make investment decisions consistent with the investment policy. Investment
transactions are reported to the Executive Committee of the Board of Managers on
a monthly basis.
85
Our investment policy is designed to generate a favorable rate of return,
consistent with established guidelines for liquidity, safety and
diversification, and to complement the lending activities of the bank.
Investment decisions are made in accordance with the policy and are based on
credit quality, interest rate risk, balance sheet composition, market
expectations, liquidity, income and collateral needs.
The investment policy does not permit participation in hedging programs,
interest rate swaps, options or futures transactions or the purchase of any
securities that are below investment grade.
Our investment strategy is to maximize the return on the investment
portfolio consistent with guidelines that have been established for liquidity,
safety, duration and diversification. Our investment strategy also considers our
interest rate risk position as well as our liquidity, loan demand and other
factors. Acceptable investment securities include U. S. Treasury and Agency
obligations, collateralized mortgage obligations issued by Fannie Mae and
Freddie Mac, corporate debt obligations, New Jersey municipal bonds,
mortgage-backed securities, commercial paper, mutual funds, bankers acceptances
and federal funds. Securities purchased for the investment portfolio require a
minimum credit rating of "A" by Moody's or Standard & Poor's.
Securities for the investment portfolio are classified as held to maturity,
available for sale or held for trading. Securities that are classified as held
to maturity are securities that we have the intent and ability to hold until
their contractual maturity date and are reported at cost. Securities that are
classified as available for sale are reported at fair value. Available for sale
securities include U.S. Treasury and Agency Obligations, U.S. Agency and private
collateralized mortgage obligations (CMOs), corporate debt obligations and
equities. Sales of securities may occur from time to time in response to changes
in market rates and to facilitate balance sheet reallocation to effectively
manage interest rate risk. At the present time there are no securities that are
classified as held for trading.
CMOs are a type of debt security issued by a special-purpose entity that
aggregates pools of mortgages and mortgage related securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. In contrast to mortgage-backed securities from which cash
flow is received (and prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage related securities
underlying CMOs is paid in accordance with predetermined priority to investors
holding various tranches of such securities or obligations. A particular tranche
of CMOs may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Accordingly, CMOs attempt to moderate
risks associated with conventional mortgage related securities resulting from
unexpected prepayment activity. In declining interest rate environments, we try
to purchase CMOs with principal lock out periods, reducing prepayment risk in
the investment portfolio. During rising interest rate periods, our strategy is
to purchase CMOs that are receiving principal payments that can be reinvested at
higher current yields. Investments in CMOs involve a risk that actual
prepayments will differ from those estimated in pricing the security, which may
result in adjustments to the net yield on such securities. Additionally, the
market value of such
86
securities may be adversely affected by changes in the market interest rates.
Management believes these securities may represent attractive alternatives
relative to other investments due to the wide variety of maturity, repayment and
interest rate options available. All CMOs in the investment portfolio are rated
"AAA."
Amortized Cost and Fair Value of Securities. The following tables sets
forth certain information regarding the amortized cost and fair values of our
securities as of the dates indicated.
At December 31,
--------------------------------------------------------------------
At June 30, 2002 2001 2000 1999
--------------------- -------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---------- -------- --------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
Held to Maturity:
U.S. Government & Agency
Collateralized Mortgage
Obligations.................... $ 19,852 $ 20,424 $ 32,849 $ 33,615 $ 51,367 $ 51,280 $ 85,617 $ 84,358
State and municipal............... 86,868 89,239 75,562 75,871 59,751 60,003 58,162 56,095
Corporate and other............... 3,411 3,398 4,540 4,556 12,941 12,938 18,901 18,645
-------- -------- -------- -------- -------- -------- -------- --------
Total held-to-maturity......... $110,131 $113,061 $112,951 $114,042 $124,059 $124,221 $162,680 $159,098
======== ======== ======== ======== ======== ======== ======== ========
Available for sale:
U.S. Government & Agency
obligations.................... $105,985 $107,638 $ 76,111 $ 78,042 $ 80,994 $ 81,222 $ 70,866 $ 69,905
U.S. Government & Agency Pass
Thru........................... 41,718 42,532 35,106 35,225 38,970 38,499 41,713 39,259
U.S. Government & Agency
Collateralized Mortgage
Obligations.................... 400,912 407,334 274,100 275,741 128,170 127,542 140,222 135,994
Corporate and other............... 166,989 171,005 101,988 105,708 87,523 87,776 118,535 116,674
-------- -------- -------- -------- -------- -------- -------- --------
Total available for sale....... $715,604 $728,509 $487,305 $494,716 $335,657 $335,039 $371,336 $361,832
======== ======== ======== ======== ======== ======== ======== ========
Average expected life of
securities(1)..................... 3.19 years 3.3 years 3.22 years 3.24 years
- ----------
(1) Average expected life is based on prepayment assumptions utilizing interest
rates as of the reporting dates and does not include Fannie Mae and FHLB
stock.
87
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of our securities
portfolio as of June 30, 2002. No tax equivalent adjustments were made to the
weighted average yields. Amounts are shown at amortized cost for held to
maturity securities and at fair value for available for sale securities.
At June 30, 2002
----------------------------------------------------------------
More Than One Year More Than Five Years
One Year or Less to Five Years to Ten Years
------------------- ------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Held to Maturity:
U.S. Government & Agency
Collateralized Mortgage
Obligations ..................... $ -- --% $ 5,290 6.44% $ 7,773 5.99%
State and municipal ................... 2,926 2.33 18,739 4.14 37,633 4.39
Corporate and other ................... -- -- -- -- -- --
------- ---- -------- ---- -------- ----
Total held-to-maturity ............. $ 2,926 2.33% $ 24,029 4.65% $ 45,406 4.66%
------- ---- -------- ---- -------- ----
Available for sale:
U.S. Government Agency Pass Thru ...... $45,592 5.16% $ 62,046 3.92% $ -- --%
U.S. Government Agency
Collateralized Mortgage
Obligations ..................... -- -- 778 5.72 148,306 5.52
Corporate and other ................... 14,443 6.77 107,633 5.58 4,806 6.59
------- ---- -------- ---- -------- ----
Total available for sale (1) ....... $60,035 5.52% $170,457 4.97% $153,112 5.55%
======= ==== ======== ==== ======== ====
At June 30, 2002
-----------------------------------------
After Ten Years Total
------------------- -------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- -------- -------- --------
(Dollars in thousands)
Held to Maturity:
U.S. Government & Agency
Collateralized Mortgage
Obligations ..................... $ 6,789 6.06% $ 19,852 6.13%
State and municipal ................... 27,570 4.59 86,868 4.33
Corporate and other ................... 3,411 6.92 3,411 6.92
-------- ---- -------- ----
Total held-to-maturity.............. $ 37,770 5.07% $110,131 4.71%
======== ==== ======== ====
Available for sale:
U.S. Government Agency Pass Thru ...... $ -- --% $107,638 4.45%
U.S. Government Agency
Collateralized Mortgage
Obligations ..................... 300,782 5.56 449,866 5.53
Corporate and other ................... 44,123 5.90 171,005 5.78
-------- ---- -------- ----
Total available for sale (1) ....... $344,905 5.38% $728,509 5.33%
======== ==== ======== ====
- ----------
(1) Excludes FHLB stock.
88
Sources of Funds
General. Sources of funds consist of principal and interest cash flows
received from loans and mortgage-backed securities, contractual maturities on
investments, deposits and Federal Home Loan Bank advances. These sources of
funds are for lending, investing and general corporate purposes.
Deposits. We offer a variety of deposits for retail and business accounts.
Deposit products include savings accounts, checking accounts, interest bearing
checking accounts, money market deposit accounts and certificate of deposit
accounts at varying interest rates and terms. We also offer IRA and KEOGH
accounts. For business customers we offer several checking account and savings
plans, cash management services, payroll origination service, escrow account
management and master card business cards. Our customer relationship management
strategy focuses on relationship banking for retail and business customers to
enhance the customer experience. Deposit activity is influenced by state and
local economic activity, changes in interest rates, internal pricing decisions
and competition. Deposits are primarily obtained from the areas surrounding our
branch locations. In order to attract and retain deposits we offer competitive
rates, quality customer service and we offer a wide variety of products and
services that meet the needs of our customers, including online banking. We do
not have any brokered deposits.
Deposit pricing strategy is monitored monthly by the Asset/Liability
Committee. Deposit pricing is set weekly by our Treasury Department. When
considering our deposit pricing we consider competitive market rates, FHLB
advance rates and rates on other sources of funds. Core deposits, defined as
savings accounts, interest and non-interest bearing checking accounts and money
market deposit accounts represented 55% of total deposits at December 31, 2001
and 57% at June 30, 2002. As of June 30, 2002 and December 31, 2001, time
deposits maturing in less than one year amounted to $918.3 million and $881.7
million, respectively.
The following table indicates the amount of our certificates of deposit by
time remaining until maturity as of June 30, 2002.
Maturity
---------------------------------------------------
3 Months or Over 3 to 6 Over 6 to 12 Over 12
Less Months Months Months Total
----------- ----------- ------------ -------- ----------
(In thousands)
Certificates of deposit less than $100,000 ... $309,854 $220,743 $225,815 $145,926 $ 902,338
Certificates of deposit of $100,000 or more .. 91,973 37,135 32,826 22,809 184,743
-------- -------- -------- -------- ----------
Total of certificates of deposit ............. $401,827 $257,878 $258,641 $168,735 $1,087,081
======== ======== ======== ======== ==========
89
Certificates of Deposit Maturities. The following table sets forth certain
information regarding our certificates of deposit.
Period to Maturity from June 30, 2002
---------------------------------------------------------------------
Two to Three to At
Less Than One to Three Four Four to Five Years June 30,
One Year Two Years Years Years Five Years or More 2002
---------- --------- ------- -------- ---------- ---------- ----------
(In thousands)
Rate:
1.00 to 2.00%.... $ 33,018 $ 37 $ -- $ -- $ 10 $ -- $ 33,065
2.01 to 3.00%.... 622,054 4,929 -- -- -- 15 626,998
3.01 to 4.00%.... 155,649 52,627 13,669 239 4,271 -- 226,455
4.01 to 5.00%.... 36,485 23,267 12,349 2,304 19,728 920 95,053
5.01 to 6.00%.... 41,501 14,090 2,192 4,249 840 1,126 63,998
6.01 to 7.00%.... 29,639 8,688 1,656 1,501 -- -- 41,484
Over 7.01%.... -- 6 20 -- -- 2 28
-------- -------- ------- ------ ------- ------ ----------
Total......... $918,346 $103,644 $29,886 $8,293 $24,849 $2,063 $1,087,081
======== ======== ======= ====== ======= ====== ==========
At December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Rate:
1.00 to 2.00%.... $ 2,913 $ 9 $ --
2.01 to 3.00%.... 270,298 18 646
3.01 to 4.00%.... 363,796 114 6,078
4.01 to 5.00%.... 194,786 40,498 401,848
5.01 to 6.00%.... 154,084 588,850 592,970
6.01 to 7.00%.... 66,632 404,155 9,838
Over 7.01%.... 28 633 1,698
---------- ---------- ----------
Total......... $1,052,537 $1,034,277 $1,013,078
========== ========== ==========
90
Borrowed Funds. At June 30, 2002, we had $194.9 million of borrowed funds.
Borrowed funds consist primarily of FHLB advances and repurchase agreements with
existing commercial customers. Repurchase agreements are contracts for the sale
of securities owned or borrowed by us, with an agreement to repurchase those
securities at an agreed upon price and date. We use repurchase agreements as an
investment vehicle for our commercial sweep checking product. Our policies limit
the use of repurchase agreements to collateral consisting of U.S. Treasury
obligations, U.S. agency obligations or mortgage related securities. There were
$42.8 million of repurchase agreements outstanding as of June 30, 2002, and we
averaged approximately $42.1 million outstanding pursuant to such agreements
during the year ended December 31, 2001.
As a member of the Federal Home Loan Bank of New York, The Provident Bank
is eligible to obtain advances upon the security of the FHLB common stock owned
and certain residential mortgage loans, provided certain standards related to
credit-worthiness have been met. FHLB advances are available pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. We had $152.1 million of FHLB advances outstanding as of June 30,
2002, and we averaged approximately $132.8 million of FHLB advances during the
year ended December 31, 2001.
The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated.
Six Months Ended
June 30, Year Ended December 31,
------------------- ------------------------------
2002 2001 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Maximum Balance:
FHLB advances ................................... $152,653 $136,966 $144,664 $145,563 $145,556
FHLB line of credit ............................. -- 26,900 26,900 82,000 53,300
Securities sold under agreements to repurchase .. 49,776 46,751 51,103 47,784 33,537
Average Balance:
FHLB advances ................................... 146,079 135,430 132,756 139,650 119,627
FHLB line of credit ............................. -- 3,439 1,788 32,714 10,023
Securities sold under agreements to repurchase .. 45,116 38,309 42,144 37,780 24,482
Weighted Average Interest Rate:
FHLB advances ................................... 5.14% 6.08% 5.90% 6.11% 6.02%
FHLB line of credit ............................. N/A 5.44 5.50 6.93 5.77
Securities sold under agreements to repurchase .. 1.58 3.57 3.07 4.21 3.89
91
The following table sets forth certain information as to our borrowings at
the dates indicated.
At December 31,
At June 30, ------------------------------
2002 2001 2000 1999
----------- -------- -------- --------
(Dollars in thousands)
FHLB advances................................... $152,131 $144,664 $132,240 $145,270
FHLB line of credit............................. -- -- 7,000 39,300
Securities sold under agreements to repurchase.. 42,794 51,103 40,663 32,071
-------- -------- -------- --------
Total borrowings............................. $194,925 $195,767 $179,903 $216,641
======== ======== ======== ========
Weighted average interest rate of FHLB
advances..................................... 5.14% 5.90% 6.11% 6.02%
Weighted average interest rate of FHLB line of
credit....................................... N/A 5.50% 6.93% 5.77%
Weighted average interest rate of securities
sold under agreements to repurchase.......... 1.58% 3.07% 4.21% 3.89%
Financial Management and Trust Services
The Provident Bank offers a full range of trust and financial management
services primarily to individuals. These services include wealth management
services, such as investment management and investment advisory accounts, as
well as custody accounts. We also serve as trustee for living and testamentary
trusts. Our trust officers also provide estate settlement services when The
Provident Bank has been named executor or guardian of an estate. At June 30,
2002 the book value of assets under administration was $191.7 million and the
number of accounts under administration was 507.
Subsidiary Activities
Provident Mortgage Corporation is a wholly-owned subsidiary of The
Provident Bank. It was established as a New Jersey corporation to provide
mortgage banking services as a successor to Residential Home Funding Corp., a
mortgage company specializing in FHA-insured loans and VA-guaranteed loans and,
to a lesser extent, alternative residential loan products. We acquired
Residential Home Funding Corp. in July 2001. All loans originated by the
mortgage company are sold to established investors with the loan servicing
released.
Provident Investment Services, Inc. is a wholly-owned subsidiary of The
Provident Bank. It was established as a New Jersey corporation to provide life,
health, property and casualty insurance in the State of New Jersey and conducts
non-deposit investment product and insurance sales.
Provident Title, LLC is a joint venture in which The Provident Bank has a
49% interest and Investor's Title Agency, Inc. has a 51% interest. Provident
Title, LLC is licensed to sell title insurance in the State of New Jersey. It
commenced business in October 2001.
PSB Funding Corporation is a majority owned subsidiary of The Provident
Bank. It was established as a New Jersey corporation to engage in real estate
activities (including the
92
acquisition of mortgage loans from The Provident Bank) that enable it to be
taxed as a real estate investment trust for federal and New Jersey tax purposes.
The Provident Bank maintains several subsidiaries, including Dudley
Investment Corp., Beehive Investment, Inc. and Paulus Hook Corp., which
currently conduct no business.
Properties
We conduct our business through 49 full-service branch offices located in
Hudson, Bergen, Essex, Mercer, Middlesex, Monmouth, Morris, Ocean, Somerset and
Union Counties, New Jersey. The aggregate net book value of our premises and
equipment was $42.5 million at June 30, 2002. On September 6, 2002, The
Provident Bank completed its acquisition and assumption of approximately $21.8
million in deposits of two full-service branch offices located in Brick, New
Jersey from another financial institution. The Provident Bank consolidated its
pre-existing branch office in Brick, New Jersey with one of the acquired
offices. The following table sets forth certain information with respect to our
headquarters office and branch offices at June 30, 2002.
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration Net Book Value
- -------------------------------- --------- ------------- ------------- --------------
(In thousands)
Jersey City Headquarters (1) Owned 1986 N/A $10,845.0
830 Bergen Avenue
Jersey City, New Jersey 07306
Ampere Owned 1983 N/A $ 448.8
100 Bloomfield Avenue
Bloomfield, New Jersey 07003
Bayonne 20th Owned 1972 N/A $ 334.9
464-472 Avenue C
Bayonne, New Jersey 07002
Bayonne 26th Owned 1976 N/A $ 335.4
569 Broadway
Bayonne, New Jersey 07002
Belleville Owned 1973 N/A $ 408.8
208-218 Washington Street
Belleville, New Jersey 07109
Bergen/Harrison Owned 1960 N/A $ 250.4
533 Bergen Avenue
Jersey City, New Jersey 07304
Bergen Journal Square Leased 12/28/01 1/31/07 $ 55.8
895 Bergen Avenue
Jersey City, New Jersey 07306
93
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration Net Book Value
- -------------------------------- --------- ------------- ------------- --------------
(In thousands)
Berkeley Leased 7/5/94 7/31/04 $ 105.8
Holiday Plaza 2
1 Plaza Drive
Toms River, New Jersey 08753
Bloomfield Owned 1960 N/A $ 1,069.4
11 Broad Street
Bloomfield, New Jersey 07003
Brick Township Leased 2/1/94 1/31/04 $ 78.8
1930 Route 88
Brick, New Jersey 08724
Bridgewater Leased 1/1/01 10/31/05 $ 464.7
715 Promenade Boulevard, Unit 2
Bridgewater, New Jersey 08807
Brookdale Owned 1968 N/A $ 609.2
1260 Broad Street
Bloomfield, New Jersey 07003
Clark Owned 1998 N/A $ 704.1
10 Westfield Avenue
Clark, New Jersey 07066
Denville Leased 6/1/99 5/31/04 $ 101.2
490 East Main Street
Denville, New Jersey 07834
Dumont Owned 1971 N/A $ 359.5
21 Washington Avenue
Dumont, New Jersey 07628
Dunellen Owned 1978 N/A $ 641.0
333 North Avenue
Dunellen, New Jersey 08812
East Brunswick Leased 11/1/84 9/30/11 $ 511.2
308 Rues Lane
East Brunswick, New Jersey 08816
East Windsor Owned 1978 N/A $ 454.6
Rte 130 & Dutch Neck Road
East Windsor, New Jersey 08520
Freehold (2) Leased 1996 5/31/10 $ 274.9
4331 Route 9 and Pond Road
Freehold, New Jersey 07728
94
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration Net Book Value
- -------------------------------- --------- ------------- ------------- --------------
(In thousands)
Greenbrook Owned 1978 N/A $ 245.2
930 N. Washington Avenue
Green Brook, New Jersey 08812
Greenville Owned 1963 N/A $ 423.4
1553 Kennedy Boulevard
Jersey City, New Jersey 07305
Heights Owned 1964 N/A $ 1,312.1
3670 Kennedy Boulevard
Jersey City, New Jersey 07307
Hillsborough Owned 1992 N/A $ 962.5
425 Route 206
Hillsborough, New Jersey 08876
Hoboken Leased 5/12/95 5/31/05 $ 65.5
77 River Street
Hoboken, New Jersey 07030
Kearny Owned 1998 N/A $ 740.5
249 Kearney Avenue
Kearny, New Jersey 07032
Keyport Leased 11/12/98 11/30/03 $ 128.2
c/o Stop and Shop Supermarket
100 Highway 35
Keyport, New Jersey 07735
Lafayette Owned 1960 N/A $ 53.0
350 Communipaw Avenue
Jersey City, New Jersey 07304
Leonia Leased 2/1/72 1/31/07 $ 16.3
320-322 Broad Avenue
Leonia, New Jersey 07605
Main Leased 4/1/88 3/31/08 $ 139.8
239 Washington Street
Jersey City, New Jersey 07302
Manasquan Leased 3/1/00 2/28/07 $ 306.3
Highway 71 and 205 Main Street
Manasquan, New Jersey 08736
Monroe Leased 6/1/97 5/31/07 $ 145.9
170 Overlook Drive
Monroe, New Jersey 08343
95
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration Net Book Value
- -------------------------------- --------- ------------- ------------- --------------
(In thousands)
Montgomery Leased 12/1/95 6/30/03 $ 75.1
2162 Route 206 South
Belle Mead, New Jersey 08502
Morris Plains Leased 2/1/88 1/31/06 $ 146.4
Routes 10 & 202
Morris Plains, New Jersey 07950
New Providence Owned 1996 N/A $ 1,223.0
65 South Street
New Providence, New Jersey 07974
Ocean Grove (2) Leased 1992 1/22/18 $ 162.7
40 Main Street
Ocean Grove, New Jersey 07756
Ocean Township Leased 4/1/98 3/31/18 $ 877.9
1502 Route 35 South
Ocean Township, New Jersey 07712
Oradell (3) Leased 7/1/97 6/30/02 $ 92.7
550 Kinderkamack Road
Oradell, New Jersey 07649
Piscataway Leased 3/15/99 3/31/04 $ 282.6
Centennial Square Shopping Plaza
1297 Centennial Avenue, Unit 1
Piscataway, New Jersey 08854
Point Pleasant Owned 2002 N/A $ 2,045.1
604-610 Laurel Avenue
Pt. Pleasant, New Jersey 08742
Roseland Leased 4/1/98 3/31/08 $ 95.9
161 Eagle Rock Avenue
Roseland, New Jersey 07068
South Freehold Leased 4/1/98 3/31/03 $ 24.3
3585 Route 9 North
Freehold, New Jersey 07728
South Orange Owned 1995 N/A $ 783.6
159 South Orange Avenue
South Orange, New Jersey 07079
Teaneck Leased 1/1/76 12/31/05 $ 123.5
464 Cedar Lane
Teaneck, New Jersey 07666
96
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration Net Book Value
- -------------------------------- --------- ------------- ------------- --------------
(In thousands)
Toms River Leased 7/5/94 7/31/04 $ 155.2
Bellcrest Plaza
953 Fischer Boulevard
Toms River, New Jersey 08753
Union City Owned 1974 N/A $ 869.2
3720 Bergenline Avenue
Union City, New Jersey 07087
Wall Leased 11/15/86 11/30/11 $ 183.9
Route 35 & New Bedford Road
Wall Township, New Jersey 07719
West New York - 55th Street Owned 1970 N/A $ 1,019.0
5410 Bergenline Avenue
West New York, New Jersey 07093
West New York - 60th Street Owned 1971 N/A $ 542.8
6002 Broadway and 60th Street
West New York, New Jersey 07093
West New York - 62nd Street Owned 1985 N/A $ 574.0
6141 Bergenline Avenue
West New York, New Jersey 07093
- ----------
(1) The main office building also houses certain administrative offices.
(2) The Provident Bank owns the building but leases the land.
(3) The Provident Bank is negotiating an extension of this lease.
Legal Proceedings
The Provident Bank is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to its financial condition or results of operations.
Personnel
As of June 30, 2002, we had 646 full-time employees and 85 part-time
employees. Our employees are not represented by a collective bargaining unit. We
consider our relationship with our employees to be good.
97
FEDERAL AND STATE TAXATION
Federal Taxation
General. Provident Financial Services, Inc. and The Provident Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The most recent tax period
audited by the Internal Revenue Service was December 31, 1996. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to The Provident Bank.
Method of Accounting. For federal income tax purposes, The Provident Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns.
Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the
1996 Act), The Provident Bank was permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at our taxable income. The
Provident Bank was required to use the direct charge off method to compute its
bad debt deduction beginning with its 1996 federal tax return. Savings
institutions were required to recapture any excess reserves over those
established as of December 31, 1987 (base year reserve).
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should The Provident Bank fail to meet certain asset and definitional
tests. Federal legislation has eliminated these recapture rules.
Retained earnings at June 30, 2002 and December 31, 2001 included
approximately $33.7 million for which no provisions for income tax had been
made. This amount represents an allocation of income to bad debt deductions for
tax purposes only. Events that would result in taxation of these reserves
include failure to qualify as a bank for tax purposes, distributions in complete
or partial liquidation, stock redemptions and excess distributions to
shareholders. At June 30, 2002 and December 31, 2001, The Provident Bank has an
unrecognized tax liability of $13.9 million with respect to this reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended, which we refer to as the Code, imposes an alternative minimum tax (AMT)
at a rate of 20% on a base of regular taxable income plus certain tax
preferences (alternative minimum taxable income or AMTI). The AMT is payable to
the extent such AMTI is in excess of an exemption amount and the AMT exceeds the
regular income tax. Net operating losses can offset no more than 90% of AMTI.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years. The Provident Bank has not been subject
to the alternative minimum tax and has no such amounts available as credits for
carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At
98
June 30, 2002, The Provident Bank had no net operating loss carryforwards for
federal income tax purposes.
Corporate Dividends-Received Deduction. Provident Financial Services, Inc.
may exclude from its income 100% of dividends received from The Provident Bank
as a member of the same affiliated group of corporations.
State Taxation
New Jersey State Taxation. The Provident Bank has filed New Jersey Savings
Institution income tax returns. Generally, the income of savings institutions in
New Jersey, which is calculated based on federal taxable income, subject to
certain adjustments, is subject to New Jersey tax. The Provident Bank is not
currently under audit with respect to its New Jersey income tax returns and The
Provident Bank' state tax returns have not been audited for the past five years.
On July 2, 2002, the State of New Jersey enacted income tax law changes
which will be retroactive to tax years beginning January 1, 2002. The more
relevant changes include an increase in the tax rate for savings bank from three
percent to nine percent and the establishment of an Alternative Minimum
Assessment (AMA) tax. Under the new legislation, a taxpayer, including The
Provident Bank, will pay the greater of the corporate business (CBT) tax (at 9%
of taxable income) or the AMA tax. There are two methods for calculating the AMA
tax, the gross receipts method or the gross profits method. Under the gross
receipts method, the tax is calculated by multiplying the gross receipts by the
applicable factor, which ranges from 0.125% to 0.4%. Under the gross profits
method, the tax is calculated by multiplying the gross profits by the applicable
factor, which ranges from 0.25% to 0.8%. The taxpayer has the option of choosing
either the gross receipts or gross profits method, but once an election is made,
the taxpayer must use the same method for the next four tax years. The AMA tax
is creditable against the CBT in a year in which the CBT is higher, limited to
the AMA for that year, and limited to an amount such that the tax is not reduced
by more than 50% of the tax otherwise due and other statutory minimums. The AMA
tax for each taxpayer may not exceed $5.0 million per year and the sum of the
AMA for each member of an affiliated group may not exceed $20.0 million per year
for members of an affiliated group with five or more taxpayers. The AMA for tax
years beginning after June 30, 2006 shall be zero.
New Jersey tax law does not and has not allowed for a taxpayer to file a
tax return on a combined or consolidated basis with another member of the
affiliated group where there is common ownership. However, under the new tax
legislation, if the taxpayer cannot demonstrate by clear and convincing evidence
that the tax filing discloses the true earnings of the taxpayer on its business
carried on in the State of New Jersey, the New Jersey Director of the Division
of Taxation may, at the director's discretion, require the taxpayer to file a
consolidated return of the entire operations of the affiliated group or
controlled group, including its own operations and income. See "Risk
Factors--Adoption of State Tax Legislation May Have a Negative Impact on Our Net
Income."
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, Provident Financial Services, Inc. is exempted from Delaware
corporate income tax
99
but is required to file annual returns and pay annual fees and a franchise tax
to the State of Delaware.
REGULATION
General
The Provident Bank is a New Jersey chartered savings bank, and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation (FDIC) under the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF). The Provident Bank is subject to extensive
regulation, examination and supervision by the Commissioner of the New Jersey
Department of Banking and Insurance (the Commissioner) as the issuer of its
charter, and by the FDIC as the deposit insurer. The Provident Bank must file
reports with the Commissioner and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approval prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions and opening or acquiring branch offices. The
Commissioner and the FDIC conduct periodic examinations to assess The Provident
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank can engage and is intended primarily for the protection of the
deposit insurance fund and depositors. 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.
Provident Financial Services, Inc., as a bank holding company controlling
The Provident Bank, will be subject to the Bank Holding Company Act of 1956, as
amended (BHCA), and the rules and regulations of the Federal Reserve Board under
the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the New
Jersey Banking Act) and the regulations of the Commissioner under the New Jersey
Banking Act applicable to bank holding companies. The Provident Bank and
Provident Financial Services, Inc. will be required to file reports with, and
otherwise comply with the rules and regulations of the Federal Reserve Board and
the Commissioner. Provident Financial Services, Inc. will be required to file
certain reports with, and otherwise comply with, the rules and regulations of
the Securities and Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Commissioner, the
FDIC, the Federal Reserve Board or through legislation, could have a material
adverse impact on The Provident Bank and Provident Financial Services, Inc. and
their operations and stockholders.
100
- --------------------------------------------------------------------------------
Certain of the laws and regulations applicable to The Provident Bank and
Provident Financial Services, Inc. are summarized below or elsewhere in this
prospectus. These summaries do not purport to be complete and are qualified in
their entirety by reference to such laws and regulations.
- --------------------------------------------------------------------------------
New Jersey Banking Regulation
Activity Powers. The Provident Bank derives its lending, investment and
other activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations,
savings banks, including The Provident Bank, generally may invest in:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Commissioner. New Jersey savings banks may
exercise those powers, rights, benefits or privileges authorized for national
banks or out-of-state banks or for federal or out-of-state savings banks or
savings associations, provided that before exercising any such power, right,
benefit or privilege, prior approval by the Commissioner by regulation or by
specific authorization is required. The exercise of these lending, investment
and activity powers are limited by federal law and the related regulations. See
"--Federal Banking Regulation--Activity Restrictions on State-Chartered Banks"
below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New
Jersey chartered savings bank may not make loans or extend credit to a single
borrower and to entities related to the borrower in an aggregate amount that
would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. The Provident Bank currently
complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend unless the savings bank
would, after the payment of the dividend, have a surplus of not less than 50% of
its capital stock, or the payment of the dividend would not reduce the surplus.
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Federal law may also limit the amount of dividends that may be paid by The
Provident Bank. See "--Federal Banking Regulation--Prompt Corrective Action"
below.
Minimum Capital Requirements. Regulations of the Commissioner impose on New
Jersey chartered depository institutions, including The Provident Bank, minimum
capital requirements similar to those imposed by the FDIC on insured state
banks. See "--Federal Banking Regulation--Capital Requirements."
Examination and Enforcement. The New Jersey Department of Banking and
Insurance may examine The Provident Bank whenever it deems an examination
advisable. The Department examines The Provident Bank at least every two years.
The Commissioner may order any savings bank to discontinue any violation of law
or unsafe or unsound business practice and may direct any director, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Commissioner has ordered the activity to be terminated, to show cause
at a hearing before the Commissioner why such person should not be removed.
Federal Banking Regulation
Capital Requirements. FDIC regulations require banks to maintain minimum
levels of capital. The FDIC regulations define two tiers, or classes, of
capital.
Tier 1 capital is comprised of the sum of:
. common stockholders' equity, excluding the unrealized appreciation or
depreciation, net of tax, from available for sale securities;
. non-cumulative perpetual preferred stock, including any related
retained earnings; and
. minority interests in consolidated subsidiaries minus all intangible
assets, other than qualifying servicing rights and any net unrealized
loss on marketable equity securities.
The components of Tier 2 capital currently include:
. cumulative perpetual preferred stock;
. certain perpetual preferred stock for which the dividend rate may be
reset periodically;
. hybrid capital instruments, including mandatory convertible
securities;
. term subordinated debt;
. intermediate term preferred stock;
. allowance for possible loan losses; and
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. up to 45% of pretax net unrealized holding gains on available for sale
equity securities with readily determinable fair market values.
Allowance for possible loan losses includible in Tier 2 capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital
that may be included in total capital cannot exceed 100% of Tier 1 capital. The
FDIC regulations establish a minimum leverage capital requirement for banks in
the strongest financial and managerial condition, with a rating of 1 (the
highest examination rating of the FDIC for banks) under the Uniform Financial
Institutions Rating System, of not less than a ratio of 3.0% of Tier 1 capital
to total assets. For all other banks, the minimum leverage capital requirement
is 4.0%, unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution.
The FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of a ratio of
total capital, which is defined as the sum of Tier 1 capital and Tier 2 capital,
to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include:
. the quality of the bank's interest rate risk management process;
. the overall financial condition of the bank; and
. the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The FDIC adopted regulations, effective April 1, 2002, establishing minimum
regulatory capital requirements for equity investments in non-financial
companies. The regulations apply a series of marginal capital charges that range
from 8% to 25% depending upon the size of the aggregate equity investment
portfolio of the banking organization relative to its Tier 1 capital. The
capital charge would be applied by making a deduction, which would be based on
the adjusted carrying value of the equity investment from the organization's
Tier 1 capital. We do not believe this new capital requirement will have a
material adverse effect upon our operations. However, we will have to take this
requirement into consideration should we, at some point in the future, decide to
invest in non-financial companies.
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The following table shows our leverage ratio, our Tier 1 risk-based capital
ratio, and our total risk-based capital ratio, at June 30, 2002:
As of June 30, 2002
----------------------------------------------------------------------------------
Pro Forma of
Historical Percent of Pro Forma Percent Capital Percent of
Capital Assets/(1)/ Capital/(2)/ Assets/(1)/ Requirements Assets/(1)/
---------- ----------- ------------ ----------- ------------ -----------
(Dollars in thousands)
Regulatory Tier 1 leverage capital...... $279,979 9.39% $424,380 13.45% $126,219 4.0%
Tier 1 risk-based capital............... 279,979 13.84 424,380 20.62 82,314 4.0
Total risk-based capital................ 301,937 14.93 446,338 21.69 164,628 8.0
- ----------
/(1)/For purposes of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total leverage assets. In calculating Tier 1 risk based
capital and total risk-based capital, assets are based on total
risk-weighted assets.
/(2)/ Assumes the sale of 38,318,000 shares of common stock in the stock
offering.
As the table shows, as of June 30, 2002, The Provident Bank was considered
"well capitalized" under FDIC guidelines.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended, (FDIA) which was added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDIC Improvement Act), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for national banks and their
subsidiaries, unless such activities and investments are specifically exempted
by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
. the bank held such types of investments during the 14 month period
from September 30, 1990 through November 26, 1991;
. the state in which the bank is chartered permitted such investments as
of September 30, 1991; and
. the bank notifies the FDIC and obtains approval from the FDIC to make
or retain such investments. Upon receiving such FDIC approval, an
institution's investment in such equity securities will be subject to
an aggregate limit up to the amount of its Tier 1 capital.
Section 24 provides an exception for majority owned subsidiaries of a bank,
but Section 24 limits the activities of such subsidiaries to those permissible
for a national bank, permissible under Section 24 of the FDIA and the related
FDIC regulations, or as approved by the FDIC.
Before making a new investment or engaging in a new activity that is not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations, an insured bank must seek approval from the FDIC to make such
investment or engage in such activity. The FDIC will not approve the activity
unless the bank meets its minimum capital requirements and the FDIC determines
that the activity does not present a significant risk to the FDIC
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insurance funds. Certain activities of subsidiaries that are engaged in
activities permitted for national banks only through a "financial subsidiary"
are subject to additional restrictions.
