-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VtGQtUWD1L8YvmggA+fp4QVMzy8YfknZbZ7FpeqzPhNX+4eJc4/5pzTwrdfYccMj XVZxaWllxFAQUhPyaC+Ylg== 0000928385-02-003450.txt : 20021101 0000928385-02-003450.hdr.sgml : 20021101 20021101112446 ACCESSION NUMBER: 0000928385-02-003450 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20021101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001178970 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98241 FILM NUMBER: 02806079 BUSINESS ADDRESS: STREET 1: 830 BERGEN AVENUE CITY: JERSEY CITY STATE: NJ ZIP: 07306 BUSINESS PHONE: 2013331000 S-1/A 1 ds1a.txt AMENDMENT NO. 2 TO FORM S-1 As filed with the Securities and Exchange Commission on November 1, 2002 Registration No. 333-98241 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PROVIDENT FINANCIAL SERVICES, INC. (Exact Name of Registrant as Specified in its Certificate of Incorporation) Delaware 6036 42-1547151 (State or Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation Industrial Classification Identification No.) or Organization) Code Number) 830 Bergen Avenue Jersey City, New Jersey 07306 (201) 333-1000 (Address of Principal Place of Business or Intended Principal Place of Business) Paul M. Pantozzi Chairman, Chief Executive Officer and President The Provident Bank 830 Bergen Avenue Jersey City, New Jersey 07306 (201) 333-1000 (Name, Address and Telephone Number of Agent for Service) Copies to: John J. Gorman, Esq. Robert C. Azarow, Esq. Marc P. Levy, Esq. Thacher Proffitt & Wood Luse Gorman Pomerenk & Schick, P.C. 11 West 42/nd/ Street 5335 Wisconsin Avenue, N.W., Suite 400 New York, New York 10024 Washington, D.C. 20015 (212) 789-1200 (202) 274-2000 Approximate date of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box: [X] If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_]
CALCULATION OF REGISTRATION FEE ========================================================================================================================== Proposed Proposed maximum maximum Title of each class of Amount to be offering price aggregate offering Amount of securities to be registered registered per share price registration fee - -------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value per share 61,538,300 $ 10.00 $ 615,383,000/(2)/ $ 56,616/(3)/ shares/(1)/ - -------------------------------------------------------------------------------------------------------------------------- Interests of plan participants $ 14,713,840 -- -- (4) ==========================================================================================================================
(1) Includes the maximum number of shares of Common Stock that may be issued in connection with this offering and shares of Common Stock to be contributed to The Provident Bank Foundation, a private foundation. (2) Estimated solely for the purpose of calculating the registration fee. (3) $51,141 of the registration fee was previously paid on August 16, 2002. (4) The $14,713,840 of participation interests being registered is based on the assets in The Provident Bank Employee Savings Incentive Plan at June 30, 2002 which are available to purchase common stock in the offering. Pursuant to Rule 457(h)(2), no additional fee is required with respect to the interests of plan participants. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. [LOGO] PROVIDENT FINANCIAL SERVICES, INC. Proposed Holding Company for The Provident Bank Up to 59,618,300 Shares of Common Stock ================================================================================ 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 the offering 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 up to 59,618,300 shares of common stock 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 any 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 __, 2002. We may extend this expiration date without notice to you, until _____ __, 2003, unless regulators approve a later date. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond February __, 2003. If the offering is extended beyond February __, 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 1.73%. If the offering is terminated, subscribers will have their funds returned promptly, 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 21. TERMS OF THE OFFERING Price: $10.00 per share
Minimum Maximum Adjusted 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
_____________________ 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 of 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 (___) ___-____. _____________________ SANDLER O'NEILL & PARTNERS, L.P. _____________________ ___________ __, 2002 [MAP] TABLE OF CONTENTS TERMS OF THE OFFERING ................................................................................. 1 SUMMARY ............................................................................................... 1 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA ........................................................ 12 RECENT DEVELOPMENTS ................................................................................... 14 RISK FACTORS .......................................................................................... 21 FORWARD-LOOKING STATEMENTS ............................................................................ 28 THE PROVIDENT BANK .................................................................................... 29 PROVIDENT FINANCIAL SERVICES, INC. .................................................................... 30 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING ................................................... 30 OUR POLICY REGARDING DIVIDENDS ........................................................................ 32 MARKET FOR THE COMMON STOCK ........................................................................... 32 REGULATORY CAPITAL COMPLIANCE ......................................................................... 34 CAPITALIZATION ........................................................................................ 35 PRO FORMA DATA ........................................................................................ 36 COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE FOUNDATION ..................... 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 43 BUSINESS OF PROVIDENT FINANCIAL SERVICES, INC. ........................................................ 62 BUSINESS OF THE PROVIDENT BANK ........................................................................ 63 FEDERAL AND STATE TAXATION ............................................................................ 96 REGULATION ............................................................................................ 98 MANAGEMENT ............................................................................................ 117 THE CONVERSION AND OFFERING ........................................................................... 132 General ............................................................................................ 132 Reasons for the Conversion ......................................................................... 133 Effects of the Conversion .......................................................................... 134 Federal and State Tax Consequences of the Conversion ............................................... 136 Establishment of the Charitable Foundation ......................................................... 140 The Stock Offering ................................................................................. 144 How We Determined Stock Pricing and the Number of Shares to be Issued .............................. 144 Subscription Offering and Subscription Rights ...................................................... 149 Direct Community Offering .......................................................................... 151 Syndicated Community Offering ...................................................................... 152 Public Offering Alternative ........................................................................ 152 Procedure For Purchasing Shares .................................................................... 152 Restrictions on Transfer of Subscription Rights and Shares of Common Stock ......................... 155 Plan of Distribution and Marketing Arrangements .................................................... 155 Limitations on Purchases of Common Stock ........................................................... 157 Restrictions on Sale of Stock by Directors and Officers ............................................ 159 Interpretation, Amendment and Termination .......................................................... 159 Conversion Center .................................................................................. 159 Participation by Management in the Offering ........................................................ 160 RESTRICTIONS ON ACQUISITION OF PROVIDENT FINANCIAL SERVICES, INC. AND THE PROVIDENT BANK .............. 161 DESCRIPTION OF CAPITAL STOCK .......................................................................... 166 INDEMNIFICATION AND LIMITATIONS OF LIABILITY FOR DIRECTORS, OFFICERS AND EMPLOYEES .................... 168 TRANSFER AGENT AND REGISTRAR .......................................................................... 168 LEGAL AND TAX MATTERS ................................................................................. 168 EXPERTS ............................................................................................... 169 REGISTRATION REQUIREMENTS ............................................................................. 169 WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ........................................................... 169
i 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 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. 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. . 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 by delivering on 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 non-interest income relates to 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, 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. . 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 arise and that complement or enhance our market presence, although we currently have no specific arrangements or understandings regarding any specific acquisition transaction. 2 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 Commissioner 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 ability 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. 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. 3 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 or the offering is extended beyond February __, 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. 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. 4 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 $401,572,640 to a maximum of $537,620,000, with a midpoint of $470,000,000. 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 in 2002." 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 basis and 54.4% on a price-to-tangible book 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%
- ------------------ (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 $615,383,000. 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 individuals through a single account, may purchase more than $500,000 (50,000 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; . persons on joint accounts with you; . accounts registered to the same address; . companies, trusts or other entities in which you have an interest or hold a 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 accounts 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 only be allowed if the qualifying account is so registered. 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 5:00 p.m., New Jersey time, on December __, 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 _____ __, 2003. Termination of the Offering The subscription offering will expire at 5:00 p.m., New Jersey time, on December __, 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 February __, 2003, unless regulators approve a later date. If the subscription offering and/or community offerings extend beyond February __, 2003, we will resolicit subscriptions before proceeding with the offerings. All further extensions, in the aggregate, may not last beyond November __, 2004. 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 range. Specifically, we may increase the purchase limitations and we may seek regulatory approval to extend the offering beyond the _____ __, 2003 expiration date, provided that any such extension will 7 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 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 in 2002," "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 conditional 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 8 . $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 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 Receive % of Shares Midpoint of Value of Shares Plan 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 employees 10% (3) (3)
- -------------------- (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 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 (___) ___-____, Monday through Friday between 10:00 a.m. and 4:00 p.m., New Jersey time. 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 December 31, At June 30, ------------------------------------------------------------ 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 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 2001 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. 14
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 assets ....... 2.70% 2.91% 2.91% 2.87% 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 is 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 is 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 in residential mortgage loans originated 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 15 months ended June 30, 2002 and $80.7 million 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 totalled $12.8 million at September 30, 2002 compared to $8.1 million at December 31, 2001. This increase in non-performing loans is attributable 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 utilized 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 compared to 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 is 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 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 16 million or 197.0% during the nine month period. Yields in the two and five year maturity sector 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 is 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 is attributable to cash flows from deposits and principal repayments on loans and investments that are being invested 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 is attributable to the decline in short-term interest rates. The cost of 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 the borrowers 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 17 that has ceased doing business under allegations of fraud, the loan loss provision for the quarter 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 is 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 is attributable to a $1.4 million increase in salaries and benefits, and a $441,000 increase in consulting expense which is offset by a $381,000 decrease in data processing fees 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 allegation 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 18 million for the nine months 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 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 is 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 is 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 the borrowers 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 is attributable to a $334,000 increase in net gains on loan 19 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. 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 is primarily attributable to increases of $3.2 million in salaries and commissions, $2.1 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 is 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. 20 RISK FACTORS - ------------------------------------------------------------------------------- You should 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 is 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% or 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 21 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. 22 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 substantially dependent on 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. 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 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. Changes in interest rates could have an adverse affect on net interest income. 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 the operation of a bank, the classification of assets by the bank and the adequacy of a bank's allowance for loan losses. Any change in such regulation and 23 oversight, whether in the form 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 certain weaknesses and failures to comply including compliance with the reporting requirements of the Home Mortgage Disclosure Act. We have taken action and implemented procedures to redress the FDIC's concerns and findings. 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. 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, in certain instances, The Provident Bank has violated certain fair lending laws, including the Equal Credit Opportunity Act and Regulation B of the Federal Reserve Board. 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 which could result in the imposition of civil money penalties. See "Regulation--Federal Banking Regulation- Community Reinvestment Act and Fair Lending Laws." 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 to 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 can give no assurance that such strategies will be implemented or, if implemented, will be effective. 24 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 in the offering. 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 Stock Will Develop, Which may Hinder Your Ability to Sell Your Common 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 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 Hurt 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 will also 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. 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 impact 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 25 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 twelve 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. 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 the recognition and retention plan. The Contribution of Shares and Cash to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Impact Net Income in 2002 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 offering. The form of the contribution will be 80% common stock and 20% cash. The maximum amount of this initial contribution shall 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 2002 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. 26 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 Hurt 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 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 hurt 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 to pursue a tender offer, change in control or to attempt a takeover 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, or to remove directors from our Board of Directors. 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. 27 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 February __, 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 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 February __, 2003. 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. 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 28 . 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 21. 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. Our executive offices are located at 830 Bergen Avenue, Jersey City, New Jersey, and our telephone number is (201) 333-1000. For further information on our operations and financial condition, see "Business of The Provident Bank." 29 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, and will have no significant liabilities. Provident Financial Services, Inc.'s executive offices are located at 830 Bergen Avenue, Jersey City, New Jersey, and our 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 to be between $376.4 million and $510.4 million, or $587.4 million if the offering is increased by 15%. Provident Financial Services, Inc. intends to distribute the net proceeds from the offering as follows:
- ------------------------------------------------------------------------------------------------------------ 59,618,300 38,318,000 Shares 51,842,000 Shares 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 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. 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 30 "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. May Use 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. 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. 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. Following the conversion, we may also 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. 31 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 the dividends. 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 this type of 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. is being formed 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 conditional 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. 32 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. 33 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."