The Gramm-Leach-Bliley Act (Gramm-Leach) permits a state-chartered savings
bank to engage, through financial subsidiaries, in any activity in which a
national bank may engage through a financial subsidiary and on substantially the
same terms and conditions. In general, Gramm-Leach permits a national bank that
is well-capitalized and well-managed to conduct, through a financial subsidiary,
any activity permitted for a financial holding company other than insurance
underwriting, insurance investments, real estate investment or development or
merchant banking. The total assets of all such financial subsidiaries may not
exceed the lesser of 45% of the bank's total assets or $50 billion. The bank
must have policies and procedures to assess the financial subsidiary's risk and
protect the bank from such risk and potential liability, must not consolidate
the financial subsidiary's assets with the bank's and must exclude from its own
assets and equity all equity investments, including retained earnings, in the
financial subsidiary. State chartered savings banks may retain subsidiaries in
existence as of March 11, 2000 and may engage in activities that are not
authorized under Gramm-Leach; otherwise, Gramm-Leach will preempt all state laws
regarding the permissibility of certain activities for state chartered banks if
such state law is in conflict with the provisions of Gramm-Leach (with the
exception of certain insurance activities), regardless of whether the state law
would authorize broader or more restrictive activities. Although The Provident
Bank meets all conditions necessary to establish and engage in permitted
activities through financial subsidiaries, it has not yet determined whether or
the extent to which it will seek to engage in such activities.
Federal Home Loan Bank System. The Provident Bank is a member of the FHLB
system, which consists of twelve regional FHLBs, each subject to supervision and
regulation by the Federal Housing Finance Board (FHFB). The FHLB provides a
central credit facility primarily for member thrift institutions as well as
other entities involved in home mortgage lending. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLBs. It
makes loans to members (i.e., advances) in accordance with policies and
procedures, including collateral requirements, established by the respective
boards of directors of the FHLBs. These policies and procedures are subject to
the regulation and oversight of the FHFB. All long term advances are required to
provide funds for residential home financing. The FHFB has also established
standards of community or investment service that members must meet to maintain
access to such long term advances. The Provident Bank, as a member of the FHLB
of New York, is required to purchase and hold shares of capital stock in that
FHLB in an amount at least equal to the greater of (i) 1% of the aggregate
principal amount of its unpaid mortgage loans, home purchase contracts and
similar obligations at the beginning of each year; (ii) 0.3% of its assets; or
(iii) 5% (or such greater fraction as established by the FHLB) of its advances
from the FHLB as of December 31, 2001. Pursuant to Gramm-Leach, the foregoing
minimum share ownership requirements will be replaced by regulations to be
promulgated by the FHFB. Gramm-Leach specifically provides that the minimum
requirements in existence immediately prior to adoption of Gramm-Leach shall
remain in effect until such regulations are adopted. The Provident Bank is in
compliance with these requirements.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including The Provident Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors
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and officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and to unsafe or unsound practices.
The FDIC is required, with some exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
. insolvency, or when the assets of the bank are less than its
liabilities to depositors and others;
. substantial dissipation of assets or earnings through violations of
law or unsafe or unsound practices;
. existence of an unsafe or unsound condition to transact business;
. likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business;
and
. insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital with
no reasonable prospect of replenishment of capital without federal
assistance.
Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC established a
system for setting deposit insurance premiums based upon the risks a particular
bank or savings association posed to its deposit insurance funds. Under the
risk-based deposit insurance assessment system, the FDIC assigns an institution
to one of three capital categories based on the institution's financial
information, as of the reporting period ending six months before the assessment
period. The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized. With respect to the capital ratios,
institutions are classified as well capitalized, adequately capitalized or
undercapitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to supervisory subgroups based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds, which may include information
provided by the institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including The Provident Bank.
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Under the Deposit Insurance Funds Act of 1996, the assessment base for the
payments on the bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation was
expanded to include, beginning January 1, 1997, the deposits of institutions
insured by the Bank Insurance Fund, such as The Provident Bank. The annual rate
of assessments for the payments on the Financing Corporation bonds for the
quarterly period beginning on January 1, 2002 was 0.0182% for both
BIF-assessable deposits and SAIF-assessable deposits.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits 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 condition imposed by the
FDIC. The management of The Provident Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Transactions with Affiliates of The Provident Bank. Transactions between an
insured bank, such as The Provident Bank, and any of its affiliates is governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution generally is not treated as an affiliate of the bank for purposes of
Sections 23A and 23B, but the Federal Reserve Board has proposed a comprehensive
regulation implementing Sections 23A and 23B, which would establish certain
exceptions to this policy.
Section 23A:
. limits the extent to which the bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of such bank's capital stock and retained earnings, and limits all
such transactions with all affiliates to an amount equal to 20% of
such capital stock and retained earnings; and
. requires that all such transactions be on terms that are consistent
with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase of
assets, issuance of guarantees and other similar types of transactions. Further,
most loans by a bank to any of its affiliates must be secured by collateral in
amounts ranging from 100 to 130 percent of the loan amounts. In addition, any
covered transaction by a bank with an affiliate and any purchase of assets or
services by a bank from an affiliate must be on terms that are substantially the
same, or at least as favorable to the bank, as those that would be provided to a
non-affiliate.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
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Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to some exceptions, from extending
credit to or offering any other service, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or its affiliates or not
obtain services of a competitor of the institution.
Privacy Standards. Effective July 1, 2001, financial institutions,
including Provident Financial Services, Inc. and The Provident Bank, became
subject to FDIC regulations implementing the privacy protection provisions of
Gramm-Leach. These regulations require Provident Financial Services, Inc. and
The Provident Bank to disclose their privacy policy, including identifying with
whom they share "non-public personnel information" to customers at the time of
establishing the customer relationship and annually thereafter.
The regulations also require Provident Financial Services, Inc. and The
Provident Bank to provide their customers with initial and annual notices that
accurately reflect its privacy policies and practices. In addition, Provident
Financial Services, Inc. and The Provident Bank are required to provide their
customers with the ability to "opt-out" of having Provident Financial Services,
Inc. and The Provident Bank share their non-public personal information with
unaffiliated third parties before they can disclose such information, subject to
certain exceptions. The implementation of these regulations did not have a
material adverse effect on Provident Financial Services, Inc. and The Provident
Bank. Gramm-Leach also provides for the ability of each state to enact
legislation that is more protective of consumers' personal information.
Currently there are a number of privacy bills pending in the New Jersey
legislature. No action has been taken on any of these bills, and we cannot
predict whether any of them will become law or what impact, if any, these bills
will have if enacted into law.
On February 1, 2001, the FDIC and other federal banking agencies adopted
guidelines establishing standards for safeguarding customer information to
implement certain provisions of Gramm-Leach. The guidelines describe the
agencies' expectations for the creation, implementation and maintenance of an
information security program, which would include administrative, technical and
physical safeguards appropriate to the size and complexity of the institution
and the nature and scope of its activities. The standards set forth in the
guidelines are intended to insure the security and confidentiality of customer
records and information, protect against any anticipated threats or hazards to
the security or integrity of such records and protect against unauthorized
access to or use of such records or information that could result in substantial
harm or inconvenience to any customer. We implemented the guidelines prior to
their effective date of July 1, 2001 and such implementation did not have a
material adverse effect on our operations.
Uniform Real Estate Lending Standards. Under the FDIA, the federal banking
agencies adopted uniform regulations prescribing standards for extensions of
credit that are secured by liens on interests in real estate or made for the
purpose of financing the construction of a building or other improvements to
real estate. Under the joint regulations adopted by the federal banking
agencies, all insured depository institutions must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real
108
estate. These policies must establish loan portfolio diversification standards,
prudent underwriting standards, including loan-to-value limits, that are clear
and measurable, loan administration procedures, and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
. for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
. for land development loans, or loans for the purpose of improving
unimproved property prior to the erection of structures, the
supervisory limit is 75%;
. for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
. for loans for the construction of one- to four-family residential
properties, the supervisory limit is 85%; and
. for loans secured by other improved property, for example, farmland,
completed commercial property and other income-producing property
including non-owner occupied, one-to four-family property, the limit
is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Provident Bank has established, however, internal loan-to-value limits
for real estate loans that are more stringent than the maximum limits currently
imposed under federal law.
Community Reinvestment Act and Fair Lending Laws. All FDIC insured
institutions have a responsibility under the Community Reinvestment Act and
related regulations to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In connection with its
examination of a state chartered savings bank, the FDIC is required to assess
the institution's record of compliance with the Community Reinvestment Act.
Among other things, the current Community Reinvestment Act regulations replace
the prior process-based assessment factors with a new evaluation system that
rates an institution based on its actual performance in meeting community needs.
In particular, the current evaluation system focuses on three tests:
. a lending test, to evaluate the institution's record of making loans
in its service areas;
109
. an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and
. a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
An institution's failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities. We received a satisfactory Community Reinvestment Act rating in our
most recently completed federal examination, which was conducted by the FDIC in
1999.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. The failure to comply with the
Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the FDIC, as well as other federal regulatory agencies
and the Department of Justice.
The FDIC recently conducted an examination relating to our compliance with
various federal banking regulations, which examination was unrelated to safety
and soundness. The FDIC noted weaknesses and failures to comply with the
reporting requirements of the Home Mortgage Disclosure Act. The Home Mortgage
Disclosure Act imposes on financial institutions reporting obligations relating
to home purchase and home improvement loans originated or purchased, or for
which the financial institution receives applications. This loan data is used by
regulatory agencies to help determine whether a financial institution is serving
the housing needs of the communities it serves, to assist public officials in
the distribution of public sector investments where it is needed, and to assist
federal bank regulators in identifying possible discriminatory lending patterns.
We have taken action and implemented procedures to redress the FDIC's concerns
and findings, including the refiling with the FDIC of our Home Mortgage
Disclosure Act data for 2000 and 2001. In connection with the recent compliance
examination, the FDIC has informed The Provident Bank that the FDIC has made a
preliminary finding that it has reason to believe that The Provident Bank has
violated fair lending laws, including the Equal Credit Opportunity Act and its
implementing regulation, Regulation B of the Federal Reserve Board. The FDIC's
preliminary finding relates to an underwriting guideline on overdraft and
personal loans that the FDIC alleges could lead to disparate treatment of these
credit applicants on a prohibited basis. The FDIC's preliminary finding also
relates to The Provident Bank's prior practice of requesting reimbursement for
appraisals purchased by The Provident Bank from fixed-rate home equity loan
applicants who paid no loan application fee or other related costs and who
requested copies of the appraisal. The Equal Credit Opportunity Act and
Regulation B, promote the availability of credit to all creditworthy applicants
without regard to race, color, religion, national origin, sex, marital status or
age. Regulation B also requires creditors to notify applicants of actions taken
on their loan applications, to report credit history in the names of both
spouses on an account, to collect information about the applicant's race or
other personal characteristics in applications for certain dwelling-related
loans, and to provide applicants with copies of appraisal reports used in credit
transactions. This finding by the FDIC is preliminary and subject to further
review by the FDIC. The Provident Bank has responded in writing to the FDIC that
The Provident Bank does not agree with the FDIC's finding and has provided
detailed
110
information to the FDIC in support of its position. Although we believe no
further enforcement action will result from the FDIC's review of this matter, we
cannot assure you that we will not be subject to further enforcement action,
which may include referring this matter to the Department of Justice for further
review and enforcement. The Attorney General of the United States may, on a
referral to the Department of Justice from the FDIC, commence a civil action to
obtain appropriate relief that may include actual and punitive damages and
injunctive relief, as well as the imposition of civil money penalties. The FDIC
has not issued a final report of examination nor assigned us a compliance
rating, but we anticipate that the FDIC will require us to implement corrective
actions and may also require a written agreement with The Provident Bank to
ensure that corrective actions are taken and continued in the future. If we are
required to enter into a written agreement with the FDIC and in the future fail
to comply with any such agreement, we could be subject to further regulatory
action, including restrictions on our ability to expand through bank and branch
acquisitions, and possible monetary penalties. Management of The Provident Bank
has determined that the alleged failures and violations preliminarily found by
the FDIC to have occurred have not had a material adverse effect on its
operations or financial condition.
Safety and Soundness Standards. Pursuant to the requirements of FDIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. The FDIC Improvement Act also established a
system of prompt corrective action to resolve the problems of undercapitalized
institutions. The FDIC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The FDIC's
regulations define the five capital categories as follows:
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An institution will be treated as "well capitalized" if:
. its ratio of total capital to risk-weighted assets is at least 10%;
. its ratio of Tier 1 capital to risk-weighted assets is at least 6%;
and
. its ratio of Tier 1 capital to total assets is at least 5%, and it is
not subject to any order or directive by the FDIC to meet a specific
capital level.
An institution will be treated as "adequately capitalized" if:
. its ratio of total capital to risk-weighted assets is at least 8%; or
. its ratio of Tier 1 capital to risk-weighted assets is at least 4%;
and
. its ratio of Tier 1 capital to total assets is at least 4% (3% if the
bank receives the highest rating under the Uniform Financial
Institutions Rating System) and it is not a well-capitalized
institution.
An institution will be treated as "undercapitalized" if:
. its total risk-based capital is less than 8%; or
. its Tier 1 risk-based-capital is less than 4%; and
. its leverage ratio is less than 4% (or less than 3% if the institution
receives the highest rating under the Uniform Financial Institutions
Rating System).
An institution will be treated as "significantly undercapitalized" if:
. its total risk-based capital is less than 6%;
. its Tier 1 capital is less than 3%; or
. its leverage ratio is less than 3%.
An institution that has a tangible capital to total assets ratio equal to
or less than 2% would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any
112
parent holding company. The aggregate liability of a parent holding company is
limited to the lesser of:
. an amount equal to five percent of the bank's total assets at the time
it became "undercapitalized," or
. the amount that is necessary (or would have been necessary) to bring
the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depository bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under the FDIA, the
FDIC is required to appoint a receiver or a conservator for a critically
undercapitalized bank within 90 days after the bank becomes critically
undercapitalized or to take such other action that would better achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the bank continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings, including that the bank is viable.
Loans to a Bank's Insiders
Federal Regulation. A bank's loans to its executive officers, directors,
any owner of 10% or more of its stock (each, an insider) and any of certain
entities affiliated with any such person (an insider's related interest) are
subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and
the insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to The Provident Bank's loans. See "--New Jersey Banking
Regulation--Loans-to-One Borrower Limitations." All loans by a bank to all
insiders and insiders' related interests in the aggregate may not exceed the
bank's unimpaired capital and unimpaired surplus. With certain exceptions, loans
to an executive officer, other than loans for the education of the officer's
children and certain loans secured by the officer's residence, may not exceed
the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank's
unimpaired capital and surplus. Regulation O also requires that any proposed
loan to an insider or a related interest of that insider be approved in advance
by a majority of the board of directors of the bank, with any interested
directors not participating in the voting, if such loan, when aggregated with
any existing loans to that insider and the insider's related interests, would
exceed either (1) $500,000 or (2) the greater of $25,000 or 5% of the bank's
unimpaired capital and surplus. Generally, such loans must be made on
substantially the
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same terms as, and follow credit underwriting procedures that are not less
stringent than, those that are prevailing at the time for comparable
transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or
compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
New Jersey Regulation. Provisions of the New Jersey Banking Act impose
conditions and limitations on the liabilities to a savings bank of its directors
and executive officers and of corporations and partnerships controlled by such
persons that are comparable in many respects to the conditions and limitations
imposed on the loans and extensions of credit to insiders and their related
interests under Regulation O, as discussed above. The New Jersey Banking Act
also provides that a savings bank that is in compliance with Regulation O is
deemed to be in compliance with such provisions of the New Jersey Banking Act.
Federal Reserve System
Under Federal Reserve Board regulations, The Provident Bank is required to
maintain noninterest-earning reserves against its transaction accounts. The
Federal Reserve Board regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $41.3 million or less,
subject to adjustment by the Federal Reserve Board, and an initial reserve of
$1.2 million plus 10%, subject to adjustment by the Federal Reserve Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $41.3 million. The first $5.7 million of otherwise reservable balances,
subject to adjustments by the Federal Reserve Board, are exempted from the
reserve requirements. The Provident Bank is in compliance with these
requirements. Because required reserves must be maintained in the form of either
vault cash, a noninterest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce The Provident Bank's interest-earning assets.
Internet Banking
Technological developments are significantly altering the ways in which
most companies, including financial institutions, conduct their business. The
growth of the Internet is prompting banks to reconsider business strategies and
adopt alternative distribution and marketing systems. The federal bank
regulatory agencies have conducted seminars and published materials targeted to
various aspects of internet banking, and have indicated their intention to
reevaluate their regulations to ensure that they encourage banks' efficiency and
competitiveness consistent with safe and sound banking practices. We cannot
assure you that the bank regulatory agencies will adopt new regulations that
will not materially affect our internet operations or restrict any such further
operations.
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The USA PATRIOT Act
In response to the events of September 11th, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001. The USA PATRIOT Act gives the federal government new 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 takes 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.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
. Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
. Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
. Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
. Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to
certain record keeping obligations with respect to correspondent
accounts of foreign banks.
. Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
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The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
Holding Company Regulation
Federal Regulation. After the conversion, Provident Financial Services,
Inc. will be regulated as a bank holding company. Bank holding companies are
subject to examination, regulation and periodic reporting under the Bank Holding
Company Act, as administered by the Federal Reserve Board. The Federal Reserve
Board has adopted capital adequacy guidelines for bank holding companies on a
consolidated basis substantially similar to those of the FDIC for The Provident
Bank. As of June 30, 2002, Provident Financial Services, Inc.'s total capital
and Tier 1 capital ratios for Provident Financial Services, Inc. would, on a pro
forma basis, exceed these minimum capital requirements. See "Regulatory Capital
Compliance."
Regulations of the Federal Reserve Board provide that a bank holding
company must serve as a source of strength to any of its subsidiary banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective action provisions of the FDIA, a bank holding company parent of an
undercapitalized subsidiary bank would be directed to guarantee, within
limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "--Federal Banking Regulation--Prompt Corrective
Action." If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the Federal Reserve
Board may prohibit the bank holding company parent of the undercapitalized bank
from paying any dividend or making any other form of capital distribution
without the prior approval of the Federal Reserve Board.
As a bank holding company, Provident Financial Services, Inc. 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 will be required for Provident Financial
Services, Inc. to acquire direct or indirect ownership or control of any voting
securities of any bank or bank holding company if, after giving effect to such
acquisition, it would, directly or indirectly, own or control more than 5% of
any class of voting shares of such bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its 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, will be 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. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating, as well as a "satisfactory" rating for management, at its most
recent bank holding company inspection by the Federal Reserve Board, and that is
not the subject of any unresolved supervisory issues.
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In addition, a bank holding company which does not qualify as a financial
holding company under Gramm-Leach, is generally prohibited from engaging in, or
acquiring direct or indirect control 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 permissible. Some of the
principal activities that the Federal Reserve Board has determined by regulation
to be so closely related to banking as to be permissible are:
. making or servicing loans;
. performing certain data processing services;
. providing discount brokerage services; or acting as fiduciary,
investment or financial advisor;
. leasing personal or real property;
. making investments in corporations or projects designed primarily to
promote community welfare; and
. acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incident to activities which are
financial in nature. Provident Financial Services, Inc. has not elected to
qualify as a financial holding company under Gramm-Leach, although it may seek
to do so in the future. Bank holding companies may qualify to become a financial
holding company if:
. each of its depository institution subsidiaries is "well capitalized";
. each of its depository institution subsidiaries is "well managed";
. each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most recent
examination; and
. the bank holding company has filed a certification with the Federal
Reserve Board that it elects to become a financial holding company.
Under the Federal Deposit Insurance Act, depository institutions are liable
to the FDIC for losses suffered or anticipated by the FDIC in connection with
the default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This law would
potentially be applicable to Provident Financial Services, Inc. if it ever
acquired as a separate subsidiary a depository institution in addition to The
Provident Bank.
New Jersey Regulation. Under the New Jersey Banking Act, a company owning
or controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking
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Act defines the terms "company" and "bank holding company" as such terms are
defined under the BHCA. Each bank holding company controlling a New Jersey
chartered bank or savings bank must file certain reports with the Commissioner
and is subject to examination by the Commissioner.
Acquisition of Provident Financial Services, Inc. Under federal law and
under the New Jersey Banking Act, no person may acquire control of Provident
Financial Services, Inc. or The Provident Bank without first obtaining approval
of such acquisition of control by the Federal Reserve Board and the
Commissioner. See "Restrictions on Acquisition of Provident Financial Services,
Inc.--Regulatory Restrictions."
Federal Securities Laws. Upon completion of the offering, Provident
Financial Services, Inc. common stock will be registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Provident Financial Services, Inc. will then 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 the common
stock in the offering does not cover the resale of the shares. Shares of the
common stock purchased by persons who are not affiliates of Provident Financial
Services, Inc. may be resold without registration. Shares purchased by an
affiliate of Provident Financial Services, Inc. will be subject to the resale
restrictions of Rule 144 under the Securities Act of 1933. If Provident
Financial Services, Inc. meets the current public information requirements of
Rule 144 under the Securities Act of 1933, each affiliate of Provident Financial
Services, Inc. who 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 Provident Financial Services, Inc., or the average
weekly volume of trading in the shares during the preceding four calendar weeks.
Provision may be made in the future by Provident Financial Services, Inc. to
permit affiliates to have their shares registered for sale under the Securities
Act of 1933.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 implementing legislative reforms intended to address corporate and
accounting irregularities. In addition to the establishment of a new accounting
oversight board which will enforce auditing, quality control and independence
standards and will be funded by fees from all publicly traded companies, the Act
restricts accounting companies from providing both auditing and consulting
services. To ensure auditor independence, any non-audit services being provided
to an audit client will require preapproval by the company's audit committee
members. In addition, the audit partners must be rotated. The Act requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willfully violate this certification
requirement. In addition, under the Act, counsel will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such
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evidence to the audit committee or other similar committee of the board of
directors or the board itself.
The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change. The period during which certain types of
law suits can be instituted against a company or its officers has been extended,
and bonuses issued to top executives prior to restatement of a company's
financial statements are now subject to disgorgement if such restatement was due
to corporate misconduct. Executives are also prohibited from insider trading
during retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, civil and criminal penalties have been enhanced.
The Act also increases the oversight of, and codifies certain requirements
relating to, audit committees of public companies and how they interact with the
company's "registered public accounting firm" (RPAF). Audit Committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer. In addition, companies must disclose whether
at least one member of the committee is a "financial expert" (as such term will
be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited
from performing statutorily mandated audit services for a company if such
company's chief executive officer, chief financial officer, comptroller, chief
accounting officer or any person serving in equivalent positions has been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent public or certified accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading. In accordance with the Act, the SEC proposed
rules requiring inclusion of an internal control report and assessment by
management in the annual report to shareholders. The Act requires the RPAF that
issues the audit report to attest to and report on management's assessment of
the company's internal controls. In addition, the Act requires that each
financial report required to be prepared in accordance with (or reconciled to)
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
MANAGEMENT
Shared Management Structure
The directors of Provident Financial Services, Inc. will be those same
persons who are the directors of The Provident Bank. In addition, each of the
executive officers of Provident Financial Services, Inc. will also be an
executive officer of The Provident Bank. Under The Provident Bank's current form
of organization, we are governed by a Board of Managers, which is equivalent to
a Board of Directors. After the conversion, The Provident Bank and Provident
Financial Services, Inc. each will be governed by a Board of Directors. For ease
of reference, we
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sometimes use the term "directors" instead of "managers" when referring to
members of our Board of Managers.
To date, The Provident Bank has compensated its directors and executive
officers for their services. Initially, Provident Financial Services, Inc. will
not separately compensate its directors and officers. We expect to continue this
practice after the offering until we have a business reason to establish
separate compensation programs.
Directors of Provident Financial Services, Inc.
The Board of Directors of Provident Financial Services, Inc. initially
consists of eleven members, each of whom belongs to one of three classes.
Directors serve three-year staggered terms so that only a portion of the
directors will be elected at each annual meeting of stockholders. The class of
directors whose term of office expires at the first annual meeting of
stockholders following completion of the conversion will consist of Directors
Comey, Connor, O'Donnell and Sheenan. The class of directors whose term expires
at the second annual meeting of stockholders following completion of the
conversion will consist of Directors Fekete, Leff, Pantozzi and Scott. The class
of directors whose term of office expires at the third annual meeting of
stockholders following the completion of the conversion will consist of
Directors Hernandez, Jackson and McConnell. The biographical information
regarding these individuals is set forth under "Directors of The Provident
Bank."
Executive Officers of Provident Financial Services, Inc.
The following individuals are the executive officers of Provident Financial
Services, Inc. and hold the offices set forth below opposite their names. The
biographical information for each executive officer is set forth under
"Executive Officers of Provident Financial Services, Inc. or The Provident Bank
Who Are Not Directors."
Name Age(1) Position
- ----------------- ------ --------------------------------------------------------------
Paul M. Pantozzi 57 Chairman of the Board, Chief Executive Officer and President
Kevin J. Ward 53 Executive Vice President and Chief Operating Officer
Linda A. Niro 47 Senior Vice President and Chief Financial Officer
John F. Kuntz 46 General Counsel and Corporate Secretary
Kenneth J. Wagner 51 Senior Vice President-Investor Relations
- ----------
(1) As of June 30, 2002
The executive officers of Provident Financial Services, Inc. will be
elected annually and will hold office until their respective successors have
been elected or until death, resignation, retirement or removal by the Board.
Directors of The Provident Bank
Composition of our Board. We currently have eleven directors. No director
shall serve beyond The Provident Bank annual meeting following his attaining the
age of 72. Directors of The Provident Bank will be elected annually by Provident
Financial Services, Inc. as its sole stockholder.
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The following table states our directors' names, their ages as of June 30,
2002, the years when they began serving as directors and when their current term
expires:
Director Term
Directors Age Position Since Expires
- ------------------- --- ------------------------------- -------- -------
Paul M. Pantozzi 57 Chairman of the Board, Chief 1989 2004
Executive Officer and President
J. Martin Comey 68 Director 1975 2003
Geoffrey M. Connor 55 Director 1996 2003
Frank L. Fekete 50 Director 1995 2004
Carlos Hernandez 52 Director 1996 2005
William T. Jackson 63 Director 1974 2005
David Leff 68 Director 1992 2004
Arthur R. McConnell 64 Director 1990 2005
Edward O'Donnell 52 Director 2002 2003
Daniel T. Scott 57 Director 1987 2004
Thomas E. Sheenan 67 Director 1990 2003
The Business Background of Our Directors. The business experience for the
past five years of each of our directors is as follows:
Paul M. Pantozzi. Mr. Pantozzi has been the Chief Executive Officer and
President of The Provident Bank since 1993 and Chairman since 1998.
J. Martin Comey. Mr. Comey is retired. He previously served as Vice
President of the Schering Plough Corp. of Madison, New Jersey.
Geoffrey M. Connor. Mr. Connor is a practicing attorney and Partner in the
Princeton, New Jersey office of the law firm of Reed Smith LLP.
Frank L. Fekete. Mr. Fekete is a certified public accountant and the
Managing Partner of the accounting firm of Mandel, Fekete & Bloom, CPAs, located
in Jersey City, New Jersey.
Carlos Hernandez. Mr. Hernandez is President of New Jersey City University,
located in Jersey City, New Jersey.
William T. Jackson. Mr. Jackson is Executive Director of Bayview/New York
Cemetery located in Jersey City, New Jersey.
David Leff. Mr. Leff is retired. He was previously a Partner in the law
firm of Eichenbaum, Kantrowitz, Leff & Gulko, located in Paramus, New Jersey.
Arthur R. McConnell. Mr. McConnell is the President of McConnell Realty,
located in Atlantic Highlands, New Jersey.
Edward O'Donnell. Mr. O'Donnell is President of Tradelinks Transport, Inc.,
a transportation consulting company located in Westfield, New Jersey. From March
1995 to July 1999, Mr. O'Donnell was a Director and Executive Vice President of
NPR, Inc. (Navieras), a transportation company located in Edison, New Jersey.
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Daniel T. Scott. Mr. Scott is the Chairman and Chief Executive Officer of
Scott Printing Corp., located in New Providence, New Jersey, and of Unz & Co.,
Inc., Central Avenue Corporation and Scott On-Site, Inc.
Thomas E. Sheenan. Mr. Sheenan is the President of Sheenan Funeral Home
located in Dunellen, New Jersey.
Meetings of the Board of Directors and Committees
Our Board of Directors meets on a monthly basis and may hold additional
special meetings. During 2001, the Board of Managers of The Provident Bank held
twelve regular meetings and one annual meeting.
The Board of Directors of Provident Financial Services, Inc. did not meet
in 2001. Following the offering, the Board of Directors of Provident Financial
Services, Inc. is expected to meet quarterly, or more often as may be necessary.
The Board of Directors initially is expected to have a standing executive
committee, compensation committee, audit committee and a nominating/corporate
governance committee. Each of the compensation committee, audit committee and
nominating/corporate governance committee will be comprised solely of
independent directors within the meaning of the rules of the New York Stock
Exchange. The Board of Directors may, by resolution, designate one or more
additional committees.
The Board of Directors of The Provident Bank currently maintains an
Executive Committee, Examining Committee (to be renamed the Audit Committee) and
Managers Trust Committee.
The Executive Committee consists of Directors Comey, Jackson, Pantozzi,
Scott and a fifth director that changes on a monthly basis, with Mr. Pantozzi
serving as Chair. The Executive Committee exercises general control and
supervision of all matters pertaining to The Provident Bank, subject at all
times to the direction of the Board of Directors. The Executive Committee met
twenty-nine times during the year ended December 31, 2001.
The Examining Committee consists of Directors Fekete, Leff, McConnell,
O'Donnell and Sheenan, with Director Fekete serving as Chair. The Examining
Committee reviews the annual audit prepared by the independent accountants,
recommends the appointment of accountants, reviews the internal audit function
and reviews internal accounting controls. The Examining Committee met five times
during the year ended December 31, 2001.
The Managers Trust Committee consists of Directors Hernandez, Connor and
Pantozzi, as well as the Executive Vice President, Customer Management Group and
the Vice President and Senior Trust Officer, with Director Hernandez serving as
Chair. The Managers Trust Committee oversees the operations of the Trust
Department of The Provident Bank. The Managers Trust Committee met four times
during the year ended December 31, 2001.
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Director Compensation
The Provident Bank pays to each non-employee director an annual retainer of
$21,000 and a fee of $1,000 per board meeting attended. Non-employee members of
the Executive Committee receive an additional annual retainer of $25,000.
Non-employee members of the Examining Committee, the rotating director of the
Executive Committee, and the non-employee director members of the Managers Trust
Committee receive $800 for each committee meeting attended. The Provident Bank
pays the premiums for a life insurance policy, in the face amount of $10,000,
for each non-employee director, until the director attains the age of 70 or has
received such benefit for ten years, whichever occurs later.
Retirement Plan for the Board of Managers of The Provident Bank. The
Provident Bank maintains the Retirement Plan for the Board of Managers of The
Provident Bank, a non-qualified plan which provides cash payments for up to ten
years to eligible retired board members based on age and length of service
requirements. The maximum payment under this plan to a board member who
terminates service on or after the age of seventy with at least ten years of
service on the board, is forty quarterly payments of $1,250. The Provident Bank
may suspend payment if it does not meet FDIC or New Jersey Department of Banking
and Insurance minimum capital requirements. The Provident Bank may terminate
this plan at any time although such termination may not reduce or eliminate any
benefit previously accrued to a board member without his consent. The plan has
been amended to provide that, in the event of a change in control (as defined in
the plan), the undistributed balance of a manager's accrued benefit will be
distributed to him within 60 days of the change in control. For the year ended
December 31, 2001, The Provident Bank paid $4,000 to former board members under
this plan.
Voluntary Fee Deferral Plan for the Board of Managers. The Provident Bank
maintains the Board of Managers Voluntary Fee Deferral Plan, a non-qualified
plan which provides for the deferral of board fees by non-employee members of
The Provident Bank's Board of Managers. Board members may elect to defer board
fees to a future year as determined by that board member, so long as the
distribution of such fees does not begin beyond the year of the board member's
normal retirement date. Deferred fees are credited to an account established for
the benefit of each participant which receives interest at the prevailing prime
rate. A participating board member may receive the deferral payments pursuant to
his election in a lump sum or over a three year period, except in the event of a
change in control, death or disability, under which circumstances a lump sum
payment shall be made. In connection with the conversion and offering, the plan
has been amended to allow current board members a one-time election to invest
their account balances in shares of Provident Financial Services, Inc. common
stock. The amendment also provides that in the event of a change in control (as
defined in the plan), the undistributed balance of a participant's separate
account will be distributed within 60 days of the change in control. As of June
30, 2002, The Provident Bank had accounts totaling $953,463 on behalf of four
present or former board members who participate in this plan.
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Executive Officers of Provident Financial Services, Inc. or The Provident Bank
Who Are Not Directors
The business experience for the past five years of each of the executive
officers of Provident Financial Services, Inc. or The Provident Bank, other than
Mr. Pantozzi, is set forth below:
Kevin J. Ward. Mr. Ward has been Executive Vice President and Chief
Operating Officer of The Provident Bank since 2000. He served as Executive Vice
President, Chief Operating Officer and Chief Financial Officer of The Provident
Bank from January to November 2000. Prior to that time, he was Executive Vice
President and Chief Financial Officer of The Provident Bank.
Glenn H. Shell. Mr. Shell has been Executive Vice President of the Customer
Management Group of The Provident Bank since 2002. Prior to that time, he served
as Executive Vice President and Chief Lending Officer of The Provident Bank.
Gregory French. Mr. French has been Senior Vice President of the Market
Development Group of The Provident Bank since February 2001. He was Vice
President of Marketing, eBusiness for American International Group in New York,
New York from January 2000 to February 2001. Prior to that time he served as
Vice President, Citibank National Director, Field Marketing of Citigroup in New
York, New York.
C. Gabriel Haagensen. Mr. Haagensen has served as Executive Vice President
- - Human Capital Management of The Provident Bank since 2000. Prior to that time
he was Executive Vice President - Operations.
Kenneth J. Wagner. Mr. Wagner has been Senior Vice President of Strategic
Business Development of The Provident Bank since 2001. He served as Senior Vice
President of Customer Relationship Management of The Provident Bank from 1998 to
2001. Prior to that time he was Senior Vice President and Comptroller of The
Provident Bank.
Linda A. Niro. Ms. Niro has served as Senior Vice President and Chief
Financial Officer of The Provident Bank since 2000. Prior to that time, she
served as Vice President and Treasurer of The Provident Bank.
John F. Kuntz. Mr. Kuntz has been Vice President and General Counsel of The
Provident Bank since September 2001. He was Vice President and Assistant General
Counsel of Mellon Investor Services LLC in Ridgefield Park, New Jersey from
August 2000 to September 2001. Prior to that time he was a Partner with the law
firm of Bourne Noll & Kenyon P.C., Summit, New Jersey.
124
Executive Officer Compensation
Summary Compensation Table. The following table sets forth for the year
ended December 31, 2001, certain information as to the total remuneration paid
by The Provident Bank to its Chief Executive Officer, as well as to the four
most highly compensated executive officers of The Provident Bank, other than the
Chief Executive Officer, who received total annual compensation in excess of
$100,000. Each of the individuals listed in the table below are referred to as a
Named Executive Officer.
Annual Compensation
-------------------------------------------------
Other Annual All Other
Compensation LTIP Compensation
Name and Principal Position Year Salary Bonus(2) (3) Payouts (4)
- ---------------------------- ---- -------- -------- ------------ ------- ------------
Paul M. Pantozzi 2001 $500,000 $375,000 $53,440 -- $51,503
Chairman, Chief Executive
Officer and President
Kevin J. Ward 2001 255,000 99,450 -- -- 31,302
Executive Vice President
and Chief Operating
Officer
Glenn H. Shell 2001 225,000 92,250 -- -- 27,405
Executive Vice President,
Customer Management Group
Gregory French 2001 177,692/(1)/ 101,425 -- -- 27,202
Senior Vice President,
Market Development
Group
C. Gabriel Haagensen 2001 185,000 50,413 -- -- 22,432
Executive Vice President,
Human Capital
Management
- ----------
/(1)/Mr.French was initially employed as Senior Vice President in February 2001
at an annual salary of $210,000.
(2) Bonus payments earned pursuant to the Incentive Program for Senior
Executives of The Provident Bank. In addition, Mr. French received a
signing bonus of $40,000 in February 2001.
(3) The Provident Bank provides certain of its executive officers with non-cash
benefits and perquisites, such as the use of employer-owned automobiles,
club membership dues and certain other personnel benefits. Management
believes that the aggregate value of these benefits for 2001 did not, in
the case of any Named Executive Officer, exceed $50,000 or 10% of the
aggregate salary and annual bonus reported for him in the Summary
Compensation Table except for Mr. Pantozzi, who had $53,440 of such
benefits including a stipend of $18,000, club membership dues of $17,500
and automobile-related expenses of $17,940.
(footnotes continued on following page)
125
(4) Includes the following components: (i) employer payment of health insurance
premiums of $9,763, $8,444, $7,154, $9,763 and $5,700 for Messrs. Pantozzi,
Ward, Shell, French and Haagensen, respectively; (ii) employer payment of
dental insurance premiums of $380 each for Messrs. Pantozzi, Ward, Shell,
French and Haagensen, respectively; (iii) employer payment of life
insurance premiums of $4,560, $2,736, $2,451, $798 and $2,029 for Messrs.
Pantozzi, Ward, Shell, French and Haagensen, respectively; (iv) employer
payment of long term disability insurance premiums of $1,800, $1,892,
$1,670, $1,561 and $1,373 for Messrs. Pantozzi, Ward, Shell, French and
Haagensen, respectively; (v) employer contributions to the Savings
Incentive Plan of $11,900 each for Messrs. Pantozzi, Ward, Shell and
Haagensen, respectively and a payment in lieu of first year participation
in the Savings Incentive Plan of $14,700 to Mr. French; and (vi) employer
contribution to the Supplemental Executive Savings Plan of $23,100, $5,950,
$3,850, $0 and $1,050 for Messrs. Pantozzi, Ward, Shell, French and
Haagensen, respectively.
Employment Agreements
Provident Financial Services, Inc. will enter into employment agreements
with Messrs. Pantozzi, Ward and Shell, effective upon completion of the
conversion. Each of these agreements has a term of thirty-six months. The
agreements renew for an additional year beginning on the first anniversary date
of the agreement, and on each anniversary date thereafter, so that the remaining
term is thirty-six months. However, if timely written notice of nonrenewal is
provided to the executive, the employment under the agreement ceases at the end
of thirty-six months following such anniversary date. Under the agreements, the
base salaries for Messrs. Pantozzi, Ward and Shell are $560,008, $270,300 and
$238,500, respectively. In addition to the base salary, each agreement provides
for, among other things, participation in bonus programs, and other employee
pension benefit and fringe benefit plans applicable to executive employees. In
addition, the agreements provide for reasonable vacation and sick leave,
reimbursement of certain club membership fees incurred by each executive and the
use of a company-owned automobile. The agreements provide for termination by
Provident Financial Services, Inc. for cause at any time, in which event, the
executive would have no right to receive compensation or other benefits for any
period after termination. In the event the executive's employment is terminated
for reasons other than for cause, for retirement or for disability or following
a change in control the executive would be entitled to a lump sum payment
equivalent to the greater of: the payments due for the remaining term of the
employment agreement, or three times the sum of (i) the highest annual rate of
base salary and (ii) the greater of (x) the average cash bonus paid over the
last three years or (y) the cash bonus paid in the last year, as well as the
continuation of life, medical, dental and disability insurance coverage for
three years. The executive may resign from employment as a result of (i) a
material change in the nature or scope of the executive's function, duties or
responsibilities, (ii) a material reduction in benefits and perquisites,
including base salary, from those being provided as of the effective date of the
employment agreement, (iii) a relocation where the executive is required to
perform services at a location more than 25 miles from The Provident Bank's
principal executive offices, (iv) a failure to elect or reelect or to appoint or
reappoint executive to certain position(s) at Provident Financial Services, Inc.
or The Provident Bank, or to nominate or elect the Executive to the Board(s) of
Directors of Provident Financial Services, Inc. or The Provident Bank, (v) a
liquidation or dissolution of The Provident Bank or Provident Financial
Services, Inc., or (vi) a material breach of the employment agreement by The
Provident Bank or Provident Financial Services, Inc. as of the effective date of
the employment agreement and be entitled to the severance benefits described
above. The agreement generally provides that following a change in control (as
defined in the agreement), the executive will receive the severance payments and
insurance benefits described
126
above if he resigns during the one-year period following the change in control
or if he is terminated during the remaining term of the employment agreement
following the change in control. Messrs. Pantozzi, Ward and Shell would receive
an aggregate of $2,805,024, $1,109,250 and $992,250, respectively, pursuant to
their employment agreements upon a change in control of Provident Financial
Services, Inc., based upon current levels of compensation.
Under each employment agreement, if an executive becomes disabled or
incapacitated to the extent that the executive is unable to perform his duties,
he will be entitled to 75% of his base salary and all comparable insurance
benefits until the earlier of: (i) return to full-time employment; (ii)
employment by another employer; (iii) age 65; or (iv) death. Upon retirement at
age 65 or in accordance with any retirement policy established with his consent,
the executive is entitled to benefits under such retirement policy and other
plans to which he is a party but shall not be entitled to any benefit payments
specifically as a result of the employment agreement.
Change in Control Agreements
Provident Financial Services, Inc. will enter into change in control
agreements with six other officers including Messrs. Kuntz, French and Haagensen
and Ms. Niro, which provide certain benefits in the event of a change in control
of The Provident Bank or Provident Financial Services, Inc. Each of the change
in control agreements provides for a term of 24 months. Commencing on each
anniversary date, the Board of Directors may extend any change in control
agreement for an additional year. The change in control agreements enable
Provident Financial Services, Inc. to offer to designated officers certain
protections against termination without cause in the event of a "change in
control." For these purposes, a "change in control" is defined generally to
mean: (i) approval by shareholders of a plan of reorganization, merger or
consolidation of The Provident Bank or Provident Financial Services, Inc. where
The Provident Bank or Provident Financial Services, Inc. is not the surviving
entity; (ii) changes to the Board of Directors of The Provident Bank or
Provident Financial Services, Inc. whereby individuals who constitute the
current Board cease to constitute a majority of the Board, subject to certain
exceptions; (iii) the acquisition of all or substantially all of the assets of
Provident Financial Services, Inc. or the beneficial ownership of 20% or more of
the voting securities of Provident Financial Services, Inc.; or (iv) a complete
liquidation or dissolution of Provident Financial Services, Inc. or The
Provident Bank or approval by the shareholders of Provident Financial Services,
Inc. of a plan for such dissolution or liquidation. These protections against
termination without cause in the event of a change in control are frequently
offered by other financial institutions, and Provident Financial Services, Inc.
may be at a competitive disadvantage in attracting and retaining key employees
if it does not offer similar protections. Although the change in control
agreements may have the effect of making a takeover more expensive to an
acquiror, we believe that the benefits of enhancing our ability to attract and
retain qualified management persons by offering the change in control agreements
outweighs any disadvantage of such agreements.
Following a change in control of Provident Financial Services, Inc. or The
Provident Bank, an officer is entitled to a payment under the change in control
agreement if the officer's employment is terminated during the term of such
agreement by Provident Financial Services, Inc. or The Provident Bank, other
than for cause, disability or retirement, as defined, or if the officer
terminates employment during the term of such agreement for good reason. Good
reason
127
is generally defined to include the assignment of duties materially inconsistent
with the officer's positions, duties or responsibilities as in effect prior to
the change in control, a reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from its
location immediately prior to the change in control, or a failure of Provident
Financial Services, Inc. to obtain an assumption of the agreement by its
successor. In the event that an officer who is a party to a change in control
agreement is entitled to receive severance payments pursuant to the agreement,
he will receive a cash payment equal to three times the highest level of
aggregate annualized base salary and other cash compensation paid to the officer
during the calendar year in which he was terminated or either of the immediately
preceding two calendar years. In addition to the severance payment, each covered
officer is generally entitled to receive life, health, dental and disability
coverage for the remaining term of the agreement. Notwithstanding any provision
to the contrary in the change in control agreement, payments under the change in
control agreements are limited so that they will not constitute an excess
parachute payment under Section 280G of the Internal Revenue Code.
Benefit Plans
Employee Savings Incentive Plan. The Provident Bank maintains The Provident
Bank Employee Savings Incentive Plan, a tax-qualified defined contribution plan
generally covering employees who have worked at The Provident Bank for one year
in which they have 1,000 or more hours of service. Participants may contribute
up to 5% of their compensation to the Savings Incentive Plan on an after-tax
basis. For this purpose, compensation includes wages, salaries, commissions of
dedicated salespeople and overtime. Participants are immediately vested in their
personal contributions. The Provident Bank currently will match 115% of the
total amount contributed by the participants. The Provident Bank may from time
to time amend the Savings Incentive Plan to provide for a different matching
contribution. Participants become vested in the employer matching contributions
as follows: 33% at the end of the first calendar year following the end of the
first year of plan participation, 66% at the end of the second calendar year
following the end of the first year of plan participation and 100% at the end of
the third calendar year following the end of the first year of plan
participation. In addition, participants' accounts generally become fully vested
in the matching contributions in the event of termination of employment due to
retirement, disability or death.
The Savings Incentive Plan permits participants to direct the investment of
their accounts into various investment options set forth under the plan. In
connection with the stock offering, the Savings Incentive Plan intends to offer
participants the opportunity to invest in an "Employer Stock Fund" which intends
to purchase stock of Provident Financial Services, Inc. in the stock offering,
and after the stock offering, in the open market. Each participant who directs
the trustee to invest all or part of his account in the Employer Stock Fund will
have assets in his account applied to the purchase of shares of Provident
Financial Services, Inc.
Upon termination of employment due to retirement at age 65 or older, a
participant is eligible to receive the vested value of his account either in a
single sum payment or in approximately equal annual installments, for a period
not to exceed 10 years or the participant's estimated life expectancy. For a
participant who terminates employment for reasons other than retirement at age
65 or older, the form of distribution of his vested account generally will be in
128
the form of a single sum payment. In the event of the participant's death, the
value of the plan account will be paid to the participant's beneficiary in a
single cash payment.
Pension Plan. The Provident Bank maintains The Provident Bank Pension Plan,
a tax-qualified plan generally covering employees age 21 or older who have
worked at The Provident Bank for one year in which they have accrued 1,000 or
more hours of service. Pension Plan participants generally become entitled to
retirement benefits upon the later of attainment of age 65 or the fifth
anniversary of participation in the plan, which is referred to as the normal
retirement date. The normal retirement benefit is equal to 1.35% of the
participant's average final compensation up to the Average Social Security Level
plus 2% of the participant's average final compensation in excess of the Average
Social Security Level multiplied by the participant's years of credited service
to a maximum of 30 years.
Participants who have completed at least 5 years of vested service
generally become 100% vested in their accrued retirement benefits. Vested
retirement benefits generally will be paid beginning on the participant's normal
retirement date.
A participant may elect to retire prior to age 65 and receive early
retirement benefits if retirement occurs after completion of at least 5
consecutive years of vested service and attainment of age 55. If such an early
retirement is made, retirement benefits will begin on the first day of any month
during the 10 year period preceding his normal retirement date, as directed by
the retiring participant. If a participant elects to retire prior to both
attaining age 65 and completing 25 years of credited service his accrued pension
benefit will be reduced 3% per year for the first five years prior to age 65 and
5% thereafter to age 55. If a participant elects to retire early after both
attaining age 60 and completing 25 years of credited service his accrued pension
benefit will be unreduced. Any participant who terminated employment prior to
January 1, 2002 will receive an early pension benefit equal to the actuarial
equivalent of the annual amount of the normal pension that would otherwise have
been payable to the participant had he not elected to receive an early pension.
If the termination of service occurs after the normal retirement date, the
participant's benefits will begin on the participant's postponed retirement
date.
The standard form of benefit payment for a married participant is a 50%
joint and survivor benefit that is reduced actuarially and the standard form of
benefit payment for a non-married participant is a straight life benefit. A
non-married participant or a participant who has complied with the spousal
consent requirements may elect to receive payment of his benefits in the
following optional forms: (a) straight life benefit; (b) 100% joint and survivor
benefit; (c) 50% joint and survivor benefit; or (d) period certain and life
benefit.
In the event a married participant who is vested in the Pension Plan dies
prior to his termination of service, his spouse will be entitled to one-half of
the amount payable to the participant had the participant elected to retire the
day before his death with the 50% joint and survivor benefit, assuming the
participant died after age 55. If the participant dies prior to age 55, the
retirement benefits payable to the participant's spouse will commence at the
time the participant would have been age 55.
129
In the event a non-married participant dies before his termination of
service after both attaining age 55 and completing 20 years of service, his
beneficiary will be entitled to one-half of the amount payable to the
participant assuming the participant retired on the first day of the month
following his death, and assuming that the beneficiary had been his spouse with
a 50% joint and survivor benefit and that the beneficiary had been born on the
same day as the participant. Payments made to beneficiaries of non-married
participants cease upon the earlier of the beneficiary's death or the receipt of
the 120th monthly payment.
If the total value of a pension payable directly to a participant or to any
other beneficiary under the Pension Plan is less than $5,000, as determined by
the Pension Plan's actuary, payment of such value shall automatically be made in
a single sum in lieu of such pension.
The following table indicates the annual retirement benefit that would be
payable under the Pension Plan and the Supplemental Executive Retirement Plan
upon retirement at or after a participant's normal retirement date in calendar
year 2002, considering the average annual earnings and credited service
classifications specified below.
Average Final Earnings 15 years 20 years 25 years 30 years 35 years(1)
- ------------------------------ ----------- ----------- ----------- ----------- ------------
$125,000...................... $ 33,654.15 $ 44,872.20 $ 56,090.25 $ 67,308.30 $ 67,308.30
150,000...................... 41,154.15 54,872.20 68,590.25 82,308.30 82,308.30
175,000...................... 48,654.15 64,872.20 81,090.25 97,308.30 97,308.30
200,000...................... 56,154.15 74,872.20 93,590.25 112,308.30 112,308.30
225,000...................... 63,654.15 84,872.20 106,090.25 127,308.30 127,308.30
250,000...................... 71,154.15 94,872.20 118,590.25 142,308.30 142,308.30
300,000...................... 86,154.15 114,872.20 143,590.25 172,308.30 172,308.30
400,000...................... 116,154.15 154,872.20 193,590.25 232,308.30 232,308.30
450,000...................... 131,154.15 174,872.20 218,590.25 262,308.30 262,308.30
500,000...................... 146,154.15 194,872.20 243,590.25 292,308.30 292,308.30
600,000...................... 176,154.15 234,872.20 293,590.25 352,308.30 352,308.30
- ----------
(1) The Pension Plan and the Supplemental Executive Retirement Plan do not
count service in excess of 30 years in the benefit formula.
Average final earnings is the average base salary, as reported in the
"Salary" column of the Summary Compensation Table, for the highest five
consecutive years during the final 10 years of employment. Tax laws impose a
limit ($200,000 for individuals retiring in 2002) on average final earnings that
may be counted in computing benefits under the Pension Plan and on the annual
benefits ($160,000 in 2002). The Pension Plan may also pay benefits accrued as
of January 1, 1994 based on tax law limits then in effect. For Messrs. Pantozzi,
Ward, Shell, and Haagensen, benefits based on average final earnings in excess
of this limit are payable under the Supplemental Executive Retirement Plan.
The benefits shown in the preceding table are annual benefits payable in
the form of a single life annuity and are not subject to any deduction for
Social Security benefits or other offset amounts. As of June 30, 2002, Mr.
Pantozzi had 39 years of service; Mr. Ward had 30 years of service; Mr. Shell
had 8 years of service; Mr. French had 1 year of service; and Mr. Haagensen had
22 years of service.
130
Supplemental Executive Retirement Plan. In January 1990, The Provident Bank
established the Supplemental Executive Retirement Plan, a non-qualified
retirement plan. Participation in the SERP is limited to executive management or
highly compensated employees as designated by the Board of Directors and
currently consists of Messrs. Pantozzi, Ward, Shell and Haagensen. The SERP pays
to each participant an amount equal to the amount which would have been payable
under the terms of the Pension Plan but for the limitations under Sections
401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended, less the
amount payable under the terms of the Pension Plan. Such amounts will be paid on
a monthly basis beginning within 90 days following termination of employment,
but in no event before age 60, in the form of a qualified joint and 100%
survivor annuity for married participants and a single life annuity for
non-married participants. The plan has been amended to provide that in the event
of a change in control (as defined in the plan), the undistributed balance of an
employee's accrued benefit will be paid to him within 60 days of the change in
control. For the year ended December 31, 2001, The Provident Bank expensed
$154,644, $36,845, $18,737 and $7,213 relating to the SERP on behalf of Messrs.
Pantozzi, Ward, Shell and Haagensen, respectively.
Supplemental Executive Savings Plan. In January 1990, The Provident Bank
established the Supplemental Executive Savings Plan, a non-qualified plan that
provides additional benefits to certain participants whose benefits under the
Employee Savings Incentive Plan are limited by tax law limitations applicable to
tax-qualified plans. Participation in the Executive Savings Plan is limited to
executive management or highly compensated employees as designated by the Board
of Directors and currently consists of Messrs. Pantozzi, Ward, Shell and
Haagensen. The Executive Savings Plan contributes for each participant an amount
equal to the amount which would have been contributed under the terms of the
Savings Incentive Plan but for the limitations under Section 401(a)(17), 401(m)
and 415 of the Code, less the amount actually contributed under the Savings
Incentive Plan. For employees who are employed by The Provident Bank on or after
January 1, 1998, The Provident Bank established an investment fund to provide
for payments due under this plan and allows participants to choose, with the
plan administrator's consent, from a variety of investment options. Any benefits
payable under the Executive Savings Plan attributable to The Provident Bank's
contributions and the earnings on these contributions shall be vested under the
terms and conditions of the Savings Incentive Plan. If there is a change in
control, as defined in the Executive Savings Plan, the unpaid balance of the
account shall become 100% vested and will be distributed within 60 days thereof.
As of December 31, 2001, The Provident Bank expensed $23,100, $5,950, $3,850 and
$1,050 relating to the Executive Savings Plan on behalf of Messrs. Pantozzi,
Ward, Shell and Haagensen, respectively. In connection with the stock offering
and adoption of the ESOP, the Supplemental Executive Savings Plan has been
amended to include a feature that would require a contribution for each
participant who also participates in the ESOP equal to the amount which would
have been contributed under the terms of the ESOP but for the limitations under
Section 401(a)(17) and 415 of the Code, less the amount actually contributed
under the ESOP. The benefit payable under this portion of the Supplemental
Executive Savings Plan may be calculated as if the contribution was applied to
the repayment of a loan obtained to purchase shares in the stock offering, in
substantially the same manner as under the ESOP. The amendment also requires the
distribution of shares equal to the value of a participants' account balance
attributable to the ESOP component of the plan at the same time and in the same
manner as the participant receives a distribution from the ESOP. In the event of
a change in control (as defined in the amendment),
131
the amendment requires that the undistributed balance of a participant's account
be paid to him or her within 60 days.
Voluntary Bonus Deferral Plan for the Chairman. The Provident Bank
maintains the Voluntary Bonus Deferral Plan for Mr. Pantozzi, a non-qualified
plan which provides for the deferral of his bonus payments. Mr. Pantozzi may
defer one-quarter, one-half or all of his bonus award for a period of five years
or until the attainment of age 65. The Bank established an investment fund to
provide for the payment of the deferred bonus awards due under this plan and
allows Mr. Pantozzi to choose, with the plan administrator's consent, from a
variety of investment options. Mr. Pantozzi will receive a lump sum payment upon
a change in control, as defined in the plan, and is eligible to apply for a
hardship distribution of some or all of his separate account, in the event of a
financial hardship. Mr. Pantozzi has never deferred any bonus payments pursuant
to this plan.
Voluntary Bonus Deferral Plan. The Provident Bank maintains the Voluntary
Bonus Deferral Plan, a non-qualified plan which provides for the deferral of
some or all of any bonus payments awarded under our management incentive bonus
program. An eligible employee may defer either one-half or all of a bonus award
for a period of 5 years or 10 years, or until the attainment of age 60 or 65,
but in no event may any amount be deferred beyond the year in which such
employee attains age 65. Deferred bonus awards are invested by The Provident
Bank board, in its sole discretion, in a portfolio of assets consisting of any
combination of obligations of the United States with maturities not exceeding
five years in duration. An eligible employee will receive a lump sum payment
upon a change in control, as defined in this plan, and is eligible to apply for
a hardship distribution of some or all of his separate accounts. As of June 30,
2002, The Provident Bank had accounts totaling $303,741 on behalf of eight
participants in this plan.
Employee Stock Ownership Plan and Trust. The Provident Bank intends to
implement an employee stock ownership plan in connection with the conversion and
offering. We intend that this plan will be a tax-qualified plan generally
covering employees who are at least 21 years old, who have at least one year of
employment with The Provident Bank or a designated affiliated corporation and
who have completed at least 1,000 hours of service. As part of the conversion
and offering, the employee stock ownership plan intends to borrow funds from
Provident Financial Services, Inc. and use those funds to purchase a number of
shares equal to up to 8% of the common stock sold in the stock offering.
Collateral for the loan will be the common stock purchased by the employee stock
ownership plan. The loan will be repaid principally from a participating
employers' discretionary contributions to the employee stock ownership plan over
a period of up to 30 years. The loan documents will provide that the loan may be
repaid over a shorter period, without penalty. It is anticipated that the
interest rate for the loan will be a floating-rate equal to the prime rate.
Shares purchased by the employee stock ownership plan will be held in a suspense
account for allocation among participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released from
the suspense account in an amount proportional to the repayment of the employee
stock ownership plan loan will be allocated among employee stock ownership plan
participants on the basis of compensation in the year of allocation. Benefits
under the plan will not vest at all in the first five
132
years of credited service but will vest entirely upon completion of five years
of credited service. In general, the employee stock ownership plan will credit
participants with up to five years of service for employment prior to adoption
of a plan. A participant's interest in his account under the plan will also
fully vest in the event of a termination of service due to a participant's early
or normal retirement, death, disability, or upon a change in control (as defined
in the plan). Vested benefits will be payable in the form of common stock and/or
cash. Contributions to the employee stock ownership plan are discretionary,
subject to the loan terms and tax law limits. Therefore, benefits payable under
the employee stock ownership plan cannot be estimated. Under generally accepted
accounting principles, a participating employer will be required to record
compensation expense each year in an amount equal to the fair market value of
the shares released from the suspense account. In the event of a change in
control, the employee stock ownership plan will terminate and participants will
become fully vested in their account balances.
Future Stock Benefit Plans
Stock Option Plan. We intend to adopt a stock option plan for our
directors, officers and employees after the conversion and offering, subject to
shareholder approval. Federal regulations prohibit us from implementing this
plan until six months after the conversion and offering.
Provident Financial Services, Inc. expects that the stock option plan will
authorize a committee of non-employee directors or the full Board of Directors,
to grant options to purchase up to 10% of the shares sold in the conversion. The
stock option plan will have a term of 10 years. The committee will decide which
directors, officers and employees will receive options and the terms of those
options. Generally, no stock option will permit its recipient to purchase shares
at a price that is less than the fair market value of a share on the date the
option is granted, and no option will have a term that is longer than 10 years.
If we implement a stock option plan before the first anniversary of the
conversion, current regulations will require that:
. the total number of options available for grant to non-employee
directors be limited to 30% of the options authorized under the plan;
. the number of options that may be granted to any one non-employee
director be limited to 5% of the options authorized under the plan;
. the number of options that may be granted to any officer or employee
be limited to 25% of the options authorized for the plan;
. the options may not vest more rapidly than 20% per year, beginning on
the first anniversary of stockholder approval of the plan; and
. accelerated vesting not be permitted except for death, disability or
upon a change in control of The Provident Banks or Provident Financial
Services, Inc.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases.
Recognition and Retention Plan. We expect to implement a recognition and
retention plan for our directors and officers after the conversion and offering.
Federal regulations prohibit
133
us from implementing this plan until six months after the conversion and
offering. If the recognition plan is implemented within the first 12 months
after the conversion and offering, federal regulations require that the plan be
approved by a majority of the outstanding shares of common stock of Provident
Financial Services, Inc.
In the event the recognition and retention plan is implemented within 12
months after the conversion and offering, Provident Financial Services, Inc.
expects that the plan will authorize a committee of non-employee directors or
the full Board of Directors of Provident Financial Services, Inc. to make
restricted stock awards of up to 4% of the shares sold in the offering. In the
event Provident Financial Services, Inc. implements the recognition and
retention plan more than 12 months after the conversion and offering, the
recognition and retention plan will not be subject to regulations limiting the
plan to no more than 4% of the shares sold in the offering. The committee will
decide which directors, officers and employees will receive restricted stock and
the terms of those awards. Provident Financial Services, Inc. may obtain the
shares needed for this plan by issuing additional shares or through stock
repurchases. If we implement a recognition and retention plan before the first
anniversary of the conversion and offering, current regulations will require
that:
. the total number of shares that are awarded to non-employee directors
be limited to 30% of the shares authorized under the plan;
. the number of shares that are awarded to any one non-employee director
be limited to 5% of the shares authorized under the plan;
. the number of shares that are awarded to any officer or employee be
limited to 25% of the shares authorized under the plan;
. the awards may not vest more rapidly than 20% per year, beginning on
the first anniversary of stockholder approval of the plan; and
. accelerated vesting not be permitted except for death, disability or
upon a change in control of The Provident Bank or Provident Financial
Services, Inc.
Restricted stock awards under this plan may feature employment restrictions
that require continued employment for a period of time for the award to be
vested. Awards are not vested unless the specified employment restrictions are
met. However, pending vesting, the award recipient may have voting and dividend
rights. When an award becomes vested, the recipient must include the current
fair market value of the vested shares in his or her income for federal income
tax purposes. Generally, we will be allowed a federal income tax deduction
(subject to limitations discussed below, and subject to certain reporting and
withholding tax requirements) in the same amount and in the same year as the
recipient employee recognizes the taxable income. However, if the stock award
recipient elects under Code Section 83(b) to include in income the fair market
value of the shares at the grant date (e.g. before the recipient vests in the
property), then we will be allowed a federal income tax deduction in the same
amount at the time of the grant and not when the restrictions lapse. Such
deductions would also be subject to the deduction limitations of Code Section
162(m) as described below.
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Limitations on Federal Tax Deductions for Executive Officer Compensation
As a private entity, The Provident Bank has been subject to federal tax
rules, which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the offering, federal tax laws may limit this deduction to
$1.0 million each tax year for each executive officer named in the summary
compensation table in Provident Financial Services, Inc.'s proxy statement for
that year. This limit will not apply to non-taxable compensation under various
broad-based retirement and fringe benefit plans, to compensation that is
"qualified performance-based compensation" under applicable law or to
compensation that is paid in satisfaction of commitments that arose before the
conversion. To the extent that compensation paid to any executive officer is not
deductible, the net after-tax cost of providing the compensation will be higher
and the net after-tax earnings of Provident Financial Services, Inc. will be
reduced.
Transactions With Directors and Executive Officers
The Provident Bank does not originate loans for members of its Board of
Managers. There is one residential mortgage loan outstanding to a current Board
member that was originated prior to his service as a Board member.
The Provident Bank adheres to relevant federal and state law for loans it
makes to its executive officers. See "Regulation--Loans to a Bank's Insiders."
As of June 30, 2002, The Provident Bank had loans and loan commitments totaling
$811,283 to its executive officers.
The Provident Bank retains the law firm of Reed Smith LLP to perform legal
services from time to time. Director Connor is a partner at Reed Smith LLP.
THE CONVERSION AND OFFERING
- --------------------------------------------------------------------------------
The Commissioner of Banking and Insurance of the STate of New Jersey has
approved the plan of conversion, subject to approval by The Provident Bank's
depositors entitled to vote on the plan and the satisfaction of ceRtain other
conditions.
Approval by the Commissioner does not constitute a recommendation or
endorsement of the plan of conversion by the Commissioner.
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General
Our Board of Managers has unanimously adopted the plan of conversion, as
amended, pursuant to which The Provident Bank will convert from a mutual savings
bank to a capital stock savings bank. The plan of conversion includes the
formation of Provident Financial Services, Inc. as the holding company for The
Provident Bank. Following completion of the conversion, Provident Financial
Services, Inc. will own 100% of the capital stock of The Provident Bank.
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Provident Financial Services, Inc. has received approval from the Federal
Reserve Bank of New York to acquire The Provident Bank and thereby become a bank
holding company. The plan of conversion was approved by the Commissioner, and
The Provident Bank has received a notice of intent not to object to the plan of
conversion from the FDIC, subject to, among other things, approval of the plan
of conversion by The Provident Bank's depositors.
The Provident Bank has called a special meeting of depositors for this
purpose, which will be held on January 7, 2003. Depositors with deposit accounts
totaling at least $100 at The Provident Bank on November 11, 2002 will be
entitled to vote at the special meeting. The plan of conversion must be approved
by a majority of the votes entitled to be cast at the special meeting. We will
complete the conversion only upon completion of the sale of the minimum number
of shares of common stock offered in this prospectus and approval of the plan of
conversion by the voting depositors.
The aggregate price of the shares of common stock to be issued in the
conversion will be between $383,180,000 and $518,420,000, which is based upon an
independent appraisal of the estimated pro forma market value of the common
stock of Provident Financial Services, Inc. The appraisal was prepared by RP
Financial, LC., a consulting firm experienced in the valuation and appraisal of
savings institutions. All shares of common stock to be issued and sold in the
conversion will be sold at the same price ($10.00) per share. The independent
appraisal will be affirmed or, if necessary, updated at the completion of the
offering. See "--How We Determined Stock Pricing and the Number of Shares to be
Issued" for additional information as to the determination of the estimated pro
forma market value of the common stock.
Reasons for the Conversion
In adopting the plan of conversion, our Board of Managers determined that
the conversion was advisable and in the best interests of The Provident Bank,
its depositors and the communities in which we operate.
Our new structure will permit Provident Financial Services, Inc. to issue
capital stock, which is a source of capital not available to a mutual savings
bank, and we will take advantage of this new ability by issuing common stock in
the offering.
The conversion will also give us greater flexibility to structure and
finance the expansion of our operations, including the potential acquisition of
other financial institutions, and to diversify into other financial services.
The holding company form of organization is expected to provide additional
flexibility to diversify our business activities through existing or newly
formed subsidiaries, or through acquisitions of or mergers with other financial
institutions, as well as other companies. Although we have no current
arrangements or understandings regarding any such opportunities, Provident
Financial Services, Inc. should be in a position after the conversion, subject
to regulatory limitations and Provident Financial Services, Inc.'s financial
position, to take advantage of any such opportunities that may arise.
The capital being raised in the conversion will also provide additional
resources to enable us to further develop and enhance our technology and
delivery channels.
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Finally, the conversion will enable us to better manage our capital by
giving us broader investment opportunities through the holding company
structure, and enable us to distribute capital to stockholders of Provident
Financial Services, Inc. in the form of dividends and stock repurchases.
Effects of the Conversion
General. Each depositor in a mutual savings bank has both a deposit account
in the institution and a pro rata ownership interest in the equity of the
savings institution based upon the balance in the depositor's account. This
interest may only be realized in the event of a liquidation of the savings
institution. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the equity of the institution without any additional payment beyond the amount
of the deposit. A depositor who reduces or closes such depositor's account
receives the balance in the account but receives nothing for such depositor's
ownership interest in the equity of the institution, which is lost to the extent
that the balance in the account is reduced. Consequently, depositors of a mutual
savings bank have no way to realize the value of their ownership interest,
except in the unlikely event that the mutual savings bank is liquidated. In such
event, the depositors of record at that time would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. Capital stock is
separate and apart from deposit accounts and cannot be and is not insured by the
FDIC or any other governmental agency. Certificates are issued to evidence
ownership of the capital stock sold in connection with the conversion. The stock
certificates are transferable, and, therefore, the stock may be sold or traded
with no effect on any deposit account the seller or trader may hold in the
institution.
Continuity. While the conversion is being accomplished, and after
completion of the conversion, the routine business of The Provident Bank of
accepting deposits and making loans will continue without interruption. The
Provident Bank will continue to be subject to regulation by the Commissioner and
the FDIC. After the conversion, The Provident Bank will continue to provide
services for depositors and borrowers under current policies by its management
and staff.
The Board of Managers serving The Provident Bank immediately before the
conversion will serve as directors of The Provident Bank after the conversion.
The directors of Provident Financial Services, Inc. will consist of those
individuals currently serving on the Board of Managers of The Provident Bank. We
anticipate that all officers of The Provident Bank serving immediately before
the conversion will retain their positions after the conversion. See
"Management."
Deposit Accounts and Loans. Under the plan of conversion, each depositor in
The Provident Bank at the time of the conversion will automatically continue as
a depositor after the
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conversion. Each deposit account will remain the same with respect to deposit
balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase common stock in the offering. See "--Procedure for
Purchasing Shares." Each deposit account will be insured by the FDIC to the same
extent as before the conversion. Depositors will continue to hold their existing
certificates of deposit, passbooks and other evidences of their accounts.
Furthermore, 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 they were contractually fixed prior to the conversion.
Voting Rights of Depositors. Voting rights and control of The Provident
Bank, as a mutual savings bank, are vested in the Board of Managers. After the
conversion, direction of The Provident Bank will be under the control of the
Board of Directors of The Provident Bank. Provident Financial Services, Inc., as
the holder of all of the outstanding common stock of The Provident Bank, will
have exclusive voting rights with respect to any matters concerning The
Provident Bank requiring stockholder approval, including the election of
directors of The Provident Bank.
After the conversion, the holders of the common stock of Provident
Financial Services, Inc. will have exclusive voting rights with respect to any
matters concerning Provident Financial Services, Inc. These voting rights will
be exclusive except to the extent Provident Financial Services, Inc. in the
future issues preferred stock with voting rights. Each holder of common stock
will be entitled to vote on any matters to be considered by Provident Financial
Services, Inc.'s stockholders, including the election of directors of Provident
Financial Services, Inc., subject to the restrictions and limitations set forth
in Provident Financial Services, Inc.'s certificate of incorporation discussed
below in "Restrictions on Acquisitions of Provident Financial Services, Inc -
Provident Financial Services Inc.'s Charter and Bylaws."
Liquidation Account. In the unlikely event of a complete liquidation of The
Provident Bank in its current mutual form, each depositor would receive a pro
rata share of any assets of The Provident Bank remaining after payment of claims
of all creditors (including the claims of all depositors to the withdrawable
value of their accounts). Each depositor's pro rata share of such liquidating
distribution would be in the same proportion as the value of such depositor's
deposit account was to the total value of all deposit accounts in The Provident
Bank at the time of liquidation.
Upon a complete liquidation of The Provident Bank after the conversion,
each depositor would have a claim as a creditor of the same general priority as
the claims of all other general creditors of The Provident Bank. However, except
as described below, a depositor's claim would be solely for the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of The Provident
Bank above that amount. Instead, the holder of The Provident Bank's common stock
(i.e., Provident Financial Services, Inc.) would be entitled to any assets
remaining upon a liquidation of The Provident Bank.
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The plan of conversion provides for the establishment, upon the completion
of the conversion, of a "liquidation account" for the benefit of eligible
account holders and supplemental eligible account holders in an amount equal to
the surplus and reserves of The Provident Bank as of the date of its latest
balance sheet contained in this prospectus. Upon a complete liquidation of The
Provident Bank after the conversion, each eligible account holder and
supplemental eligible account holder who continues to maintain such account
holder's deposit account at The Provident Bank would be entitled to an interest
in the liquidation account prior to any payment to the holders of The Provident
Bank's capital stock. Each eligible account holder and supplemental eligible
account holder would have a pro rata interest in the total liquidation account
for the account holder's deposit accounts based on the proportion that the
aggregate balance of such person's qualifying deposit accounts on March 31, 2002
(the eligibility record date) and September 30, 2002 (the supplemental
eligibility record date), as applicable, bears to the aggregate balance of all
qualifying deposit accounts of all eligible account holders and supplemental
eligible account holders. For this purpose, qualifying deposit accounts include
all savings, time, demand, interest bearing demand, money market and passbook
accounts maintained at The Provident Bank (excluding any escrow accounts). The
liquidation account will be an off-balance sheet memorandum account that will
not be reflected in the published financial statements of Provident Financial
Services, Inc. or The Provident Bank.