Pro Forma at June 30, 2002, Based Upon the Sale at $10.00 per Share of ---------------------------------------------------------------------- 59,618,300 38,318,000 45,080,000 51,842,000 Shares Historical at June 30, Shares Shares Shares (Adjusted 2002 (Minimum) (Midpoint) (Maximum) Maximum)(1) ----------------- ----------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent of of of of of Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) -------- --------- ------- --------- ------- --------- -------- --------- -------- --------- (Dollars in thousands) GAAP capital .................. $310,568 10.13% $454,969 14.04% $480,773 14.69% $506,779 15.34% $536,688 16.07% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Leverage capital: Capital level(3) ............ $279,979 9.39% $424,380 13.45% $450,184 14.13% $476,190 14.80% $506,099 15.55% Requirement(4) .............. 119,217 4.00 126,219 4.00 127,468 4.00 128,724 4.00 130,169 4.00 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Excess ................... $160,762 5.39% $298,161 9.45% $322,716 10.13% $347,466 10.80% $375,930 11.55% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Risk-based capital: Tier 1 capital level(3) ..... $279,979 13.84% $424,380 20.62% $450,184 21.81% $476,190 23.00% $506,099 24.36% Requirement(5) .............. 80,914 4.00 82,314 4.00 82,564 4.00 82,815 4.00 83,104 4.00 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Excess ................... $199,065 9.84% $342,066 16.62% $367,620 17.81% $393,375 19.00% $422,995 20.36% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Total capital level(3) ...... $301,937 14.93% $446,338 21.69% $472,142 22.87% $498,148 24.06% $528,057 25.42% Requirement(5) .............. 161,827 8.00 164,628 8.00 165,128 8.00 165,630 8.00 166,208 8.00 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Excess ................... $140,110 6.93% $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 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%. 34 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 37.0% 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. 35 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 thirty 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 $4,721,089 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 36 tables give effect to the implementation of a recognition and retention plan. Subject to the receipt of stockholder approval, the recognition and retention plan will 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, 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 the stock option plan; . 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. 37
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 stockholder's equity per share(9) .......................... 64.53% 68.98% 72.63% 76.21% =============== =============== =============== ===============
(footnotes on following page) 38 - -------------------------------------------------------------------------------- (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 thirty 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) and 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. 39
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) 40 - -------------------------------------------------------------------------------- (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 1,532,720, 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 37,194,005, 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) and 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. 41 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 were 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 Maximum Adjusted Maximum - ------------------------------------------------------------------------------------------------------------------------------------ With Without With Without With Without With Without Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) Estimated offering amount... $ 383,180 $ 412,250 $ 450,800 $ 485,000 $ 518,420 $ 557,750 596,183 641,413 Pro forma market capitalization............ 401,573 412,250 470,000 485,000 537,620 557,750 615,383 641,413 Total assets................ 3,400,605 3,422,009 3,459,659 3,485,360 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 2,755,709 2,755,709 2,755,709 2,755,709 Pro forma stockholders' equity.................... 644,896 666,300 703,950 729,651 762,833 793,002 830,549 865,855 Pro forma net income........ 15,852 15,949 16,006 16,116 16,162 16,282 16,340 16,474 Pro forma stockholders' equity per share.......... 16.06 16.16 14.98 15.04 14.19 14.22 13.49 13.50 Pro forma net income per share................. 0.42 0.42 0.37 0.36 0.32 0.31 0.28 0.27 Pro forma pricing ratios: Offering price as a percentage of pro forma stockholders' equity per share............... 62.27% 61.88% 66.76% 66.49% 70.47% 70.32% 74.13% 74.07% Offering price to pro forma net income per share................... 11.90x 11.90x 13.51x 13.89x 15.63x 16.13x 17.86x 18.52x Pro forma financial ratios: Return on assets.......... 0.93% 0.93% 0.93% 0.92% 0.92% 0.92% 0.91% 0.91% Return on equity.......... 4.92 4.79 4.55 4.42 4.24 4.11 3.93 3.81 Equity/assets............. 18.96 19.47 20.35 20.93 21.68 22.35 23.16 23.91
42 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 The Provident Bank, which will be a wholly-owned subsidiary. The Provident Bank's results from operations are generally dependent upon net interest income. Net interest income is the difference between interest income earned on loans and investments less interest expense paid on deposits and borrowings. Results from 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 on bank owned life insurance and income from our products and services. Non-interest expense consists mainly of salary and benefit expense, net occupancy expense, data processing expense, advertising and promotion expense and other operating expenses. Results from operations are also impacted by changes in interest rates, economic conditions, competition and changes in government policies, accounting changes or 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 43 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 company. 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 44 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 45 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 46 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 8.70%, 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 Value Percent Interest Rates Amount Change Change 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 47 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 rate 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. 48
For the Six Months Ended June 30, ---------------------------------------------------------------------- At June 30, 2002 2002 2001 --------------------- ---------------------------------- --------------------------------- Average Average Average Average Outstanding Yield/ Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Rate Balance Earned/Paid 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% $ 24,233 $ 580 4.79% Investment securities (1) .......... 110,131 4.53 113,982 2,693 4.72 116,568 2,993 5.13 Securities available for sale ...... 728,509 5.26 596,917 16,540 5.54 392,849 11,744 5.98 Net loans (2) ...................... 1,919,729 7.10 1,929,574 68,149 7.06 1,958,118 75,410 7.70 ----------- ----------- ----------- ---------- ---------- Total interest-earning assets .. 2,828,775 6.30 2,743,950 88,272 6.43 2,491,768 90,727 7.28 ------ ----------- ------ ---------- ------ Non-interest earning assets ........ 237,502 215,883 191,891 ----------- ----------- ---------- Total assets ................... $ 3,066,277 $ 2,959,833 $2,683,659 =========== =========== ========== Interest-bearing liabilities: Savings deposits .................. $ 823,530 1.81 $ 785,557 6,873 1.75 664,881 $ 8,241 2.48 Money market accounts ............. 88,913 1.81 89,532 851 1.90 72,665 831 2.29 Interest bearing checking ......... 264,955 1.19 250,961 1,519 1.21 202,893 1,561 1.54 Time accounts ..................... 1,087,081 3.23 1,065,741 18,741 3.52 1,062,738 29,802 5.61 Borrowings ........................ 194,925 4.18 191,195 4,109 4.30 177,178 4,882 5.51 ----------- ------ ----------- ----------- ---------- ---------- Total interest-bearing liabilities .................. 2,459,404 2.57 2,382,986 32,093 2.69 2,180,355 45,317 4.16 ------ ----------- ------ ---------- ------ Non-interest bearing liabilities .. 296,305 283,348 233,465 ----------- ----------- ---------- Total liabilities .............. 2,755,709 2,666,334 2,413,820 Equity ............................ 310,568 293,499 269,839 ----------- ----------- ---------- Total liabilities and equity ... $ 3,066,277 $ 2,959,833 $2,683,659 =========== =========== ========== Net interest income ................ $ 56,179 $ 45,410 =========== ========== Net interest rate spread ........... 3.73% 3.74% 3.12% ====== ====== ====== Net interest earning assets ........ $ 369,371 $ 360,964 $ 311,413 =========== =========== ========== Net interest margin (3) ............ 4.09% 3.64% ====== ====== Ratio of interest-earning assets to total interest-bearing liabilities ....................... 1.15x 1.15x 1.14x =========== =========== ==========
(footnotes on following page) 49
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 ========== =========== ----------------------------------- 1999 ----------------------------------- Average Average Outstanding Interest Yield/ Balance Earned/Paid Rate ----------------------------------- 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. 50 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, Year Ended December 31, ------------------------------ ------------------------------------------------------------------- 2002 vs. 2001 2001 vs. 2000 2000 vs. 1999 ------------------------------ -------------------------------- ------------------------------- Increase/(Decrease) Total Increase/(Decrease) Total Increase/(Decrease) Total Due to Increase/ Due to Increase/ Due to Increase/ ------------------ (Decrease) ------------------ (Decrease) ------------------ (Decrease) Volume Rate Volume Rate Volume Rate (In thousands) Interest-earning assets: Federal funds sold and short-term investments ... $ 1,502 $ (1,192) $ 310 $ 982 $ (193) $ 789 $ (511) $ 91 $ (420) Investment securities ..... (65) (235) (300) (1,465) (340) (1,805) (2,808) (296) (3,104) Securities available for sale ..................... 7,215 (2,419) 4,796 5,023 (1,262) 3,761 (1,312) 690 (622) Loans ..................... (1,086) (6,175) (7,261) 2,195 (3,480) (1,285) 16,890 731 17,621 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets ................ $ 7,566 (10,021) (2,455) 6,735 (5,275) 1,460 12,259 1,216 13,475 -------- --------- --------- -------- --------- -------- -------- -------- -------- Interest-bearing liabilities: Savings deposits .......... $ 3,178 (4,546) (1,368) 1,392 (1,569) (177) 425 1,230 1,655 Money market accounts ..... 337 (317) 20 (249) (114) (363) (450) (44) (494) Interest-bearing checking . 679 (721) (42) 267 (107) 160 139 (87) 52 Time accounts ............. 251 (11,312) (11,061) 2,298 (3,937) (1,639) 2,357 4,918 7,275 Borrowings ................ 932 (1,705) (773) (1,841) (1,306) (3,147) 3,258 701 3,959 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities ........... $ 5,377 $(18,601) (13,224) 1,867 (7,033) (5,166) 5,729 6,718 12,447 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net interest income ....... $ 2,189 $ 8,580 $ 10,769 $ 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. 51 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. 52 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 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 53 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 54 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 55 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 56 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 57 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 58 $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. 59 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 60 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 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 61 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, make a loan to the ESOP, 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. 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 62 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 attracts 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 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, New Jersey in Hudson County. 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 ten-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 industry groups including pharmaceutical and other manufacturing, 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 63 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 15/th/ 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-central New Jersey 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 opportunities to acquire institutions or bank branches that could expand 64 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 the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. 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 65 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 $100,000, 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." 66 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% =========== ====== ========== ======= ========== ======= ========== ======== ---------------------------------------------- 1998 1997 --------------------- ---------------------- Amount Percent Amount Percent --------- -------- ---------- -------- 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% ========= ======== ========== =======
67 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 One Three Five Through Twenty Twenty 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 68 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 69 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. Over 95% 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. 70 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. 71 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 $100,000, 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. 72 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. This portfolio includes in excess of $35.0 million of "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. 73 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 represent less than 1% 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. 74 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 loans ..................... 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 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 Manager 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 75 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. 76 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 77 warranted. Assets which do not currently expose The Provident Bank to sufficient risk to 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 that 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 78 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 of Balance Number of Balance Number Balance Number Balance Loans of Loans 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 of Balance Number of Balance Number Balance Number Balance Loans of Loans 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 ========= ========= ========= ========= ========= ========= ========= =========
79 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, 80 commercial, etc.) and loan risk rating. The factors we consider in assessing loan risk ratings include the following: . 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 and commercial mortgage 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 81 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. 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. 82 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. 83 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 Loans in Amount of Loans in Amount of Loans in Amount of Each Allowance Each Allowance Each Allowance for Category to for Loan Category to for Loan Category to Loan 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 Loans in Amount of Loans in Amount of Loans in Amount of Each Allowance Each Allowance Each Allowance for Category to for Loan Category to for Loan Category to Loan 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. 84 Our investment policy is designed to generate a favorable rate of return consistent with established guidelines for liquidity, safety, 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 85 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 Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair 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 Thrus.............................. 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 FNMA and FHLB stock. 86 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 to More Than Five Years to One Year or Less Five Years 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 Thrus..... $ 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% ========== ========= ========== ========= ============ ========= ------------------------------------------------ After Ten Years Total ---------------------- ---------------------- Weighted Weighted Carrying Average Carrying Average Value Yield Value Yield ---------- --------- ---------- --------- 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 Thrus..... $ -- --% $ 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. 87 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 ============ ============ ============ ============ ============
88 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 ========== ========== ==========
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
89 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
The following table sets forth certain information as to our borrowings at the dates indicated.
At June 30, At December 31, -------------------------------------------- 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. 90 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 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 Date of Leased or Leased or 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 20/th/ Owned 1972 N/A $ 334.9 464-472 Avenue C Bayonne, New Jersey 07002 Bayonne 26/th/ 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
91
Original Year Date of Leased or Leased or Lease Location Owned Acquired Expiration Net Book Value - ------------------------------------------------ --------- --------------- -------------- ---------------- (In thousands) Bergen Journal Square Leased 12/28/01 1/31/07 $ 55.8 895 Bergen Avenue Jersey City, New Jersey 07306 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
92
Original Year Date of Leased or Leased or Lease Location Owned Acquired Expiration Net Book Value - ------------------------------------------------ --------- --------------- -------------- ---------------- (In thousands) Freehold (2) Leased 1996 5/31/10 $ 274.9 4331 Route 9 and Pond Road Freehold, New Jersey 07728 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
93
Original Year Date of Leased or Leased or Lease Location Owned Acquired Expiration Net Book Value - ------------------------------------------------ --------- --------------- -------------- ---------------- (In thousands) Monroe Leased 6/1/97 5/31/07 $ 145.9 170 Overlook Drive Monroe, New Jersey 08343 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