If, however, on any annual closing date (i.e., the end of any period for
which The Provident Bank has prepared audited financial statements subsequent to
the eligibility record date or supplemental eligibility record date, as
applicable) of The Provident Bank, commencing on or after the effective date of
the conversion, the amount in any deposit account is less than the amount in
such deposit account on March 31, 2002 (with respect to an eligible account
holder), or September 30, 2002 (with respect to a supplemental eligible account
holder), or any other annual closing date, then the interest in the liquidation
account relating to the 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. For purposes of the liquidation account, time
deposit accounts will be deemed to be closed upon maturity regardless of
renewal. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account.
Any assets remaining after the above liquidation rights of eligible account
holders and supplemental eligible account holders are satisfied would be
distributed to Provident Financial Services, Inc. as the sole stockholder of The
Provident Bank.
We have no plans to liquidate.
Federal and State Tax Consequences of the Conversion
Consummation of the conversion is conditioned on our prior receipt of (i)
either an IRS ruling or an opinion of counsel with respect to the federal income
tax consequences of the conversion, and (ii) either a ruling from the State of
New Jersey taxing authorities or an opinion of counsel or tax advisor with
respect to the New Jersey tax consequences of the conversion. Unlike private
letter rulings, opinions of counsel are not binding on the IRS or the State of
New Jersey taxing authorities, and either could disagree with such opinions. In
the event of such
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disagreement, there can be no assurance that The Provident Bank or the
depositors would prevail in a judicial proceeding.
Federal Tax Opinion. We intend to proceed with the conversion on the basis
of an opinion from our special counsel, Luse Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to federal tax matters that are material to the conversion.
The opinion is based, in part, on factual representations made by us. With
regard to the conversion, Luse Gorman Pomerenk & Schick, P.C. has opined as
follows:
1. No gain or loss will be recognized by The Provident Bank in its mutual
or stock form by reason of the conversion;
2. No gain or loss will be recognized by The Provident Bank or Provident
Financial Services, Inc. on the receipt by The Provident Bank of money from
Provident Financial Services, Inc. in exchange for shares of The Provident
Bank's capital stock or by Provident Financial Services, Inc. upon the
receipt of money from the sale of its common stock;
3. The basis of the assets of The Provident Bank in the stock form will be
the same as immediately prior to the conversion;
4. The holding period of the assets of The Provident Bank in the stock form
will include the holding period of The Provident Bank in the mutual form;
5. No gain or loss will be recognized by The Provident Bank's account
holders upon the issuance to them of accounts in The Provident Bank
immediately after the conversion, in the same dollar amounts and on the
same terms and conditions as their accounts at The Provident Bank in its
mutual form, plus an interest in the liquidation account in exchange for
their deemed ownership interests in The Provident Bank prior to the
conversion;
6. It is more likely than not that the fair market value of the
nontransferable subscription rights to purchase common stock of Provident
Financial Services, Inc. is zero. Accordingly, no gain or loss will be
recognized by eligible account holders and supplemental eligible account
holders upon the receipt of nontransferable subscription rights in the
conversion, and no taxable income will be realized upon the exercise by
them of the nontransferable subscription rights;
7. The tax basis of account holders' accounts in The Provident Bank
immediately after the conversion will be the same as the tax basis of their
accounts immediately before conversion;
8. The tax basis of each account holder's interest in the liquidation
account will be zero; and
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9. It is more likely than not that the tax basis of the common stock
purchased in the conversion will be the amount paid for such stock. The
holding period for the stock purchased pursuant to subscription rights will
begin on the date of purchase.
The tax opinion as to (6) and (9) above is based on the position that
subscription rights to be received by eligible account holders and supplemental
eligible account holders do not have any economic value at the time of
distribution or at the time the subscription rights are exercised. According to
our counsel, the Internal Revenue Service has not in the past concluded that
nontransferable subscription rights in a mutual to stock conversion have value.
However, since 1993 the Internal Revenue Service has specifically declined to
issue rulings on whether nontransferable subscription rights have value. Counsel
stated that they are unaware of any instance subsequent to 1993 in which the
Internal Revenue Service has taken the position that nontransferable
subscription rights issued by a converting financial institution have value.
Counsel also noted 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 common stock at
the same price to be paid by members of the general public in any community
offering. Based on the foregoing, Luse Gorman Pomerenk & Schick, P.C. believes
that it is more likely than not (more than a 50% likelihood) that the
nontransferable subscription rights to purchase common stock have no value for
tax purposes. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights would be taxable
probably only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and we could recognize gain on such distribution.
The opinions of Luse Gorman Pomerenk & Schick, P.C., unlike a letter ruling
issued by the Internal Revenue Service, are 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, 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.
State Tax Opinion. KPMG LLP, in rendering its New Jersey opinion, based on
the express instructions from us, relied on the opinion (Federal Opinion) of
Luse Gorman Pomerenk & Schick, P.C., dated October 31, 2002, for all matters
regarding federal income taxes. In addition, KPMG LLP relied on the
representations made by us to Luse Gorman Pomerenk & Schick, P.C. With regard to
the conversion, KPMG LLP has opined as follows:
New Jersey Corporate Business Tax. Assuming that the federal income tax
consequences of the proposed transaction as set forth in the Federal Opinion are
the consequences of the proposed transaction, then for New Jersey Corporate
Business Tax (CBT) purposes:
1. The conversion should be treated as a reorganization, and The Provident
Bank in its mutual or stock form should not recognize any gain or loss for
New Jersey CBT purposes;
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2. No gain or loss should be recognized for New Jersey CBT purposes by The
Provident Bank on the receipt of money from Provident Financial Services,
Inc. in exchange for its shares or by Provident Financial Services, Inc.
upon the receipt of money from the sale of its common stock;
3. The assets of The Provident Bank in its stock form will have the same
basis as they had immediately prior to the conversion;
4. The holding period of The Provident Bank's assets, in its stock form,
will include the period during which the assets were held by The Provident
Bank in its mutual form;
5. The Provident Bank, in its stock form, will be treated as if there had
been no reorganization. Accordingly, the taxable year of The Provident Bank
will not end on the effective date of the conversion merely because of the
transfer of assets of The Provident Bank, in its mutual form, to The
Provident Bank in its stock form, and the tax attributes of The Provident
Bank in its mutual form will be taken into account by The Provident Bank in
its stock form, as if there had been no reorganization;
6. The part of the taxable year of The Provident Bank before the
reorganization and the part of the taxable year of The Provident Bank after
the reorganization should constitute a single taxable year of The Provident
Bank in its stock form. Consequently, The Provident Bank will not be
required to file a New Jersey CBT return for any portion of such taxable
year solely by reason of the conversion; and
7. The tax attributes of The Provident Bank, in its mutual form, enumerated
in Internal Revenue Code Section 381(c) will be taken into account by The
Provident Bank in its stock form, with the exception of net operating
losses (NOLs).
KPMG's use of the term "should" represents their highest level of comfort
(i.e., greater than 70% likelihood of prevailing if challenged) in transactions
where the state tax conformity is dependent on a federal opinion provided by
another entity. KPMG has not expressed any reservations regarding the state tax
aspects of their opinion.
New Jersey Gross Income Tax. Assuming that the federal income tax
consequences of the proposed transaction as set forth in the Federal Opinion are
the consequences of the proposed transaction, then for New Jersey Gross Income
Tax (GIT) purposes:
1. No gain or loss will be recognized by the account holders of The
Provident Bank, in its mutual form, upon the issuance to them of
withdrawable deposit accounts in The Provident Bank, in its stock form, in
the same dollar amount and under the same terms as their deposit accounts
in The Provident Bank, in its mutual form, and no gain or loss will be
recognized by eligible account holders or supplemental eligible account
holders upon receipt by them of an interest in the liquidation account of
The Provident Bank, in its stock form, in exchange for their deemed
ownership interests in The Provident Bank, in its mutual form;
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2. The basis of the account holders' deposit accounts in The Provident
Bank, in its stock form, should be the same as the basis of their deposit
accounts in The Provident Bank, in its mutual form, surrendered in exchange
therefor. In addition, the basis of each eligible account holder's and
supplemental eligible account holder's interests in the liquidation account
of The Provident Bank, in its stock form, will be zero, that being the cost
of such property;
3. It is more likely than not that the fair market value of the
nontransferable subscription rights to purchase Provident Financial
Services, Inc. common stock will be zero. Accordingly, no gain or loss will
be recognized by eligible account holders or supplemental eligible account
holders upon the distribution to them of the nontransferable subscription
rights to purchase Provident Financial Services, Inc. common stock. No
taxable income will be realized by the eligible account holders or
supplemental eligible account holders or other eligible subscribers as a
result of the exercise of the nontransferable subscription rights; and
4. It is more likely than not that the basis of Provident Financial
Services, Inc. common stock to its stockholders will be the purchase price
thereof, increased by the basis, if any, of the subscription rights
exercised. The stockholder's holding period will commence upon the exercise
of the subscription rights.
As to the New Jersey Corporate Business Tax opinions 1 through 7, KPMG LLP
believes that the New Jersey CBT consequences described should prevail (i.e.,
there is a greater than 70% likelihood that those consequences should prevail)
if challenged.
In addition, as to the New Jersey Gross Income Tax opinions 1 through 4,
KPMG LLP believes that the New Jersey GIT consequences described more likely
than not should prevail (i.e., there is a greater than 50% likelihood that those
consequences should prevail) if challenged. Since it is the opinion of Luse
Gorman Pomerenk & Schick, P.C., that for federal income tax purposes, it is
"more likely than not" (i.e., there is a greater than 50% likelihood that those
consequences should prevail) that the nontransferable subscription rights to
purchase common stock have no value, these opinions of KPMG LLP, in its reliance
on the federal opinion, are limited to that same level of comfort in its
conclusion. If the fair market value of the nontransferable subscription rights
to purchase Provident Financial Services, Inc. common stock is deemed to have an
ascertainable value, the depositors would recognize New Jersey taxable income
equal to the amount of such value recognized for Federal income tax purposes.
The opinions of KPMG LLP, unlike a letter ruling issued by the State of New
Jersey, are not binding on the State of New Jersey and the conclusions expressed
therein may be challenged at a future date.
Establishment of the Charitable Foundation
General. In furtherance of our commitment to the communities we serve, we
intend to voluntarily establish a charitable foundation in connection with the
conversion. The plan of conversion provides that the foundation will be
established as a non-stock corporation and will be funded with an initial
contribution valued at 6% of the gross proceeds receive in the offering.
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The form of funding shall be 80% common stock and 20% cash, with the maximum
amount of the contribution being $24,000,000. The contribution of common stock
and cash to the foundation will be dilutive to the interests of stockholders and
will have an adverse impact on the reported earnings of Provident Financial
Services, Inc. in 2003, the year in which the foundation is established. The
contribution of the common stock to the foundation will not be included in
determining whether the minimum number of shares of common stock (38,318,000)
has been sold in order to complete the offering.
Purpose of the Foundation. The purpose of the foundation is to provide
funding to support charitable causes and community development activities in the
communities we serve. The foundation is being formed as a complement to our
existing community activities, not as a replacement for such activities. While
we intend to continue to emphasize community lending and development activities
following the conversion, such activities are not our sole corporate purpose.
The foundation, conversely, will be completely dedicated to community activities
and the promotion of charitable causes, and may be able to support such
activities in ways that are not currently available to The Provident Bank.
We believe that the foundation will enable us to assist our local community
in areas beyond community lending and development. We believe the establishment
of a charitable foundation is consistent with our commitment to community
service. The board further believes that the funding of the foundation with
common stock of Provident Financial Services, Inc. is a means of enabling the
communities served by us to share in the growth and success of Provident
Financial Services, Inc. long after completion of the conversion. The foundation
will accomplish that goal by providing for continued ties between the foundation
and The Provident Bank, thereby forming a partnership with our community. The
establishment of the foundation will also enable Provident Financial Services,
Inc. and The Provident Bank to develop a unified charitable donation strategy
and will centralize the responsibility for administration and allocation of
corporate charitable funds. Charitable foundations have been formed by other
financial institutions for this purpose, among others. We do not, however,
expect the contribution to the foundation to take the place of our traditional
community lending activities.
Structure of the Foundation. The foundation will be incorporated under
Delaware law as a non-stock corporation. The foundation's initial Board of
Directors will consist of persons who are directors or officers of The Provident
Bank. Additional directors, including persons who are not affiliated with The
Provident Bank, may be appointed to the foundation's board in the future.
Directors of the foundation who are affiliated with The Provident Bank are not
expected to be paid additional compensation for their service on the
foundation's board. The members of the foundation elect the directors of the
foundation. Only persons serving as directors of the foundation qualify as
members of the foundation, with voting authority. Directors may be divided into
three classes with each class appointed for three-year terms. The certificate of
incorporation of the foundation provides that the corporation is organized
exclusively for charitable purposes, including community development, as set
forth in Section 501(c)(3) of the Code. The foundation's certificate of
incorporation further provides that no part of the net earnings of the
foundation will inure to the benefit of, or be distributable to, its directors,
officers or members.
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The authority for the affairs of the foundation will be vested in the Board
of Directors of the foundation. The directors of the foundation will be
responsible for establishing the policies of the foundation with respect to
grants or donations by the foundation, consistent with the purpose for which the
foundation was established. Although no formal policy governing foundation
grants exists at this time, the foundation's Board of Directors will adopt such
a policy upon establishment of the foundation. As directors of a not-for-profit
corporation, directors of the foundation will at all times be bound by their
fiduciary duty to advance the foundation's charitable goals, to protect the
assets of the foundation and to act in a manner consistent with the charitable
purpose for which the foundation is established. The directors of the foundation
will also be responsible for directing the activities of the foundation,
including the management of the common stock of Provident Financial Services,
Inc. and the cash held by the foundation. The Board of Directors of the
foundation will appoint such officers as may be necessary to manage the
operation of the foundation
The foundation has committed to the FDIC that all shares of common stock
held by the foundation will be voted in the same ratio as all other shares of
Provident Financial Services, Inc.'s common stock on all proposals considered by
stockholders of Provident Financial Services, Inc.
As a private foundation under Section 501(c)(3) of the Code, the foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of common stock by Provident Financial Services,
Inc. is that the amount of common stock that may be sold by the foundation in
any one year shall not exceed 5% of the average market value of the assets held
by the foundation, except where the Board of Directors of the foundation
determines that the failure to sell an amount of common stock greater than such
amount would result in a longer-term reduction of the value of the foundation's
assets and as such would jeopardize the foundation's capacity to carry out its
charitable purposes.
Upon completion of the conversion and the contribution of shares to the
foundation, Provident Financial Services, Inc. would have 40,157,264, 47,000,000
and 53,762,000 shares issued and outstanding at the minimum, midpoint and
maximum of the estimated valuation range. Because Provident Financial Services,
Inc. will have an increased number of shares outstanding, the voting and
ownership interests of purchasers of common stock in the offering will be
diluted by 4.58% and 3.57% at the minimum and maximum of the offering,
respectively, as compared to their interests in Provident Financial Services,
Inc. if the foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data." If the charitable foundation was not
established and funded as part of the conversion, RP Financial estimates that
the pro forma valuation of Provident Financial Services, Inc. would be greater,
and as a result a greater number of shares of common stock would be issued in
the offering. At the minimum, midpoint and maximum of the valuation range, the
pro forma valuation of Provident Financial Services, Inc. is $401.6 million,
$470.0 million and $537.6 million with the foundation, as compared with $412.3
million, $485.0 million and $557.8 million, respectively, without the
foundation. See "Comparison of Valuation and Pro Forma Information With and
Without the Foundation."
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Tax Considerations. We have been advised by our independent tax advisors
that an organization created for the above purposes would qualify as a Section
501(c)(3) exempt organization under the Code, and would be classified as a
private foundation as determined in Section 509 of the Code. The foundation will
submit a timely request to the IRS to be recognized as an exempt organization.
As long as the foundation files its application for recognition of tax-exempt
status within 15 months from the date of its organization, and provided the IRS
approves the application, the effective date of the foundation's status as a
Section 501(c)(3) organization will be the date of its organization. However,
the advice we have received from our tax advisors does not consider the impact
of the condition to be agreed to by the foundation that common stock of
Provident Financial Services, Inc. held by the foundation be voted in the same
ratio as all other shares of Provident Financial Services, Inc.'s common stock
on all proposals considered by stockholders of Provident Financial Services,
Inc. Consistent with this condition, in the event that Provident Financial
Services, Inc. or the foundation receives an opinion of their legal counsel that
compliance with the voting restriction would have the effect of causing the
foundation to lose its tax-exempt status, or otherwise have a material and
adverse tax consequence on the foundation or subject the foundation to an excise
tax under Section 4941 of the Code, the FDIC may waive such voting restriction
upon submission of a legal opinion by Provident Financial Services, Inc. or the
foundation that is satisfactory to them.
The independent tax advisors' opinion further provides that there is
substantial authority for the position that Provident Financial Services, Inc.'s
contribution of its own stock to the foundation would not constitute an act of
self-dealing, and that Provident Financial Services, Inc. would be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution less the nominal par value that the foundation is required to pay
to Provident Financial Services, Inc. for such stock, subject to an annual
limitation based on 10% of Provident Financial Services, Inc.'s annual taxable
income. Provident Financial Services, Inc., however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Provident Financial Services, Inc. estimates that all of the
deduction should be deductible over the six-year period.
Although we have received an opinion of our independent tax advisors that
we will be entitled to the deduction for the charitable contribution, there can
be no assurances that the IRS will recognize the foundation as a Section
501(c)(3) exempt organization or that the deduction will be permitted. In such
event, Provident Financial Services, Inc.'s tax benefit related to the
foundation would have to be fully expensed, resulting in a further reduction in
earnings in the year in which the IRS makes such a determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The foundation will be required to make an
annual filing with the IRS within five and one-half months after the close of
the foundation's fiscal year to maintain its tax-exempt status.
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Regulatory Conditions Imposed on the Foundation. The FDIC imposes numerous
requirements on the establishment and operation of a charitable foundation. As a
result, the foundation will be subject to the following:
(a) the foundation will be subject to examination by the FDIC, at the
charitable foundation's expense, and must comply with supervisory
directives imposed by the FDIC;
(b) as long as the charitable foundation controls shares of Provident
Financial Services, Inc., those shares must be voted in the same ratio
as all other shares are voted on each proposal considered by the
shareholders;
(c) for at least five years after its establishment, at least one seat on
the charitable foundation's Board of Directors must be reserved for an
independent director from the local community;
(d) for at least five years after its establishment, at least one seat on
the charitable foundation's Board of Directors must be reserved for a
director from the Provident Financial Services, Inc.'s or The
Provident Bank's Board of Directors;
(e) the charitable foundation must provide the FDIC with a copy of the
annual report it submits to the IRS;
(f) the charitable foundation must operate according to written policies
adopted by its Board of Directors, including a conflict of interest
policy; and
(g) any additional purchases of Provident Financial Services, Inc. common
stock by the foundation will be counted as repurchases by Provident
Financial Services, Inc. for purposes of FDIC repurchase restrictions.
Additionally, we have entered into the following commitments with the
Federal Reserve Board with respect to the establishment and operation of our
charitable foundation:
(a) the charitable foundation will not acquire additional shares without
notifying the Federal Reserve Board; and
(b) the charitable foundation will be treated as an affiliate for purposes
of Section 23A and 23B of the Federal Reserve Act, which governs
transactions between affiliates of financial institutions.
See also "The Conversion and Offering - Regulatory Conditions Imposed on
the ESOP" for additional commitments with the Federal Reserve Board.
The Stock Offering
Provident Financial Services, Inc. is offering between 38,318,000 and
51,842,000 shares of common stock (subject to adjustment to up to 59,618,300)
pursuant to this prospectus and in accordance with the conversion.
The shares of common stock are being offered for sale at a fixed purchase
price of $10.00 per share in the subscription offering pursuant to subscription
rights in the following order of
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priority to: (i) holders of deposit accounts with a balance of $50.00 or more on
March 31, 2001; (ii) our ESOP; (iii) holders of deposit accounts with a balance
of $50.00 or more on September 30, 2002; and (iv) employees, officers and
directors of The Provident Bank who are not eligible depositors under categories
(i) or (iii). Subject to the prior rights of holders of subscription rights, any
shares of common stock not subscribed for in the subscription offering may be
offered concurrently in the community offering at $10.00 per share to certain
members of the general public, with a preference first given to natural persons
residing in the State of New Jersey. Subscription rights will expire if not
exercised by 3:00 p.m., New Jersey time, on December 16, 2002 unless extended by
The Provident Bank and Provident Financial Services, Inc.
How We Determined Stock Pricing and the Number of Shares to be Issued
The plan of conversion and regulations require that the aggregate purchase
price of the common stock sold in the offering be based on the appraised pro
forma market value of the common stock, as determined on the basis of an
independent valuation. We retained RP Financial, L.C. to make the independent
valuation. No limitations were imposed on the scope of RP Financial's
investigation. RP Financial will receive a fee of $100,000, which amount does
not include a fee of $20,000 to be paid to RP Financial for assistance in the
preparation of a business plan. We have agreed to indemnify RP Financial and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial's liability results from its
negligence or bad faith.
The independent valuation was prepared by RP Financial in reliance upon the
information contained in the prospectus, including the financial statements. RP
Financial utilized the independent appraisal methodology promulgated by the
federal and state banking agencies, particularly regarding the selection of the
peer group. Pursuant to this methodology (1) a peer group of comparable
publicly-traded institutions was selected; (2) a financial and operational
comparison of The Provident Bank to the peer group was conducted to discern key
similarities and differences; and (3) the pro forma market value of The
Provident Bank was determined based on the market pricing of the peer group,
subject to certain valuation adjustments based on the identified key
similarities and differences. In addition, the pricing characteristics of recent
conversions, both at conversion and in the aftermarket, were considered.
Additionally, the valuation incorporated a "technical analysis" of recently
completed stock conversions, including closing pricing and aftermarket trading
of such offerings. RP Financial's valuation was based on the market and
operating environment for The Provident Bank and for all thrifts as of the date
of its appraisal and may be updated to account for changes in the market for
thrift stocks and the external operation environment or changes in the
operations or financial conditions of The Provident Bank, among other factors.
RP Financial also considered the following factors, among others:
. the present and projected operating results and financial condition of
The Provident Bank and the economic and demographic conditions in our
existing market area;
. historical, financial and other information relating to The Provident
Bank;
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. the aggregate size of the offering;
. a comparative evaluation of the operating and financial
characteristics of The Provident Bank with those of the peer group of
publicly-traded bank holding companies. Such comparative evaluations
considered such key factors as financial strength, profitability,
growth and viability of earnings, asset growth, primary market area,
dividends, liquidity of the shares, marketing of the issue,
management, and the effect of government regulations and regulatory
reform;
. areas where RP Financial concluded that The Provident Bank's market
value warranted an upward adjustment relative to the peer group
included financial condition, asset growth and dividends. The
valuation adjustment for financial condition was attributed to more
favorable credit quality measures and our balance sheet structure
after completing the offering. The valuation adjustment for asset
growth reflected our stronger asset growth during the most recent 12
month period versus the peer group. The valuation adjustment for
dividends reflected our higher capital after the offering and the
strength of our earnings;
. areas where RP Financial concluded that The Provident Bank's market
value warranted no adjustment relative to the peer group included
primary market area, liquidity of the shares, management and effect of
government regulations and regulatory reform. These conclusions
reflected the comparability of operations of The Provident Bank versus
the peer group in these areas;
. areas where RP Financial concluded that The Provident Bank's market
value warranted a downward adjustment relative to the peer group
included profitability, growth and viability of earnings and marketing
of the issue. The valuation adjustment for profitability, growth and
viability of earnings was based primarily on The Provident Bank's
lower return on equity and other components of earnings relative to
the peer group. The valuation adjustment for marketing of the issue
reflected the significant amount of common stock represented by the
offering and current conditions in the market for selling common
stock; and
. based particularly on the downward adjustments for profitability
growth and viability of earnings and marketability of the issue, RP
Financial concluded that the market value of The Provident Bank, as
reflected in key pricing ratios, should be discounted relative to the
average value of the peer group companies.
Two of the pricing ratios that RP Financial considered in determining our
market value were the price-to-book value ratio and the price-to-earnings ratio
or P/E ratio. The price-to-book value ratio represents the price per share of
stock divided by its book value, or equity, per share. Based on a $470.0 million
midpoint valuation, we had a pro forma price-to-book value ratio of 65.9%,
compared to the peer group's price-to-book value ratio of 154.0%. The P/E ratio
represents the price per share of stock divided by earnings, or net income, per
share. Based on a $470.0 million midpoint valuation, we had a pro forma
price-to-earnings ratio of 16.8x, compared to the peer group's price-to-earnings
ratio of 15.1x. The P/E ratio and the price-to-book value ratio constitute pro
forma information calculated using the assumptions under "Pro Forma Data."
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The following table presents a summary of selected pricing ratios for the
peer group companies and the resulting pricing ratios for Provident Financial
Services, Inc. Compared to the median pricing ratios of the peer group,
Provident Financial Services, Inc.'s pro forma pricing ratios at the maximum of
the offering range indicated a premium of 26.2% on a price-to-earnings basis and
a discount of 54.8% on a price-to-book value basis and 54.4% on a
price-to-tangible book value basis. The estimated appraised value and the
resulting discounts took into consideration the potential financial impact of
the conversion.
Price to earnings Price to book Price to tangible
multiple (1) value ratio book value ratio
----------------- ------------- -----------------
Provident Financial Services, Inc.
Pro forma data based on financial data as of
September 30, 2002
Maximum number of shares 19.00x 69.63% 71.76%
Minimum number of shares 14.51x 61.39% 63.61%
Valuation of peer group companies as of October 18,
2002
Averages 15.77x 148.18% 157.88%
Medians 15.06x 153.96% 157.42%
- ----------
(1) Based on trailing twelve month earnings.
On the basis of the foregoing, RP Financial advised us that as of October
18, 2002, the estimated pro forma market value of the common stock ranged from a
minimum of $383,180,000 to a maximum of $518,420,000, with a midpoint of
$450,800,000 (the estimated valuation range). RP Financial defines the estimated
pro forma market value as the price at which our common stock, immediately upon
completion of the conversion, would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts. This pro forma market value is
derived from the independent valuation prepared by RP Financial, taking into
account the factors described above. The Board of Managers of The Provident Bank
determined to offer the shares in the offering at the purchase price of $10.00
per share, the price most commonly used in stock offerings involving mutual to
stock conversions. Based on the estimated valuation range and the purchase price
of $10.00 per share, the number of shares of common stock that Provident
Financial Services, Inc. will issue will range from between 38,318,000 shares to
51,842,000 shares, with a midpoint of 45,080,000 shares. In addition, up to
1,920,000 shares are being contributed to the charitable foundation as part of
the conversion. The contribution of the common stock to the foundation will not
be included in determining whether the minimum number of shares of common stock
(38,318,000) has been sold in order to complete the offering.
The Board of Managers of The Provident Bank reviewed the independent
valuation and, in particular, considered (i) our financial condition and results
of operations for the six months ended June 30, 2002, and the year ended
December 31, 2001, (ii) financial comparisons in relation to other financial
institutions, and (iii) stock market conditions generally and in particular for
financial institutions, all of which are set forth in the independent valuation.
The Board also reviewed the methodology and the assumptions used by RP Financial
in preparing the independent valuation. The estimated valuation range may be
amended with the approval of the
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bank regulators, if necessitated by subsequent developments in our financial
condition or market conditions generally.
- --------------------------------------------------------------------------------
The independent valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares. RP
Financial did not independently verify the financial statements and other
information provided by The Provident Bank, nor did RP Financial value
independently the assets or liabilities of The Provident Bank. The independent
valuation considers The Provident Bank as a going concern and should not be
considered as an indication of liquidation value. Moreover, because the
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing shares in the offering will thereafter be able
to sell such shares at prices at or above the purchase price.
- --------------------------------------------------------------------------------
Following commencement of the subscription offering, the maximum of the
estimated valuation range may be increased by up to 15%, to up to $596,183,000,
which will result in a corresponding increase in the maximum of the offering
range to up to 59,618,300 shares, to reflect changes in market and financial
conditions, demand for the shares, or regulatory considerations, without the
resolicitation of subscribers. The minimum of the estimated valuation range and
the minimum of the offering range may not be decreased without a refund of
subscriber proceeds and a resolicitation of subscribers. The purchase price of
$10.00 per share will remain fixed. See "--Limitations on Purchases of Common
Stock" as to the method of distribution and allocation of additional shares that
may be issued in the event of an increase in the offering range to fill unfilled
orders in the subscription and community offerings.
The independent valuation will be updated at the time of the completion of
the offering. We may not sell any shares of common stock unless RP Financial
confirms to The Provident Bank, Provident Financial Services, Inc., the
Commissioner and the FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause RP Financial to conclude that the aggregate value of the common
stock is incompatible with its estimate of the pro forma market value of the
common stock at the conclusion of the offering. If the update to the independent
valuation at the conclusion of the offering results in an increase in the
maximum of the estimated valuation range to more than $596,183,000 and a
corresponding increase in the offering range to more than 59,618,300 shares, or
a decrease in the minimum of the estimated valuation range to less than
$383,180,000 and a corresponding decrease in the offering range to fewer than
38,318,000 shares, then Provident Financial Services, Inc., after consulting
with the bank regulators, may terminate the plan of conversion and return all
funds promptly, with interest on payments made by check, certified or teller's
check, bank draft or money order, extend or hold a new subscription offering,
community offering, or both, establish a new offering range, commence a
resolicitation of subscribers or take such other actions as permitted by the
bank regulators in order to complete the conversion and the offering. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the subscription and community offerings would not exceed 45 days
unless further extended with the approval of the
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bank regulators for periods of up to 90 days not to extend beyond 24 months
following the special meeting of depositors, or January 7, 2005.
An increase in the independent valuation and the number of shares to be
issued in the offering would decrease both a subscriber's ownership interest and
Provident Financial Services, Inc.'s pro forma earnings and stockholders' equity
on a per share basis while increasing pro forma earnings and stockholders'
equity on an aggregate basis. A decrease in the independent valuation and the
number of shares to be issued in the offering would increase both a subscriber's
ownership interest and Provident Financial Services, Inc.'s pro forma earnings
and stockholders' equity on a per share basis while decreasing pro forma net
income and stockholders' equity on an aggregate basis. For a presentation of the
effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of RP Financial and the detailed memorandum
of the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of The Provident Bank and the other
locations specified under "Where You Can Obtain Additional Information."
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, rights to subscribe for the
purchase of common stock have been granted to the following persons in the
following order of priority:
(1) Eligible accounts holders. Depositors with deposits in The Provident
Bank with balances aggregating $50 or more as of March 31, 2001;
(2) The Provident Bank Employee Stock Ownership Plan;
(3) Supplemental eligible account holders. Depositors with deposits in The
Provident Bank with balances aggregating $50 or more as of September
30, 2002; and
(4) Employees, officers and directors of The Provident Bank who are not
depositors entitled to purchase shares in categories (1) or (3) above.
All subscriptions received will be subject to the availability of common
stock after satisfaction of all subscriptions of all subscribers having prior
rights in the subscription offering and to the maximum and minimum purchase
limitations set forth in the plan of conversion and as described below under
"--Limitations on Purchases of Common Stock."
The following is a more detailed description of the priorities for the
purchase of shares:
Priority 1: Eligible Account Holders. Subject to the maximum purchase
limitations, each depositor with $50 or more on deposit at The Provident Bank as
of the close of business on March 31, 2001 will receive nontransferable
subscription rights to subscribe for up to the greater of the following:
(i) $520,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock; or
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(iii) 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued
by a fraction, the numerator of which is the amount of qualifying
deposits of the eligible account holder and the denominator of which
is the total amount of qualifying deposits of all eligible account
holders.
The following example illustrates how the maximum subscription limitation
is calculated. Assuming that shares are sold at the maximum of the offering
range (51,842,000 shares), a depositor had $25,000 on deposit as of March 31,
2001, and there were $2.34 billion of qualifying deposits as of that date, then
the depositor would receive subscription rights to subscribe for up to the
greater of:
(i) $520,000 of common stock;
(ii) $518,420 of common stock, which is one-tenth of one percent of a
$518,420,000 offering; and
(iii) $8,308 of common stock, or 830 shares, which is the product of: 15 x
(51,842,000 shares of common stock x ($25,000/$2.34 billion)).
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 subscribing eligible account holder to purchase the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated pro rata to remaining subscribing eligible account
holders whose subscriptions remain unfilled in the same proportion that each
subscriber's aggregate deposit account balances as of the eligibility record
date (qualifying deposits) bears to the total amount of qualifying deposits of
all subscribing eligible account holders whose subscriptions remain unfilled.
Subscription rights to purchase common stock received by our executive officers
and directors, including their associates, based on their increased deposits 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 common stock, each eligible account holder must list on their
subscription order form all deposit accounts in which they had an ownership
interest as of the March 31, 2001 eligibility record date.
Priority 2: The Provident Bank Employee Stock Ownership Plan. Our ESOP
shall be given the opportunity to purchase in the aggregate up to 8% of the
common stock issued in the offering. Our ESOP intends to purchase 8% of the
shares of common stock sold in the offering. If the ESOP's subscription is not
filled in its entirety, the employee stock ownership plan will purchase shares
in the open market.
Priority 3: Supplemental Eligible Account Holders. To the extent that there
are sufficient shares of common stock remaining after satisfaction of
subscriptions by eligible account holders and the ESOP, and subject to the
maximum purchase limitations, each depositor with $50.00 or more on deposit, as
of the close of business on September 30, 2002, will receive nontransferable
subscription rights to subscribe for up to the greater of:
(i) $520,000 of common stock;
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(ii) one-tenth of one percent of the total offering of common stock; or
(iii) 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued
by a fraction, the numerator of which is the amount of qualifying
deposits of the supplemental eligible account holder and the
denominator is the total amount of qualifying deposits of all
supplemental eligible account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
supplemental eligible account holders so as to permit each supplemental eligible
account holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing supplemental eligible account holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to total qualifying deposits of all
subscribing supplemental eligible account holders whose subscriptions remain
unfilled. To ensure proper allocation of common stock, each supplemental
eligible account holder must list on their subscription order form all deposit
accounts on which they had an ownership interest as of the September 30, 2002
supplemental eligibility record date.
Priority 4: Employees, officers and directors. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by eligible
account holders, the ESOP and supplemental eligible account holders, and subject
to the maximum purchase limitations, each employee, officer and director who is
not an eligible depositor in categories (1) or (3) above will receive a
nontransferable subscription right to purchase up to $520,000 of common stock
(52,000 shares).
Regulatory Conditions Imposed on the ESOP
In connection with our bank holding company application, we have entered
into certain commitments with the Federal Reserve Board with respect to the
establishment and funding of the ESOP, including that the ESOP will not,
directly or indirectly:
(a) take any action causing us or any of our subsidiaries to become a
subsidiary of the ESOP;
(b) together with the charitable foundation, acquire or retain shares that
would cause the combined interests of the ESOP, the charitable foundation and
their officers, directors and affiliates to equal or exceed 25% of our or any of
our subsidiaries' outstanding voting shares;
(c) exercise or attempt to exercise a controlling influence over our or any
of our subsidiaries' management or policies;
(d) seek or accept representation on our or any of our subsidiaries' board
of directors;
(e) have or seek to have any representative serve as our or any of our
subsidiaries' officer, agent or employee;
(f) propose a director or slate of directors in opposition to a nominee or
slate of nominees proposed by our or any of our subsidiaries' management or
board of directors;
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(g) solicit or participate in soliciting proxies with respect to any matter
presented to our or any of our subsidiaries' shareholders;
(h) attempt to influence our or any of our subsidiaries' dividend policies
or practices;
(i) attempt to influence our or any of our subsidiaries' loan and credit
decisions or policies, pricing of services, personnel decisions, location of
offices, branching, hours of operation or similar activities;
(j) enter into any other banking or nonbanking transactions with us or any
of our subsidiaries, except that the ESOP may establish and maintain deposit
accounts with our bank subsidiaries, provided that the aggregate balances of all
such accounts do not exceed $500,000 and that the accounts are maintained on
substantially the same terms as those prevailing for comparable accounts of
persons unaffiliated with us;
(h) individually or together with the charitable foundation, acquire 25% or
more of any class of voting securities or otherwise acquire control of any bank
or bank holding company without the Federal Reserve Bank of New York's prior
approval;
(i) acquire any nonvoting equity interest in any bank or bank holding
company without notifying the Federal Reserve Bank of New York of the terms of
any such interest;
(j) individually or together with the charitable foundation, make any
investments (other than in Provident Financial Services, Inc. or its subsidiary
bank) that could not be made by a bank holding company under the Bank Holding
Company Act of 1956, as amended;
(k) acquire more than 5% of the voting securities of any company (as
defined in Regulation Y of the Board of Governors of the Federal Reserve
System), including any bank, corporation, general or limited partnership,
association or business trust, without prior notification to the Federal Reserve
Bank of New York;
(l) acquire, without the prior written approval of the Federal Reserve Bank
of New York, securities of any company, including Provident Financial Services,
Inc., if, at the time of such acquisition, the ratio of the combined debt of
Provident Financial Services, Inc. and the ESOP to the equity of Provident
Financial Services, Inc. exceeds 30%; and
(m) generally incur any debt in the future without the prior written
approval of the Federal Reserve Bank of New York, if, after the ESOP incurs such
debt, the ratio of the combined debt of Provident Financial Services, Inc. and
the ESOP to the equity of Provident Financial Services, Inc. exceeds 30%.
Direct Community Offering
Any shares of 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 shares directly to the general public. The community offering, if
any, shall be for a period of not more than 45 days, unless extended, and may
commence concurrently with, during or promptly after the subscription offering.
In accordance with applicable regulations, the common stock will be offered and
sold so as to achieve the widest distribution. No person may purchase more than
$520,000 of common stock in the community offering. Further, Provident Financial
Services,
155
Inc. may limit total subscriptions so as to assure that the number of shares
available for the public offering may be up to a specified percentage of the
number of shares of common stock.
In the event of an oversubscription for shares in the community offering,
shares will be allocated (to the extent shares remain available):
. first to natural persons residing in the State of New Jersey, and
. thereafter, on a pro rata basis to such persons based on the amount of
their respective subscriptions.
The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the indicated counties, has an intent to remain for a period of time, and who
has manifested the genuineness of that intent by establishing an ongoing
physical presence, together with an indication that such presence is something
other than merely transitory in nature. We may utilize deposit or loan records
or such other evidence provided to us to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
our sole discretion.
Syndicated Community Offering
Any shares of common stock not sold in the subscription offering or in the
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 Sandler O'Neill &
Partners, L.P. and Provident Financial Services, Inc. in a manner that is
intended to achieve the widest distribution of the common stock, subject to the
rights of Provident Financial Services, Inc. to accept or reject in whole or in
part any order in the syndicated community offering. It is expected that the
syndicated community offering, if any, will commence as soon as practicable
after termination of the subscription offering and the community offering, if
any. The syndicated community offering shall be completed within 45 days after
the termination of the subscription offering, unless such period is extended as
provided herein.
If for any reason a syndicated community offering of unsubscribed shares of
common stock cannot be effected and any shares remain unsold after the
subscription offering and the community offering, if any, the boards of
directors of Provident Financial Services, Inc. and The Provident Bank will seek
to make other arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the bank regulators and to
compliance with applicable state and federal securities laws.
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The opportunity to purchase shares of common stock in the direct community or
syndicated community offerings is subject to our right, in our sole discretion,
to accept or reject any order in whole or in part either at the time of receipt
of an order or as soon as practicable following the expiration date. If we
reject a purchase order in part, the subscriber will not have the right to
cancel the remainder of the order.
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Public Offering Alternative
As an alternative to a syndicated community offering, we may offer for sale
shares of common stock not sold in the subscription offering, the community
offering or the syndicated community offering to or through underwriters.
Certain provisions restricting the purchase and transfer of common stock shall
not be applicable to sales to underwriters for purposes of such public offering.
Any underwriter shall agree to purchase such shares from Provident Financial
Services, Inc. with a view to reoffering them to the general public, subject to
certain terms and conditions described in the plan of conversion. If the public
offering is utilized, then Provident Financial Services, Inc. will amend the
registration statement filed with the Securities and Exchange Commission, of
which this prospectus is a part, to reflect the specific terms of such public
offering alternative, including, without limitation, the terms of any
underwriting agreements, commission structure and plan of distribution.
Procedure For Purchasing Shares
Prospectus Delivery. To ensure that each purchaser receives a prospectus at
least 48 hours before the expiration date, prospectuses may not be mailed any
later than five days prior to such date or be hand delivered any later than two
days prior to such date. Order forms may only be distributed with a prospectus.
Expiration Date. The offering will terminate at 3:00 p.m., New Jersey time
on December 16, 2002, unless extended by us for up to an additional 45 days or,
if approved by the bank regulators, for an additional period after such 45-day
extension. We are not required to give purchasers notice of any extension unless
the expiration date is later than January 30, 2003, in which event purchasers
will be given the right to increase, decrease, confirm, or rescind their orders.
Use of Order Forms. In order to purchase the common stock, each purchaser
must complete an order form except for certain persons purchasing in the
syndicated community offering as more fully described below. Any person
receiving an order form who desires to purchase common stock may do so by
delivering by mail using the return envelope provided, by overnight courier to
the indicated address on the order form, or by bringing a properly executed and
completed order form, together with full payment for the shares purchased to one
of our full-service branch offices. The order form must be received prior to
3:00 p.m., New Jersey time on December 16, 2002. Each person ordering shares is
required to represent that they are purchasing such shares for their own
account. Our interpretation of the terms and conditions of the plan of
conversion and of the acceptability of the order forms will be final. We are not
required to accept copies of order forms.
Payment for Shares. Payment for all shares will be required to accompany a
completed order form for the purchase to be valid. Payment for shares may be
made by (i) check or money order, or (ii) authorization of withdrawal from a
deposit account maintained with The Provident Bank. Third party checks will not
be accepted as payment for a subscriber's order. Appropriate means by which such
withdrawals may be authorized are provided in the order forms.
157
Once such a withdrawal amount has been authorized, a hold will be placed on
such funds, making them unavailable to the depositor until the offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from deposit accounts, all funds authorized for withdrawal will
continue to earn interest at the contract rate until the offering is completed
or terminated.
Interest penalties for early withdrawal applicable to certificate of
deposit accounts will not apply to withdrawals authorized for the purchase of
shares. However, if a withdrawal results in a certificate of deposit account
with a balance less than the applicable minimum balance requirement, the
certificate of deposit shall be canceled at the time of withdrawal without
penalty, and the remaining balance will earn interest at our passbook rate
subsequent to the withdrawal.
Payments made by check or money order will be placed in a segregated
savings account and will be paid interest at our passbook rate from the date
payment is received until the offering is completed or terminated. Such interest
will be paid by check, on all funds held, including funds accepted as payment
for shares of common stock, promptly following completion or termination of the
offering.
The ESOP will not be required to pay for the shares it intends to purchase
until consummation of the offering.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the offering, provided that the IRA accounts are not
maintained at The Provident Bank. Persons with IRAs maintained with us must have
their accounts transferred to a self-directed IRA account with an unaffiliated
trustee in order to use funds in such IRA to purchase shares of common stock in
the offering. In addition, the provisions of ERISA and IRS regulations require
that executive officers, trustees, and 10% stockholders who use self-directed
IRA funds and/or Keogh plan accounts to purchase shares of common stock in the
offering, make such purchase for the exclusive benefit of the IRA and/or Keogh
plan participant. Assistance on how to transfer IRAs maintained at The Provident
Bank can be obtained from the conversion information center. Depositors
interested in using funds in an IRA maintained at The Provident Bank should
contact the conversion information center as soon as possible.
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Once submitted, an order cannot be modified or revoked unless the offering is
terminated or extended beyond January 30, 2003 or the number of shares to be
sold is increased to more than 59,618,300 shares.
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Depending on market conditions, the common stock may be offered for sale to
the general public on a best efforts basis in a syndicated community offering by
a selling group of broker-dealers to be managed by Sandler O'Neill & Partners,
L.P. Sandler O'Neill & Partners, L.P., in their discretion, will instruct
selected broker-dealers as to the number of shares to be allocated to each
selected broker-dealer. Only upon allocation of shares to selected
broker-dealers may they take orders from their customers. Investors who desire
to purchase shares in the community offering directly through a selected
broker-dealer, which may include Sandler
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O'Neill & Partners, L.P., will be advised that the members of the selling group
are required either (a) upon receipt of an executed order form or direction to
execute an order form on behalf of an investor, to forward the appropriate
purchase price to us for deposit in a segregated account on or before twelve
noon, prevailing time, of the business day next following such receipt or
execution; or (b) upon receipt of confirmation by such member of the selling
group of an investor's interest in purchasing shares, and following a mailing of
an acknowledgment by such member to such investor on the business day next
following receipt of confirmation, to debit the account of such investor on the
third business day next following receipt of confirmation and to forward the
appropriate purchase price to us for deposit in the segregated account on or
before twelve noon, prevailing time, of the business day next following such
debiting. Payment for any shares purchased pursuant to alternative (a) above
must be made by check in full payment therefor. Payment for shares purchased
pursuant to alternative (b) above may be made by wire transfer to The Provident
Bank.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
registration address noted on the order form, as soon as practicable following
consummation of the offering. For individuals purchasing shares in the
subscription offering, certificates will be registered in the identical manner
in which that individual's qualifying account(s) at The Provident Bank is
registered. Any certificates returned as undeliverable will be held by us until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to purchasers, purchasers may not be able to sell the
shares of stock which they ordered.
Restrictions on Transfer of Subscription Rights and Shares of Common Stock
Applicable regulations and the plan of conversion prohibit any person with
subscription rights 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. Such rights may be exercised only by the person or
persons to whom they are granted and only for such person's account. With the
exception of IRA stock purchases, the subscription rights of a qualifying
account cannot be transferred to a qualifying account with a different form of
ownership. Adding or deleting a name or otherwise altering the form of
beneficial ownership of a qualifying account will result in the loss of
subscription rights. Each person exercising such subscription rights will be
required to certify that such person is purchasing shares solely for such
person's own account and that such person 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 an intent to make
an offer to purchase such subscription rights or shares of common stock prior to
the completion of the conversion.
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We will pursue any and all legal and equitable remedies (including forfeiture)
in the event we become aware of the transfer of subscription rights and will not
honor orders known by us to involve the transfer of such rights.
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Plan of Distribution and Marketing Arrangements
Offering materials have been initially distributed through mailings to
eligible account holders, our ESOP participants, supplemental eligible account
holders and employees, officers and directors of The Provident Bank who are not
eligible account holders or supplemental eligible account holders. Offering
materials also will be initially distributed by mail in direct response to an
inquiry from depositors and other customers of The Provident Bank who are
otherwise not eligible account holders or supplemental eligible account holders.
Additional copies of the offering materials will be made available through our
conversion center and Sandler O'Neill & Partners, L.P. We also will distribute
offering materials if requested following any informational meetings that may be
held for employees, customers and natural persons residing in our local market
areas, and following direct telephone solicitation of natural persons or other
investors whom we believe may be interested in participating in the stock
offering. All prospective purchasers are to send payment directly to The
Provident Bank, where such funds will be held in a segregated savings account
and not released until the offering is completed or terminated.
We have engaged Sandler O'Neill & Partners, L.P., a broker-dealer
registered with the NASD, as a financial and marketing advisor in connection
with the offering of our common stock. In its role as financial and marketing
advisor, Sandler O'Neill & Partners, L.P. will assist us in the offering as
follows: (i) consulting as to the securities marketing implications of any
aspect of the plan of conversion or related corporate documents; (ii) reviewing
with our Board of Managers the financial and securities marketing implications
of the independent appraiser's appraisal of the common stock; (iii) reviewing
all offering documents, including the prospectus, stock order forms and related
offering materials (we are responsible for the preparation and filing of such
documents); (iv) assisting in the design and implementation of a marketing
strategy for the offering; (v) assisting us in obtaining all requisite
regulatory approvals; (vi) assisting us in preparing for meetings with potential
investors and broker-dealers; and (vii) providing such other general advice and
assistance as may be requested to promote the successful completion of the
offering, which may include training and educating our employees regarding the
mechanics and regulatory requirements of the offering, conducting informational
meetings for employees, customers and the general public and coordinating the
selling efforts in our local communities. For these services, Sandler O'Neill &
Partners, L.P. will receive a fee of 1.0% of the aggregate dollar amount of the
common stock sold in the offering, excluding shares sold to the ESOP and to our
employees and directors, and their immediate families, and shares contributed to
our charitable foundation.
To the extent any shares of the common stock remain available after the
subscription and direct community offerings, Sandler O'Neill & Partners, L.P.,
at our request, may seek to form a syndicate of registered broker-dealers to
assist in the solicitation of orders of the common stock in a syndicated
community offering, subject to the terms and conditions to be set forth in a
selected dealer's agreement. Sandler O'Neill & Partners, L.P. has agreed to use
its best efforts to assist us with the solicitation of subscriptions and orders
for shares of our common stock in the syndicated community offering. Sandler
O'Neill & Partners, L.P. is not obligated to take or purchase any shares of our
common stock in the offering. Sandler O'Neill & Partners, L.P. has expressed no
opinion as to the prices at which the common stock may trade nor has Sandler
O'Neill & Partners, L.P. provided any written report or opinion to us as to the
fairness of the
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conversion. If there is a syndicated community offering, Sandler O'Neill &
Partners, L.P. will receive a fee of 1.0% of the aggregate dollar amount of the
common stock sold in the syndicated community offering. The total fees payable
to Sandler O'Neill & Partners, L.P. and other NASD member firms in the
syndicated community offering shall not exceed 5.5% of the aggregate dollar
amount of the common stock sold in the syndicated community offering.
In addition, we have engaged Sandler O'Neill & Partners, L.P. to act as
conversion agent in connection with the offering. In its role as conversion
agent, Sandler O'Neill & Partners, L.P. will assist us in the offering as
follows: (i) consolidation of accounts and development of a central file; (ii)
preparation of proxy, order and/or request forms; (iii) organization and
supervision of the conversion information center; (iv) proxy solicitation and
special meeting services; and (v) subscription services. For these services,
Sandler O'Neill & Partners, L.P. will receive a fee of $100,000.
We also will reimburse Sandler O'Neill & Partners, L.P. for its reasonable
out-of-pocket expenses associated with its marketing effort, up to a maximum of
$75,000 (including legal fees and expenses). We have made an advance payment of
$50,000 to Sandler O'Neill & Partners, L.P. If the plan of conversion is
terminated or if Sandler O'Neill & Partners, L.P. terminates its agreement with
us in accordance with the provisions of the agreement, Sandler O'Neill &
Partners, L.P. will only receive reimbursement of its reasonable out-of-pocket
expenses. We will indemnify Sandler O'Neill & Partners, L.P. against liabilities
and expenses (including legal fees) incurred in connection with the conversion,
including in connection with certain claims or litigation arising out of or
based upon untrue statements or omissions contained in the offering material for
the common stock, including liabilities under the Securities Act of 1933.
Our directors and executive officers may participate in the solicitation of
offers to purchase common stock. Other trained employees may participate in the
offering in ministerial capacities, providing clerical work in effecting a sales
transaction or answering questions of a ministerial nature. Other questions of
prospective purchasers will be directed to executive officers or registered
representatives. We will rely on Rule 3a4-1 of the Exchange Act, so as to permit
officers, directors, and employees to participate in the sale of the common
stock. No officer, director, or employee will be compensated for his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
Limitations on Purchases of Common Stock
The plan of conversion includes the following limitations upon the purchase
of shares in the offering.
(1) No subscription for fewer than 25 shares will be accepted;
(2) No fractional shares will be issued;
(3) The maximum amount of common stock that may be purchased in the
offering by a person or group of persons acting through a single
account is $520,000;
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(4) The maximum amount of common stock that may be purchased in the
community offering, the syndicated community offering and the public
offering, if any, by a person or group of persons acting in concert is
$520,000;
(5) No person, other than the ESOP, by himself or herself or with an
associate, and no group of persons acting in concert, may subscribe
for or purchase more than $700,000 of common stock in the offering;
(6) Officers and directors and their associates may not purchase, in the
aggregate, more than 25% of the shares to be sold in the offering. For
purposes of this limitation, members of our Boards of Directors are
not deemed to be acting in concert solely by reason of their board
membership, and, any shares attributable to the officers and directors
and their associates, but held by a tax-qualified employee plan other
than that portion of a plan which is self-directed, shall not be
included; and
(7) The ESOP intends to purchase 8% of the shares sold in the offering.
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Depending upon market and financial conditions, with the approval of the
regulatory authorities but without further notice to subscribers, we may
increase or decrease any of the above purchase limitations at any time.
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The purchase limits set forth in (3), (4) and (5) above are based on the
maximum of the offering range and will not be increased if the offering range is
increased by up to 15%.
The term "associate" is used above to indicate any of the following
relationships with a person:
. any corporation or organization, other than Provident Financial
Services, Inc. or The Provident Bank or a majority-owned subsidiary of
Provident Financial Services, Inc. or The Provident Bank, of which the
person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity security;
. any trust or other estate in which the person has a substantial
beneficial interest or as to which the person serves as trustee or in
a similar fiduciary capacity; and
. the parents, spouse, sisters, brothers or children of such person, and
anyone married to the foregoing.
As used above, the term "acting in concert" means:
. knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement;
. a combination or pooling of 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; or
162
. a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert
with any person or company who is also acting in concert with that
other party, except that any tax-qualified employee plan will not be
deemed to be acting in concert with its trustee or a person who serves
in a similar capacity solely for the purpose of determining whether
stock held by the trustee and stock held by the plan will be
aggregated.
Persons or companies who file jointly a Form 13-D or Form 13-G pursuant to
the Exchange Act will be deemed to be acting in concert.
If we increase the maximum purchase limitation to up to 9.99% of the shares
sold in the offering, orders for shares exceeding 5.0% of the shares sold may
not exceed, in the aggregate, 10% of the shares sold. In computing the number of
shares to be allocated, all numbers will be rounded down to the next whole
number.
Common stock purchased in the offering will be freely transferable except
for shares purchased by executive officers and directors of The Provident Bank
or Provident Financial Services, Inc. and except as described below. Any
purchases made by any associate of Provident Financial Services, Inc. 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 NASD guidelines, members of the NASD 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.
We will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to subscribe for shares
reside. However, no shares will be offered or sold under the plan of conversion
to any person who resides in a foreign country or resides in a state of the
United States in which a small number of persons otherwise eligible to subscribe
for shares under the plan of conversion reside or as to which we determine that
compliance with the securities laws of the state would be impracticable for
reasons of cost or otherwise, including, but not limited to, a requirement that
we (including any of our officers, directors or employees) register, under the
securities laws of the state, as a broker, dealer, salesman or agent. No
payments will be made in lieu of the granting of subscription rights to any
person.
Restrictions on Sale of Stock by Directors and Officers
All shares of the common stock purchased by our directors and executive
officers in the offering will be subject to the restriction that such shares may
not be sold or otherwise disposed of for value for a period of one year
following the date of purchase, except for any disposition of such shares
following the death of the original purchaser. Sales of shares of the common
stock by Provident Financial Services, Inc.'s directors and executive officers
will also be subject to certain insider trading and other transfer restrictions
under the federal securities laws. See "Regulation--Federal Securities Laws."
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Interpretation, Amendment and Termination
All interpretations of the plan of conversion by the Board of Managers will
be final, subject to the authority of the New Jersey Commissioner of Banking and
Insurance and the FDIC. The plan of conversion provides that, if deemed
necessary or desirable by the Board of Managers of The Provident Bank, the plan
of conversion may be substantively amended by a two-thirds vote of the Board of
Managers as a result of comments from regulatory authorities or otherwise, at
any time prior to submission of proxy materials to The Provident Bank's
depositors. Amendment of the plan of conversion thereafter requires a two-thirds
vote of the Board of Managers, with the concurrence of the New Jersey
Commissioner of Banking and Insurance and the FDIC. Any amendments to the plan
of conversion made after approval by voting depositors of The Provident Bank
with the concurrence of the Commissioner and the FDIC will not require further
approval by the voting depositors. The plan of conversion may be terminated by a
two-thirds vote of the Board of Managers of The Provident Bank at any time prior
to the earlier of approval of the plan by the New Jersey Commissioner of Banking
and Insurance and the date of the special meeting of depositors, and may be
terminated at any time thereafter with the concurrence of the New Jersey
Commissioner of Banking and Insurance with the approval of voting depositors of
The Provident Bank. The plan of conversion shall be terminated if the conversion
is not completed within 24 months from the date on which the depositors of The
Provident Bank approve the plan of conversion, and may not be extended by The
Provident Bank or the New Jersey Commissioner of Banking and Insurance.
Conversion Center
If you have any questions regarding the offering or the conversion, please
call the Conversion Center at (866) 332-2002, from 10:00 a.m. to 4:00 p.m., New
Jersey time, Monday through Friday.
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Participation by Management in the Offering
The following table sets forth information regarding intended common stock
purchases by each of the directors and executive officers of The Provident Bank
and their associates, and by all directors and executive officers as a group,
assuming the availability of shares. In the event the individual maximum
purchase limitation is increased, persons subscribing for the maximum amount may
increase their purchase order. This table excludes shares to be purchased by the
ESOP, as well as any recognition and retention plan awards or stock option
grants that may be made no earlier than six months after the completion of the
conversion, subject to shareholder approval. The directors and executive
officers have indicated their intention to purchase in the offering an aggregate
of $4.8 million of common stock, equal to 1.26%, 1.07%, 0.93%, and 0.81% of the
number of shares to be sold in the offering, at the minimum, midpoint, maximum
and adjusted maximum of the estimated valuation range, respectively.
Aggregate Purchase Number of
Name Price(1) Shares(1)
- --------------------------------------------------------- ------------------ ---------
Directors
J. Martin Comey ......................................... $ 500,000 50,000
Geoffrey M. Connor ...................................... 300,000 30,000
Frank L. Fekete ......................................... 300,000 30,000
Carlos Hernandez ........................................ 150,000 15,000
William T. Jackson ...................................... 300,000 30,000
David Leff .............................................. 300,000 30,000
Arthur R. McConnell ..................................... 100,000 10,000
Edward O'Donnell ........................................ 225,000 22,500
Paul M. Pantozzi ........................................ 500,000 50,000
Daniel T. Scott ......................................... 400,000 40,000
Thomas E. Sheenan ....................................... 325,000 32,500
Executive Officers Who Are Not Directors
Donald Blum ............................................. 50,000 5,000
Joseph L. Derise ........................................ 100,000 10,000
Charles Firestone ....................................... 30,000 3,000
Gregory French .......................................... 125,000 12,500
C. Gabriel Haagensen .................................... 200,000 20,000
John F. Kuntz ........................................... 7,500 750
Linda A. Niro ........................................... 60,000 6,000
Giacomo Novielli ........................................ 50,000 5,000
Michael Revesz .......................................... 100,000 10,000
Glenn H. Shell .......................................... 350,000 35,000
Kenneth J. Wagner ....................................... 15,000 1,500
Kevin J. Ward ........................................... 350,000 35,000
---------- -------
All directors and executive officers as a group ...... $4,837,500 483,750
========== =======
- ----------
(1) Includes purchases by associates.
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RESTRICTIONS ON ACQUISITION OF PROVIDENT FINANCIAL SERVICES, INC.
AND THE PROVIDENT BANK
General
Although the Board of Managers of The Provident Bank and the Board of
Directors of Provident Financial Services, Inc. are not aware of any effort that
might be made to obtain control of Provident Financial Services, Inc. after
conversion, the Boards, as discussed below, believe that it is appropriate to
include certain provisions as part of Provident Financial Services, Inc.'s
certificate of incorporation to protect the interests of Provident Financial
Services, Inc. and its stockholders from takeovers which the Board of Directors
of Provident Financial Services, Inc. might conclude are not in the best
interests of The Provident Bank, Provident Financial Services, Inc. or Provident
Financial Services, Inc.'s stockholders.
The following discussion is a general summary of the material provisions of
Provident Financial Services, Inc.'s certificate of incorporation and bylaws,
The Provident Bank's charter and bylaws and certain other regulatory provisions
which may be deemed to have an "anti-takeover" effect. The following description
of certain of these provisions is necessarily general and, with respect to
provisions contained in Provident Financial Services, Inc.'s certificate of
incorporation and bylaws and The Provident Bank's proposed stock charter and
bylaws, reference should be made in each case to the document in question, each
of which is part of The Provident Bank's application to the FDIC and Provident
Financial Services, Inc.'s Registration Statement filed with the SEC. See "Where
You Can Find Additional Information."
Provisions in Provident Financial Services, Inc.'s Certificate of Incorporation
and Bylaws
Provident Financial Services, Inc.'s certificate of incorporation and
bylaws contain a number of provisions, relating to corporate governance and
rights of stockholders, that might 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 Provident Financial
Services, Inc. more difficult.
The following description is a summary of the provisions of the certificate
of incorporation and bylaws. See "Where You Can Find Additional Information" as
to how to review a copy of these documents.
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 Provident Financial Services, Inc.'s
board. 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.
Restrictions on Call of Special Meetings. The certificate of incorporation
and bylaws provide that special meetings of stockholders can be called only by
the Board of Directors
166
pursuant to a resolution adopted by a majority of the total number of authorized
directorships. Stockholders are not authorized to call a special meeting of
stockholders.
Prohibition of Cumulative Voting. The certificate of incorporation
prohibits cumulative voting for the election of directors.
Limitation of Voting Rights. The certificate of incorporation provides that
in no event will any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a 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 held in excess of the 10% limit.
Authorized but Unissued Shares of Capital Stock. After the conversion,
Provident Financial Services, Inc. will have authorized but unissued shares of
common and preferred stock. See "Description of Capital Stock." The Board of
Directors could use these shares of common and preferred stock to render more
difficult or to discourage an attempt to obtain control of Provident Financial
Services, Inc. by means of a merger, tender offer or proxy contest.
Restrictions on Removing Directors from Office. The certificate of
incorporation provides that directors may only be removed for cause, and only by
the affirmative vote of the holders of at least 80% of the voting power of all
of our then-outstanding stock entitled to vote (after giving effect to the
limitation on voting rights discussed above in "Limitation on Voting Rights.")
Authorized but Unissued Shares. The certificate of incorporation also
authorizes 50 million shares of serial preferred stock. Provident Financial
Services, Inc. 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
Provident Financial Services, Inc. that the Board of Directors does not approve,
it might be possible for the Board of Directors to authorize the issuance of a
series of preferred stock with rights and preferences that would impede that
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 Provident
Financial Services, Inc. The Board of Directors has no present plan or
understanding to issue any preferred stock.
Amendments to Certificate of Incorporation and Bylaws. Amendments to the
certificate of incorporation must be approved by Provident Financial Services,
Inc.'s Board of Directors and also by a majority of the outstanding shares of
Provident Financial Services, Inc.'s voting stock; 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
offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity security of Provident Financial Services, Inc.;
(ii) The inability of stockholders to act by written consent;
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(iii) The inability of stockholders to call special meetings of
stockholders;
(iv) The division of the Board of Directors into three staggered classes;
(v) The ability of the Board of Directors to fill vacancies on the board;
(vi) The inability to deviate from the manner prescribed in the Bylaws by
which stockholders nominate directors and bring other business before
meetings of stockholders;
(vii) The requirement that at least 80% of stockholders must vote to remove
directors, and can only remove directors for cause;
(viii) The ability of the Board of Directors to amend and repeal the
bylaws; and
(ix) The ability of the Board of Directors to evaluate a variety of factors
in evaluating offers to purchase or otherwise acquire Provident
Financial Services, Inc.
The bylaws may be amended by the affirmative vote of a majority of the
directors of Provident Financial Services, Inc. or the affirmative vote of at
least 80% of the total votes eligible to be voted at a duly constituted meeting
of stockholders.
Supermajority Vote. Provident Financial Services, Inc.'s certificate of
incorporation requires the affirmative vote of holders of at least 80% of the
voting power of the then-outstanding shares of stock to approve a business
combination with an interested stockholder, including the following
transactions: (i) any merger or consolidation with an interested stockholder, as
defined in the certificate of incorporation, or an affiliate of an interested
stockholder; (ii) any sale, lease or other disposition of 25% or more of our
assets to an interested stockholder or an affiliate of such interested
stockholder; (iii) the issuance or transfer by Provident Financial Services,
Inc. of any securities to an interested stockholder or an affiliate of such
interested stockholder in exchange for cash, securities or other property having
a fair market value of at least 25% of our outstanding common stock; (iv) the
adoption of any plan or proposal for the liquidation or dissolution of Provident
Financial Services, Inc. proposed by an interested stockholder or an affiliate
of such interested stockholder; or (v) any transaction which has the effect of
increasing the proportional share of the ownership of securities of Provident
Financial Services, Inc. by an interested stockholder or an affiliate of such
interested stockholder. An interested stockholder is defined in our certificate
of incorporation as the owner of more than 10% of the voting power of the
outstanding voting stock, a person who has succeeded (including through
assignment) to any shares of the voting stock within a two-year period of such
voting stock being owned by an interested stockholder through a series of
transactions, not involving a public offering, or an affiliate of Provident
Financial Services, Inc. who was the beneficial owner of at least 10% of our
voting stock within a two-year period immediately prior to the date in question.
Voting stock is defined in our certificate of incorporation as outstanding
shares of Provident Financial Services, Inc. entitled to vote in the election of
directors.
168
Restrictions in The Provident Bank's Certificate of Incorporation and Bylaws
The Provident Bank's charter will contain a provision whereby the
acquisition of beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of The Provident Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate, will be prohibited for a period of five years following
the date of completion of the conversion. If shares are acquired in violation of
this provision of The Provident Bank's charter, all shares beneficially owned by
any person in excess of 10% will be considered "excess shares" and will not be
counted as shares entitled to vote and will not be voted by any person or
counted as voting shares in connection with any matters submitted to the
stockholders for a vote. If holders of revocable proxies for more than 10% of
the shares of the common stock of Provident Financial Services, Inc. seek, among
other things, to elect one-third or more of Provident Financial Services, Inc.'s
Board of Directors, to cause Provident Financial Services, Inc.'s stockholders
to approve the acquisition or corporate reorganization of Provident Financial
Services, Inc. or to exert a continuing influence on a material aspect of the
business operations of Provident Financial Services, Inc., which actions could
indirectly result in a change in control of The Provident Bank, the Board of
Directors of The Provident Bank will be able to assert this provision of The
Provident Bank's charter against these holders. Although the Board of Directors
of The Provident Bank is not currently able to determine when and if it would
assert this provision of The Provident Bank's charter, the Board, in exercising
its fiduciary duty, may assert this provision if it were deemed to be in the
best interests of The Provident Bank, Provident Financial Services, Inc. and its
stockholders. It is unclear, however, whether this provision, if asserted, would
be successful against such persons in a proxy contest which could result in a
change in control of The Provident Bank indirectly through a change in control
of Provident Financial Services, Inc.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL, is intended to discourage
certain takeover practices by impeding the ability of a hostile acquiror to
engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation may not consummate a
merger or other business combination transaction with such corporation at any
time during the three-year period following the date such "Person" acquired 15%
of the outstanding voting stock. The term "business combination" is defined
broadly to cover a wide range of corporate transactions, including mergers,
sales of assets, issuances of stock, transactions with subsidiaries and the
receipt of disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203:
(1) any business combination if, prior to the date a person acquired 15%
of the voting stock, the Board of Directors approved either the
business combination or the transaction which resulted in the
stockholder acquiring 15%;
169
(2) any business combination involving a person who acquired at least 85%
of the outstanding voting stock in the same transaction in which 15%
was acquired (with the number of shares outstanding calculated without
regard to those shares owned by the corporation's directors who are
also officers and by certain employee stock plans);
(3) any business combination that is approved by the Board of Directors
and by a two-thirds vote of the outstanding voting stock not owned by
the interested party; and
(4) certain business combinations that are proposed after the corporation
had received other acquisition proposals and which are approved or not
opposed by a majority of certain continuing members of the Board of
Directors.
A corporation may exempt itself from the requirement of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by Section 203 of the DGCL. At the present time, the Board of
Directors does not intend to propose any such amendment.
Regulatory Restrictions
Federal Change in Bank Control Act. Federal law provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a bank holding company unless the Federal
Reserve Board has been given 60 days prior written notice. For this purpose, the
term "control" means the acquisition of the ownership, control or holding of the
power to vote 25% or more of any class of a bank holding company's voting stock,
and the term "person" includes an individual, corporation, partnership, and
various other entities. In addition, an acquiring person is presumed to acquire
control if the person acquires the ownership, control or holding of the power to
vote of 10% or more of any class of the holding company's voting stock if (a)
the bank holding company's shares are registered pursuant to Section 12 of the
Exchange Act or (b) no other person will own, control or hold the power to vote
a greater percentage of that class of voting securities. Accordingly, the prior
approval of the Federal Reserve Board would be required before any person could
acquire 10% or more of the common stock of Provident Financial Services, Inc.
The Federal Reserve Board may prohibit an acquisition of control if:
. it would result in a monopoly or substantially lessen competition;
. the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
. the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person.
170
Federal Bank Holding Company Act. Federal law provides that no company may
acquire control of a bank directly or indirectly without the prior approval of
the Federal Reserve Board. Any company that acquires control of a bank becomes a
"bank holding company" subject to registration, examination and regulation by
the Federal Reserve Board. Pursuant to federal regulations, the term "company"
is defined to include banks, corporations, partnerships, associations, and
certain trusts and other entities, and "control" of a bank is deemed to exist if
a company has voting control, directly or indirectly of at least 25% of any
class of a bank's voting stock, and may be found to exist if a company controls
in any manner the election of a majority of the directors of the bank or has the
power to exercise a controlling influence over the management or policies of the
bank. In addition, a bank holding company must obtain Federal Reserve Board
approval prior to acquiring voting control of more than 5% of any class of
voting stock of a bank or another bank holding company.
An acquisition of control of a bank that requires the prior approval of the
Federal Reserve Board under the BHCA is not subject to the notice requirements
of the Change in Bank Control Act. Accordingly, the prior approval of the
Federal Reserve Board under the BHCA would be required (a) before any bank
holding company could acquire 5% or more of the common stock of Provident
Financial Services, Inc. and (b) before any other company could acquire 25% or
more of the common stock of Provident Financial Services, Inc.
New Jersey Restrictions. The New Jersey Banking Act requires prior approval
of the Commissioner before any person may acquire a New Jersey bank holding
company, such as Provident Financial Services, Inc. except as otherwise
expressly permitted by federal law. For this purpose, the term "person" is
defined broadly to mean a natural person or a corporation, company, partnership,
or other forms of organized entities. The term "acquire" is defined differently
for an existing bank holding company and for other companies or persons. A bank
holding company will be treated as "acquiring" a New Jersey bank holding company
if the bank holding company acquires more than 5% of any class of the voting
shares of the bank holding company. Any other person will be treated as
"acquiring" a New Jersey bank holding company if it acquires ownership or
control of more than 25% of any class of the voting shares of the bank holding
company.
DESCRIPTION OF CAPITAL STOCK
General
Provident Financial Services, Inc. is authorized to issue 200,000,000
shares of common stock having a par value of $0.01 per share and 50,000,000
shares of serial preferred stock having a par value of $0.01 per share.
Provident Financial Services, Inc. currently expects to issue between 40,157,264
and 53,762,000 shares, with an adjusted maximum of 61,538,300 shares, of common
stock, including shares contributed to the foundation, and no shares of
preferred stock in the conversion. Each share of the common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of the common stock, except as noted otherwise in this prospectus. Upon
payment of the purchase price for the common stock, in accordance with the plan
of conversion, all such stock will be duly authorized, fully paid, validly
issued, and non-assessable.
171
The common stock of Provident Financial Services, Inc. will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Voting Rights. The holders of the common stock will possess exclusive
voting power in Provident Financial Services, Inc. Each stockholder will be
entitled to one vote for each share held on all matters voted upon by
stockholders, except as discussed in "Restrictions on Acquisition of Provident
Financial Services, Inc.--Provident Financial Services, Inc.'s Charter and
Bylaws--Limitation of Voting Rights." There will be no right to cumulate votes
in the election of directors. If Provident Financial Services, Inc. issues
preferred stock, subsequent to the conversion, holders of the preferred stock
may also possess voting rights.