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Original Year Date of Leased or Leased or Lease Location Owned Acquired Expiration Net Book Value - ------------------------------------------------ --------- --------------- -------------- ---------------- (In thousands) Teaneck Leased 1/1/76 12/31/05 $ 123.5 464 Cedar Lane Teaneck, New Jersey 07666 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 - 55/th/ Street Owned 1970 N/A $ 1,019.0 5410 Bergenline Avenue West New York, New Jersey 07093 West New York - 60/th/ Street Owned 1971 N/A $ 542.8 6002 Broadway and 60/th/ Street West New York, New Jersey 07093 West New York - 62/nd/ 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. 95 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 96 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 97 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. 98 - -------------------------------------------------------------------------------- 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 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. 99 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 100 . up to 45% of pretax net unrealized holding gains on available forZsale 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. 101 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 --------------------------------------------------------------------------------- Historical Percent of Pro Forma Percent of Pro Forma 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 federally chartered 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 102 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 103 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. 104 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 limit on 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. 105 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-Bliley Financial Services Modernization Act. 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 106 interests in real estate or are made for the purpose of financing permanent improvements to real 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: 107 . a lending test, to evaluate the institution's record of making loans in its service areas; . 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 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 certain weaknesses and failures to comply, including compliance with the reporting requirements of the Home Mortgage Disclosure Act. We have taken action and implemented procedures to redress the FDIC's concerns and findings. 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. 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, in certain instances, The Provident Bank has violated certain fair lending laws, including the Equal Credit Opportunity Act and Regulation B of the Federal Reserve Board. 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 which could result in the imposition of civil money penalties. 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, and 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. 108 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 defines the five capital categories as follows: 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%; 109 . 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 parent holding company. The aggregate liability of a parent holding company is limited to the lesser of: . an amount equal to the 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 to 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 110 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 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- 111 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 dramatically 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. The USA PATRIOT Act In response to the events of September 11/th/, 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 impose 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 by October 26, 2002 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, 112 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. 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. 113 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. 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"; 114 . 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 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 of 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. 115 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 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 116 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 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." 117
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. 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. 118 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. 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 119 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. 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 120 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. 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. 121 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. 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 LTIP All Other Name and Principal Position Year Salary Bonus (2) Compensation (3) Payouts Compensation (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) 122 (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 123 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 36 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 124 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 125 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. 126 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 120/th/ 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. 127 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), 128 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 129 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 130 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; . 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. 131 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. - -------------------------------------------------------------------------------- General Our Board of Managers has unanimously adopted the plan of conversion, as amended, pursuant to which The Provident Bank will reorganize 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. 132 Provident Financial Services, Inc. has requested 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 December __, 2002. Depositors with deposit accounts totaling at least $100 at The Provident Bank on ______, 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 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 $401,572,640 and $537,620,000, 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, L.C., 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. will 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. 133 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 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 134 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. 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. 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 135 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 bears to the aggregate balance of all qualifying deposit accounts on that date. 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) 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 the qualifying date 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 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 136 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; 6. It is more likely than not that the fair market 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 9. It is more likely than not that the tax basis of the common stock purchased in the conversion will be the amount paid and 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 137 specifically declined to issue rulings on whether nontransferable subscription rights have value. Whether subscription rights are considered to have ascertainable value is a question of fact. 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. However, whether or not the nontransferable subscription rights have value for tax purposes is based on all of the facts and circumstances present. 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; 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 should have the same basis as they had immediately prior to the conversion; 138 4. The holding period of The Provident Bank's assets, in its stock form, should 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, should be treated as if there had been no reorganization. Accordingly, the taxable year of The Provident Bank should 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 should 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 should 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) should 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 should 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; 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, should be zero, that being the cost of such property; 139 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 should be zero. Accordingly, no gain or loss should 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 should 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 as to 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, the New Jersey opinion of KPMG LLP, in its reliance on the federal opinion, is 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 offering. 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 2002, the year in which the foundation is established. The contribution of the common stock to the foundation will not be included in determining whether 140 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. 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 141 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." 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 142 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. 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; 143 (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. 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 the 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 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. 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 5:00 p.m., New Jersey time, on December __, 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 144 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, fundamental analysis of the peer group and The Provident Bank to determine the pro forma market value of Provident Financial Services, Inc. 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; . 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, 145 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 of 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. . 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 ratio and the price-to-earnings ratio or P/E ratio. The price-to-book 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 ratio of 65.9%, compared to the peer group's price-to-book 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 ratio constitute pro forma information calculated using the assumptions under "Pro Forma Data." 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 basis and 54.4% on a price-to-tangible book 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. 146 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 $401,572,640 to a maximum of $537,620,000, with a midpoint of $470,000,000 (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 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 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 147 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 $401,572,640 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 bank regulators for periods of up to 90 days not to extend beyond 24 months following the special meeting of depositors, or _______ __, 2004. 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." No sale of shares of common stock may occur unless, prior to such consummation, RP Financial confirms to The Provident Bank and the bank regulators that, to the best of its knowledge, nothing of a material nature has occurred that, taking into account all relevant 148 factors, would cause RP Financial to conclude that the independent valuation is incompatible with its estimate of the pro forma market value of the common stock of Provident Financial Services, Inc. at the conclusion of the offering. Any change that would result in an aggregate purchase price that is below the minimum or above the maximum of the estimated valuation range would be subject to regulatory approval. If such confirmation is not received, we may extend the offering, reopen or commence a new offering, establish a new estimated valuation range and commence a resolicitation of all purchasers with the approval of the bank regulators or take such other actions as permitted by the bank regulators in order to complete the offering. 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 balance 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) $500,000 of common stock; (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 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 $1.0 billion of qualifying 149 deposits as of that date, then the depositor would receive subscription rights to subscribe for up to $500,000 of common stock, which is the greater of: (i) $500,000 of common stock; (ii) $518,420 of common stock, which is one-tenth of one percent of a $518,420,000 offering; and (iii) $19,441 of common stock, or 1,944 shares, which is the product of: 15 x (51,842,000 shares of common stock x ($25,000/$1.0 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) $500,000 of common stock; (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. 150 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. 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 category (1) or (3) above will receive a nontransferable subscription right to purchase up to $500,000 of common stock (50,000 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; (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 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 $500,000 of common stock in the community offering. Further, Provident Financial Services, 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 The Provident Bank depositors entitled to vote on the plan of conversion, 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. 151 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. - -------------------------------------------------------------------------------- The opportunity to purchase shares of common stock in the direct community or syndicated offering 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. - -------------------------------------------------------------------------------- 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 152 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 5:00 p.m., New Jersey time on December __, 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 February __, 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 or in person) to the Conversion Center, a properly executed and completed order form, together with full payment for the shares purchased. The order form must be received prior to 5:00 p.m., New Jersey time on December __, 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. 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. 153 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 Center. Depositors interested in using funds in an IRA maintained at the bank should contact the Conversion Center as soon as possible. - -------------------------------------------------------------------------------- Once submitted, an order cannot be modified or revoked unless the offering is terminated or extended beyond February __, 2003. - -------------------------------------------------------------------------------- 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 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. 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. 154 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 to whom they are granted and only for such person's account. Joint stock registration will only be allowed if the qualifying account is so registered. 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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 information 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 155 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 offering, 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 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 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 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 156 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 subscription offering by a person or group of persons acting through a single account is $500,000; 4) 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; 5) 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 the Board 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 6) The ESOP intends to purchase 8% of the shares sold in the offering. 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. 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. 157 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 . 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. 158 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." 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 members. 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 members, 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 members 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 (___) ___-____, from 10:00 a.m. to 4:00 p.m., New Jersey time, Monday through Friday. 159 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. 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 160 RESTRICTIONS ON ACQUISITION OF PROVIDENT FINANCIAL SERVICES, INC. AND THE PROVIDENT BANK General Although the Boards of Directors of The Provident Bank and 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 of Directors, 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 charter 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 shareholders can be called only by the Board of Directors 161 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 (i) no person shall 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.; and (ii) shares beneficially owned in violation of the stock ownership restriction described above shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to a vote of stockholders. For these purposes, a person (including management) who has obtained the right to vote shares of the common stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be a beneficial owner of those shares. 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 statement. 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: 162 (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; (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 shareholder; (iii) the issuance or transfer by Provident Financial Services, Inc. of any securities to an interested stockholder or an affiliate of such interested shareholder 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 shareholder; 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 shareholder. 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 of the voting stock shares 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. 163 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. Restriction 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: 164 (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%; (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 Restrict 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 165 . 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. 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 166 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. 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. 167 Accordingly, the issuance of preferred stock could adversely affect the voting and other rights of holders of common stock. 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 directors 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 _____________________ 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., 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. 168 EXPERTS The consolidated financial statements of The Provident Bank and subsidiaries as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001, have been included in this document and in the registration statement in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere in this document, and upon the authority of said firm as experts in accounting and auditing. RP Financial, LC, has consented to the publication in this document of the summary of its report setting forth its belief as to the estimated pro forma market value of the common stock upon conversion and its opinion with respect to the value of the subscription rights. REGISTRATION REQUIREMENTS Our common stock will be registered under Section 12(g) of the Exchange Act. We will be subject to the information, proxy solicitation, insider trading restrictions, tender offer rules, periodic reporting and other requirements of the SEC under the Exchange Act. We may not deregister the common stock under the Exchange Act for a period of at least three years following the conversion. WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION We have filed a registration statement with the SEC under the Securities Act of 1933 with respect to the common stock offered through this prospectus. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. You may examine this information without charge at the public reference facilities of the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain copies of the material from the SEC at prescribed rates. The registration statement also is available through the SEC's world wide web site on the internet at http://www.sec.gov. This document contains a description of the material features of certain contracts and other documents filed as exhibits to the registration statement. The statements as to the contents of such exhibits are of necessity brief descriptions and are not necessarily complete. Each such statement is qualified by reference to the contract or document. Provident Financial Services, Inc. has filed an application for conversion with the Commissioner of Banking of the State of New Jersey and with the Federal Deposit Insurance Corporation. Provident Financial Services, Inc. has also filed an application with the Federal Reserve Bank of New York to become a bank holding company. This prospectus omits some information contained in those applications. In connection with the offering, Provident Financial Services, Inc. will register the common stock with the SEC under Section 12(g) of the Exchange Act. Upon this registration, Provident Financial Services, Inc. will become subject to the SEC's proxy solicitation rules and periodic reporting requirements. 169 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. 170 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 hereby 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 Common Stock (Subject to Increase to up to 59,618,300 Shares) --------------- PROSPECTUS --------------- Sandler O'Neill & Partners, L.P. ___________ __, 2002 Until the later of ________, 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. PART II: INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution
Amount ------ New Jersey State Banking Department application fee ...................... $ 3,500 SEC registration fee (1) ................................................. 56,616 National Association of Securities Dealers filing fee (1) ................ 30,500 New York Stock Exchange filing fee (1) ................................... 250,000 Printing, postage and mailing ............................................ 1,461,000 Legal fees and expenses .................................................. 600,000 Marketing fees and selling commissions ................................... 4,888,994 Accounting fees and expenses ............................................. 250,000 Appraiser's fees and expenses (including preparing business plan) ........ 120,000 Transfer agent and registrar fees and expenses ........................... 25,000 Conversion agent fees and expenses ....................................... 100,000 Certificate printing ..................................................... 11,000 Telephone, temporary help and other equipment ............................ 200,000 Blue Sky fees and expenses (including fees of counsel) ................... 10,000 Miscellaneous 200,000 ---------- Total .................................................................... $8,206,610 ==========
- ------------ (1) Actual expenses based upon the registration and sale of 61,538,300 shares of common stock at $10.00 per share. All other expenses are estimated. Item 14. Indemnification of Directors and Officers Article TENTH of the Certificate of Incorporation of Provident Financial Services, Inc. (the "Corporation") sets forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability which they incur in their capacities as such: TENTH: A. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or an Officer of the Corporation or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a Director, Officer, employee or agent or in any other capacity while serving as a Director, Officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article TENTH shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director of Officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article TENTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article TENTH is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article TENTH or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article TENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article TENTH with respect to the indemnification and advancement of expenses of Directors and Officers of the Corporation. Item 15. Recent Sales of Unregistered Securities Not Applicable. Item 16. Exhibits and Financial Statement Schedules: The exhibits and financial statement schedules filed as part of this registration statement are as follows: (a) List of Exhibits 1.1 Engagement Letter between The Provident Bank and Sandler O'Neill & Partners, L.P.* 1.2 Form of Agency Agreement between Provident Financial Services, Inc. and Sandler O'Neill & Partners, L.P.* 2 Plan of Conversion, as amended, of The Provident Bank 3.1 Certificate of Incorporation of Provident Financial Services, Inc.* 3.2 Bylaws of Provident Financial Services, Inc.* 4 Form of Common Stock Certificate of Provident Financial Services, Inc.* 5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered 8.1 Federal Tax Opinion of Luse Gorman Pomerenk & Schick 8.2 State Tax Opinion of KPMG LLP 10.1 Form of Employment Agreement between Provident Financial Services, Inc. and certain executive officers 10.2 Form of Change in Control Agreement between Provident Financial Services, Inc. and certain executive officers* 10.3 Employee Savings Incentive Plan* 10.4 Employee Stock Ownership Plan* 10.5 Supplemental Executive Retirement Plan, as amended* 10.6 Supplemental Executive Savings Plan, as amended* 10.7 Retirement Plan for the Board of Managers of The Provident Bank, as amended* 10.8 The Provident Bank Amended and Restated Board of Managers Voluntary Fee Deferral Plan* 10.9 Voluntary Bonus Deferral Plan for the Chairman, as amended* 10.10 Voluntary Bonus Deferral Plan, as amended* 21 Subsidiaries of Registrant* 23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included as Exhibits 5 and 8.1) 23.2 Consent of KPMG LLP 23.3 Consent of RP Financial, LC 24 Power of Attorney (set forth on signature page of registration statement)* 99.1 Appraisal Agreement between Provident Financial Services, Inc. and RP Financial, LC* 99.2 Updated Appraisal Report of RP Financial, LC 99.3 Opinion of RP Financial, LC with respect to Subscription Rights 99.4 Form of Marketing Materials to be used in connection with the Offerings* 99.5 Order and Acknowledgment Form* 99.6 Business Plan Agreement between Provident Financial Services, Inc. and RP Financial, LC* 99.7 Prospectus Supplement for participants in The Provident Bank Employee Savings Incentive Plan
- ------------------------------- * Previously filed (b) Financial Statement Schedules No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes. Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any duration from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any additional or changed material information on the plan of distribution. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Jersey City, New Jersey on November 1, 2002. PROVIDENT FINANCIAL SERVICES, INC. By: /s/ Paul M. Pantozzi --------------------------------------- Paul M. Pantozzi Chief Executive Officer and President (Duly Authorized Representative) In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates stated.
Signatures Title Date ---------- ----- ---- /s/ Paul M. Pantozzi Chairman, Chief Executive November 1, 2002 - -------------------------------- Officer and President (Principal ---------- Paul M. Pantozzi Executive Officer) /s/ Linda A. Niro Senior Vice President and Chief November 1, 2002 - -------------------------------- Financial Officer (Principal ---------------- Linda A. Niro Financial and Accounting Officer) /s/ J. Martin Comey* Director November 1, 2002 - -------------------------------- ---------------- J. Martin Comey /s/ Geoffrey M. Connor* Director November 1, 2002 - -------------------------------- ---------------- Geoffrey M. Connor /s/ Frank L. Fekete* Director November 1, 2002 - -------------------------------- ---------------- Frank L. Fekete
/s/ Carlos Hernandez* Director November 1, 2002 - ------------------------------- ---------------- Carlos Hernandez /s/ William T. Jackson* Director November 1, 2002 - ------------------------------- ---------------- William T. Jackson /s/ David Leff* Director November 1, 2002 - ------------------------------- ---------------- David Leff /s/ Arthur R. McConnell* Director November 1, 2002 - ------------------------------- ---------------- Arthur R. McConnell /s/ Edward O' Donnell* Director November 1, 2002 - ------------------------------- ---------------- Edward O'Donnell /s/ Daniel T. Scott* Director November 1, 2002 - ------------------------------- ---------------- Daniel T. Scott /s/ Thomas E. Sheenan* Director November 1, 2002 - ------------------------------- ---------------- Thomas E. Sheenan
* By Paul M. Pantozzi pursuant to power of attorney. - --------------------------------------------------- As filed with the Securities and Exchange Commission on November 1, 2002 Registration No. 333-98241 ______________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________ EXHIBITS TO PRE-EFFECTIVE AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT ON FORM S-1 Provident Financial Services, Inc. Jersey City, New Jersey EXHIBIT INDEX
1.1 Engagement Letter between The Provident Bank and Sandler O'Neill & Partners, L.P.* 1.2 Form of Agency Agreement between Provident Financial Services, Inc. and Sandler O'Neill & Partners, L.P.* 2 Plan of Conversion, as amended, of The Provident Bank 3.1 Certificate of Incorporation of Provident Financial Services, Inc.* 3.2 Bylaws of Provident Financial Services, Inc.* 4 Form of Common Stock Certificate of Provident Financial Services, Inc.* 5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered 8.1 Federal Tax Opinion of Luse Gorman Pomerenk & Schick 8.2 State Tax Opinion of KPMG LLP 10.1 Form of Employment Agreement between Provident Financial Services, Inc. and certain executive officers 10.2 Form of Change in Control Agreement between Provident Financial Services, Inc. and certain executive officers* 10.3 Employee Savings Incentive Plan* 10.4 Employee Stock Ownership Plan* 10.5 Supplemental Executive Retirement Plan, as amended* 10.6 Supplemental Executive Savings Plan, as amended* 10.7 Retirement Plan for the Board of Managers of The Provident Bank, as amended* 10.8 The Provident Bank Amended and Restated Board of Managers Voluntary Fee Deferral Plan* 10.9 Voluntary Bonus Deferral Plan for the Chairman, as amended* 10.10 Voluntary Bonus Deferral Plan, as amended* 21 Subsidiaries of Registrant* 23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included as Exhibits 5 and 8.1) 23.2 Consent of KPMG LLP 23.3 Consent of RP Financial, LC 24 Power of Attorney (set forth on signature page of registration statement)* 99.1 Appraisal Agreement between Provident Financial Services, Inc. and RP Financial, LC* 99.2 Updated Appraisal Report of RP Financial, LC 99.3 Opinion of RP Financial, LC with respect to Subscription Rights 99.4 Form of Marketing Materials to be used in connection with the Offerings* 99.5 Order and Acknowledgment Form* 99.6 Business Plan Agreement between Provident Financial Services, Inc. and RP Financial, LC* 99.7 Prospectus Supplement for participants in The Provident Bank Employee Savings Incentive Plan
- ------------------------------- * Previously filed EX-2 3 dex2.txt EXHIBIT 2 EXHIBIT 2 THE PROVIDENT BANK JERSEY CITY, NEW JERSEY PLAN OF CONVERSION From Mutual to Stock Form of Organization 1. General This Plan of Conversion provides for the conversion of The Provident Bank (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 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. The Board of Managers has considered the alternatives available to the Bank with respect to its corporate structure, and has determined that a mutual-to-stock conversion as described in this Plan will be in the best interests of the Bank, its depositors and the communities in which the Bank operates. Restructuring the Bank into the capital stock form of organization will increase its capital base and enhance the Bank's ability to expand its franchise and the range of products and services it offers. The conversion proceeds will provide the Bank with additional resources to further develop and enhance its technology capabilities and delivery channels. It will provide the Bank with greater flexibility to structure and finance the expansion of its operations, including the potential acquisition of other financial institutions. The stock form of organization will also enable the Bank to adopt stock benefit plans as a further performance incentive and as a further means of attracting, retaining and compensating management and other key personnel. The stock holding company form of organization will also offer the Bank greater organizational and operating flexibility, including the expanded powers available to holding companies under the recently enacted financial modernization legislation. The Plan provides that non-transferable subscription rights to purchase Conversion Stock will be offered first to Eligible Account Holders of record as of the Eligibility Record Date, then to the Bank's ESOP, then to Supplemental Eligible Account Holders as of the Supplemental Eligibility Record Date and then to Directors, Officers and Employees. Concurrently with, at any time during, or promptly after the Subscription Offering, and subject to availability after the satisfaction of subscription rights, an opportunity to subscribe may also be offered to the general public in a Community Offering with a preference given to natural persons who reside in the Bank's Local Community. The price of the Conversion Stock will be based upon an independent appraisal of the Bank and the Holding Company and will reflect its estimated pro forma market value, as converted. No change will be made in the Board of Managers or management as a result of the Conversion. In furtherance of the Bank's commitment to its community, this Plan provides for the establishment of a charitable foundation as part of the Conversion. The Foundation is intended to complement the Bank's existing community reinvestment activities in a manner that will allow the Bank's local communities to share in the growth and profitability of the Holding Company and the Bank over the long term. Consistent with the Bank's goal, the Holding Company intends to donate to the Foundation cash and shares of Common Stock, in an aggregate amount up to 8% of the value of the shares of Conversion Stock sold in the Conversion. Upon the Conversion, the legal existence of the Bank shall not terminate but the stock Bank shall be a continuation of the entity of the mutual Bank and all property of the mutual Bank, including its right, title and interest in and to all property of whatever kind and nature, whether real, personal, or mixed, and things, and choses in action, and every right, privilege, interest and asset of every conceivable value or benefit then existing or pertaining to it, or which would inure to it, immediately by operation of law and without the necessity of any conveyance or transfer and without any further act or deed shall vest in the stock 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. All pending actions and other judicial or administrative proceedings to which the Bank was a party shall not be discontinued by reason of the Conversion, but may be prosecuted to final judgment or order in the same manner as if the Conversion had not been made and the stock Bank resulting from the Conversion may continue the actions in its name notwithstanding the Conversion. Upon the Conversion, each Person having a Deposit Account at the Bank prior to the Conversion will continue to have a Deposit Account, without further payment therefore, in the same amount and subject to the same terms and conditions (except for liquidation rights) as in effect prior to the Conversion. All of the Bank's insured Deposit Accounts will continue to be insured by the FDIC to the extent provided by applicable law. This Plan has been unanimously approved by the Board of Managers of the Bank and must be approved by the affirmative vote of at least a majority of the eligible votes of Voting Depositors. Each Voting Depositor will be entitled to cast one vote for each $100 or fraction thereof of deposits in the Bank on the Voting Record Date, providing that no Voting Depositor shall be entitled to cast more than 1,000 votes. By approving the Plan, the Voting Depositors will also be approving all steps necessary and incidental to the formation of the Bank (in stock form) and the Holding Company. The Conversion is also subject to the approval of the Commissioner, the Federal Reserve Board and the FDIC. 2. Definitions Acting in Concert: the term "acting in concert" means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; and (ii) 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. 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. A 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. Application: The application to be filed with the Commissioner by the Bank in connection with the Conversion. Associate: The term "associate," when used to indicate a relationship with any Person, means (i) any corporation (other than the Holding Company, the Bank or a majority-owned subsidiary of the Holding Company) of which such Person is an officer, director or owner of more than 10% of the outstanding voting stock, (ii) any trust of which such Person is a trustee or substantial beneficiary, (iii) the parents, spouse, sisters, brothers, children or anyone married to 2 such Person, and (iv) any partnership in which the person is a general or limited partner; provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an associate of any Director or Officer of the Holding Company or the Bank. Bank: The Provident Bank, Jersey City, New Jersey, in its pre-Conversion mutual form or post-Conversion stock form, as indicated by the context in which it is used. Commissioner: The Commissioner of New Jersey Department of Banking and Insurance. Community Offering: The offering to the general public of any unsubscribed shares, which may be effected as provided in Section 5 hereof. The Community Offering may include a Syndicated Community Offering managed by one or more investment banking firms. Control: The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities of such Person, the ownership of voting securities of any company that possesses such power, or otherwise. Conversion: The change of the Bank's certificate of incorporation and bylaws to a stock certificate of incorporation and bylaws, the sale by the Holding Company of Conversion Stock, and the issuance and sale by the Bank of common stock to the Holding Company, all as provided for in this Plan. Conversion Stock: Shares of common stock that will be issued and sold by the Holding Company as a part of the Conversion; provided, however, that for purposes of calculating Subscription Rights and maximum purchase limitations under the Plan, references to the number of shares of Conversion Stock shall refer to the number of shares offered in the Subscription Offering. Department: The New Jersey Department of Banking and Insurance. Deposit Account: Any deposit maintained at the Bank, including without limitation, savings, time, demand, negotiable orders of withdrawal (NOW), money market and passbook accounts, but excluding tax, insurance and other escrow accounts. Director: A member of the Board of Directors of the Bank after the Conversion or a member of the Board of Directors of the Holding Company. Eligibility Record Date: The close of business on March 31, 2001. Eligible Account Holder: Any Person holding a Qualifying Deposit in the Bank on the Eligibility Record Date. Employee. Any individual who is employed by the Bank on a substantially full-time basis, and for purposes of Section 5.C.3, who is an employee as of the date of distribution of the prospectus and as of the expiration of the subscription offering. 3 ESOP: The Employee Stock Ownership Plan established by the Bank or the Holding Company. Estimated Price Range: The range of the minimum and maximum aggregate values of the Conversion Stock determined by the Board of Managers of the Bank and the Board of Directors of the Holding Company. The Estimated Price Range will be within the estimated pro forma market value of the Conversion Stock as determined by the Independent Appraiser prior to the Subscription Offering as updated from time to time thereafter. Exchange Act: The Securities Exchange Act of 1934, as amended. FDIC: The Federal Deposit Insurance Corporation. FRB: The Board of Governors of the Federal Reserve System. Foundation: The charitable foundation that will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, the establishment and funding of which is contemplated by Section 14 herein. Holding Company: The corporation which, upon completion of the Conversion, will own all of the outstanding common stock of the Bank. Independent Appraiser: An appraiser retained by the Bank to prepare an appraisal of the pro forma market value of the Conversion Stock. Internal Revenue Code: The Internal Revenue Code of 1986, as amended. Local Community: The State of New Jersey. Manager: A member of the Board of Managers of the Bank prior to the Conversion. Market Maker: A dealer (i.e., any Person who engages directly or indirectly as agent, broker or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing, and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers. Non-Tax-Qualified Employee Stock Benefit Plan: Any stock option, bonus stock or restricted stock plan or other employee benefit plan that is not a "Tax-Qualified Employee Stock Benefit Plan" and that is maintained by the Bank or the Holding Company for the benefit of Officers, Employees or Directors of the Bank or the Holding Company, or any Affiliate of any of them. Officer: An executive officer of the Bank or the Holding Company, which includes the chairman of the board, chief executive officer, president, any vice president in charge of a principal business function or functions or who otherwise has a policy-making function, chief 4 financial officer, comptroller or principal accounting officer, and any person performing functions similar to those performed by the foregoing persons. Order Form: Any form to be used in the Subscription Offering and in the Community Offering or the Syndicated Community Offering to purchase Conversion Stock. Person: An individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. Plan: This Plan of Conversion of the Bank, including any amendment approved as provided in this Plan. Public Offering: The offering for sale by the Underwriters to the general public of any shares of Conversion Stock not subscribed for in the Subscription Offering or the Community Offering. Purchase Price: The price per share, determined as provided in Section 5 of the Plan, at which the Conversion Stock will be sold in accordance with the terms hereof. Qualifying Deposit: The aggregate balance of each Deposit Account of $50 or more in the Bank of an Eligible Account Holder as of the Eligibility Record Date or a Supplemental Eligible Account Holder as of the Supplemental Eligibility Record Date. Deposit Accounts with balances of less than $50 shall not constitute a Qualifying Deposit. Resident and Residence. Any person who occupies a dwelling within the State of New Jersey and establishes an ongoing physical presence within the State of New Jersey together with an indication that such presence is something other than merely transitory in nature. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall be in the State of New Jersey. To the extent a person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a Resident. In all cases, however, such a determination shall be made in the sole discretion of the Bank. SEC: Securities and Exchange Commission. Special Meeting: The Special Meeting of Voting Depositors called for the purpose of considering and voting upon the Plan of Conversion. Subscription Offering: The offering of shares of Conversion Stock for subscription and purchase pursuant to Section 5 of the Plan. Subscription Rights: Non-transferable, non-negotiable, personal rights of the Bank's Eligible Account Holders, ESOP, Supplemental Eligible Account Holders, and Directors, Officers and Employees, or trusts of any such persons including individual retirement accounts and Keogh accounts, to subscribe for shares of Conversion Stock in the Subscription Offering. 5 Supplemental Eligibility Record Date: The close of business on the last day of the calendar quarter preceding approval of the Plan by the Commissioner. Supplemental Eligible Account Holder: Any person holding a Qualifying Deposit (other than an officer or director and their associates) on the Supplemental Eligibility Record Date. Syndicated Community Offering: The offering of Conversion Stock, following or concurrently with the Community Offering, through a syndicate of broker-dealers. Tax-Qualified Employee Plans: Any defined benefit plan or defined contribution plan of the Bank or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which with its related trust meets the requirements to be "qualified" under Section 401 of the Internal Revenue Code. Underwriters: The investment banking firm or firms agreeing to purchase Conversion Stock in order to offer and sell such Conversion Stock in the Public Offering. Voting Depositor: Any Depositor of the Bank who owns a Deposit Account on the Voting Record Date. Voting Record Date: The date fixed by the Board of Managers as the date for determining Depositors of the Bank entitled to notice of and to vote at the Special Meeting, which date shall not be more than 60 nor less than 20 days before the date of the Special Meeting. 3. Regulatory and Depositor Approvals This Plan, having been unanimously adopted by the Board of Managers of the Bank, shall be submitted, together with an Application, to the Commissioner for approval and to request certain waivers, if required, and to the FDIC for non-objection. Following approval of this Plan by the Board of Managers of the Bank, the Bank shall cause notice of the adoption of the Plan, and of its intention to convert to stock form, to be conspicuously posted at its home office and each of its branch offices. The Bank shall also issue a press release containing all of the material terms of the proposed Conversion and shall place an advertisement containing such material terms in a newspaper having general circulation in the communities in which the principal office and branches of the Bank are located. Following (i) approval of the Bank's Application by the Commissioner, (ii) the non-objection of the FDIC and (iii) the receipt of all necessary waivers by the Commissioner, the Bank shall submit the Plan to the Bank's Voting Depositors for approval at the Special Meeting. The Bank shall mail to each Voting Depositor, at his or her last known address appearing on the records of the Bank, a Notice of Special Meeting, a proxy card and a Proxy Statement and certain other documents relating to the Bank and its Conversion. 6 The Special Meeting shall be held upon written notice given no less than 20 days nor more than 45 days prior to the date of the Special Meeting. At the Special Meeting, each Voting Depositor shall be entitled to cast one vote in person or by proxy for every one hundred dollars ($100.00) of Deposit Accounts such Voting Depositor had with the Bank as of the Voting Record Date. No Voting Depositor, however, shall be entitled to cast more than 1,000 votes. The Board of Managers shall appoint an independent custodian and tabulator to receive and hold proxies to be voted at the Special Meeting and count the votes cast in favor of and in opposition to the Plan. The Commissioner shall be notified of the results of the Special Meeting by a certificate signed by the appropriate Officers of the Bank promptly after the conclusion of the Special Meeting. The Plan must be approved by the affirmative vote of at least a majority of the number of votes entitled to be cast by Voting Depositors at the Special Meeting. If the Plan is so approved, the Bank shall take all other necessary steps to effect the Conversion subject to the terms and conditions of the Plan. If the Plan is not so approved, upon conclusion of the Special Meeting and any adjournment or postponement thereof, the Plan shall not be implemented without further vote and all funds submitted in the Subscription Offering and Community Offering shall be returned to subscribers, with interest as provided herein, and all withdrawal authorizations shall be canceled. The Board of Managers of the Bank intends to take all necessary steps to form the Holding Company. The Holding Company will make timely applications for any requisite regulatory approvals, including an Application with the Commissioner, a bank holding company application with the FRB, and a Registration Statement on Form S-1 with the SEC. 4. Conversion Procedures The Conversion Stock will be offered for sale in the Subscription Offering to Eligible Account Holders, the ESOP, and Directors, Officers and Employees in the priorities set forth in Section 5.C of this Plan, prior to or within 45 days after the date of the Special Meeting. The Subscription Offering may begin as early as the mailing of the proxy statement for the Special Meeting. The Bank may, either concurrently with, at any time during, or promptly after the Subscription Offering, also offer the Conversion Stock to and accept orders from other Persons in a Community Offering with a preference given to natural persons residing in the Local Community; provided that the Bank's Eligible Account Holders, ESOP, Supplemental Eligible Account Holders and Directors, Officers and Employees shall have the priority rights to subscribe for Conversion Stock set forth in Section 5 of this Plan. The Holding Company and the Bank may delay commencing the Subscription Offering beyond such 45-day period in the event there exists unforeseen material adverse market or financial conditions. If the Subscription Offering commences prior to the Special Meeting, subscriptions will be accepted subject to the approval of the Plan at the Special Meeting. The period for the Subscription Offering will be not less than 20 days nor more than 45 days and the period for the Community Offering will be not more than 45 days, unless extended by the Bank. If, upon completion of the Subscription Offering and any Community Offering, any shares of Conversion Stock remain available for sale, such shares will, if feasible, be offered for sale in a Syndicated Community Offering or sold to the Underwriters for resale to the general 7 public in the Public Offering. If for any reason the Syndicated Community Offering or Public Offering of all shares not sold in the Subscription Offering and Community Offering cannot be effected, the Holding Company and the Bank will use their best efforts to obtain other purchasers, subject to regulatory approval. Completion of the sale of all shares of Conversion Stock not sold in the Subscription Offering and Community Offering is required within 45 days after termination of the Subscription Offering, subject to extension of such 45-day period by the Holding Company and the Bank with the approval of the Commissioner, and the FDIC if required. The Holding Company and the Bank may jointly seek one or more extensions of such 45-day period if necessary to complete the sale of all shares of Conversion Stock. In connection with such extensions, subscribers and other purchasers will be permitted to increase, decrease or rescind their subscriptions or purchase orders to the extent required by the Commissioner and/or the FDIC in approving the extensions. Completion of the sale of all shares of Conversion Stock is required within 24 months after the date of the Special Meeting. The Bank may elect to pay fees on a per share basis to brokers who assist Persons in determining to purchase Conversion Stock in the Community Offering and Syndicated Community Offering. The Boards of Directors of the Holding Company and the Bank also intend to take all necessary steps to establish the Foundation and to fund the Foundation in the manner set forth in Section 3A hereof. Upon the issuance of the Conversion Stock, the Holding Company will purchase from the Bank all of the capital stock of the Bank to be issued by the Bank in the Conversion in exchange for the at least 50% of the Conversion proceeds. The Boards of Managers of the Bank may determine for any reason at any time prior to the issuance of the Conversion Stock not to utilize a holding company form of organization in the Conversion. If the Board of Managers determines not to complete the Conversion utilizing a holding company form of organization, the stock of the Bank will be issued and sold in accordance with the Plan. In such case, the Holding Company's registration statement will be withdrawn from the SEC, the Bank will take steps necessary to complete the Conversion, including filing any necessary documents with the Commissioner and the FDIC and will issue and sell the Conversion Stock in accordance with this Plan. In such event, any subscriptions or orders received for Conversion Stock of the Holding Company shall be deemed to be subscriptions or orders for Conversion Stock of the Bank, and the Bank shall take such steps as permitted or required by the FDIC, the Commissioner and the SEC. 8 5. Stock Offering A. Total Number of Shares and Purchase Price of Conversion Stock The total number of shares of Conversion Stock to be issued and sold in the Conversion will be determined jointly by the Board of Directors of the Holding Company and the Board of Managers of the Bank prior to the commencement of the Subscription Offering, subject to adjustment if necessitated by market or financial conditions prior to consummation of the Conversion. In particular, the total number of shares may be increased by up to 15% of the number of shares offered in the Subscription and Community Offering if the Estimated Price Range is increased subsequent to the commencement of the Subscription and Community Offering to reflect changes in market and financial conditions, demand for the shares, and regulatory considerations. All shares of Conversion Stock offered for sale in the Subscription Offering, Community Offering, Syndicated Community Offering or Public Offering will be sold at a uniform price per share referred to in this Plan as the Purchase Price. The aggregate price for which all shares of Conversion Stock will be sold will be based on an independent appraisal of the estimated total pro forma market value of the Holding Company and the Bank. The appraisal will be performed in accordance with regulatory guidelines and will be made by an Independent Appraiser experienced in the area of thrift institution appraisals. The appraisal will include, among other things, an analysis of the historical and pro forma operating results and capital of the Bank and a comparison of the Holding Company, the Bank and the Conversion Stock with comparable thrift institutions and holding companies and their respective outstanding capital stock. Prior to the commencement of the Subscription and Community Offerings, an Estimated Price Range will be established, which range will vary within 15% above to 15% below the midpoint of such range. The number of shares of Conversion Stock to be issued and the Purchase Price per share may be increased or decreased by the Bank. In the event that the aggregate Purchase Price of the Conversion Stock to be issued in the Conversion is below the minimum of the Estimated Price Range, or materially above the maximum of the Estimated Price Range, resolicitation of purchasers may be required provided that up to a 15% increase above the maximum of the Estimated Price Range will not be deemed material so as to require a resolicitation. Up to a 15% increase in the number of shares to be issued which is supported by an appropriate change in the estimated pro forma market value of the Bank or the Holding Company will not be deemed to be material so as to require a resolicitation of subscriptions. In the event that the aggregate Purchase Price of the Conversion Stock is below the minimum of the Estimated Price Range or in excess of 15% above the maximum of the Estimated Price Range, and a resolicitation is required, such resolicitation shall be effected in such manner and within such time as the Bank shall establish, with the approval of the Commissioner and the FDIC, if required. Based upon the independent appraisal, the Board of Directors of the Holding Company and the Board of Managers of the Bank will jointly fix the Purchase Price. The Purchase Price for each share of Conversion Stock will be determined by dividing the estimated appraised aggregate pro forma market value of the Holding Company and the Bank, based on the independent appraisal, by the total number of shares of Conversion Stock to be issued and sold by the Holding Company upon Conversion. If, following completion of the Subscription 9 Offering and any Community Offering or Syndicated Community Offering, a Public Offering is effected, the Purchase Price for each share of Conversion Stock in the Public Offering will be the same as the Purchase Price in the Subscription and Community Offering. The price paid by the Underwriters for each share of Conversion Stock will be the Purchase Price less a negotiated underwriting discount. Notwithstanding the foregoing, no sale of Conversion Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the Bank, the Holding Company and to the Commissioner and the FDIC that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Conversion Stock at the Purchase Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the Holding Company and the Bank. If such confirmation is not received, the Bank may cancel the Subscription and Community Offerings and/or any Syndicated Community Offering or Public Offering, extend the Conversion, establish a new Estimated Price Range, extend, reopen or hold new Subscription, community or Syndicated Community Offerings, or take such other action as the Commissioner and the FDIC may permit. B. Purchase by the Holding Company of the Stock of the Bank Upon the consummation of the sale of all of the Conversion Stock, the Holding Company will purchase from the Bank all of the capital stock of the Bank to be issued by the Bank in the Conversion in exchange for at least 50% of the Conversion proceeds. The Holding Company may retain up to 50% of the proceeds of the Conversion. The Conversion proceeds will provide economic strength to the Holding Company and the Bank for the future in a highly competitive and regulated environment and would facilitate expansion through acquisitions, diversification into other related businesses and for other business and investment purposes, including the payment of dividends and future repurchases of Conversion Stock. C. Subscription Rights Non-transferable Subscription Rights to purchase shares will be issued without payment therefor to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and the Directors, Officers and Employees as set forth below. 1. Preference Category No. 1: Eligible Account Holders Each Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Conversion Stock in an amount equal to the greater of $500,000, one-tenth of one percent (.10%) of the total offering of shares, or 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 the Qualifying Deposit of the Eligible Account Holder and the 10 denominator is the total amount of Qualifying Deposits of all Eligible Account Holders as of the Eligibility Record Date. If sufficient shares are not available, shares shall be allocated first to permit each subscribing Eligible Account Holder to purchase to the extent possible 100 shares, and thereafter among each subscribing Eligible Account Holder pro rata in the same proportion as his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unsatisfied. Non-transferable Subscription Rights to purchase Conversion Stock received by Directors and Officers of the Bank and their Associates, based on their increased deposits in the Bank in the one-year period preceding the Eligibility Record Date, shall be subordinated to all other subscriptions involving the exercise of non-transferable Subscription Rights of Eligible Account Holders. 2. Preference Category No. 2: The ESOP The ESOP shall receive, without payment, as a second priority, after the satisfaction of the subscriptions of Eligible Account Holders, non-transferable subscription rights to purchase up to 8% of the shares of Conversion Stock offered for sale in the Conversion. If, after the satisfaction of subscriptions of Eligible Account Holders, a sufficient number of shares are not available to fill the subscriptions by such plans, the subscription by the ESOP shall be filled to the maximum extent possible. If all the Conversion Stock offered for sale in the Conversion is purchased by Eligible Account Holders, then the ESOP may purchase shares in the open market following consummation of the Conversion or directly from the Holding Company through authorized but unissued shares. The ESOP may purchase shares of Common Stock in the open market after the effective date of the Conversion to enable it to acquire, together with any shares of Conversion Stock acquired in the Conversion, up to 8% of the outstanding shares of Common Stock. 3. Preference Category No. 3: Supplemental Eligible Account Holders Each Supplemental Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Conversion Stock in an amount equal to the greater of $500,000, one-tenth of one percent (.10%) of the total offering of shares, or 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 the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in the converting Bank, in each case on the Supplemental Eligibility Record Date. Subscription Rights received pursuant to this category shall be subordinated to all Subscription Rights received by Eligible Account Holders and the ESOP pursuant to Category Nos. 1 and 2 above. 11 Any non-transferable Subscription Rights to purchase shares received by an Eligible Account Holder in accordance with Category No. 1 shall reduce to the extent thereof the Subscription Rights to be distributed to such person pursuant to this Category. In the event of an oversubscription for shares under the provisions of this subparagraph, the shares available shall be allocated first to permit each subscribing Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares, if any, allocated in accordance with Category No. 1) equal to 100 shares, and thereafter among each subscribing Supplemental Eligible Account Holder pro rata in the same proportion as his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. 4. Preference Category No. 4: Directors, Officers and Employees Each Director, Officer and Employee of the Holding Company and the Bank, who is not an Eligible Account Holder or Supplemental Eligible Account Holder, shall receive, as third priority and without payment, a nontransferable subscription right to purchase $500,000 worth of Conversion Stock. Subscription rights received pursuant to Section 5C shall be subordinated to all rights to purchase Conversion Stock received by Eligible Account Holders, Supplemental Eligible Account Holders and the ESOP. D. Community Offering, Syndicated Offering and Public Offering 1. Any remaining shares of Conversion Stock not sold in the Subscription Offering may be offered for sale to the general public through a Community Offering, with preference as to the purchase of Conversion Stock given first to natural persons residing in the Bank's Local Community and then to the public at large. The Community Offering, if any, may commence simultaneously with the Subscription Offering, or may commence during or after the commencement of the Subscription Offering, as the Board of Directors of the Holding Company and the Board of Managers of the Bank so determine. The right to subscribe for shares of Conversion Stock in the Community Offering is subject to the right of the Bank and Holding Company to accept or reject such subscriptions in whole or in part in their sole discretion. Conversion Stock being sold in the Community Offering will be offered and sold in a manner that will achieve the widest distribution of the Conversion Stock. No person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase more than $500,000 of Conversion Stock offered in the Community Offering; provided, however, that the amount permitted to be purchased in the Community Offering may be increased to 5% of the total offering of shares without the resolicitation of subscribers, unless required by the Commissioner and/or the FDIC. If the maximum purchase limit is so increased, orders accepted in the Community Offering shall be filled up to a maximum of 2% of the total offering and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. Further, the Bank may 12 limit total subscriptions under this Section 5.D.1 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 Conversion Stock. The Community Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended. 