Dividends. The holders of common stock will be entitled to receive and
share equally in such dividends as may be declared by the Board of Directors of
Provident Financial Services, Inc. out of funds legally available therefore. If
Provident Financial Services, Inc. issues preferred stock, the holders thereof
may have a priority over the holders of the common stock with respect to
dividends. See "Dividend Policy."
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of Provident Financial Services, Inc., the holders of the common
stock will be entitled to receive, after payment or provision for payment of all
debts and liabilities of Provident Financial Services, Inc. (including all
deposits in The Provident Bank and accrued interest thereon) and after
distribution of the liquidation account established upon completion of the
offering for the benefit of eligible account holders and supplemental eligible
account holders who continue their deposit accounts at The Provident Bank, all
assets of Provident Financial Services, Inc. available for distribution, in cash
or in kind. See "The Conversion And Offering--Liquidation Rights." If preferred
stock is issued subsequent to the offering, the holders thereof may have a
priority over the holders of common stock in the event of liquidation or
dissolution.
No Preemptive Rights. Holders of the common stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The common
stock will not be subject to call for redemption, and, upon receipt by Provident
Financial Services, Inc. of the full purchase price therefor, each share of the
common stock will be fully paid and non-assessable.
Preferred Stock. None of the 50,000,000 authorized shares of preferred
stock of Provident Financial Services, Inc. will be issued in the conversion.
Provident Financial Services, Inc.'s Board of Directors is authorized, without
stockholder approval, to issue serial preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such shares.
If and when issued, the serial preferred stock may rank senior to the common
stock as to dividend rights, liquidation preferences, or both, and may have
full, limited or no voting rights. Accordingly, the issuance of preferred stock
could adversely affect the voting and other rights of holders of common stock.
172
INDEMNIFICATION AND LIMITATIONS OF LIABILITY FOR
DIRECTORS, OFFICERS AND EMPLOYEES
The directors, officers, employees and agents of Provident Financial
Services, Inc. are entitled to indemnification to the fullest extent permitted
by Delaware law with respect to all expenses, liabilities or losses incurred in
connection with any proceedings involving such persons by reason of their
activities in connection with us if such indemnification is authorized by the
Board of Directors. In addition, such individuals are entitled to be paid for
expenses incurred in defending against a proceeding in advance of the final
disposition of the proceeding; however, such amounts advanced must be repaid if
it is determined any such individual was not entitled to indemnification. The
Certificate of Incorporation states that no director will be personally liable
to Provident Financial Services, Inc. or any stockholder for monetary damages
for breach of fiduciary duty except for: liability for a breach of duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, approval of an unlawful dividend, stock purchase
or stock redemption or any transaction from which the director received an
improper personal benefit.
The directors, officers, employees and agents of The Provident Bank are
similarly entitled to indemnification if a majority of disinterested directors
determine that such person acted in good faith and in a manner such person
reasonably believed to be not opposed to the best interests of The Provident
Bank and, with respect to a criminal proceeding, such person had no reasonable
cause to believe their conduct was unlawful. No director or officer of The
Provident Bank will be personally liable to The Provident Bank or any
stockholder for a breach of fiduciary duty owed to it or its stockholders except
for a breach of duty of loyalty, an act not in good faith or involving a knowing
violation of law or receipt of an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
Registrar & Transfer Company will act as the transfer agent and registrar
for the common stock.
LEGAL AND TAX MATTERS
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to Provident
Financial Services, Inc. and The Provident Bank, will issue its opinion to us
regarding the legality of the issuance of the common stock and the federal
income tax consequences of the conversion and the establishment of the
charitable foundation. The New Jersey income tax consequences of the conversion
will be passed upon for us by KPMG LLP. Certain legal matters will be passed
upon for Sandler O'Neill & Partners, L.P. by Thacher Proffitt & Wood.
173
You may obtain a copy of the plan of conversion as well as the certificate
of incorporation and bylaws of Provident Financial Services, Inc. without charge
from us by contacting John F. Kuntz, 830 Bergen Avenue, Jersey City, New Jersey,
07306, or by telephone at (201) 333-1000. Copies of the appraisal report of RP
Financial and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of The Provident Bank by contacting Mr. Kuntz as indicated above.
175
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
(With Independent Auditors' Report Thereon)
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Financial Statements
Contents
Page
Independent Auditors' Report F-2
Consolidated Statements of Condition as of June 30, 2002
(unaudited), December 31, 2001 and 2000 F-3
Consolidated Statements of Income for the six months ended
June 30, 2002 and 2001 (unaudited), and the years ended
December 31, 2001, 2000, and 1999 F-4
Consolidated Statements of Changes in Equity for the six
months ended June 30, 2002 (unaudited), and the years
ended December 31, 2001, 2000, and 1999 F-6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited), and the
years ended December 31, 2001, 2000, and 1999 F-8
Notes to Consolidated Financial Statements F-10
All schedules are omitted as the required information either is not applicable
or is included in the consolidated financial statements or related notes.
Separate financial statements for Provident Financial Services, Inc. have not
been included in this prospectus because Provident Financial Services, Inc.,
which has engaged in only organizational activities to date, has no significant
assets, contingent or other liabilities, revenues or expenses.
F-1
Independent Auditors' Report
The Examining Committee of the
Board of Managers
The Provident Bank:
We have audited the accompanying consolidated statements of condition of The
Provident Bank and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in equity, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Provident Bank
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Short Hills, New Jersey
March 20, 2002
F-2
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Condition
June 30, 2002 (Unaudited), December 31, 2001 and 2000
(Dollars in Thousands)
Assets 2002 2001 2000
-------------- -------------- --------------
Cash and due from banks (note 2) $ 76,198 71,539 53,356
Federal funds sold 50,000 35,000 13,000
Short-term investments 20,406 864 946
-------------- -------------- --------------
Total cash and cash equivalents 146,604 107,403 67,302
-------------- -------------- --------------
Investment securities (market value of $113,061
(unaudited), $114,042 and $124,221 at June 30,
2002, December 31, 2001 and 2000, respectively)
(note 3) 110,131 112,951 124,059
Securities available for sale, at fair value (note 4) 728,509 494,716 335,039
Federal Home Loan Bank stock 11,514 12,555 12,803
Loans (note 5) 1,941,687 2,016,545 1,975,190
Less allowance for loan losses (note 6) 21,958 21,909 20,198
-------------- -------------- --------------
Net loans 1,919,729 1,994,636 1,954,992
-------------- -------------- --------------
Other real estate owned, net (note 7) 123 -- 204
Banking premises and equipment, net (note 8) 42,481 42,213 39,460
Accrued interest receivable 16,306 15,331 19,147
Intangible assets (note 9) 26,234 27,781 30,723
Bank owned life insurance 46,195 44,790 42,034
Other assets (note 13) 18,451 17,341 15,816
-------------- -------------- --------------
Total assets $ 3,066,277 2,869,717 2,641,579
============== ============== ==============
Liabilities and Equity
Deposits (note 10):
Demand deposits $ 616,000 546,639 487,568
Savings deposits 823,530 742,547 646,491
Certificates of deposit of $100,000 or more 184,743 132,614 130,141
Other time deposits 902,338 919,923 904,136
-------------- -------------- --------------
Total deposits 2,526,611 2,341,723 2,168,336
Mortgage escrow deposits 10,843 13,753 11,577
Borrowed funds (note 11) 194,925 195,767 179,903
Other liabilities (notes 12 and 13) 23,330 26,344 18,691
-------------- -------------- --------------
Total liabilities 2,755,709 2,577,587 2,378,507
-------------- -------------- --------------
Retained earnings (notes 13 and 16) 302,561 287,535 263,455
Accumulated other comprehensive income (loss) 8,007 4,595 (383)
-------------- -------------- --------------
Total equity 310,568 292,130 263,072
Commitments and contingencies (notes 5, 14 and 15)
-------------- -------------- --------------
Total liabilities and equity $ 3,066,277 2,869,717 2,641,579
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-3
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Income
Six Months ended June 30, 2002 and 2001 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Six-months ended
June 30 Years ended December 31
------------------------- ---------------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- --------- ----------
Interest income:
Mortgage loans $ 48,960 53,822 105,659 111,536 98,239
Commercial loans 8,274 9,376 18,771 13,522 10,954
Consumer loans 10,915 12,212 24,314 24,971 23,216
Investment securities 2,693 2,993 5,784 7,589 10,693
Securities available for sale 16,540 11,744 25,337 21,577 22,199
Other short-term investments 128 152 174 109 75
Federal funds 762 428 940 216 670
---------- ---------- ---------- --------- ----------
Total interest income 88,272 90,727 180,979 179,520 166,046
---------- ---------- ---------- --------- ----------
Interest expense:
Deposits (note 10) 27,984 40,435 75,289 77,309 68,821
Borrowed funds 4,109 4,882 9,234 12,381 8,423
---------- ---------- ---------- --------- ----------
Total interest expense 32,093 45,317 84,523 89,690 77,244
---------- ---------- ---------- --------- ----------
Net interest income 56,179 45,410 96,456 89,830 88,802
Provision for loan losses (note 6) 1,200 1,200 1,900 2,060 2,100
---------- ---------- ---------- --------- ----------
Net interest income after
provision for loan losses 54,979 44,210 94,556 87,770 86,702
---------- ---------- ---------- --------- ----------
Non-interest income:
Fees 8,354 7,895 14,234 13,011 13,652
Net gain (loss) on securities
transactions (notes 3 and 4) 995 56 94 (325) 527
Commissions 598 518 1,011 1,513 250
Bank owned life insurance 1,405 1,344 2,756 2,034 --
Other income (note 15) 626 610 3,141 2,043 1,259
---------- ---------- ---------- --------- ----------
Total non-interest income 11,978 10,423 21,236 18,276 15,688
---------- ---------- ---------- --------- ----------
Non-interest expenses:
Salaries and employee benefits (note 12) 23,190 19,235 40,407 34,604 33,792
Net occupancy expense (note 14) 6,578 5,934 12,109 11,656 11,831
Federal deposit insurance 207 205 413 431 315
Data processing expense (note 15) 3,023 3,127 6,496 5,784 5,542
Advertising and promotion expense 1,706 1,249 3,620 2,890 3,370
Amortization of intangibles (note 9) 1,715 2,039 4,376 3,570 4,006
Other operating expenses (note 15) 8,207 6,327 13,208 16,930 12,997
---------- ---------- ---------- --------- ----------
Total non-interest expenses 44,626 38,116 80,629 75,865 71,853
---------- ---------- ---------- --------- ----------
F-4 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Income
Six Months ended June 30, 2002 and 2001 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Six-months ended
June 30 Years ended December 31
------------------------- ---------------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- --------- ----------
Income before income tax expense and
the cumulative effect of a change in
accounting principle $ 22,331 16,517 35,163 30,181 30,537
Income tax expense (note 13) 6,786 5,127 11,083 9,283 10,907
---------- ---------- ---------- --------- ----------
Income before the cumulative effect
of a change in accounting principle 15,545 11,390 24,080 20,898 19,630
Cumulative effect of a change in accounting principle,
net of tax of $0 (519) -- -- -- --
---------- ---------- ---------- --------- ----------
Net income $ 15,026 11,390 24,080 20,898 19,630
========== ========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
F-5
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
Six-months ended June 30, 2002 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Accumulated
other
Retained comprehensive Total
earnings income (loss) equity
-------------- --------------- ----------
Balance at December 31, 1998 $ 222,927 1,092 224,019
Comprehensive income:
Net income 19,630 -- 19,630
Unrealized holding losses on securities arising
during the period (net of tax of $4,075) -- (6,658)
Less reclassification adjustment for losses
included in net income (net of tax
of $200) -- 327
Net unrealized holding losses on securities -------------
arising during the period (net of tax of $4,275) (6,985) (6,985)
----------
Total comprehensive income 12,645
-------------- ------------- ----------
Balance at December 31, 1999 242,557 (5,893) 236,664
-------------- ------------- ----------
Comprehensive income:
Net income 20,898 -- 20,898
Unrealized holding gains on securities arising
during the period (net of tax of $3,252) -- 5,309
Add reclassification adjustment for
losses included in net income (net
of tax of $124) -- 201
Net unrealized holding gains on securities -------------
arising during the period (net of tax of $3,376) 5,510 5,510
----------
Total comprehensive income 26,408
-------------- ------------- ----------
Balance at December 31, 2000 263,455 (383) 263,072
-------------- ------------- ----------
Comprehensive income:
Net income 24,080 -- 24,080
Unrealized holding gains on securities arising
during the period (net of tax of $3,087) -- 5,036
Less reclassification adjustment for gains
included in net income (net of tax
of $36) -- (58)
Net unrealized holding gains on securities -------------
arising during the period (net of tax
of $3,051) 4,978 4,978
---------
Total comprehensive income 29,058
-------------- ------------- ----------
Balance at December 31, 2001 287,535 4,595 292,130
-------------- ------------- ----------
F-6 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
Six-months ended June 30, 2002 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Accumulated
other
Retained comprehensive Total
earnings income (loss) equity
-------------- --------------- ----------
The following is unaudited:
Comprehensive income:
Net income $ 15,026 -- 15,026
Unrealized holding gains on securities arising
during the period (net of tax of $2,467) 4,029
Less reclassification adjustment for
gains included in net income (net
of tax of $378) (617)
-------------
Net unrealized holding gains on securities
arising during the period (net of tax
of $2,089) 3,412 3,412
----------
Total comprehensive income 18,438
-------------- ------------- ----------
Balance at June 30, 2002 $ 302,561 8,007 310,568
-------------- ------------- ----------
See accompanying notes to consolidated financial statements.
F-7 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months ended June 30, 2002 and 2001 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Six-months ended June 30 Years ended December 31
------------------------- -----------------------------------
2002 2001 2001 2000 1999
----------- ---------- --------- --------- --------
Cash flows from operating activities:
Net income $ 15,026 11,390 24,080 20,898 19,630
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
intangibles 4,993 4,544 9,579 8,566 9,226
Provision for loan losses 1,200 1,200 1,900 2,060 2,100
Deferred tax benefit (1,991) (2,146) (3,302) (801) (2,577)
Increase in cash surrender value of
bank owned life insurance (1,405) (1,344) (2,756) (2,034) --
Net amortization of premiums and
discount on securities (193) (205) (368) (368) (235)
Accretion of net deferred loan fees (526) (690) (1,538) (1,405) (2,034)
Amortization of premiums on
purchased loans 444 860 1,386 1,255 --
Proceeds from sales of other real
estate owned, net 173 204 204 154 228
Provision for losses on other real
estate owned -- -- -- 47 16
Net gain on investment securities
transactions (36) (55) (17) (114) (428)
Net gain on sale of loans (879) (979) (1,719) (293) (75)
Proceeds from sale of loans 43,256 60,110 80,652 25,264 46,396
Net (gain) loss on securities
available for sale (959) -- (77) 439 (98)
Decrease (increase) in accrued
interest receivable (975) 2,484 3,816 (4,287) (1,336)
Increase in other assets (2,324) (681) (559) (3,757) (1,423)
Increase (decrease) in mortgage
escrow deposits (2,910) 660 2,176 (955) (2,949)
Increase (decrease) in other liabilities (3,086) (1,881) 7,653 2,883 3,395
--------- ---------- --------- --------- ---------
Net cash provided by
operating activities 49,808 73,471 121,110 47,552 69,836
--------- ---------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from maturities, calls and
paydowns of investment securities 80,015 39,300 59,014 72,202 105,207
Purchases of investment securities (77,177) (25,447) (47,951) (33,481) (34,783)
Proceeds from sales of securities
available for sale 1,041 -- 248 43,564 39,185
Proceeds from maturities and paydowns
of securities available for sale 51,110 89,408 123,026 48,311 75,259
Purchases of securities available for sale (278,294) (178,632) (275,225) (51,204) (169,836)
Purchase of Bank Owned Life Insurance -- -- -- (40,000) --
Net decrease (increase) in loans 31,679 (68,769) (121,416) (106,029) (242,762)
Purchases of premises and equipment, net (3,027) (4,123) (7,956) (2,800) (5,275)
--------- ---------- --------- --------- ---------
Net cash used in
investing activities (194,653) (148,263) (270,260) (69,437) (233,005)
--------- ---------- --------- --------- ---------
F-8 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months ended June 30, 2002 and 2001 (Unaudited), and
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
Six-months ended June 30 Years ended December 31
------------------------ ------------------------------------
2002 2001 2001 2000 1999
---------- ---------- --------- --------- ----------
Cash flows from financing activities:
Net increase in deposits $ 184,888 105,564 173,387 71,732 40,551
Proceeds from borrowings 36,000 18,880 77,240 68,441 115,945
Payments on borrowings (36,842) (18,021) (61,376) (105,179) (45,924)
----------- ---------- ---------- ---------- ----------
Net cash provided by
financing activities 184,046 106,423 189,251 34,994 110,572
----------- ---------- ---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 39,201 31,631 40,101 13,109 (52,597)
Cash and cash equivalents at beginning of period 107,403 67,302 67,302 54,193 106,790
----------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 146,604 98,933 107,403 67,302 54,193
=========== ========== ========== ========== ==========
Cash paid during the period for:
Interest on deposits and borrowings $ 31,826 45,346 84,988 89,149 77,176
=========== ========== ========== ========== ==========
Income taxes $ 9,200 6,650 12,100 11,631 11,819
=========== ========== ========== ========== ==========
Noncash investing activities - transfer of loans
receivable to other real estate owned $ 296 -- -- 539 --
=========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-9
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Provident
Bank and its wholly-owned subsidiaries (the Bank). All intercompany
balances and transactions have been eliminated in consolidation.
The consolidated statement of condition as of June 30, 2002, and the
related consolidated statements of income and cash flows for the six-month
periods ended June 30, 2002 and 2001, and consolidated statement of changes
in equity for the six-month period ended June 30, 2002, are unaudited and,
in the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been made.
Business
The Bank provides a full range of banking services to individual and
corporate customers through branch offices in New Jersey. The Bank is
subject to competition from other financial institutions and to the
regulations of certain federal and state agencies, and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements of the Bank have been prepared in
conformity with accounting principles generally accepted in the United
States of America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
consolidated balance sheets and revenues and expenses for the periods then
ended. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to change in the near
term relates to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses,
management generally obtains independent appraisals for significant
properties.
Federal Home Loan Bank of New York Stock
The Bank, as a member of the Federal Home Loan Bank of New York (FHLB), is
required to hold shares of capital stock of the FHLB at cost based on a
specified formula.
Securities
Securities include investment securities and securities available for sale.
Securities that an entity has the positive intent and ability to hold to
maturity are classified as "investment securities" and reported at
amortized cost. Securities to be held for indefinite periods of time and
not intended to be held to maturity are classified as "securities available
for sale" and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of equity, net
of deferred taxes. Gains or losses on the sale of securities are based upon
the specific identification method.
F-10 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Loans
Mortgages on real estate and other loans are stated at the face amount of
the loans. Unearned income on discounted loans, principally lease financing
loans, is generally included in income based on the rule of seventy-eights
method, which approximates the level yield method. Accrued interest on
loans that are contractually 90 days or more past due or when collection of
interest appears doubtful is reversed and charged against interest income.
Income is subsequently recognized only to the extent cash payments are
received and the principal balance is expected to be recovered. Such loans
are restored to an accrual status only if the loan is brought contractually
current and the borrower has demonstrated the ability to make future
payments of principal and interest.
An impaired loan is defined as a loan for which it is probable, based on
current information, that the lender will not collect amounts due under the
contractual terms of the loan agreement. The Bank has defined the
population of impaired loans to be all commercial loans as well as
residential mortgage loans greater than $500,000. Impaired loans are
individually assessed to determine that each loan's carrying value is not
in excess of the fair value of the related collateral or the present value
of the expected future cash flows.
Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized in interest income using the level-yield
method over the contractual lives of the specifically identified loans
adjusted for prepayments.
Allowance for Loan Losses
Losses on loans are charged to the allowance for loan losses. Additions to
this allowance are made by recoveries of loans previously charged off and
by a provision charged to expense. The determination of the balance of the
allowance for loan losses is based on an analysis of the loan portfolio,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate allowance.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and real
estate, future additions to the allowance for loan losses may be necessary
based on changes in economic conditions in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance or additional write-downs based on their judgments about
information available to them at the time of their examination.
Banking Premises and Equipment
Land is carried at cost. Banking premises, furniture, fixtures and
equipment are carried at cost, less accumulated depreciation, computed
using the straight-line method based on their estimated useful lives
(generally 25 to 40 years for buildings and 3 to 5 years for furniture and
equipment). Leasehold improvements, carried at cost, net of accumulated
amortization, are amortized over the terms of the leases or the estimated
useful lives of the assets, whichever are shorter, using the straight-line
method. Maintenance and repairs are charged to expense as incurred.
F-11 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Other Real Estate Owned
Other real estate owned is property acquired through foreclosure or deed in
lieu of foreclosure. These properties are carried at fair value, less
estimated costs to sell. Fair market value is generally based on recent
appraisals. When a property is acquired, the excess of the loan balance
over fair value is charged to the allowance for loan losses. A reserve for
real estate owned has been established to provide for possible write-downs
and selling costs. Real estate owned is carried net of the related reserve.
Operating results from real estate owned, including rental income,
operating expenses, and gains and losses realized from the sales of real
estate owned, are recorded as incurred.
Income Taxes
The Bank uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Trust Department
Trust assets consisting of securities and other property (other than cash
on deposit held by the Bank in fiduciary or agency capacities for customers
of the Trust Department) are not included in the accompanying consolidated
statements of condition because such properties are not assets of the Bank.
Intangible Assets
Intangible assets of the Bank consist of goodwill, core deposit premiums,
and mortgage servicing rights. Goodwill represents the excess of the
purchase price over the estimated fair value of identifiable net assets
acquired through purchase acquisitions. The amortization of goodwill was on
a straight-line basis over a period of 20 years prior to the adoption of
Statement No. 142, "Goodwill and Other Intangible Assets" on January 1,
2002. The amortization of goodwill is included in other operating expenses.
Core deposit premiums represent the intangible value of depositor
relationships assumed in purchase acquisitions and are amortized on a
straight-line basis over a period of ten years. Mortgage servicing rights
are recorded when purchased or originated mortgage loans are sold, with
servicing rights retained. The amortization of the mortgage servicing
rights is on an accelerated basis, adjusted for prepayments. The fair value
of the mortgage servicing rights approximates the carrying value. The
amortization of the core deposit premiums and mortgage servicing rights is
recorded in other operating expenses.
Employee Benefit Plans
The Bank maintains a pension plan which covers substantially all employees.
The Bank's policy is to fund at least the minimum contribution required by
the Employee Retirement Income Security Act of 1974.
F-12 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The Bank has a savings incentive plan covering substantially all employees
of the Bank. Contributions are currently made by the Bank in an amount
equal to 115% of employee contributions. The contribution percentage is
determined quarterly by the Board of Managers.
Postretirement Benefits Other Than Pensions
The Bank provides postretirement health care and life insurance plans to
its employees. The medical and life insurance coverage is noncontributory
to the participants. The costs of such benefits are accrued based on
actuarial assumptions from the date of hire to the date the employee is
fully eligible to receive the benefits.
Comprehensive Income
Comprehensive income is divided into net income and other comprehensive
income. Other comprehensive income includes items previously recorded
directly to equity, such as unrealized gains and losses on securities
available for sale. Comprehensive income is presented in the statements of
changes in equity.
Segment Reporting
The Bank's operations are solely in the financial services industry and
include providing to its customers traditional banking and other financial
services. The Bank operates primarily in the geographical regions of
Northern and Central New Jersey. Management makes operating decisions and
assesses performance based on an ongoing review of the Bank's consolidated
financial results. Therefore, the Bank has a single operating segment for
financial reporting purposes.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Statement No. 141,
"Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after
June 30, 2001. Statement No. 141 also specifies the criteria acquired
intangible assets must meet to be recognized and reported apart from
goodwill. Statement No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement
No. 142. Statement 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets and for Long-Lived Assets."
The Bank adopted the provisions of Statement No. 141 upon issuance. The
initial adoption of Statement 141 had no impact on the Bank's consolidated
financial statements. The Bank adopted Statement No. 142 effective January
1, 2002. In accordance with Statement No. 142, the Bank tests its
intangible assets with indefinite useful lives for impairment annually on
June 30. In accordance with the transitional provisions of Statement No.
142, impairment is recognized as a cumulative effect of a change in
accounting principle. On October 3, 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment or
disposal
F-13 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," it retains many of the fundamental provisions of
the statement. The statement is effective for fiscal years beginning after
December 15, 2001. The initial adoption of SFAS No. 144 did not have a
significant impact on the Bank's financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold and commercial paper.
Bank Owned Separate Account Life Insurance
Bank owned life insurance ("BOLI") is accounted for using the cash
surrender value method and is recorded at its realizable value. The change
in the net asset value is included in other assets and other non-interest
income.
Reclassifications
Certain reclassifications have been made to the 2001, 2000 and 1999
consolidated financial statements to conform to the presentation adopted in
2002.
(2) Cash and Due from Banks
Included in cash on hand and due from banks at June 30, 2002, December 31,
2001 and 2000 is $3,209,000 (unaudited), $5,163,000 and $3,954,000,
respectively, representing reserves required by banking regulations.
(3) Investment Securities
Investment securities at June 30, 2002, December 31, 2001 and 2000 are
summarized as follows (in thousands):
2002
-------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------------- -------------------- -------------------- -------------------
(Unaudited)
U.S. Government Agency Collateralized
mortgage obligations $ 19,852 573 1 20,424
State and municipal 86,868 2,393 22 89,239
Corporate and other 3,411 29 42 3,398
----------------- -------------------- -------------------- -------------------
$ 110,131 2,995 65 113,061
================= ==================== ==================== ===================
F-14 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
2001
---------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------------- ------------------ ------------------ -----------------
U.S. Government Agency Collateralized
mortgage obligations $ 32,849 767 1 33,615
State and municipal 75,562 782 473 75,871
Corporate and other 4,540 59 43 4,556
------------------- ------------------ ------------------ -----------------
$ 112,951 1,608 517 114,042
=================== ================== ================== =================
2000
---------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------------- ------------------ ------------------ -----------------
U.S. Government Agency Collateralized
mortgage obligations $ 51,367 184 271 51,280
State and municipal 59,751 449 197 60,003
Corporate and other 12,941 17 20 12,938
------------------- ------------------ ------------------ -----------------
$ 124,059 650 488 124,221
=================== ================== ================== =================
The Bank generally purchases securities for long-term investment
purposes, and differences between carrying and market values may
fluctuate during the investment period. In the opinion of management, the
Bank expects to recover carrying values by retaining investment
securities until their maturity or until such recovery has taken place.
Investment securities having a carrying value of $7,213,160 (unaudited),
$6,175,000 and $5,584,000 at June 30, 2002, December 31, 2001 and 2000,
respectively, are pledged to qualify for fiduciary powers to secure
deposits as required by law.
F-15 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The amortized cost and market value of investment securities at June 30,
2002 and December 31, 2001, by contractual maturity, are shown below (in
thousands). Expected maturities may differ from contractual maturities
due to prepayment or early call privileges of the issuer.
2002 2001
----------------------------------- ----------------------------------
Amortized Market Amortized Market
cost value cost value
---------------- ---------------- ---------------- --------------
(Unaudited)
Due in one year or less $ 2,926 2,931 982 982
Due after one year through five years 24,029 24,754 34,246 34,993
Due after five years through ten years 45,406 46,951 36,230 36,528
Due after ten years 37,770 38,425 41,493 41,539
---------------- ---------------- ---------------- --------------
$ 110,131 113,061 112,951 114,042
================ ================ ================ ==============
During the six months ended June 30, 2002, the Bank realized gains and
losses on paydowns of investment securities of $54,000 (unaudited) and
$18,000 (unaudited), respectively. During the six months ended June 30,
2001, the Bank realized gains and losses on paydowns of investment
securities of $68,000 (unaudited) and $13,000 (unaudited), respectively.
During 2001, the Bank realized gains and losses on paydowns of investment
securities of $24,000 and $7,000, respectively. During 2000, the Bank
realized gains and losses on paydowns of investment securities of
$127,000 and $13,000, respectively. During 1999, the Bank realized gains
and losses on paydowns of investment securities of $471,000 and $43,000,
respectively.
(4) Securities Available for Sale
Securities available for sale at June 30, 2002, December 31, 2001 and
2000 are summarized as follows (in thousands):
2002
---------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------------- -------------------- -------------------- -------------------
(Unaudited)
U.S. Government obligations $ 105,985 1,653 -- 107,638
U.S. Government agencies 442,630 7,589 353 449,866
Corporate and other 166,989 4,162 146 171,005
------------------- -------------------- -------------------- -------------------
$ 715,604 13,404 499 728,509
=================== ==================== ==================== ===================
F-16 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
2001
---------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------------- -------------------- -------------------- -------------------
U.S. Government obligations $ 76,111 1,931 -- 78,042
U.S Government agencies 309,206 3,315 1,555 310,966
Corporate and other 101,988 3,756 36 105,708
------------------- -------------------- -------------------- -------------------
$ 487,305 9,002 1,591 494,716
=================== ==================== ==================== ===================
2000
---------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------------- -------------------- -------------------- -------------------
U.S. Government obligations $ 80,994 331 103 81,222
U.S Government agencies 167,140 204 1,303 166,041
Corporate and other 87,523 510 257 87,776
------------------- -------------------- -------------------- -------------------
$ 335,657 1,045 1,663 335,039
=================== ==================== ==================== ===================
Securities available for sale having a carrying value of $80,931,751
(unaudited), $94,896,000, and $100,027,000 at June 30, 2002, December 31,
2001 and 2000, respectively, are pledged to secure other borrowings and
securities sold under repurchase agreements.
The amortized cost and market value of securities available for sale at
June 30, 2002 and December 31, 2001, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual
maturities due to prepayment or early call privileges of the issuer.
2002 2001
----------------------------------- -----------------------------------
Amortized Market Amortized Market
cost value cost value
--------------- ---------------- ---------------- ---------------
(Unaudited)
Due in one year or less $ 59,046 60,035 67,023 69,450
Due after one year through five years 166,343 170,457 105,872 108,956
Due after five years through ten years 150,110 153,112 113,075 114,576
Due after ten years 340,105 344,905 201,335 201,734
--------------- ---------------- ---------------- ---------------
$ 715,604 728,509 487,305 494,716
=============== ================ ================ ===============
F-17 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Proceeds from the sale of securities available for sale during the six
months ended June 30, 2002 were $1,041,300 (unaudited), resulting in gross
gains and losses of $0 (unaudited) and $0 (unaudited), respectively. There
were no sales of securities available for sale during the six months ended
June 30, 2001. Proceeds from the sale of securities available for sale
during 2001 were $248,000, resulting in gross gains and gross losses of
$97,000 and $20,000, respectively. During 2000, proceeds from the sale of
securities available for sale were $43,564,000, resulting in gross gains
and gross losses of $84,000 and $523,000, respectively. During 1999,
proceeds from the sale of securities available for sale were $39,185,000,
resulting in gross gains and gross losses of $134,000 and $36,000,
respectively.
(5) Loans
Loans receivable at June 30, 2002, December 31, 2001 and 2000 are
summarized as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
(Unaudited)
Mortgage loans:
Residential $ 737,821 795,442 905,825
Commercial 422,569 412,280 380,237
Multifamily 94,158 95,456 95,387
Commercial construction 92,898 80,717 75,980
---------- ---------- ----------
Total mortgage loans 1,347,446 1,383,895 1,457,429
---------- ---------- ----------
Mortgage warehouse loans 146,994 167,905 66,949
Commercial loans 151,999 141,491 121,540
Consumer loans 294,176 322,219 328,831
---------- ---------- ----------
Total loans 593,169 631,615 517,320
---------- ---------- ----------
Premium on purchased loans 2,266 2,566 3,264
Less net deferred fees 1,194 1,531 2,823
---------- ---------- ----------
$1,941,687 2,016,545 1,975,190
========== ========== ==========
The premium on purchased loans is amortized using the effective interest
method as payments are received. Required reductions due to loan
prepayments are charged against operating expense. For the six months ended
June 30, 2002 and 2001, and the years ended December 31, 2001, 2000 and
1999, $444,000 (unaudited), $860,000 (unaudited), $1,386,000, $1,255,000
and $862,000, respectively, was charged to operating expense as a result of
prepayments and normal amortization.
Included in loans are loans for which the accrual of interest income has
been discontinued due to a deterioration in the financial condition of the
borrowers. The principal amount of these nonaccrual loans is $4,627,000
(unaudited), $8,084,000 and $9,480,000 at June 30, 2002, December 31, 2001
and 2000, respectively.
F-18 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
If the nonaccrual loans had performed in accordance with their original
terms, interest income would have increased by $209,000 (unaudited),
$146,000 (unaudited), $653,000, $662,000 and $342,000 during the six months
ended June 30, 2002, 2001 and for years 2001, 2000 and 1999, respectively.
At June 30, 2002 and December 31, 2001, there are no commitments to lend
additional funds to borrowers whose loans are nonaccrual.
At June 30, 2002, December 31, 2001 and 2000, the impaired loan portfolio
is primarily collateral dependent and totals $1,385,000 (unaudited),
$1,402,000 and $1,449,000, respectively, for which general and specific
allocations to the allowance for loan losses of $32,000 (unaudited),
$32,000 and $78,000, respectively, are identified. The average balance of
impaired loans during the six months ended June 30, 2002 and 2001, and for
the years ended December 31, 2001, 2000 and 1999 was $1,392,000
(unaudited), $1,426,000 (unaudited), $1,417,000, $1,449,000 and $1,481,000,
respectively. The amount of cash basis interest income that was recognized
on impaired loans during the six months ended June 30, 2002 and 2001, and
for the years ended December 31, 2001, 2000 and 1999 was insignificant for
the respective periods.
Loans serviced for others are not included in the accompanying consolidated
statements of condition. The unpaid principal balances of loans serviced
for others was approximately $399,397,000 (unaudited), $478,055,000,
(unaudited), $395,256,000, $459,741,000, and $482,652,000 at June 30, 2002
and 2001, and December 31, 2001, 2000 and 1999, respectively.
The Bank, in the normal course of conducting its business, extends credit
to meet the financing needs of its customers through commitments.
Commitments and contingent liabilities, such as commitments to extend
credit (including loan commitments of $129,121,000 (unaudited),
$341,754,000 and $228,848,000 at June 30, 2002, December 31, 2001 and 2000,
respectively, and undisbursed home equity and personal credit lines of
$48,679,000 (unaudited), $31,411,000 and $31,739,000 at June 30, 2002,
December 31, 2001 and 2000, respectively), exist which are not reflected in
the accompanying consolidated financial statements. These instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the consolidated financial statements. The Bank uses the same
credit policies and collateral requirements in making commitments and
conditional obligations as it does for on-balance-sheet loans. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation of the borrower.
The Bank grants residential real estate loans on single and multi-family
dwellings to borrowers throughout New Jersey. Its borrowers' abilities to
repay their obligations are dependent upon various factors, including the
borrowers' income and net worth, cash flows generated by the underlying
collateral, value of the underlying collateral, and priority of the Bank's
lien on the property. Such factors are dependent upon various economic
conditions and individual circumstances beyond the Bank's control; the Bank
is therefore subject to risk of loss. The Bank believes that its lending
policies and procedures adequately minimize the potential exposure to such
risks and that adequate provisions for loan losses are provided for all
known and inherent risks. Collateral and/or guarantees are required for
virtually all loans.