2. If any Conversion Stock remains unsold after the close of the Subscription and Community Offerings, the Holding Company and the Bank may use the services of a syndicate of registered broker-dealers to sell such unsold shares on a best efforts basis in a Syndicated Community Offering. The syndicate of registered broker-dealers may be managed by one of the syndicate members who will act as agent of the Holding Company and the Bank to assist the Holding Company and the Bank in the sale of the Conversion Stock. Neither the syndicate manager nor any other syndicate member shall have any obligation to take or purchase any of the shares of Conversion Stock in the Syndicated Community Offering. No person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase more than $500,000 of Conversion Stock offered in any Syndicated Community Offering; provided, however, that the amount permitted to be purchased in the Syndicated Community Offering may be increased to 5% of the total offering of shares without the resolicitation of subscribers, unless required by the Commissioner and/or the FDIC. If the maximum purchase limit is so increased, orders accepted in the Syndicated Community Offering shall be filled up to a maximum of 2% of the total offering and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. Any shares of Conversion Stock not sold in the Subscription Offering, the Community Offering or the Syndicated Community Offering may be offered for sale through an underwritten firm commitment public offering. Any Syndicated Community Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended. 3. Any shares of Conversion Stock not sold in the Subscription Offering, the Community Offering or any Syndicated Community Offering, if any, shall then be sold to the Underwriters for resale to the general public in the Public Offering. It is expected that the Public Offering will commence as soon as practicable after termination of the Subscription Offering and any Community Offering or Syndicated Community Offering. No person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase more than $500,000 of Conversion Stock offered in the Public Offering; provided, however, that the amount permitted to be purchased in the Public Offering may be increased to 5% of the total offering of shares without the resolicitation of subscribers, unless required by the Commissioner and/or the FDIC. The Public Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended as provided in Section 5 hereof. Each share of Conversion Stock will be offered for sale in the Public Offering at the Purchase Price less any underwriting discount as provided in Section 5.A hereof, and set forth in the underwriting agreement between the Holding Company, the Bank and the Underwriters. Such underwriting agreement shall be filed with the Commissioner, the FDIC and the SEC. 13 4. If for any reason a Public Offering of unsubscribed shares of Conversion Stock cannot be effected and any shares remain unsold after the Subscription Offering and any Community Offering/Syndicated Community Offering, the Board of Directors of the Holding Company and the Board of Managers of the 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 Commissioner and the FDIC and to compliance with applicable securities laws. E. Additional Limitations Upon Purchases of Shares of Conversion Stock The following additional limitations shall be imposed on all purchases of Conversion Stock in the Conversion: 1. The maximum purchase of Conversion Stock in the subscription offering by any person or group of persons through a single account is $500,000. No Person, by himself or herself, or with an Associate or group of Persons acting in concert, may purchase more than $700,000 of Conversion Stock, except for the ESOP, which may subscribe for up to 8% of the Conversion Stock issued in the Conversion. For purposes of this paragraph, an Associate of a Person does not include a Tax-Qualified or Non-Tax Qualified Employee Plan in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes of this paragraph, shares held by one or more Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a Person shall not be aggregated with shares purchased directly by or otherwise attributable to that Person. 2. Directors and Officers and their Associates may not purchase in all categories in the Conversion an aggregate of more than 25.0% of the Conversion Stock. For purposes of this paragraph, an Associate of a Person does not include any Tax-Qualified Employee Plan. Moreover, any shares attributable to the Officers and Directors and their Associates, but held by one or more Tax-Qualified Employee Plans shall not be included in calculating the number of shares which may be purchased under the limitation in this paragraph. 3. The minimum number of shares of Conversion Stock that may be purchased by any Person in the Conversion is 25 shares, provided sufficient shares are available. 4. The Boards of Directors of the Holding Company and the Bank may, in their sole discretion, increase the maximum purchase limitation referred to in subparagraph 1 above up to 9.99%, provided that orders for shares exceeding 5% of the shares being offered in the Subscription Offering shall not exceed, in the aggregate, 10% of the shares being offered in the Subscription Offering. Requests to purchase additional shares of Conversion Stock under this provision will be allocated by the Boards of Directors on a pro rata basis giving priority in accordance with the priority rights set forth in this Section 5. 14 Depending upon market and financial conditions, the Board of Managers of the Bank, if required with the approval of the Commissioner and the FDIC and without further approval of the Voting Depositors, may increase or decrease any of the above purchase limitations. For purposes of this Section 5, the Directors and/or Officers of the Holding Company and the Bank shall not be deemed to be Associates or a group acting in concert solely as a result of their serving in such capacities. Each Person purchasing Conversion Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the above purchase limitations. F. Restrictions and Other Characteristics of Conversion Stock Being Sold 1. Transferability. Shares purchased by Directors or Officers may not be sold or otherwise disposed of for value for a period of one year from the date of Conversion, except for any disposition of such shares following the death of the original purchaser. The certificates representing shares of Conversion Stock issued to Directors and Officers shall bear a legend giving appropriate notice of the one-year holding period restriction. Appropriate instructions shall be given to the transfer agent for such stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares of common stock of the Holding Company subsequently issued as a stock dividend, stock split, or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for Holding Company or Bank Directors and Officers as may be then applicable to such restricted stock. 2. Purchases After Conversion. No Director or Officer of the Holding Company or of the Bank, or Associate of such a Director or Officer, shall purchase any outstanding shares of capital stock of the Holding Company, except through a broker or dealer registered with the SEC, for a period of three years following the Conversion without the prior written approval of the Commissioner. This restriction does not apply, however, to: (a) negotiated transactions involving more than one percent of the outstanding common stock; (b) the purchase of common stock made pursuant to an employee stock option plan or employee stock purchase plan which meets the requirements of Section 423 of the Internal Revenue Code; or (c) the purchase of common stock pursuant to a non-tax-qualified employee stock benefit plan which may be attributable to individual Officers and Directors of the Bank or Holding Company. As used herein, the term "negotiated transaction" means a transaction in which the securities are offered and the terms and arrangements relating to any sale are arrived at through direct communications between the seller or any Person acting on its behalf and the purchaser or his investment representative. The term "investment representative" shall mean a professional investment advisor acting as agent for the purchaser and independent of the seller and not acting on behalf of the seller in connection with the transaction. 3. Stock Repurchases. Applicable FDIC regulations prohibit the Holding Company from repurchasing its capital stock within one year following the Conversion, 15 except that open market stock repurchases of up to 5% of its outstanding capital stock may be permitted if extraordinary circumstances exist. The Holding Company must establish, to the satisfaction of the FDIC, compelling and valid business purpose for any repurchases within one year of the Conversion, and provide notice to the FDIC. The FDIC will not object to a repurchase program if (i) it does not adversely affect the Bank's financial condition, (ii) the Bank demonstrates extraordinary circumstances and a compelling and valid business purpose for the repurchase program consistent with the Bank's business plan, and (iii) the repurchase program is not contrary to other applicable regulations. 4. Voting Rights. After Conversion, holders of deposit accounts will not have voting rights in the Bank or the Holding Company. Exclusive voting rights as to the Bank will be vested in the Holding Company, as the sole stockholder of the Bank. Voting rights as to the Holding Company will be held exclusively by its stockholders. G. Exercise of Subscription Rights; Order Forms 1. If the Subscription Offering occurs concurrently with the solicitation of proxies for the Special Meeting, the subscription prospectus and Order Form may be sent to each Eligible Account Holder, the ESOP, Supplemental Eligible Account Holders and Directors, Officers and Employees, at their last known address as shown on the records of the Bank. However, the Bank may, and if the Subscription Offering commences after the Special Meeting the Bank shall, furnish a subscription prospectus and Order Form only to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Directors, Officer and Employee who have returned to the Bank by a specified date prior to the commencement of the Subscription Offering a post card or other written communication requesting a subscription prospectus and Order Form. In such event, the Bank shall provide a postage-paid post card for this purpose and make appropriate disclosure in its proxy statement for the solicitation of proxies to be voted at the Special Meeting and/or letter sent in lieu of the proxy statement to those Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Director, Officer and Employee who are not Voting Depositors on the Voting Record Date. 2. Each Order Form will be preceded or accompanied by a prospectus describing the Holding Company and the Bank and the shares of Conversion Stock being offered for subscription and containing all other information required by the Commissioner, FDIC or the SEC or necessary to enable Persons to make informed investment decisions regarding the purchase of Conversion Stock. 3. The Order Forms (or accompanying instructions) used for the Subscription Offering and any Community/Syndicated Offering will contain, among other things, the following: (i) A clear and intelligible explanation of the Subscription Rights granted under the Plan to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and the Directors, Officers and Employees; 16 (ii) A specified expiration date by which Order Forms must be returned to and actually received by the Bank or its representative for purposes of exercising Subscription Rights, which date will be not less than 20 days after the Order Forms are mailed by the Bank; (iii) The Purchase Price to be paid for each share subscribed for when the Order Form is returned; (iv) A statement that 25 shares is the minimum number of shares of Conversion Stock that may be subscribed for under the Plan; (v) A specifically designated blank space for indicating the number of shares being subscribed for; (vi) A set of detailed instructions as to how to complete the Order Form including a statement as to the available alternative methods of payment for the shares being subscribed for; (vii) Specifically designated blank spaces for dating and signing the Order Form; (viii) An acknowledgment that the subscriber has received the subscription prospectus; (ix) A statement of the consequences of failing to properly complete and return the Order Form, including a statement that the Subscription Rights will expire on the expiration date specified on the Order Form unless such expiration date is extended by the Holding Company and the Bank, and that the Subscription Rights may be exercised only by delivering the Order Form, properly completed and executed, to the Bank or its representative by the expiration date, together with required payment of the Purchase Price for all shares of Conversion Stock subscribed for; (x) A statement that the Subscription Rights are non-transferable and that all shares of Conversion Stock subscribed for upon exercise of Subscription Rights must be purchased on behalf of the Person exercising the Subscription Rights for his own account; and (xi) A statement that, after receipt by the Bank or its representative, an order may not be modified, withdrawn or canceled without the consent of the Bank. H. Method of Payment Full payment for all shares of Conversion Stock at the Purchase Price per share must accompany all completed Order Forms. Payment may be made in cash (if presented in Person), by check, bank draft or money order, or if the subscriber has a Deposit Account in the Bank (including a certificate of deposit), the subscriber may authorize the 17 Bank to charge the subscriber's account. Payment may not be made by wire transfer or any other electronic transfer of funds. If a subscriber authorizes the Bank to charge his or her account, the funds will continue to earn interest, but may not be used by the subscriber until all Conversion Stock has been sold or the Plan is terminated, whichever is earlier. The Bank will allow subscribers to purchase shares by withdrawing funds from certificate accounts without the assessment of early withdrawal penalties with the exception of prepaid interest in the form of promotional gifts. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if the remaining balance of the account is less than the applicable minimum balance requirement, in which event the remaining balance will earn interest at the passbook rate. This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Conversion Stock under the Plan. Interest will also be paid, at not less than the then-current passbook rate, on all orders paid in cash, by check or money order, from the date payment is received until consummation of the Conversion. Payments made in cash, by check or money order will be placed by the Bank in an escrow or other account established specifically for this purpose. In the event of an unfilled amount of any order, the Bank will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after consummation of the Conversion. If for any reason the Conversion is not consummated, purchasers will have refunded to them all payments made (with applicable interest) and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at the Bank. If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans subscribe for shares during the Subscription Offering, such plans will not be required to pay for the shares subscribed for at the time they subscribe, but may pay for such shares of Conversion Stock subscribed for upon consummation of the Conversion. In the event that, after the completion of the Subscription Offering, the number of shares to be issued is increased above the maximum of the appraisal range included in the Prospectus, the Tax-Qualified and Non-Tax Qualified Employee Plans shall be entitled to increase their subscriptions by a percentage equal to the percentage increase in the number of shares to be issued above the maximum of the appraisal range, provided that such subscriptions shall continue to be subject to applicable purchase limits and stock allocation procedures. I. Undelivered, Defective or Late Order Forms; Insufficient Payment The Holding Company and the Bank shall have the absolute right, in their sole discretion, to reject any Order Form, including but not limited to, any Order Forms which (i) are not delivered or are returned by the United States Postal Service (or the addressee cannot be located); (ii) are not received back by the Bank or its representative, or are received after the termination date specified thereon; (iii) are defectively completed or executed; (iv) are not accompanied by the total required payment for the shares of Conversion Stock subscribed for (including cases in which the subscribers' Deposit Accounts or certificate accounts are insufficient to cover the authorized withdrawal for 18 the required payment); (v) are photocopies or facsimiles of the printed Order Forms mailed to each Person; or (vi) are submitted by or on behalf of a Person whose representations the Holding Company and the Bank believe to be false or who they otherwise believe, either alone or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. In such event, the Subscription Rights of the Person to whom such rights have been granted will not be honored and will be treated as though such Person failed to return the completed Order Form within the time period specified therein. The Bank may, but will not be required to, waive any irregularity relating to any Order Form or require submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as the Bank may specify. The interpretation of the Holding Company and the Bank of the terms and conditions of this Plan and of the proper completion of the Order Form will be final, subject to the authority of the Commissioner and the FDIC. J. Transfer of Subscriptions Prohibited Subscription Rights are nontransferable, and it is a violation of Federal and state law to either transfer or attempt to transfer Subscription Rights. Persons who transfer or attempt to transfer their Subscription Rights may be prosecuted and will risk forfeiture of such Subscription Rights. K. Member in Non-Qualified States or in Foreign Countries The Holding Company and the Bank will make reasonable efforts to comply with the securities laws of all states in the United States in which Persons entitled to subscribe for Conversion Stock pursuant to the Plan reside. However, no shares will be offered or sold under the Plan of Conversion to any such Person who (1) resides in a foreign country or (2) 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 the Holding Company and the Bank determine that compliance with the securities laws of such state would be impracticable for reasons of cost or otherwise, including, but not limited to, a requirement that the Holding Company or the Bank or any of their Officers, Directors or Employees register, under the securities laws of such state, as a broker, dealer, salesman or agent. No payments will be made in lieu of the granting of Subscription Rights to any such Person. 6. Stock Certificate of Incorporation and Bylaws A. As part of the Conversion, the Bank will take all appropriate steps to amend its certificate of incorporation to read in the form of a New Jersey stock savings bank certificate of incorporation, as prescribed by the Banking Law. A copy of the proposed stock certificate of incorporation is available upon request. B. The Bank will also take appropriate steps to amend its bylaws to read in the form prescribed by the Banking Law for a capital stock savings bank. A copy of the proposed stock bylaws is available upon request. 19 C. The effective date of the adoption of the Bank's stock certificate of incorporation and bylaws shall be the date of the issuance and sale of the Conversion Stock as specified by the Commissioner. 7. Holding Company Certificate of Incorporation A copy of the proposed certificate of incorporation and bylaws of the Holding Company will be made available from the Bank upon request. 8. Directors of the Bank Each Person serving as a member of the Board of Managers of the Bank at the time of the Conversion will thereupon become a Director of the Bank after the Conversion. 9. Stock Benefit Plans In order to provide an incentive for Directors, Officers and Employees of the Holding Company and its subsidiaries (including the Bank), the Board of Directors of the Holding Company intends to adopt, subject to shareholder approval, a stock option and incentive plan and a stock recognition and retention plan following completion of the Conversion. 10. Contributions to Tax-Qualified Employee Plans The Bank and the Holding Company may in their discretion make scheduled contributions to any Tax-Qualified Employee Plans, provided that any such contributions which are for the acquisition of Conversion Stock, or the repayment of debt incurred for such an acquisition, do not cause the Bank to fail to meet its regulatory capital requirements. 11. Securities Registration and Market Making Promptly following the Conversion, the Holding Company will register its common stock with the SEC pursuant to the Exchange Act. In connection with the registration, the Holding Company will undertake not to deregister such common stock, without the approval of the Commissioner for a period of three years thereafter. The Holding Company shall use its best efforts to encourage and assist two or more Market Makers to establish and maintain a market for its common stock promptly following Conversion. The Holding Company will also use its best efforts to cause its common stock to be quoted on the Nasdaq System or to be listed on a national or regional securities exchange. 12. Status of Deposit Accounts and Loans Subsequent to Conversion Each Deposit Account holder shall retain, without payment, a withdrawable Deposit Account or Accounts in the Bank, equal in amount to the withdrawable value of such account holder's Deposit Account or Accounts prior to the Conversion. All Deposit Accounts will continue to be insured by the Federal Deposit Insurance Corporation up to the applicable limits of insurance coverage, and shall be subject to the same terms and conditions (except as to voting and liquidation rights) as such Deposit Account in the Bank at the time of the Conversion. All loans shall retain the same status after Conversion as these loans had prior to Conversion. 20 13. Liquidation Account For purposes of granting to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain Deposit Accounts at the Bank a priority in the event of a complete liquidation of the Bank, the Bank will, at the time of Conversion, establish a liquidation account in an amount equal to the surplus and reserves of the Bank as shown on its latest statement of financial condition contained in the final offering circular used in connection with the Conversion. The creation and maintenance of the liquidation account will not operate to restrict the use or application of any of the capital accounts of the Bank; provided, however, that such capital accounts will not be voluntarily reduced below the required dollar amount of the liquidation account. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to the Deposit Account held, have a related inchoate interest in a portion of the liquidation account balance ("subaccount balance"). The initial subaccount balance of a Deposit Account held by an Eligible Account Holder or Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction, the numerator of which is the amount of the Qualifying Deposit in the Deposit Account on the Eligibility Record Date or the Supplemental Eligibility Record Date and the denominator is the total amount of the Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible Account Holders on such record dates in the Bank. Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided below. If the deposit balance in any Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder at the close of business on any annual closing date subsequent to the record date is less than the lesser of (i) the deposit balance in such Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the Qualifying Deposit in such Deposit Account on the Eligibility Record Date or the Supplemental Eligibility Record Date, the subaccount balance shall be reduced in an amount proportionate to the reduction in such deposit balance. In the event of a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Deposit Account. If all funds in such Deposit Account are withdrawn, the related subaccount balance shall be reduced to zero. In the event of a complete liquidation of the Bank (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the liquidation account in the amount of the then-current adjusted subaccount balances for Deposit Accounts then held before any liquidation distribution may be made to stockholders. No merger, consolidation, bulk purchase of assets with assumptions of Deposit Accounts and other liabilities, or similar transactions with another institution the accounts of which are insured by the Federal Deposit Insurance Corporation, shall be considered to be a complete liquidation. In such transactions, the liquidation account shall be assumed by the surviving institution. 21 14. Establishment And Funding Of Charitable Foundation. As part of the Conversion, the Holding Company and the Bank intend to establish the Foundation, which will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code, and to donate to the Foundation cash and shares of Common Stock, in an aggregate amount up to 8% of the value of the shares of Conversion Stock sold in the Conversion. The Foundation is being formed in connection with the Conversion in order to complement the Bank's existing community reinvestment activities and to share with the Bank's local community a part of the Bank's financial success as a locally headquartered, community minded, financial services institution. The funding of the Foundation with Common Stock accomplishes this goal as it enables the community to share in the growth and profitability of the Holding Company and the Bank over the long- term. The Foundation will be dedicated to the promotion of charitable purposes including community development, grants or donations to support housing assistance, not-for-profit community groups and other types of organizations or civic minded projects. The Foundation will annually distribute total grants to assist charitable organizations or to fund projects within its local community of not less than 5% of the average fair market value of Foundation assets each year, less certain expenses. In order to serve the purposes for which it was formed and maintain its Section 501(c)(3) qualification, the Foundation may sell, on an annual basis, a limited portion of the Common Stock contributed to it by the Holding Company. The board of directors of the Foundation will be comprised of individuals who are Officers and/or Directors of the Holding Company or the Bank. The board of directors of the Foundation will be responsible for establishing the policies of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. Depositor approval of this Plan shall constitute approval of the establishment and funding of the Foundation. 15. Restrictions on Acquisition of the Bank Banking regulations limit acquisitions, and offers to acquire, direct or indirect beneficial ownership of more than 10% of any class of an equity security of the Bank or the Holding Company. In addition, the stock certificate of incorporation of the Bank shall provide that for a period of five years following completion of the Conversion: (i) no Person (i.e., no individual, group acting in concert, corporation, partnership, association, joint stock company, trust, or unincorporated organization or similar company, syndicate, or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution) shall directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of the Bank's equity securities. Shares beneficially owned in violation of this charter provision shall not be counted as shares entitled to vote and shall not be voted by any Person or counted as voting shares in connection with any matter submitted to the shareholders for a vote. 22 16. Amendment or Termination of the Plan If necessary or desirable, the Plan may be amended at any time prior to submission of the Plan and proxy materials to the Voting Depositors by a two-thirds vote of the Board of Managers of the Bank. After submission of the Plan and proxy materials to the Voting Depositors, the Plan may be amended by a two-third vote of the Board of Managers of the Bank only with the concurrence of the Commissioner and the FDIC. Any amendments to the Plan made after approval by the Voting Depositors with the concurrence of the Commissioner and the FDIC shall not necessitate further approval by the Voting Depositors unless otherwise required. The Plan may be terminated by a two-third vote of the Bank's Board of Managers at any time prior to the Special Meeting of Voting Depositors, and at any time following such Special Meeting with the concurrence of the Commissioner. In its discretion, the Board of Managers of the Bank may modify or terminate the Plan upon the order or with the approval of the Commissioner and without further approval by Voting Depositors. The Plan shall terminate if the sale of all shares of Conversion Stock is not completed within 24 months of the date of the Special Meeting. A specific resolution approved by a majority of the Board of Managers of the Bank is required in order for the Bank to terminate the Plan prior to the end of such 24-month period. 17. Expenses of the Conversion The Holding Company and the Bank shall use their best efforts to assure that expenses incurred by them in connection with the Conversion shall be reasonable. 18. Tax Matters Consummation of the Conversion is expressly conditioned upon prior receipt of either a ruling of the United States Internal Revenue Service or an opinion of tax counsel or other tax advisor with respect to federal taxation, and either a ruling of the New Jersey taxation authorities or an opinion of tax counsel or other tax advisor with respect to New Jersey taxation, to the effect that consummation of the transactions contemplated herein will not be taxable to the Holding Company or the Bank. 19. Extension of Credit for Purchase of Common Stock The Bank may not loan funds or otherwise extend credit to any Person to purchase in the Conversion shares of Conversion Stock. 20. Registration Under Securities Exchange Act of 1934 The Holding Company shall register its Conversion Stock under the Securities Exchange Act of 1934, as amended, concurrently with or promptly following the Conversion. The Holding Company shall not deregister such securities for a period of three years thereafter. 21. Conversion Stock Not Insured 23 The Conversion Stock will not be insured by the FDIC or any other federal or state government agency or authority. 22. Interpretation Subject to applicable law as set forth in Section 23, all interpretations of this Plan and all applications of the provisions of this Plan to particular circumstances by a majority of the Board of Managers of the Bank shall be final, subject to the authority of the Commissioner and the FDIC. 23. Severability If any term, provision, covenant or restriction contained in this Plan is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in this Plan shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. Adopted: April 26, 2002, as amended on July 25, 2002, October 24, 2002 and October 31, 2002 24 EX-5 4 dex5.txt EXHIBIT 5 EXHIBIT 5 [LETTERHEAD OF LUSE GORMAN POMERENK & SCHICK, P.C.] (202) 274-2000 November 1, 2002 Provident Financial Services, Inc. 830 Bergen Avenue Jersey City, New Jersey 07306 Ladies and Gentlemen: We have acted as special counsel to Provident Financial Services, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, by the Company of an aggregate of 61,538,300 shares of Common Stock, par value $.01 per share (the "Shares"), of the Company and the related preparation and filing by the Company with the Securities and Exchange Commission of a Registration Statement on Form S-1 (the "Registration Statement"). In rendering the opinion set forth below, we do not express any opinion concerning law other than the federal law of the United States and the corporate law of the State of Delaware. We have examined originals or copies, certified or otherwise identified, of such documents, corporate records and other instruments, and have examined such matters of law, as we have deemed necessary or advisable for purposes of rendering the opinion set forth below. As to matters of fact, we have examined and relied upon the representations of the Company contained in the Registration Statement and, where we have deemed appropriate, representations or certificates of officers of the Company or public officials. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all documents submitted to us as copies. Based on the foregoing, we are of the opinion that the Shares to be issued and sold by the Company have been duly authorized and, when issued and sold as contemplated in the Registration Statement and the Plan of Conversion of The Provident Bank ("Bank"), will be validly issued and outstanding, fully paid and non-assessable. In rendering the opinion set forth above, we have not passed upon and do not purport to pass upon the application of securities or "blue-sky" laws of any jurisdiction (except federal securities laws). Provident Financial Services, Inc. November 1, 2002 Page 2 We consent to the filing of this opinion as an Exhibit to the Registration Statement and to the Bank's Application to the New Jersey Department of Banking and Insurance (the "New Jersey Application"), and any amendments thereto and to the reference to our firm under the heading "Legal Matters" in the Prospectus which is part of such Registration Statement and to the reference to our firm in the New Jersey Application. Very truly yours, /s/ Luse Gorman Pomerenk & Schick, P.C. LUSE GORMAN POMERENK & SCHICK A Professional Corporation EX-8.1 5 dex81.txt EXHIBIT 8.1 Exhibit 8.1 [LETTERHEAD OF LUSE GORMAN POMERENK & SCHICK] (202) 274-2000 October 31, 2002 Board of Directors The Provident Bank 830 Bergen Avenue Jersey City, New Jersey 07306-4599 Re: Federal Income Tax Opinion Relating to Conversion of The Provident Bank from a New Jersey-Chartered Mutual Savings Institution to a New Jersey Stock Savings Institution Gentlemen: In accordance with your request, set forth below is the opinion of this firm relating to the material Federal income tax consequences of the proposed conversion (the "Conversion") of The Provident Bank (the "Bank") from a New Jersey-chartered mutual savings bank to a New Jersey-chartered capital stock savings bank ("Stock Bank"). In the Conversion, all of the Bank's to-be-issued capital stock will be acquired by Provident Financial Services, Inc., a newly organized Delaware corporation (the "Holding Company"). For purposes of this opinion, we have examined such documents and questions of law as we have considered necessary or appropriate, including but not limited to the Holding Company's Registration Statement on Form S-1 relating to the proposed issuance of up to 61,538,300 shares of common stock par value $.01 per share and the Plan of Conversion adopted by the Bank on April 26, 2002 and amended on July 25, 2002, October 24, 2002 and October 31, 2002 (the "Plan"), the New Jersey Mutual Certificate of Incorporation and Bylaws of the Bank, the New Jersey Stock Certification of Incorporation and Bylaws of the Bank, and the Delaware Certificate of Incorporation and Bylaws of the Holding Company. In such examination, we have assumed and have not independently verified, the authenticity of all original documents, the accuracy of all copies, and the genuineness of all signatures. We have further assumed the absence of adverse facts not apparent from the face of the instruments and documents we examined. Capitalized terms used herein but not defined herein, shall have the same meaning as set forth in said documents. In issuing our opinion, we have assumed that the Plan has been duly and validly authorized and has been approved and adopted by the board of directors of the Bank at a meeting duly called and held; that the Bank will comply with the terms and conditions of the Plan, and that the various representations and warranties which are provided to us are accurate, complete, true and correct. Accordingly, we express no opinion concerning the effect, if any, of variations from the foregoing. We specifically express no opinion concerning tax matters relating to the Plan under state and local The Provident Bank October 31, 2002 Page 2 tax laws and under Federal income tax laws except on the basis of the documents and assumptions described above. In issuing the opinion set forth below, we have relied solely on existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"); existing and proposed Treasury Regulations (the "Regulations") thereunder; current administrative rulings, notices and procedures; and court decisions. Such laws, regulations, administrative rulings, notices and procedures and court decisions are subject to change at any time. Any such change could affect the continuing validity of the opinions set forth below. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof. In rendering our opinion, we have assumed that the persons and entities identified in the Plan of Conversion will at all times comply with applicable state and Federal laws and the factual representations of the Bank. In addition, we have assumed that the activities of the persons and entities identified in the Plan will be conducted strictly in accordance with the Plan. Any variations may affect the opinions we are rendering. For purposes of this opinion, we are relying on the factual representations provided to us by the Bank, which are incorporated herein by reference. BACKGROUND The Bank is a New Jersey-chartered mutual savings bank which is in the process of converting to a New Jersey-chartered stock savings bank. As a New Jersey-charted mutual savings bank, the Bank has no authorized capital stock. Instead the Bank, in mutual form, has a unique equity structure. A depositor in the Bank is entitled to payment of interest on his account balance as declared and paid by the Bank. A depositor has no right to a distribution of any earnings of the Bank except for interest paid on his deposit but rather such earnings become retained earnings of the Bank. However, a depositor has a right to share, pro rata, with respect to the withdrawal value of his account, in any liquidation proceeds distributed in the event the Bank is liquidated. All of the interests held by a depositor cease when such depositor closes his account with the Bank. PROPOSED TRANSACTION The Holding Company has been formed under the laws of the State of Delaware for the purpose of the proposed transactions described herein, to engage in business as a savings bank holding company and to hold all of the stock of the Stock Bank. The Holding Company will issue shares of its voting common stock ("Holding Company Conversion Stock"), upon completion of the mutual-to-stock conversion of the Bank, to persons purchasing such shares as described in greater detail below. The Provident Bank October 31, 2002 Page 3 Following regulatory approval, the Plan provides for the offer and sale of shares of Holding Company Conversion Stock in a Subscription Offering pursuant to nontransferable subscription rights on the basis of the following preference categories: (i) Eligible Account Holders of the Bank, (ii) the Bank's newly formed employee stock ownership plan, (iii) Supplemental Eligible Account Holders of the Bank, and (iv) officers, directors and employees of the Bank, all as described in the Plan. All shares must be sold, and to the extent the stock is available, no subscriber will be allowed to purchase fewer than 25 shares of Holding Company Conversion Stock. If shares remain after all orders are filled in the three preference categories described above, the Plan calls for a Community Offering for the sale of shares not purchased under the preference categories, and a Syndicated Community Offering for the shares not sold in the Community Offering. Pursuant to the Plan, all such shares will be issued and sold at a uniform price per share. The aggregate purchase price at which all shares of Holding Company Conversion Stock will be offered and sold pursuant to the Plan will be equal to the estimated pro forma market value of the Bank, as converted. The estimated pro forma market value will be determined by RP Financial, LC, an independent appraiser. The conversion of the Bank from mutual-to-stock form and the sale of newly issued shares of the stock of the Stock Bank to the Holding Company will be deemed effective concurrently with the closing of the sale of Holding Company Conversion Stock. In furtherance of the Bank's commitment to its community, this Plan provides for the establishment of a charitable foundation ("Foundation") as part of the Conversion. The Foundation is intended to complement the Bank's existing community reinvestment activities in a manner that will allow the Bank's local communities to share in the growth and profitability of the Holding Company and the Bank over the long term. Consistent with the Bank's goal, the Holding Company intends to donate to the Foundation cash and shares of Common Stock, in an aggregate amount up to 6% of the value of the shares of Holding Company Conversion Stock. OPINION OF COUNSEL This opinion is given as of the date hereof. In issuing our opinion, we have referred solely to existing provisions of the Code, existing and proposed Treasury Regulations promulgated thereunder, current administrative rulings, notices and procedures and court decisions. Such laws, regulations, administrative rulings, notices and procedures and court decisions are subject to change at any time. Any such change could affect the continuing validity of such opinions. We emphasize that the outcome of litigation cannot be predicted with certainty and, although we have attempted in good faith to opine as to the probable outcome of the merits of each tax issue with respect to which an opinion was requested, there can be no assurance that our conclusions are correct or that they would be adopted by the Internal Revenue Service or a court. The Provident Bank October 31, 2002 Page 4 Based solely upon the foregoing information, we render the following opinion: 1. The change in the form of operation of the Bank from a New Jersey mutual savings bank to a New Jersey stock savings bank, as described above, will constitute a reorganization within the meaning of Code Section 368(a)(1)(F), and no gain or loss will be recognized to either the Bank or to Stock Bank as a result of such Conversion. See Rev. Rule. 80-105, 1980-1 C.B. 78. The Bank --- and Stock Bank will each be a party to a reorganization within the meaning of Code Section 368(b). Rev. Rul. 72-206, 1972-1 C.B. 104. 