F-19 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
(6) Allowance for Loan Losses
The activity in the allowance for loan losses for the six months ended June
30, 2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999
is as follows (in thousands):
Six months ended June 30 Years ended December 31
----------------------------- ---------------------------------------
2002 2001 2001 2000 1999
------------ ------------- ------------ ------------ -----------
(Unaudited)
Balance at beginning of period $ 21,909 20,198 20,198 18,794 17,381
Provision charged to operations 1,200 1,200 1,900 2,060 2,100
Recoveries of loans previously
charged off 623 418 773 1,153 1,665
Loans charged off (1,774) (771) (962) (1,809) (2,352)
------------ ------------- ------------ ----------- -----------
Balance at end of $
period 21,958 21,045 21,909 20,198 18,794
============ ============= ============ =========== ===========
(7) Other Real Estate Owned
Other real estate owned, net, at June 30, 2002, December 31, 2001 and 2000
is summarized as follows (in thousands):
2002 2001 2000
--------------- --------------- -------------
(Unaudited)
Foreclosed real estate $ 123 -- 225
Less valuation allowance -- -- 21
--------------- --------------- -------------
Total other real estate owned, net $ 123 -- 204
=============== =============== =============
An analysis of the valuation allowance for other real estate owned for the
six months ended June 30, 2002 and 2001 and for the years ended December
31, 2001, 2000 and 1999 is as follows (in thousands):
Six months ended June 30 Years ended December 31
------------------------------ ---------------------------------------------
2002 2001 2001 2000 1999
------------- -------------- -------------- ------------- -------------
(Unaudited)
Balance at beginning of period $ -- 21 21 15 32
Provision for losses -- -- -- 47 16
Charged off -- (21) (21) (41) (33)
------------- -------------- -------------- ------------- -------------
Balance at end of
period $ -- -- -- 21 15
============= ============== ============== ============= =============
F-20 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
(8) Banking Premises and Equipment
A summary of banking premises and equipment at June 30, 2002, December 31,
2001 and 2000 is as follows (in thousands):
2002 2001 2000
------------------- ------------------- -----------------
(Unaudited)
Land $ 6,244 6,244 6,255
Banking premises 39,023 36,820 35,994
Furniture, fixtures and equipment 23,242 21,808 38,140
Leasehold improvements 8,491 7,930 7,225
Construction in progress 945 2,411 1,028
------------------- ------------------- -----------------
77,945 75,213 88,642
Less accumulated depreciation and
amortization 35,464 33,000 49,182
------------------- ------------------- -----------------
$ 42,481 42,213 39,460
=================== =================== =================
Depreciation expense for the six-months ended June 30, 2002 and 2001 and
for the years ended December 31, 2001, 2000 and 1999 amounted to $2,759,000
(unaudited), $2,505,000 (unaudited), $5,203,000, $4,996,000 and $5,220,000,
respectively.
(9) Intangible Assets
Intangible assets at June 30, 2002, December 31, 2001 and 2000 are
summarized as follows (in thousands):
2002 2001 2000
------------------- ------------------- -------------------
(Unaudited)
Goodwill $ 19,908 20,483 20,375
Core deposit premiums 2,746 3,260 5,219
Mortgage servicing rights 3,580 4,038 5,129
------------------- ------------------- -------------------
$ 26,234 27,781 30,723
=================== =================== ===================
F-21 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Amortization expense of intangible assets, for the six months ended June
30, 2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999
is as follows (in thousands):
Six months ended June 30 Years ended December 31
---------------------------------- -----------------------------------------------------
2002 2001 2001 2000 1999
--------------- --------------- ---------------- ---------------- ---------------
(Unaudited)
Goodwill amortization $ 56 668 1,340 1,410 1,354
Core deposit premiums 514 525 1,030 1,036 1,029
Mortgage servicing rights 1,145 846 2,006 1,124 1,623
--------------- --------------- ---------------- ---------------- ---------------
$ 1,715 2,039 4,376 3,570 4,006
=============== =============== ================ ================ ===============
As of December 31, 2001, the Bank had unamortized goodwill in the amount of
$20.0 million as a result of the acquisition of financial institutions for
which the amortization ceased upon the adoption of Statement No. 142 and
$0.5 million resulting from the acquisition of a mortgage banking company
in 2001. On June 30, 2002, the Bank determined that the carrying amount of
the $519,000 of goodwill related to the acquisition of the mortgage company
was impaired, and recognized the impairment as a cumulative effect of a
change in accounting principle in accordance with the transitional
provisions of SFAS No. 142.
If SFAS No. 142 had been adopted on January 1, 1999, net income would have
increased as a result of ceasing the amortization of goodwill by $585,000
(unaudited) for the six months ended June 30, 2001, and by $1,171,000 in
each of the years ended December 31, 2001, 2000 and 1999.
(10) Deposits
Deposits at June 30, 2002, December 31, 2001 and 2000 are summarized as
follows (in thousands):
Weighted Weighted Weighted
average average average
interest interest interest
2002 rate 2001 rate 2000 rate
------------- ------------- ------------- ------------- ------------- -------------
(Unaudited)
Savings deposits $ 823,530 1.81% $ 742,547 2.52% $ 646,491 2.63%
Money market accounts 88,913 1.81 79,482 2.22 75,274 2.36
NOW accounts 264,955 1.19 241,239 1.45 206,372 1.50
Non-interest bearing
deposits 262,132 -- 225,918 -- 205,922 --
Certificate of deposits 1,087,081 3.23 1,052,537 5.16 1,034,277 5.55
------------- ============= ------------- ============= ------------- =============
$ 2,526,611 $ 2,341,723 $ 2,168,336
============= ============= =============
F-22 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Scheduled maturities of certificates of deposit accounts at June 30, 2002,
December 31, 2001 and 2000 are as follows (in thousands):
2002 2001 2000
----------------- ----------------- -----------------
(Unaudited)
Within one year $ 918,346 881,656 899,451
One to three years 133,530 149,306 123,859
Three to five years 33,142 19,359 7,826
Five years and thereafter 2,063 2,216 3,141
----------------- ----------------- -----------------
$ 1,087,081 1,052,537 1,034,277
================= ================= =================
Interest expense on deposits for the six months ended June 30, 2002 and
2001 and the years ended December 31, 2001, 2000 and 1999 is summarized as
follows (in thousands):
Six months ended June 30 Years ended December 31
----------------------------------- --------------------------------------------------
2002 2001 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
(Unaudited)
Savings deposits $ 6,873 8,241 15,966 16,143 14,488
NOW and money market
accounts 2,370 2,392 4,703 4,907 5,349
Certificates of deposits 18,741 29,802 54,620 56,259 48,984
---------------- ---------------- ---------------- ---------------- ----------------
$ 27,984 40,435 75,289 77,309 68,821
================ ================ ================ ================ ================
(11) Borrowed Funds
Borrowed funds at June 30, 2002, December 31, 2001 and 2000 is summarized
as follows (in thousands):
2002 2001 2000
----------------- ----------------- -----------------
(Unaudited)
Securities sold under repurchase agreements $ 42,794 51,103 40,663
FHLB line of credit -- -- 7,000
FHLB advances 152,131 144,664 132,240
----------------- ----------------- -----------------
$ 194,925 195,767 179,903
================= ================= =================
FHLB advances are at fixed rates and mature between February 1, 2002 and
November 13, 2018. These advances are secured by investment securities and
loans receivable under a blanket collateral agreement.
F-23 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Scheduled maturities of FHLB advances at June 30, 2002 and December 31,
2001 are as follows (in thousands):
2002 2001
---------------- ----------------
(Unaudited)
Within one year $ 39,617 39,994
Within two years 34,921 53,635
Within three years 35,659 18,444
Within four years 38,902 29,550
Within five years 2,500 2,500
Thereafter 532 541
---------------- ----------------
$ 152,131 144,664
================ ================
The following tables set forth certain information as to borrowed funds for
the period ended June 30, 2002 and December 31, 2001 (in thousands):
Weighted
average
Maximum Average interest
balance balance rate
----------------- ----------------- -----------------
(Unaudited)
2002:
Securities sold under
repurchase agreements $ 49,776 45,116 1.58%
FHLB advances 152,653 146,079 5.14%
================= ================= =================
2001:
Securities sold under
repurchase agreements $ 51,103 42,144 3.07%
FHLB line of credit 26,900 1,788 5.50
FHLB advances 144,664 132,756 5.90
================= ================= =================
Securities sold under repurchase agreements are arrangements with deposit
customers of the Bank to sweep funds into short-term borrowings. The Bank
uses securities available for sale to pledge as collateral for the
repurchase agreements. These securities are held at and under the control
of the Bank.
The securities sold under repurchase agreements have maturity dates within
30 days.
At June 30, 2002 (unaudited) and December 31, 2001, the Bank has an unused
line of credit with the FHLB of $100,000,000.
F-24 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
(12) Retirement Plans
The Bank has a noncontributory defined benefit pension plan covering all of
its employees who have attained age 21 with at least one year of service.
The plan provides for 100% vesting after five years of service. The plan's
assets are invested in group annuity contracts and investment funds managed
by the Prudential Insurance Company and AllAmerica Financial.
In addition to pension benefits, certain health care and life insurance
benefits are made available to retired employees. The costs of such
benefits are accrued based on actuarial assumptions from the date of hire
to the date the employee is fully eligible to receive the benefits.
The following table shows the change in benefit obligation, the change in
plan assets and the funded status for the pension plan and postretirement
health care plan at December 31, 2001 and 2000 (in thousands):
Pension Postretirement
----------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ---------------- ----------------- ---------------
Change in benefit obligation:
Benefit obligation at beginning of
year $ 19,035 16,350 14,361 13,181
Service cost 1,077 990 803 646
Interest cost 1,620 1,374 1,105 1,025
Actuarial loss (gain) 1,452 1,070 (325) (148)
Benefits paid (845) (749) (349) (343)
Change in actuarial assumptions 3,351 -- 2,339 --
---------------- ---------------- ----------------- ---------------
Benefit obligation at end
of year $ 25,690 19,035 17,934 14,361
================ ================ ================= ===============
Pension Postretirement
----------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ---------------- ----------------- ---------------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 17,707 18,056 -- --
Actual return on plan assets (1,116) (412) -- --
Employer contributions 968 812 349 343
Benefits paid (845) (749) (349) (343)
---------------- ---------------- ----------------- ---------------
Fair value of plan assets at
end of year $ 16,714 17,707 -- --
================ ================ ================= ===============
F-25 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Pension Postretirement
--------------------------------------- ---------------------------------------
2001 2000 2001 2000
----------------- ------------------ ------------------ ------------------
Funded status $ (8,976) (1,328) (17,934) (14,361)
Unrecognized transition asset -- (61) 5,443 5,861
Unrecognized prior service cost (18) 9 -- --
Unrecognized net actuarial (gain) loss 6,631 (714) 810 (1,213)
----------------- ------------------ ------------------ ------------------
Accrued benefit cost $ (2,363) (2,094) (11,681) (9,713)
================= ================== ================== ==================
Net periodic benefit cost for the years ending December 31, 2001, 2000 and
1999 included the following components (in thousands):
Pension Postretirement
---------------------------------------------- ----------------------------------------------
2001 2000 1999 2001 2000 1999
------------- ------------- ------------- ------------- ------------- -------------
Service cost $ 1,077 990 1,179 803 646 826
Interest cost 1,620 1,374 1,223 1,105 1,025 989
Expected return on plan
assets 1,117 (1,449) (789) -- -- --
Amortization of:
Net (loss) gain (2,543) (67) (589) -- -- 31
Unrecognized prior
service cost 27 30 30 -- -- --
Unrecognized
remaining assets (61) (61) (61) 410 419 419
------------- ------------- ------------- ------------- ------------- -------------
Net periodic
pension cost $ 1,237 817 993 2,318 2,090 2,265
============= ============= ============= ============= ============= =============
The weighted average actuarial assumptions used in the plan determinations
at December 31 were as follows:
2001 2000 2001 2000
----------------- ------------------ ------------------ -------------------
Discount rate 7.00% 8.00% 7.00% 8.00%
Rate of compensation increase 5.50 5.50 5.50 5.50
Expected return on plan assets 8.00 8.00 -- --
Medical and life insurance benefits
cost rate of increase -- -- 9.00 9.50
================= ================== ================== ===================
F-26 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A 1% change in the assumed health
care cost trend rate would have the following effects on postretirement
benefits (in thousands):
1% increase 1% decrease
------------------- -------------------
Effect on total service cost and interest cost $ 335 (280)
Effect on postretirement benefits obligation 2,575 (2,240)
=================== ===================
The Bank has a savings incentive plan covering substantially all employees
of the Bank. Contributions are currently made by the Bank in an amount
equal to 115% of employee contributions. The contribution percentage is
determined quarterly by the Board of Managers. Bank contributions for the
six months ended June 30, 2002 and 2001 and for the years of 2001, 2000 and
1999 were $643,000 (unaudited), $612,000 (unaudited), $1,379,000,
$1,191,000 and $1,116,000, respectively.
The Bank also maintains a nonqualified supplemental retirement plan for
certain senior officers of the Bank. The plan, which is unfunded, provides
benefits in excess of that permitted to be paid by the pension plan under
provisions of the tax law. Amounts expensed under this supplemental
retirement plan amounted to $112,500 (unaudited), $102,906 (unaudited),
$122,000, $27,000 and $27,000 for the six months ended June 30, 2002 and
2001 and for the years 2001, 2000 and 1999, respectively. At June 30, 2002,
December 31, 2001 and 2000, $1,029,799 (unaudited), $901,000 and $581,000,
respectively, is recorded in other liabilities on the Consolidated
Statements of Condition for this supplemental retirement plan.
(13) Income Taxes
The current and deferred amounts of income tax expense for the six months
ended June 30, 2002 and 2001 and the years ended December 31, 2001, 2000
and 1999 are as follows (in thousands):
Six months ended June 30 Years ended December 31
--------------------------------- -----------------------------------------------------------
2002 2001 2001 2000 1999
--------------- --------------- ----------------- ----------------- -----------------
(Unaudited)
Current:
Federal $ 8,762 7,260 14,362 10,030 12,392
State 15 13 23 54 1,092
--------------- --------------- ----------------- ----------------- -----------------
Total current 8,777 7,273 14,385 10,084 13,484
--------------- --------------- ----------------- ----------------- -----------------
Deferred:
Federal (1,991) (2,146) (3,302) (801) (2,374)
State -- -- -- -- (203)
--------------- --------------- ----------------- ----------------- -----------------
Total deferred (1,991) (2,146) (3,302) (801) (2,577)
--------------- --------------- ----------------- ----------------- -----------------
$ 6,786 5,127 11,083 9,283 10,907
=============== =============== ================= ================= =================
F-27 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The Bank also recorded a deferred (benefit) expense of $2,089,000
(unaudited), $693,000 (unaudited), $3,051,000, $3,376,000 and $(4,275,000)
during the six months ended June 30, 2002 and 2001 and in years 2001, 2000
and 1999, respectively, to reflect the tax effect of the unrealized (loss)
gain on securities available for sale.
A reconciliation between the amount of reported total income tax expense
and the amount computed by multiplying the applicable statutory income tax
rate is as follows (in thousands):
Six months ended June 30 Years ended December 31
--------------------------------- -----------------------------------------------------------
2002 2001 2001 2000 1999
--------------- --------------- ----------------- ----------------- -----------------
(Unaudited)
Tax expense at statutory rate
of 35% $ 7,634 5,781 12,308 10,563 10,688
Increase (decrease) in taxes
resulting from:
State tax, net of
federal income tax
benefit 10 8 15 35 578
Tax-exempt income (642) (484) (1,005) (873) (764)
Goodwill -- 180 410 410 408
Bank-owned life insurance (492) (470) (965) (712) --
Other, net 276 112 320 (140) (3)
-------------- -------------- ----------------- ----------------- -----------------
$ 6,786 5,127 11,083 9,283 10,907
============== ============== ================= ================= =================
F-28 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The net deferred tax asset is included in other assets in the 2002, 2001
and 2000 consolidated statements of condition. The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at June 30, 2002, December 31, 2001 and
2000 are as follows (in thousands):
2002 2001 2000
------------------- ------------------- -------------------
(Unaudited)
Deferred tax assets:
Deferred fee income $ 199 307 --
Allowance for loan losses 8,344 8,326 7,683
Postretirement benefit 4,917 4,467 3,760
Deferred compensation 585 563 407
Pension expense 1,353 588 532
Intangibles 2,153 1,764 1,634
Depreciation 2,084 1,995 1,403
SERP 391 349 221
Deferred gain 280 311 --
Unrealized loss on securities -- -- 235
Other 172 180 133
------------------- ------------------- -------------------
Total gross deferred tax assets 20,478 18,850 16,008
------------------- ------------------- -------------------
Deferred tax liabilities:
Tax reserves for loan losses $ 230 306 459
Unrealized gain on securities 4,905 2,816 --
Investment securities, principally due to
accretion of discounts 469 486 599
Originated mortgage servicing rights 554 512 438
Other -- 312 346
------------------- ------------------- -------------------
Total gross deferred tax liabilities
6,158 4,432 1,842
------------------- ------------------- -------------------
Net deferred tax asset $ 14,320 14,418 14,166
=================== =================== ===================
Legislation was enacted in August 1996 which repealed for tax purposes the
reserve method for bad debts. As a result, the Bank must instead use the
direct charge-off method to compute its bad debt deduction. The legislation
requires the Bank to recapture its post-1987 net additions to its tax bad
debt reserves. The Bank has previously provided for this liability in the
consolidated financial statements.
Equity at June 30, 2002 (unaudited) and December 31, 2001 includes
approximately $33,700,000 for which no provision for income tax has been
made. This amount represents an allocation of income to bad debt deductions
for tax purposes only. Events that would result in taxation of these
reserves include failure
F-29 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
to qualify as a bank for tax purposes, distributions in complete or partial
liquidation, stock redemptions and excess distributions to shareholders. At
June 30, 2002 (unaudited) and December 31, 2001, the Bank has an
unrecognized tax liability of $13,900,000 with respect to this reserve.
Management has determined that it is more likely than not that it will
realize the deferred tax assets based upon the nature and timing of the
items listed above. There can be no assurances, however, that there will be
no significant differences in the future between taxable income and pretax
book income if circumstances change. In order to fully realize the net
deferred tax asset, the Bank will need to generate future taxable income.
Management has projected that the Bank will generate sufficient taxable
income to utilize the net deferred tax asset; however, there can be no
assurance as to such levels of taxable income generated.
(14) Lease Commitments
On December 28, 2001, the Bank simultaneously sold its office building at
895 Bergen Avenue, Jersey City, New Jersey and agreed in separate lease
contracts to lease back office space in this building. The Company recorded
a deferred gain of $818,000 on the sale of this building. This gain is
recognized as a reduction of rent expense over the remaining lives of these
lease contracts which has a term of five years.
The approximate future minimum rental commitments for all significant
noncancellable operating leases at December 31, 2001 are summarized as
follows (in thousands):
Year ending December 31, 2001:
2002 $ 1,739
2003 1,579
2004 1,597
2005 1,270
2006 1,168
Thereafter 5,560
----------
$ 12,913
==========
Rental expense was $1,167,000 (unaudited), $903,000 (unaudited),
$1,812,000, $1,807,000 and $1,889,000 for the six months ended June 30,
2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999,
respectively.
(15) Commitments, Contingencies and Concentrations of Credit Risk
In the normal course of business, various commitments and contingent
liabilities are outstanding which are not reflected in the accompanying
consolidated financial statements. In the opinion of management, the
consolidated financial position of the Bank will not be materially affected
by the outcome of such commitments or contingent liabilities.
During 2000, the Bank settled an outstanding litigation matter for
$3,675,000 and recorded such amount in other operating expenses in the
consolidated statements of income. In addition, during 2000, the Bank
F-30 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
entered into a merger agreement with another bank. Subsequent to the merger
agreement, the other bank rescinded the agreement and paid the Bank a
$1,000,000 break-up fee, which is recorded in other income in the
consolidated statements of income.
The Bank previously entered into a long-term data processing contract. In
exchange for certain data processing services, the Bank paid a fee of
$2,887,311 (unaudited), $3,078,291 (unaudited), $6,257,000, $5,237,000 and
$5,542,000 for the six months ended June 30, 2002 and 2001 and the years
ended December 31, 2001, 2000 and 1999, respectively.
A substantial portion of the Bank's loans are one- to four-family
residential first mortgage loans secured by real estate located in New
Jersey. Accordingly, the collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned are susceptible to changes in
real estate market conditions.
(16) Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at June 30, 2002 and December 31,
2001, the Bank is required to maintain (i) a minimum leverage ratio of Tier
1 capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier
1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification of
savings institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Generally, an institution is considered well
capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%; a
Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
Management believes that, as of June 30, 2002 and December 31, 2001, the
Bank meets all capital adequacy requirements to which it is subject.
Further, the most recent FDIC notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
F-31 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The following is a summary of the Bank's actual capital amounts and ratios
as of June 30, 2002, December 31, 2001 and 2000, compared to the FDIC
minimum capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution. The Bank's actual capital
amounts and ratios are also presented in the following table (in
thousands).
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
----------------------------- ----------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------- ------------- ------------- ------------- -------------
As of June 30, 2002
(unaudited):
Leverage (Tier 1) $ 279,979 9.39 $ 119,217 4.0% $ 149,084 5.0
Risk-based capital:
Tier 1 279,979 13.84 80,914 4.0 121,342 6.0
Total 301,937 14.93 161,827 8.0 202,313 10.00
============= ============= ============= ============= ============= =============
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
----------------------------- ----------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------- ------------- ------------- ------------- -------------
As of December 31, 2001:
Leverage (Tier 1) $ 263,389 9.41% $ 112,057 4.0% $ 140,071 5.0%
Risk-based capital:
Tier 1 263,389 13.06 77,838 4.0 116,756 6.0
Total 285,298 14.15 155,675 8.0 194,594 10.0
============= ============= ============= ============= ============= =============
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
---------------------------- ----------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------- ------------- ------------- ------------- -------------
As of December 31, 2000:
Leverage (Tier 1) $ 237,861 9.12% 104,367 4.0% 130,459 5.0%
Risk-based capital:
Tier 1 237,861 13.26 71,047 4.0 106,571 6.0
Total 258,059 14.38 142,094 8.0 177,618 10.0
============= ============= ============= ============= ============= =============
(17) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for the Bank's financial
instruments.
F-32 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Cash and Cash Equivalents
For cash and due from banks, federal funds sold and short term
investments, the carrying amount approximates fair value.
Investment Securities and Securities Available for Sale
The fair value of investment securities and securities available for sale
is estimated based on bid quotations received from securities dealers, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being
valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential
mortgage, construction, land and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and into
performing and nonperforming categories.
The fair value of performing loans is estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices of similar instruments, where available.
The fair value for significant nonperforming loans is based on recent
external appraisals of collateral securing such loans, adjusted for the
timing of anticipated cash flows.
Deposits
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits and savings deposits, is equal to the amount
payable on demand. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits with similar
remaining maturities.
Borrowed Funds
The fair value of borrowed funds is estimated by discounting future cash
flows using rates available for debt with similar terms and maturities.
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates.
F-33 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
The estimated fair values of the Bank's financial instruments as of June
30, 2002, December 31, 2001 and 2000 are presented in the following table
(in thousands). Since the fair value of off-balance-sheet commitments
approximates book value, these disclosures are not included.
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
------------- ------------- ------------- ------------- ------------- -------------
(Unaudited)
Financial assets:
Cash and cash
equivalents $ 146,604 146,604 107,403 107,403 67,302 67,302
Securities
available for
sale 728,509 728,509 494,716 494,716 335,039 335,039
Investment securities 110,131 113,061 112,951 114,042 124,059 124,221
FHLB stock 11,514 11,514 12,555 12,555 12,803 12,803
Loans 1,919,729 1,970,960 1,994,636 1,999,805 1,954,992 1,968,701
Financial liabilities:
Deposits 2,526,611 2,530,589 2,341,723 2,348,411 2,168,336 2,173,070
Borrowed funds 194,925 197,915 195,767 197,047 179,903 180,745
============= ============= ============= ============= ============= =============
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Bank's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the mortgage banking operation, deferred tax assets, and premises
and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
(18) Adoption of Plan of Conversion (Unaudited)
On April 26, 2002, the Board of Managers of the Bank approved a Plan of
Conversion (the Plan) which provides for the conversion of the Bank from
a New Jersey chartered mutual savings bank to a New Jersey chartered
stock savings bank pursuant to the rules and regulations of the New
Jersey Department of Banking (the Department) and the FDIC. As part of
the conversion, the Plan provides for the concurrent formation of a
holding company (the Holding Company) that will own 100% of the common
stock of the Bank. Following receipt of all required regulatory
approvals, the approval of the depositors of the Bank eligible to vote on
the Plan and the satisfaction of all other conditions precedent to the
conversion, the Bank will consummate the conversion.
F-34 (Continued)
THE PROVIDENT BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 (Unaudited), December 31, 2001, 2000 and 1999
Upon the consummation of the conversion, the legal existence of the Bank
shall not terminate but the stock Bank shall be a continuation of the
mutual Bank. The stock Bank shall have, hold and enjoy the same in its
own right as fully and to the same extent as the same was possessed, held
and enjoyed by the mutual Bank. The stock Bank at the time and the taking
effect of the conversion shall continue to have and succeed to all the
rights, obligations and relations of the mutual bank.
In connection with the Bank's commitment to its community, the plan of
conversion provides for the establishment of a charitable foundation as
part of the conversion. The Holding Company intends to donate to the
Foundation cash and a number of authorized but unissued shares of common
stock in an aggregate amount up to 6% of the value of the shares of
Conversion Stock sold in the conversion, up to a maximum of $24 million.
The Holding Company will recognize an expense equal to the cash and fair
value of the stock in the quarter in which the contribution occurs, which
is expected to be the fourth quarter of 2002. This expense will reduce
earnings and could have a material impact on the Bank's earnings for the
fourth quarter and for 2002.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the offering. If the conversion transaction is not
completed, all costs will be charged to expense. As of June 30, 2002,
approximately $170,300 of conversion costs had been deferred.
(19) Impact of State Tax Laws Changes (Unaudited)
The New Jersey State Legislature enacted the Business Tax Reform Act in
July 2002 which will affect the Bank's net income in 2002 and beyond. The
changes to the state tax code include, among other things, an increase to
the income tax rate for companies like the Bank to 9% from 3% and the
establishment of alternative minimum tax assessments based on the gross
receipts or gross profits for each applicable reporting entity. The
legislation is retroactive to January 1, 2002. The Bank anticipates that
these changes to the state tax rate as enacted will have no material
effect on the Bank's financial statements. An increase in tax expense, if
any, would be recorded during the quarter ending September 30, 2002.
F-35
You should rely only on the information contained in this document or that
to which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered by
this prospectus to any person in any jurisdiction in which such offer or
solicitation would be unlawful. The affairs of The Provident Bank or Provident
Financial Services, Inc. may change after the date of this prospectus. Delivery
of this document and the sales of shares made hereunder does not mean otherwise.
Provident Financial Services, Inc.
(Proposed Holding Company for The Provident Bank)
51,842,000 Shares of Common Stock
(Subject to Increase to up to 59,618,300 Shares)
----------
PROSPECTUS
----------
Sandler O'Neill & Partners, L.P.
November 12, 2002
Until the later of December 17, 2002 or 25 days after the commencement of the
offering, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, 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.
Prospectus Supplement
Interests in
THE PROVIDENT BANK
Employee Savings Incentive Plan
and
Offering of up to 1,471,384 Shares of
PROVIDENT FINANCIAL SERVICES, INC.
Common Stock
In connection with The Provident Bank's conversion, Provident Financial
Services, Inc. is allowing participants in The Provident Bank Employee Savings
Incentive Plan (the "Plan") to invest all or a portion of their accounts in the
common stock of Provident Financial Services, Inc. Based upon the value of the
Plan assets at June 30, 2002, the trustee of the Plan could purchase up to
1,471,384 shares of the common stock, assuming a purchase price of $10.00 per
share. This prospectus supplement relates to the initial election of Plan
participants to direct the trust of the Plan to invest all or a portion of their
Plan accounts in the Provident Financial Services, Inc. Stock Fund at the time
of the conversion, subject to purchase priorities set forth in the Prospectus.
The Provident Financial Services, Inc. prospectus, dated November 12, 2002,
is attached to this prospectus supplement. It contains detailed information
regarding the conversion of The Provident Bank, Provident Financial Services,
Inc. common stock and the financial condition, results of operations and
business of The Provident Bank. This prospectus supplement provides information
regarding the 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"
beginning on page 14 of the prospectus.
The interests in the Plan and the offering of the common stock have not
been approved or disapproved by 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 in this prospectus supplement are not deposits or
accounts and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other Government agency.
This prospectus supplement may be used only in connection with offers and
sales by Provident Financial Services, Inc. of interests or shares of common
stock pursuant to the Plan.
No one may use this prospectus supplement to reoffer or resell interests or
shares of common stock acquired through the Plan.
You should rely only on the information contained in this prospectus
supplement and the attached prospectus. Provident Financial Services, Inc., The
Provident Bank and the Plan have not authorized anyone to provide you with
information that is different.
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 prospectus nor any
sale of common stock shall under any circumstances imply that there has been no
change in the affairs of The Provident Bank or the Plan since the date of this
prospectus supplement, or that the information contained in this prospectus
supplement incorporated by reference is correct as of any time after the date of
this prospectus supplement.
The date of this Prospectus Supplement is November 12, 2002.
TABLE OF CONTENTS
THE OFFERING...........................................................................i
Securities Offered..................................................................i
Election to Purchase Common Stock in the Offering: Priorities.......................i
Value of the Plan..................................................................ii
Election to Purchase Common Stock in the Conversion of The Provident Bank..........ii
Method of Directing Transfer......................................................iii
Time for Directing Transfer........................................................iv
Irrevocability of Transfer Direction...............................................iv
Direction to Purchase Common Stock.................................................iv
Nature of a Participant's Interest in the Common Stock..............................v
Voting Rights of Common Stock.......................................................v
DESCRIPTION OF THE PLAN................................................................1
Introduction........................................................................1
Eligibility and Participation.......................................................1
Contributions Under the Plan........................................................1
Limitations on Contributions........................................................2
Investment of Contributions.........................................................3
Performance History.................................................................6
Investment in Common Stock of Provident Financial Services, Inc.....................6
Withdrawals and Distributions from the Plan.........................................7
Administration of the Plan..........................................................9
The Trustee.........................................................................9
Plan Administrator..................................................................9
Reports to Plan Participants........................................................9
Amendment and Termination...........................................................9
Merger, Consolidation or Transfer...................................................9
Federal Income Tax Consequences....................................................10
Additional Employee Retirement Income Security Act ("ERISA") Considerations........11
Securities and Exchange Commission Reporting and Short-Swing Profit Liability......11
Financial Information Regarding Plan Assets........................................12
LEGAL OPINION.........................................................................12
THE OFFERING
Securities Offered Provident Financial Services, Inc. is offering
participation interests in The Provident Bank Employee
Savings Incentive Plan (the "Plan"). The participation
interests represent indirect ownership of Provident
Financial Services, Inc.'s common stock through the
Plan. Assuming a purchase price of $10.00 per share,
the Plan may acquire up to 1,471,384 shares of
Provident Financial Services, Inc. common stock in the
offering for the Provident Financial Services, Inc.
Stock Fund. Only employees of The Provident Bank and
affiliated corporations that have adopted this plan as
their own may become participants in the Plan. The
common stock of Provident Financial Services, Inc. to
be issued hereby is conditioned on the consummation of
the conversion. Your investment in the common stock of
Provident Financial Services, Inc. through the Plan in
the offering is subject to the purchase priorities
contained in the plan of conversion of Provident
Financial Services, Inc.
Information with regard to the Plan is contained in
this prospectus supplement and information with regard
to the financial condition, results of operations and
business of The Provident Bank is contained in the
attached prospectus. The address of the principal
executive office of The Provident Bank is 830 Bergen
Avenue, Jersey City, NJ 07306-4599.
Election to Purchase In connection with the conversion and stock offering,
Common Stock in the The Provident Bank is establishing the Provident
Offering: Priorities Financial Services, Inc. Stock Fund as a new investment
option under the Plan. You may elect to transfer all or
part of your account balances in the Plan to the
Provident Financial Services, Inc. Stock Fund, to be
used to purchase common stock issued in the offering.
All plan participants are eligible to direct a transfer
of funds to the Provident Financial Services, Inc.
Stock Fund. However, such directions are subject to the
purchase priorities in the plan of conversion of The
Provident Bank, which are (1) eligible account holders,
(2) the newly formed employee stock ownership plan of
The Provident Bank, (3) supplemental eligible account
holders and (4) officers, employees and directors of
The Provident Bank who are not eligible account holders
or supplemental eligible account holders. An eligible
account holder is a depositor at The Provident Bank
whose deposit account(s) totaled $50.00 or more on
March 31, 2001. A supplemental eligible account holder
is a depositor at The Provident Bank whose deposit
account(s) totaled $50.00 or more on September 30,
2002. If you fall into subscription offering categories
(1), (3) or (4) above, you have subscription rights to
purchase shares
of Provident Financial Services, Inc. common stock in
the subscription offering and you may use funds in the
Plan account to pay for the shares of Provident
Financial Services, Inc. common stock, which you are
eligible to purchase. The trustee of the Provident
Financial Services, Inc. Stock Fund will, to the extent
permitted, purchase common stock in accordance with
your directions. No later than the closing date of the
subscription offering period, the amount that you elect
to transfer from your existing account balances for the
purchase of common stock in the offering will be
removed from your existing accounts and transferred to
an interest bearing account pending the closing of the
offering. At the close of the offering, and subject to
a determination of whether all or any portion of your
order may be filled (based on your purchase priority
and whether the offering is oversubscribed), all or a
portion of the amount that you have transferred to
purchase stock in the offering will be applied to the
common stock purchase.
In the event the offering is oversubscribed, i.e. there
are more orders for 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 common
stock in the offering, the amount that cannot be
invested in common stock will be reinvested in the
investment funds of the Plan. The amount that cannot be
applied to the purchase of common stock in the offering
and any interest your account earned pending investment
in common stock will be reinvested in accordance with
your then existing investment election for new
contributions.
If you fail to direct the investment of your account
balances towards the purchase of any shares in
connection with the offering, your account balances
will remain in the investment funds of the Plan as
previously directed by you.
Value of the Plan As of June 30, 2002, the market value of the assets of
the Plan was approximately $14,713,847. The plan
administrator informed each participant of the value of
his or her account balance under the Plan by regular
mail as of July 29, 2002.
Election to Purchase In connection with the conversion of The Provident
Common Stock in Bank, the Plan will permit you to direct the trustee to
the Conversion of transfer all or part of the funds which represent your
The Provident Bank current beneficial interest in the assets of the Plan
to the Provident Financial Services, Inc. Stock Fund.
You may elect to apply all or any portion of your
account balance (in increments of $10) towards the
purchase of shares in the offering. The amount that you
elect to apply towards the purchase of stock in the
offering will be removed from each of your existing
accounts on
a pro rata basis.
For example, you might elect to transfer $2,000 of your
account balance to the purchase of stock in the
offering. Assuming your account balance is $5,000 and
is invested equally in four funds, the trustee will
remove $500 from each of the four funds and will
transfer that amount to the Provident Financial
Services, Inc. Stock Fund to purchase shares in the
offering. The amount you elect to transfer must be
divisible by $10.
The trustee of the Plan will subscribe for Provident
Financial Services, Inc. common stock offered for sale
in connection with the conversion of The Provident
Bank, 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 offering.
If you elect to transfer a dollar amount and, at the
time that the transfer is made, your existing account
balance is less than that dollar amount, the trustee
will withdraw up to 100% of your account balances (to
the nearest $10) and apply the entire amount to the
purchase of stock for your account. Any excess amount
which cannot be invested in common stock in the
offering, will be reinvested in accordance with your
existing investment elections for new contributions.
Method of Directing You will receive an Investment Election Form on which
Transfer you can elect to transfer all or a portion of your
account balance in the Plan to the Provident Financial
Services, Inc. Stock Fund for the purchase of stock in
the offering. If you wish to purchase stock in the
offering, you should print your name, social security
number and daytime telephone number in Section A of the
Investment Election Form. In Section B, you will need
to set forth the dollar amount you wish to transfer.
Read all sections of the Investment Election Form
carefully and then sign and date the Investment
Election Form in Section D. In addition to the
Investment Election Form, you will receive a Stock
Order and Certification Form. You should also complete
the Stock Order and Certification Form as instructed in
the Conversion Memorandum accompanying this Prospectus
Supplement and Prospectus. Both the Investment Election
Form and the Stock Order and Certification Form should
be returned to Ann Marie Callahan in the Employee
Relations Department of The Provident Bank.
If you do not wish to purchase stock in the offering,
you should check the appropriate box on the Conversion
Memorandum, sign,
date and print your name on the Conversion Memorandum
and return it to Ann Marie Callahan in the Employee
Relations Department of The Provident Bank.
Time for Directing If you wish to purchase common stock with your Plan
Transfer account balances, you must return your Investment
Election Form and your Stock Order and Certification
Form in a sealed envelope to Ann Marie Callahan, in the
Employee Relations Department of The Provident Bank,
830 Bergen Avenue, Jersey City, NJ 07306-4599. Your
Investment Election Form and Stock Order and
Certification Form must be received by Ann Marie
Callahan no later than 12:00 Noon on Friday, December
6, 2002, if you wish to purchase stock in the offering.
Irrevocability of You may not change your Investment Election Form to
Transfer Direction transfer amounts credited to your account in the Plan
to the Provident Financial Services, Inc. Stock Fund
for the purchase of stock in the offering. You will,
however, continue to have the ability to transfer
amounts not directed towards the purchase of stock in
the offering amongst all of the other investment funds
in accordance with the Plan's procedures. If the Plan
has completed its conversion to daily valuation before
the offering is concluded, you will have the
opportunity to change your transfer amounts between
investment funds on a daily basis. Once the offering is
concluded and the conversion of the Plan to daily
valuation is complete, you will also be able to
transfer amounts to and from the Provident Financial
Services, Inc. Stock Fund on a daily basis.
Direction to You will be able to purchase stock after the offering
Purchase Common through your investment in the Provident
Stock Financial Services, Inc. Stock Fund. You may direct
that a certain percentage of your future contributions
(but not in excess of 50% of your future contributions)
or your account balance in the Plan be transferred to
the Provident Financial Services, Inc. Stock Fund.
After the offering, the trustee of the Plan will
acquire common stock in open market transactions at the
prevailing price. You may change your investment
allocation on a daily basis, assuming that the Plan has
completed its conversion to daily valuation at that
time. Special restrictions may apply to transfers
directed to and from the Provident Financial Services,
Inc. Stock Fund by the participants who are subject to
the provisions of section 16(b) of the Securities
Exchange Act of 1934, as amended, relating to the
purchase and sale of securities by officers, directors
and principal shareholders of Provident Financial
Services, Inc.
Nature of a The trustee will hold Provident Financial Services,
Participant's Inc. common stock in the name of the Plan. The trustee
Interest in the will allocate the shares of Provident Financial
Common Stock Services, Inc. common stock acquired at your direction
to your account under the Plan. Your interest in the
fund will be reported on your account statement in
shares and will be valued daily, assuming the Plan has
completed its conversion from quarterly valuation to
daily valuation of account balances by the time the
offering is concluded.
In addition, your account will also be credited with a
portion of any cash held in the Provident Financial
Services, Inc. Stock Fund. Earnings on your account
will not be affected by the investment designations of
other participants in the Plan.
Voting Rights of The Plan provides that you may direct the trustee as to
Common Stock how the trustee should vote any shares of Provident
Financial Services, Inc. common stock held by the
Provident Financial Services, Inc. Stock Fund and
credited to your account. If the trustee does not
receive your voting instructions, The Provident Bank
can direct the trustee to vote your shares in the same
manner as the shares of common stock for which
instructions were given. All voting instructions will
be kept confidential.
DESCRIPTION OF THE PLAN
Introduction
The Provident Bank (formerly "Provident Savings Bank") originally adopted
the Provident Savings Bank Employee Savings Incentive Plan (the "Plan")
effective January 1, 1975. The Plan was last amended and restated effective
January 1, 1997. The Provident Bank intends that the Plan, in operation, will
comply with the requirements of the Internal Revenue Code and the Employee
Retirement Income Security Act ("ERISA"). As a plan subject to ERISA, Federal
law provides you with various rights and protections as a plan participant.
However, your benefits under the Plan are not guaranteed and are not required to
be guaranteed by the Pension Benefit Guaranty Corporation.
The Provident Bank may amend the Plan from time to time in the future to
ensure continued compliance with all applicable laws.
Reference to Full Text of Plan. The following portions of this prospectus
supplement summarize certain provisions of the Plan. The Provident Bank
qualifies these summaries in their entirety by the full text of the Plan, which
shall have priority. You may obtain copies of the Plan document by sending a
request to: Employee Savings Incentive Plan Administrator, The Provident Bank,
830 Bergen Avenue, Jersey City, NJ 07306-4599. You should carefully read the
full text of the Plan document and your summary plan description to understand
your rights and obligations under the Plan.
Eligibility and Participation
You are eligible to become a participant in the Plan upon completion of one
year of service in which you have completed at least 1,000 hours of service.
As of June 30, 2002, approximately 512 out of 587 then eligible employees
had elected to participate in the Plan.
Contributions Under the Plan
Voluntary After-Tax Employee Contributions. You are permitted, as a
participant in the Plan, to defer from 1% to 5% of your compensation (as defined
in the Plan) and to have that amount contributed to the Plan on your behalf.
You may elect to modify the amount contributed to the Plan by filing a new
compensation reduction agreement with the Plan administrator in accordance with
the procedures established under the Plan.
Employer Matching Contributions. The Provident Bank may make matching
contributions on behalf of each participant. This contribution may change from
time to time. The Provident Bank is currently contributing 115% of the total
contributions you are presently making to your account.
Limitations on Contributions
Limitations on Voluntary After-Tax Employee Contributions. For the calendar
year beginning January 1, 2002, the amount of your voluntary after-tax employee
contributions may not exceed $11,000. For each year thereafter through 2006,
this limit will be increased by $1,000 per year (in 2006, the limit will be
$15,000). Thereafter, the Internal Revenue Service will periodically increase
this annual limitation. Contributions in excess of this limit are known as
excess deferrals.
If you also participate in the ESOP and annual additions to your accounts
in both plans exceed the maximum permissible amount, the plan administrator will
reduce the contributions allocated to you under the Plan first, so that the
total annual additions do not exceed the maximum permissible amount. If employer
contributions and voluntary after-tax employee contributions are both made to
the Plan in the year that the excess occurs, voluntary after-tax employee
contributions will be reduced before employer contributions.
Limitation on Plan Contributions for Highly Compensated Employees. Special
provisions of the Internal Revenue Code limit the amount of voluntary after-tax
employee contributions and employer matching contributions that may be made to
the Plan in any year on behalf of highly compensated employees, in relation to
the amount of voluntary after-tax employee contributions and employer matching
contributions made by or on behalf of all other employees eligible to
participate in the Plan. A highly compensated employee includes any employee who
(1) was a 5% owner of Provident Financial Services, Inc. at any time during the
current or preceding year, or (2) had compensation for the preceding year of
more than $85,000 and, if The Provident Bank so elects, was in the top 20% of
employees by compensation for the preceding year. The dollar amounts in the
foregoing sentence may be adjusted annually to reflect increases in the cost of
living. If these limitations are exceeded, the level of voluntary after-tax
employee contributions by highly compensated employees may have to be adjusted.
Vesting. At all times, you have a fully vested, nonforfeitable interest in
your after-tax contribution account. You are also vested in your employer
matching contribution account in accordance with the following schedule:
Vesting Date Vesting Percentage
- ------------ ------------------
End of the first calendar year following the
end of the first year of Plan participation 33%
End of the second calendar year following the
end of the first year of Plan participation 66%
End of the third calendar year following the
end of the first year of Plan participation 100%
You also become 100% vested in employer matching contributions, if any,
made to your account upon your normal retirement age (as defined by the Plan) or
termination of employment by reason of death, disability, or termination in
accordance with the retirement provision under section 1.18(b) of The Provident
Bank Pension Plan. If you terminate employment for reasons other than these, you
will forfeit the non-vested portion of your account. Any non-vested
employer contributions which are forfeited shall be applied to subsequent
employer matching contribution accounts.
Investment of Contributions
All amounts credited to your accounts under the Plan are held in trust. PW
Trust Company has been appointed by The Provident Bank to administer the trust.
As of June 30, 2002, the Plan offers the following investment choices for
your accounts under the Plan:
Money Market Portfolio. This portfolio seeks to provide current income,
liquidity and preservation of capital. The portfolio invests in a variety
of money market instruments that have a maturity of one year or less,
including U.S. Government securities, certificates of deposit and bankers'
acceptances. Commercial paper issued by United States corporations rated
A-1 by S&P or P-1 by Moody's at the time of purchase may also be included
in the portfolio. Investments may be made in other United States corporate
obligations which are rated "A" or better by Moody's or if not rated have
comparable quality. To allow for liquidity, investment maturities must not
exceed 91 days from the date of purchase; however 20% of the portfolio may
be invested in longer term obligations. An investment in the fund is not
insured or guaranteed by the FDIC or any other Government agency. It is
possible to lose money by investing in the fund.
GIC Portfolio. This portfolio seeks to offer stability while maximizing
current income and provide book value liquidity for individual plan
participant withdrawals. The portfolio invests in fixed income securities,
primarily insurance and bank investment contracts (together, Guaranteed
Investment Contracts - GICs). UBS Global Asset Management manages the fund.
UBS Global Asset Management's investment process is a systematic,
disciplined approach involving continuous analysis of economic conditions,
yield-curve positioning and risk/reward relationships among permissible
investment alternatives to create and maintain an optimal portfolio
structure. To address the unique aspects of investing in GICs, UBS Global
Asset Management conducts a rigorous credit review focusing on five broad
areas of analysis: asset quality, asset liquidity, capital adequacy,
profitability and management quality. At the time of the purchase, each
issuer must have an AA- or equivalent rating from S&P, Moody's or Duff &
Phelps. No more than 10% of the portfolio's assets may be invested with any
one issuer at the time of purchase. An investment in the fund is not
insured or guaranteed by the FDIC or any other Government agency. It is
possible to lose money by investing in the fund.
Balanced Portfolio. This portfolio seeks to exceed the return of the
benchmark (i.e., 60% S&P 500 and 40% Lehman Brothers Aggregate Bond Index)
over market cycles. Atlanta Capital Management (ACM) believes in investing
in a diversified group of quality stocks and bonds at reasonable valuations
in light of their expected return and risk. ACM believes the best way to
identify these securities is through a combination
of economic and company specific research. ACM uses a balanced fund
approach that seeks to enhance returns through moderate shifts in asset
allocation between stocks and bonds. ACM pursues an active but disciplined
process of rebalancing the asset allocation based on its assessment of the
risk and return potential for stocks and bonds. Typically, ACM's asset
allocation varies no more than 15% plus or minus the benchmark weighting.
ACM expects the portfolio to be fully invested, with cash reserves normally
less than 10% of the portfolio. An investment in the fund is not insured or
guaranteed by the FDIC or any other Government agency. It is possible to
lose money by investing in the fund.
Conservative Equity Portfolio. This portfolio seeks capital appreciation
through investment in equity securities of companies believed to be
undervalued in the marketplace in relation to factors such as the
companies' assets, earnings, growth potential and cash flows. The
investment advisor for this portfolio is Oppenheimer Capital. The portfolio
uses value-oriented, fundamental bottom-up research analysis in seeking the
selection of high-quality businesses which are currently undervalued. These
dominant companies are characterized by competitive advantages with
significant barriers to entry, sustainable profitability and strong cash
flows, capable managements dedicated to shareholders' interests and selling
at attractive valuations. Initial stock purchase ideas are generated from
meetings with company management, industry experts, competitors, annual
reports and 10-K's. An investment in the fund is not insured or guaranteed
by the FDIC or any other Government agency. It is possible to lose money by
investing in the fund.
Capital Growth Portfolio. This portfolio seeks to achieve long-term capital
growth though investment in stocks with positive earnings momentum. The
portfolio invests in large capitalization securities that Montag & Caldwell
(M&C) believes have the ability to produce strong earnings growth over the
next twelve to eighteen months, and are reasonably priced in the market.
M&C's process emphasizes fundamental valuation techniques, which focus on a
company's estimated future earnings and dividend growth rates. M&C closely
follows 500 companies, which have market capitalizations greater than $3
billion. An investment in the fund is not insured or guaranteed by the FDIC
or any other Government agency. It is possible to lose money by investing
in the fund.
Strategic Bond Portfolio. This portfolio seeks to outperform the market as
measured by the Lehman Brothers Aggregate Bond Index on an annualized basis
over the medium term of three to seven years. The portfolio invests in a
diversified range of fixed income securities and their futures or option
derivatives while actively seeking the segments of the bond market offering
the best total return prospects. Western Asset Management Company's
strategy is to focus on four key areas: sector allocation, issue selection,
duration exposure and yield curve analysis. This focus on multiple
investment strategies attempts to minimize risk while seeking to add value
in all areas of the fixed income markets. An investment in the fund is not
insured or guaranteed by the FDIC or any other Government agency. It is
possible to lose money by investing in the fund.
Mid-Cap Growth Portfolio. This portfolio seeks to generate a total return
in excess of the benchmark (i.e. the Russell Midcap Growth) over a full
market cycle or a rolling five-year average. Seneca Capital Management LLC
(SCM)'s mid-cap earnings-driven growth strategy employs a disciplined
investment process. First a proprietary quantitative screen is used to
identify stocks that have the following attributes: positive earnings
surprises; earnings acceleration; earnings sustainability; earnings
quality; and reasonable valuations. Candidates then undergo fundamental
analysis and management assessment. This includes a careful review of a
company's financials as well as intense examination of management to
determine the quality and motivation of those who run the company.
Portfolios generally hold 30-50 stocks. A rigorous sell discipline dictates
the sale of any company when earnings disappoint, valuations become
extended, loss of confidence in management occurs or a more attractive
opportunity manifests itself. An investment in the fund is not insured or
guaranteed by the FDIC or any other Government agency. It is possible to
lose money by investing in the fund.
Overseas Equity Portfolio. This portfolio seeks to invest in equity
securities of non-U.S. companies in both mature and emerging economies
around the globe. The portfolio invests in a diversified range of stocks
outside of the U.S. Investments will be made in stocks of companies which
have determinable value, but which are unpopular at the moment -
"undervalued" stocks. Brandes selects stocks it believes are selling at a
discount to their estimated business value and possess significant
potential for superior performance with below-average risk. Brandes focuses
on stocks that meet strict value criteria: a large enough price-to-value
discrepancy to provide a significant opportunity for appreciation. In
addition, the companies generally must have a strong balance sheet and
strong cash flow. Weightings to countries are a by-product of the bottom-up
stock selection process, not a top-down "allocation," based on an economic
outlook or strategy. The portfolio is diversified among many different
countries and industries and no one stock investment may exceed 5% of the
total value of the portfolio (at cost). An investment in the fund is not
insured or guaranteed by the FDIC or any other Government agency. It is
possible to lose money by investing in the fund.
You may elect to have both past contributions and earnings, as well as
future contributions to your account invested among the funds listed above.
Transfers of past contributions and the earnings thereon do not affect the
investment mix of future contributions.
Once the conversion of the Plan to daily valuation is complete, you may
reallocate existing account balances and future contributions on a daily basis.
Changes in the amount that you elect to contribute will continue to be made on a
quarterly basis. These changes may be made either by telephone or over the
Internet.
Performance History
The following table provides performance data with respect to the
investment funds available under the Plan:
Compounded Average Annual Returns*
As of June 30, 2002
-----------------------------------------------
Yr. to Date 1 year 3 years 5 years 7 years 10 years
----------- ------ ------- ------- ------- --------
Investment Options
Money Market Portfolio.................. 0.75% 2.20% 4.47% 4.77% 4.91% 4.61%
GIC Portfolio........................... 2.43% 5.25% 5.79% 5.88% 5.98% 6.06%
Balanced Portfolio...................... -8.30% -9.42% -1.67% 5.72% 10.13% N/A
Conservative Equity Portfolio........... 17.29% -22.63% -7.30% 1.13% 8.17% 9.17%
Capital Growth Portfolio................ -14.25% -15.22% -9.32% 2.47% 10.87% 12.34%
Strategic Bond Portfolio................ 1.74% 7.51% 7.93% 7.55% 7.71% N/A
Mid-Cap Growth Portfolio................ -16.88% -30.38% -0.57% 8.98% 12.45% 15.56%
Overseas Equity Portfolio............... -3.06% -8.60% 0.52% 7.82% 11.54% 11.71%
- ----------
* net of investment management fees.
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the FDIC, The Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.
Performance quoted is past performance and is not indicative of future results.
Investment return and principal value will fluctuate so that an investors'
shares, when redeemed, may be worth more or less than their original cost.
Performance figures represent an investment made at the beginning of the
reporting period. Results for investments made during the report period will
differ. Performance information is taken from sources believed to be reliable,
but is not guaranteed as to completeness or accuracy.
Investment in Common Stock of Provident Financial Services, Inc.
In connection with the conversion of The Provident Bank to stock form as
the wholly owned subsidiary of Provident Financial Services, Inc. and the
offering of common stock of Provident Financial Services, Inc., the Plan now
offers the Provident Financial Services, Inc. Stock Fund as an additional
investment option. The Provident Financial Services, Inc. Stock Fund invests
primarily in the common stock of Provident Financial Services, Inc. You are
being given a special one-time election in connection with the offering, to
direct the trustee to invest up to 100% of your Plan account (in increments of
$10) in the Provident Financial Services, Inc. Stock Fund. Subsequent to the
offering, you may elect to invest up to 50% of your payroll deductions in the
Provident Financial Services, Inc. Stock Fund. Although you will be limited in
the amount of your payroll deductions which you can directly invest in the
Provident Financial Services, Inc. Stock Fund, you may, if you wish, transfer
amounts which you have invested in other funds under the Plan to the Provident
Financial Services, Inc. Stock Fund without limitation.
Initially, the Provident Financial Services, Inc. Stock Fund will consist
primarily of investments in the common stock of Provident Financial Services,
Inc. made on the effective date of the conversion of The Provident Bank. After
the conversion, the trustee will accept payroll deduction contributions to the
Provident Financial Services, Inc. Stock Fund. The trustee of the Plan will, to
the extent practicable, use all amounts held by it in the Provident Financial
Services, Inc. Stock Fund, including cash dividends paid on the common stock
held in the fund, to purchase additional shares of common stock of Provident
Financial Services, Inc.
As of the date of this prospectus supplement, none of the shares of
Provident Financial Services, Inc. common stock have been issued or are
outstanding and there is no established market for Provident Financial Services,
Inc. common stock. Accordingly, there is no record of the historical performance
of the Provident Financial Services, Inc. Stock Fund. Performance of the
Provident Financial Services, Inc. Stock Fund depends on a number of factors,
including the financial condition and profitability of Provident Financial
Services, Inc. and The Provident Bank and market conditions for Provident
Financial Services, Inc. common stock generally.
Investments in the Provident Financial Services, Inc. Stock Fund involve
special risks common to investments in the common stock of Provident Financial
Services, Inc.
For a discussion of material risks you should consider, see "Risk Factors"
beginning on page 14 of the attached prospectus.
Withdrawals and Distributions from the Plan
Federal law requires the Plan to impose substantial restrictions on your
right to withdraw amounts held for your benefit under the Plan prior to your
termination of employment with The Provident Bank. A Federal tax penalty equal
to 10% of the withdrawal amount that is included in your gross income, over and
above the normal Federal and state income tax, may also be imposed on
withdrawals made prior to your attainment of age 59 1/2, regardless of whether
the withdrawals occur during your employment with The Provident Bank or after
termination of employment. This penalty would not be imposed on voluntary
after-tax employee contributions but would be imposed on earnings on such
contributions and on employer contributions and earnings.
Withdrawals Prior to Termination of Employment. You may withdraw your
voluntary after-tax employee contributions and matching contributions from your
account once such contributions "mature". Voluntary after-tax employee
contributions and matching contributions will mature based on their "class."
Beginning December 31, 2000, a new class will commence each December 31st and
end the following December 30th. Each class of contributions matures at the end
of the third class year following the year in which it begins. For example,
contributions made in the class from December 31, 2000 to December 30, 2001,
will mature by December 30, 2004. In order to withdraw your voluntary after-tax
employee contributions and matching contributions which mature on any December
30th, you must file an election with the plan administrator no later than
November 30th of that year.
You may also elect an in-service withdrawal once in any 12 month period
upon 30 days written notice prior to the commencement of any calendar quarter
by:
(i) Electing a withdrawal of your voluntary contribution account. If you
make such an election, you may make no further voluntary after-tax
employee contributions until at least 6 months after the effective
date of this withdrawal; or
(ii) Electing a withdrawal of your voluntary after-tax employee
contributions and matching employer contributions for which you
previously elected deferred distribution or which are 100% vested. If
you make such a withdrawal, you may make no further voluntary
after-tax employee contributions until an entry date commencing at
least 12 months after the effective date of your withdrawal. If you
have been a participant for less than 5 years at the time of this
election, your withdrawal will be limited to the excess of the sum of
your voluntary after-tax employee contributions and matching
contributions over the matching contributions made to you in the two
years immediately preceding the date of withdrawal.
You may also withdraw your vested account (including both employer and
voluntary after-tax employee contributions) prior to termination of employment
in the event of financial hardship, subject to the hardship distribution rules
under the Plan. These requirements insure that you have a true financial need
before you make a withdrawal.
Distributions. Payment of your benefits upon your normal or deferred
retirement (as defined under the Plan), or your termination due to your
disability, death, or for other reasons, shall be made in a single lump-sum
payment or in annual installments over a period which may not exceed 10 years
(or your estimated life expectancy, if longer). Alternatively, your benefit may
be transferred to another qualified employee benefit plan or individual
retirement account if it is an eligible rollover distribution.
Distribution Upon Death. If you die before receiving the entire value of
your Plan account, your benefits will be paid to your surviving spouse or
properly designated beneficiary in a lump sum. If you die while receiving
distributions from the Plan before your entire interest is distributed, the
remaining distributions will be made to your beneficiary at least as rapidly as
under the method selected by you prior to your death.
Commencement of Benefits. The payment of your benefits will generally
commence no later than 60 days after the close of the plan year following the
later of your attainment of normal retirement age or the year in which you
terminate employment.
Nonalienation of benefits. Except for Federal income tax withholding or a
qualified domestic relations order, your benefits payable under the Plan cannot
be alienated. Examples of alienation include transferring your benefits
voluntarily and a creditor placing a lien on your benefits. Any attempt to
alienate your benefits, whether voluntary or involuntary, shall be void.
Administration of the Plan
The Trustee
The trustee of the Plan is PW Trust Company. The trustee receives, holds
and invests the contributions to the Plan in trust and distributes them to you
and your beneficiaries in accordance with the terms of the Plan and the
directions of the Plan administrator. The trustee is responsible for investment
of the assets of the trust.
Plan Administrator
The Provident Bank is the Plan administrator. The Plan administrator is
responsible for the administration of the Plan, interpretation of the provisions
of the Plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the Plan, maintenance of
Plan records, books of account and all other data necessary for the proper
administration of the Plan, preparation and filing of all returns and reports
relating to the Plan which are required to be filed and for all disclosures
required to be made to participants, beneficiaries and others.
Reports to Plan Participants
The 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.
Amendment and Termination
The Provident Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the 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 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 the Employee
Retirement Income Security Act.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the trust assets to another plan, the Plan requires that you
would, if either the 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 Plan had then terminated.
Federal Income Tax Consequences
The following is a brief summary of the material Federal income tax aspects
of the Plan. You should not rely on this summary as a complete or definitive
description of the material Federal income tax consequences relating to the
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. Please consult your tax advisor with respect to any
distribution from the Plan and transactions involving the Plan.
As a "tax-qualified retirement plan," the Internal Revenue Code affords the
Plan special tax treatment, including the following:
(1) the sponsoring employer is allowed an immediate tax deduction for the
amount contributed to the Plan each year; and
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf (except in the case of voluntary after-tax
employee contributions); and
(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free
accumulation of income and gains on investments.
The Provident Bank will administer the Plan to comply with the requirements
of the Internal Revenue Code as of the applicable effective date of any change
in the law.
Lump-Sum Distribution. A distribution from the 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 59 1/2; and
consists of the balance credited to the participant under the 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 voluntary after-tax employee contributions you
have made to this Plan and any other profit sharing plans maintained by The
Provident Bank, which is included in the distribution.
Provident Financial Services, Inc. Common Stock Included in Lump-Sum
Distribution. If a lump-sum distribution includes Provident Financial Services,
Inc. 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 Provident Financial
Services, Inc. common stock; that is, the excess of the value of Provident
Financial Services, Inc. common stock at the time of the distribution over its
cost or other basis of the securities to the trust. The tax basis of Provident
Financial Services, Inc. common stock, for purposes of computing gain or loss on
its subsequent sale, equals the value of Provident Financial Services, Inc.
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
Provident Financial Services, Inc. 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 Provident Financial Services, Inc. common stock. Any
gain on a subsequent sale or other taxable disposition of Provident Financial
Services, Inc. common stock, in excess of the amount of net unrealized
appreciation at the time of distribution, also 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 any eligible roll-over distribution from the Plan,
including beginning in 2002, voluntary after-tax employee contributions, to
another qualified plan or to an individual retirement account in accordance with
the terms of the other plan or account. Distributions that would not be
considered eligible roll-over distributions would include (i) required minimum
distributions made to comply with tax law requirements, (ii) hardship
distributions, or (iii) one of a series of distributions made over your life
expectancy or over a period of ten years or more.
Additional Employee Retirement Income Security Act ("ERISA") Considerations
As noted above, the Plan is subject to certain provisions of ERISA,
including special provisions relating to control over the Plan's assets by
participants and beneficiaries. The 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 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 Plan
administrator, or the Plan's trustee is liable under the fiduciary
responsibility provision of ERISA for any loss which results from your exercise
of control over the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account
balance in the Plan in Provident Financial Services, Inc. common stock, the
regulations under section 404(c) of the ERISA require that the 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 the common stock be conducted in a way that ensures the
confidentiality of your exercise of these rights.
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 Provident Financial Services, Inc.
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 Provident Financial
Services, Inc., 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 2 business days after the date in which a change occurs, or annually on a
Form 5 within 45 days after the close of Provident Financial Services, Inc.'s
fiscal year. Discretionary transactions in and beneficial ownership of the
common stock through the Provident Financial Services, Inc. Stock Fund of the
Plan by officers, directors and persons beneficially owning more than 10% of the
common stock of Provident Financial Services, Inc. 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 Provident
Financial Services, Inc. of profits realized by an officer, director or any
person beneficially owning more than 10% of Provident Financial Services, Inc.'s
common stock resulting from non-exempt purchases and sales of Provident
Financial Services, Inc. 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 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 common
stock distributed from the Plan for six months following such distribution and
are prohibited from directing additional purchases of units within the Provident
Financial Services, Inc. stock fund for six months after receiving such a
distribution.
Financial Information Regarding Plan Assets
Audited financial statements prepared by KPMG LLP representing the net
assets available for benefits at December 30, 2001, and changes in net assets
available for benefits for the year ended December 30, 2001 and for the period
January 1, 2000 to December 30, 2000, are attached to this prospectus
supplement.
LEGAL OPINION
The validity of the issuance of the common stock will be passed upon by
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., which firm acted as
special counsel to The Provident Bank in connection with Provident Financial
Services, Inc.'s stock offering.
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Financial Statements and Schedule
December 30, 2001 and 2000
(With Independent Auditors' Report Thereon)
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Financial Statements and Schedule
Index
Page
Independent Auditors' Report 1
Statements of Net Assets Available for Benefits - December 30, 2001
and 2000 2
Statements of Changes in Net Assets Available for Benefits - Year ended
December 30, 2001 and for the Period January 1, 2000 to
December 30, 2000 3
Notes to Financial Statements 4
Schedule
1 Schedule H, Item 4(i) - Schedule of Assets Held for Investment
Purposes at End of Year - December 30, 2001 7
Independent Auditors' Report
Employee Savings Incentive Plan Committee
The Provident Bank:
We have audited the accompanying statements of net assets available for benefits
of The Provident Bank Employee Savings Incentive Plan as of December 30, 2001
and 2000, and the related statements of changes in net assets available for
benefits for the year ended December 30, 2001 and for the period January 1, 2000
to December 30, 2000. These financial statements are the responsibility of the
Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of The Provident
Bank Employee Savings Incentive Plan as of December 30, 2001 and 2000, and the
changes in net assets available for benefits for the year ended December 30,
2001 and for the period January 1, 2000 to December 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets held
for investment purposes at end of year as of December 30, 2001 is presented for
the purpose of additional analysis and is not a required part of the basic 2001
financial statements but is supplementary information required by the Department
of Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. The supplemental schedule is the
responsibility of the Plan's management. The supplemental schedule has been
subjected to the auditing procedures applied in the audit of the basic 2001
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic 2001 financial statements taken as a whole.
/s/ KPMG LLP
Short Hills, New Jersey
September 6, 2002
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Statements of Net Assets Available
for Benefits
December 30, 2001 and 2000
2001 2000
----------- ----------
Assets:
Investments, at fair value $15,659,610 15,898,880
Contributions receivable 89,121 --
Accrued interest receivable -- 4,614
----------- ----------
Net assets available for benefits $15,748,731 15,903,494
=========== ==========
See accompanying notes to financial statements.
2
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Statements of Changes in Net Assets
Available for Benefits
Year ended December 30, 2001 and for the Period
January 1, 2000 to December 30, 2000
2001 2000
------------ ------------
Additions:
Interest income $ 32,118 59,859
Fee sharing income 31,413 12,294
Employee contributions 999,857 907,741
Employer contributions 1,378,950 1,190,637
------------ ------------
Total additions 2,442,338 2,170,531
------------ ------------
Deductions:
Distributions 1,505,967 1,817,982
Realized and unrealized depreciation of investments 880,496 63,625
Administrative expenses 210,638 210,259
------------ ------------
Total deductions 2,597,101 2,091,866
------------ ------------
(Decrease) increase in net assets
available for plan benefits (154,763) 78,665
Net assets available for benefits
at beginning of year 15,903,494 15,824,829
------------ ------------
Net assets available for plan
benefits at end of year $ 15,748,731 15,903,494
============ ============
See accompanying notes to financial statements.
3
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 30, 2001 and 2000
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared on an
accrual basis of accounting. The Provident Bank Employee
Savings Incentive Plan (the Plan) is subject to the provisions
of the Employee Retirement Income Security Act of 1974
(ERISA).
(b) Funds and Accounts Managed by PaineWebber Trust Company
Under the terms of a trust agreement between the PaineWebber
Trust Company (the custodian) and The Provident Bank (the
Bank), the custodian manages eight funds on behalf of the
Plan. The custodian holds the Plan's investment assets and
executes transactions therein. The investments in the funds
have been reported to the Bank by the custodian as having been
determined through the use of current values for all assets.
(c) Use of Estimates
The plan administrator has made estimates and assumptions
relating to the preparation of the financial statements in
conformity with accounting principles generally accepted in
the United States of America. Actual results could differ from
those estimates.
(d) Concentration of Risk
The assets of the Plan are primarily financial instruments
which are monetary in nature. As a result, interest rates have
a more significant impact on the Plan's performance than the
effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same
magnitude as the prices of goods and services as measured by
the consumer price index. Investments in investment funds are
subject to risk conditions of the individual fund objectives,
stock market fluctuations, interest rates, economic conditions
and world affairs.
(2) Plan Description
The Plan is a voluntary, participant directed defined contribution plan
sponsored by the Bank and covers all employees who have completed one
year of continuous service, as defined, with the Bank and who have
worked at least 1,000 hours during such year. The following description
of the Plan provides only general information. Eligible employees who
participate should refer to the plan agreement for a more complete
description of the Plan's provisions.
(a) Change in Plan Year
Effective December 21, 2000, the Plan year end has been
changed from December 31 to December 30. Consequently, the
2000 financial statements are presented as of December 30,
2000 and for the period January 1, 2000 to December 30, 2000.
4
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 30, 2001 and 2000
(b) Employee Contributions
Participants may elect to make voluntary contributions of 1%
to 5% of their compensation, as defined, but not more than
$10,500, which is the maximum amount allowed by the Internal
Revenue Service in any calendar year.
(c) Employer Contributions
Contributions are made by the Bank in an amount equal to 140%
of the employee's contributions. The Board of Managers sets
the rate annually, but has the power, in its sole discretion,
to set the amount for any calendar quarter, and it may suspend
or alter bank contributions for any quarter thereafter.
(d) Vesting
Participants are always fully vested in their contributions
and income or losses thereon. Employer contributions and
income or losses thereon are vested as follows: 33% vested at
the end of the first calendar year following the end of the
first year of plan participation, 66% vested at the end of the
second calendar year following the end of the first year of
plan participation, and 100% vested at the end of the third
calendar year following the end of the first year of plan
participation.
(e) Forfeitures
Forfeitures of non-vested contributions are used to reduce
subsequent employer contributions. Forfeitures for the year
ended December 30, 2001 and 2000 amounted to $35,750 and
$34,813, respectively.
(f) Withdrawals/Benefit Payments
During employment, participants may make withdrawals in cash
of vested amounts upon 30 days written notice prior to any
valuation date. Upon retirement or termination of employment,
participants may, under certain conditions, elect to receive
vested amounts in (i) a cash lump sum, (ii) a cash lump sum
during the year following termination, or (iii) equal annual
installments over a period not to exceed ten years. Mandatory
distributions are made beginning on April 1 following the year
when a participant reaches age 70-1/2.
(g) Participants' Accounts
Separate accounts for each participant are maintained and
credited with the participant's contributions, the Bank's
contributions made on behalf of that participant and the
participant's proportionate share, as defined, of plan
earnings or losses. The benefit to which a participant is
entitled is the benefit that can be provided from his or her
account.
(h) Investment Valuation
Investments are valued at fair market value. Investment
transactions are recorded on a trade date basis.
5
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 30, 2001 and 2000
(3) Plan Expenses
Certain costs of administrative services rendered on behalf of the Plan
are borne by the Bank.
(4) Plan Termination
The Plan has no termination date, and it is the Bank's intention to
continue the Plan indefinitely. However, the Bank may discontinue
contributions or terminate the Plan by action of its Board of Managers.
Upon termination of the Plan, the amounts credited to participant
accounts would become fully vested.
(5) Federal Income Taxes
The Internal Revenue Service issued its latest determination letter on
June 2, 1995 which stated that the Plan and its underlying trust
qualify under the applicable provisions of the Internal Revenue Code
and therefore are exempt from federal income taxes. In the opinion of
the plan administrator, the Plan and its underlying trust have operated
within the terms of the Plan and remain qualified under the applicable
provisions of the Internal Revenue Code.
(6) Investments
At December 30, 2001 and 2000, individual investments in excess of 5%
of net assets available for plan benefits are as follows:
2001 2000
----------- ---------
PaineWebber Trust Company:
Money market portfolio $ -- 795,151
GIC portfolio 2,232,580 2,486,553
Balanced value portfolio 2,459,435 3,779,404
Conservative equity portfolio 2,875,850 3,640,676
Capital growth portfolio 3,792,065 5,118,480
Mid-cap growth portfolio 1,342,731 --
Overseas equity portfolio 1,423,848 --
Strategic bond portfolio 877,276 --
The increase in realized and unrealized appreciation of investments for
the years ended December 30, 2001 and 2000 is as follows:
2001 2000
--------- --------
GIC portfolio $ 137,506 153,955
Balanced value portfolio (178,674) (21,458)
Conservative equity portfolio (76,557) 301,468
Capital growth portfolio (593,458) (497,590)
Mid-cap growth portfolio (147,722) --
Overseas equity portfolio (46,101) --
Strategic bond portfolio 24,510 --
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6
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 30, 2001 and 2000
7
Schedule 1
THE PROVIDENT BANK
EMPLOYEE SAVINGS INCENTIVE PLAN
Schedule H, Item 4(i) - Schedule of Assets Held for
Investment Purposes at End of Year
December 30, 2001
Market
Cost value
---------- ---------
PaineWebber Trust Company:
General account $ 7,733 7,733
Money market portfolio 648,091 648,091
GIC portfolio 1,685,424 2,232,580
Balanced value portfolio 1,763,200 2,459,435
Conservative equity portfolio 1,982,757 2,875,850
Capital growth portfolio 2,959,496 3,792,065
Mid-cap growth portfolio 1,488,532 1,342,731
Overseas equity portfolio 1,468,899 1,423,848
Strategic bond portfolio 852,967 877,276
========== =========
7