2. No gain or loss will be recognized by Stock Bank on the receipt of money from Holding Company in exchange for its shares or by Holding Company upon the receipt of money from the sale of Holding Company Conversion Stock. Code Section 1032(a). 3. The assets of the Bank will have the same basis in the hands of Stock Bank as they had in the hands of the Bank immediately prior to the Conversion. Code Section 362(b). 4. The holding period of the Bank's assets to be received by Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion. Code Section 1223(2). 5. No gain or loss will be recognized by the account holders of the Bank upon the issuance to them of withdrawable deposit accounts in Stock Bank in the same dollar amount and under the same terms as their deposit accounts in the Bank 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 Stock Bank, in exchange for their deemed ownership interests in the Bank. Code Section 354(a). 6. The basis of the account holders' deposit accounts in the Stock Bank will be the same as the basis of their deposit accounts in the Bank surrendered in exchange therefor. The basis of each Eligible Account Holder's and Supplemental Eligible Account Holder's interests in the Liquidation Account of the Stock Bank will be zero, that being the cost of such property. 7. It is more likely than not that the fair market value of the non-transferable subscription rights to purchase Holding Company Conversion 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 Holding Company Conversion 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. Rev. Rul. 56-572, 1956-2 C.B. 182. The Provident Bank October 31, 2002 Page 5 8. It is more likely than not that the basis of the Holding Company Conversion Stock to its stockholders will be the purchase price thereof. (Section 1012 of the Code). The stockholder's holding period will commence upon the exercise of the subscription rights. (Section 1223(6) of the Code). 9. For purposes of Section 381 of the Code, the Stock Bank will be treated as if there had been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the Conversion merely because of the transfer of assets of the Bank to the Stock Bank, and the tax attributes of the Bank will be taken into account by the Stock Bank as if there had been no reorganization. (Treas. Reg. Section 1.381(b)-(1)(a)(2)). 10. The part of the taxable year of the Bank before the reorganization and the part of the taxable year of Stock Bank after the reorganization will constitute a single taxable year of Stock Bank. See Rev. Rul. 57-276, 1957-1 C.B. 126. Consequently, the Bank will not be required to file a federal income tax return for any portion of such taxable year solely by reason of the Conversion. Treas. Reg. Section 1.381(b)-1(a)(2). 11. The tax attributes of the Bank enumerated in Code Section 381(c) will be taken into account by Stock Bank. Treas. Reg. Section 1.381(b)-1(a)(2). Notwithstanding any reference to Code Section 381 above, no opinion is expressed or intended to be expressed herein as to the effect, if any, of this transaction on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Bank or its successor, Stock Bank, under the Code. Our opinion under paragraph 7 above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. Our opinion under paragraphs 7 and 8 is based on the position that the subscription rights to purchase shares of Holding Company Conversion Stock received by Eligible Account Holders and Supplemental Eligible Account Holders have a fair market value of zero. We understand that the subscription rights will be granted at no cost to the recipients, will be legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of Holding Company Conversion Stock at the same price to be paid by members of the general public in any Community Offering. We also note that the Internal Revenue Service has not in the past reached a different conclusion with respect to the value of nontransferable subscription rights. Commencing in 1993, however, the Internal Revenue Service has specifically declined to issue advanced rulings on the value of nontransferable subscription rights whenever the issue has been raised in a ruling request. If the subscription rights are subsequently found to have value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are The Provident Bank October 31, 2002 Page 6 exercised) and the Holding Company and/or Stock Bank may be taxable on the distribution of the subscription rights. CONSENT We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1 ("Registration Statement") of the Holding Company filed with the Securities and Exchange Commission with respect to the Conversion, as an exhibit to the Application for Approval to Convert to a Stock Savings Bank ("Application") of the Bank filed with the New Jersey Department of Banking and Insurance with respect to the Conversion and as an exhibit to the Notice of Intent to Convert to Stock Form ("Notice") filed with the FDIC with respect to the Conversion, as applicable. We also hereby consent to the references to this firm in the prospectus which is a part of the Registration Statement, the Application and the Notice. USE OF OPINION This opinion is rendered solely for the benefit of the Holding Company and the Bank, and may not be quoted in whole or in part or otherwise referred to, nor is it to be filed with any governmental agency or other person without our prior written consent. We expressly consent to the use of and reliance on this opinion by KPMG LLP in issuing its state tax opinion to the Bank. Very truly yours, /s/ Luse Gorman Pomerenk & Schick, P.C. LUSE GORMAN POMERENK & SCHICK, A PROFESSIONAL CORPORATION EX-8.2 6 dex82.txt EXHIBIT 8.2 Exhibit 8.2 [Letterhead of KPMG LLP] October 31, 2002 Board of Directors The Provident Bank 830 Bergen Avenue Jersey City, NJ 07306-4599 Board of Directors: You have requested the opinion of KPMG LLP ("KPMG") as to the New Jersey Corporate Business Tax ("CBT") and Gross Income Tax ("GIT") consequences of the conversion (the "Conversion") of The Provident Bank (the "Bank"), from a New Jersey chartered mutual savings bank to a New Jersey chartered capital stock savings bank (the "Stock Bank"). In the Conversion, all of the Bank's to-be-issued capital stock will be acquired by Provident Financial Services, Inc. (the "Holding Company"), a newly organized Delaware corporation. In rendering our opinion, based on the express instructions of the Bank, we are relying on the attached opinion ("Federal Opinion") of Luse, Gorman, Pomerenck & Schick, P.C., ("Special Legal Counsel"), dated October 31, for all matters regarding federal income taxes. In addition, we are relying on the representations made by the Bank to Special Legal Counsel, as outlined in this opinion in rendering our opinion. Capitalized terms have the same meaning as in the Federal Opinion unless otherwise stated. FACTS The facts as set forth in the Federal Opinion, and as we understand them to be, are as follows: The Bank is a New Jersey chartered mutual savings bank, which is in the process of converting to a New Jersey chartered stock savings bank. As a New Jersey chartered mutual savings bank, the Bank has no authorized capital stock. Instead the Bank, in mutual form, has a unique equity structure. A depositor in the Bank is entitled to payment of interest on his account balance as declared and paid by the Bank. A depositor has no right to a distribution of any earnings of the Bank except for interest paid on his deposit; rather, these earnings become retained earnings of the Bank. However, a depositor has a right to share, pro rata, with respect to the withdrawal value of his account, in any liquidation proceeds distributed in the event the Bank is liquidated. All of the interests held by a depositor cease when such depositor closes his account with the Bank. Board of Directors The Provident Bank October 31, 2002 Page 2 The Holding Company has been formed under the laws of the State of Delaware for the purpose of the proposed transactions described herein, to engage in business as a savings bank holding company and to hold all of the stock of the Stock Bank. The Holding Company will issue shares of its voting common stock ("Holding Company Conversion Stock"), upon completion of the mutual-to-stock conversion of the Bank, to persons purchasing such shares as described in greater detail below. Following regulatory approval, the Plan of Conversion adopted by the Bank on April 26, 2002 and amended on July 25, 2002, October 24, 2002, and October 31, 2002 (the "Plan"), provides for the offer and sale of shares of Holding Company Conversion Stock in a Subscription Offering pursuant to nontransferable subscription rights on the basis of the following preference categories: (i) Eligible Account Holders of the Bank, (ii) the Bank's newly formed employee stock ownership plan, (iii) Supplemental Eligible Account Holders of the Bank, and (iv) officers, directors and employees of the Bank, all as described in the Plan. All shares must be sold, and to the extent the stock is available, no subscriber will be allowed to purchase fewer than 25 shares of Holding Company Conversion Stock. If shares remain after all orders are filled in the three preference categories described above, the Plan calls for a Community Offering for the sale of shares not purchased under the preference categories, and a Syndicated Community Offering for the shares not sold in the Community Offering. Pursuant to the Plan, all such shares will be issued and sold at a uniform price per share. The aggregate purchase price at which all shares of Holding Company Conversion Stock will be offered and sold pursuant to the Plan will be equal to the estimated pro forma market value of the Bank, as converted. The estimated pro forma market value will be determined by RP Financial, LLC, an independent appraiser. The conversion of the Bank from mutual-to-stock form and the sale of newly issued shares of the stock of the Stock Bank to the Holding Company will be deemed effective concurrently with the closing of the sale of Holding Company Conversion Stock. In furtherance of the Bank's commitment to its community, this Plan provides for the establishment of a charitable foundation ("Foundation") as part of the Conversion. The Foundation is intended to complement the Bank's existing community reinvestment activities in a manner that will allow the Bank's local communities to share in the growth and profitability of the Holding Company and the Bank over the long term. Consistent with the Bank's goal, the Holding Company intends to donate to the Foundation cash and shares of Common Stock, in an aggregate amount up to 6% of the value of the shares of Holding Company Conversion Stock. Board of Directors The Provident Bank October 31, 2002 Page 3 REPRESENTATIONS In addition to the FACTS set forth above, KPMG is relying on representations set forth by the Bank to Special Legal Counsel. These representations, as we understand them, are set forth below. KPMG has not independently verified, and will not independently verify, the completeness or accuracy of any of the representations below. It is understood and agreed that KPMG is relying on the representations below in rendering the opinions contained in this letter. Representations as we understand them from the Federal Opinion: 1. The Conversion is implemented in accordance with the terms of the Plan and all conditions precedent contained in the Plan shall be performed or waived prior to the consummation of the Conversion. 2. To the best of the knowledge of the management of Bank there is not now, nor will there be at the time of the Conversion, any plan or intention, on the part of the depositors in Bank to withdraw their deposits following the Conversion. Deposits withdrawn immediately prior to or immediately subsequent to the Conversion (other than maturing deposits) are considered in making these assumptions. 3. Holding Company and Stock Bank each have no plan or intention to redeem or otherwise acquire any of the Holding Company Conversion Stock to be issued in the proposed transaction. 4. Immediately following the consummation of the Conversion, Stock Bank will possess the same assets and liabilities as Bank held immediately prior to the proposed transaction plus substantially all of the net proceeds from the sale of its stock to Holding Company, except for assets used to pay expenses of the Conversion. The liabilities transferred to Stock Bank were incurred by Bank in the ordinary course of business. 5. No cash or property will be given to Eligible Account Holders or Supplemental Eligible Account Holders in lieu of Subscription Rights or an interest in the liquidation account of Stock Bank. 6. Following the Conversion, Stock Bank will continue to engage in its business in substantially the same manner as Bank engaged in business prior to the Conversion, and it has no plan or intention to sell or otherwise dispose of any of its assets, except in the ordinary course of business. Board of Directors The Provident Bank October 31, 2002 Page 4 7. There is no plan or intention for Stock Bank to be liquidated or merged with another corporation following the consummation of the Conversion. 8. The fair market value of each Deposit Account plus an interest in the liquidation account of Stock Bank will, in each instance, be approximately equal to the fair market value of each Deposit Account of Bank plus the interest in the residual equity of Bank surrendered in exchange therefor. 9. Bank, Stock Bank and Holding Company are each corporations within the meaning of Section 7701(a)(3) of the Internal Revenue Code (the "Code"). 10. Holding Company has no plan or intention to sell or otherwise dispose of any of the stock of Stock Bank received by it in the proposed transaction. 11. Both Stock Bank and Holding Company have no plan or intention to issue additional shares of common stock following the proposed transaction, other than shares that may be issued to employees and/or directors pursuant to certain stock option and stock incentive plans or that may be issued to or pursuant to employee benefit plans. 12. Assets used to pay expenses of the Conversion and all distributions (except for regular, normal interest payments and other payments in the normal course of business made by Bank immediately preceding the transaction) will in the aggregate constitute less than 1% of the net assets of Bank and any such expenses and distributions will be paid from the proceeds of the sale of Holding Company Conversion Stock. 13. All distributions to holders in their capacity as such (except for regular, normal interest payments made by Bank), will, in the aggregate, constitute less than 1% of the fair market value of the net assets of Bank. 14. At the time of the proposed transaction, the fair market value of the assets of Bank on a going concern basis (including intangibles) will equal or exceed the amount of its liabilities plus the amount of liabilities to which such assets are subject. Bank will have a positive regulatory net worth at the time of the Conversion. 15. Bank is not under the jurisdiction of a court in any Title 11 bankruptcy. The Conversion does not involve a receivership, foreclosure, or similar proceeding agency. Board of Directors The Provident Bank October 31, 2002 Page 5 16. Bank's Eligible Account Holders and Supplemental Eligible Account Holders will pay expenses of the Conversion solely attributable to them, if any. 17. The liabilities of Bank assumed by Stock Bank plus the liabilities, if any, to which the transferred assets are subject were incurred by Bank in the ordinary course of its business and are associated with the assets being transferred. 18. There will be no purchase price advantage for Eligible Account Holders, the employee stock ownership plan, Supplemental Eligible Account Holders, or officers, directors and employees who purchase Holding Company Conversion Stock. 19. Neither the Holding Company, Bank or Stock Bank is an investment company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code. 20. None of the compensation to be received by any Deposit Account holder-employees of Bank will be separate consideration for, or allocable to, any of their deposits in Bank. No interest in the liquidation account of Stock Bank will be received by any Eligible Account Holder-employees or Supplemental Eligible Account Holder-employees as separate consideration for, or will otherwise be allocable to, any employment agreement, and the compensation paid to each Eligible Account Holder-employee or Supplemental Eligible Account Holder-employee, during the twelve-month period preceding or subsequent to the Conversion, will be for services actually rendered and will be commensurate with amounts paid to the third parties bargaining at arm's-length for similar services. No shares of Holding Company Conversion Stock will be issued to or purchased by any Eligible Account Holder-employee or Supplemental Eligible Account Holder-employee at a discount or as compensation in the proposed transaction. 21. No creditors of Bank, or the depositors in their role as creditors, have taken any steps to enforce their claims against Bank by instituting bankruptcy or other legal proceedings, in either a court or appropriate regulatory agency, that would eliminate the proprietary interests of the depositors as the equity holders of the Bank prior to the Conversion. 22. The Conversion does not involve the payment to Stock Bank or Bank of financial assistance from federal agencies within the meaning of Notice 89-102, 1989-40 C.B. 1. Board of Directors The Provident Bank October 31, 2002 Page 6 23. On a per share basis, the purchase price of Holding Company Conversion Stock will be equal to the fair market value of such stock at the time of the completion of the proposed transaction. 24. All shares of Holding Company Conversion Stock sold in the Conversion will be sold for the same price on a per share basis. 25. Bank has received or will receive prior to completion of the transaction an opinion from RP Financial, LC (the "Appraiser's Opinion"), which concludes that the Subscription Rights to be received by Eligible Account Holders, the employee stock ownership plan, Supplemental Eligible Account Holders and officers, directors and employees do not have any value at the time of their distribution or exercise. 26. Bank will not have any net operating losses, capital loss carryovers or built-in losses at the time of the Conversion. SCOPE OF OPINION The opinions contained in this letter are based on the facts, assumptions and representations stated herein. You represented to us that you have provided us with all facts and circumstances that you know or have reason to know are pertinent to this opinion letter. If any of these facts, assumptions or representations is not entirely complete or accurate, it is imperative that we are informed immediately in writing as the incompleteness or inaccuracy could cause us to change our opinions. We have not reviewed all the documents necessary to effectuate the transactions described in this letter, and we assume that all necessary documents will be properly executed under applicable law and that all steps necessary will be taken to effectuate the transactions as required by federal, state, or local law. In various sections of this letter, for ease of understanding and as a stylistic matter, we may use language (such as "will") which might suggest that we reached a conclusion on an issue at a standard different from "should" or when otherwise noted "more likely than not." Such language should not be so construed. Our conclusions on any issue discussed in this opinion letter do not exceed a "should" standard, unless otherwise noted. Board of Directors The Provident Bank October 31, 2002 Page 7 Our views as to the New Jersey tax consequences rely upon the Federal Opinion, which we understand to conclude as follows: 1. The change in the form of operation of the Bank from a New Jersey mutual savings bank to a New Jersey stock savings bank, as described above, will constitute a reorganization within the meaning of the Code Section 368(a)(1)(F), and no gain or loss will be recognized to either the Bank or to Stock Bank as a result of such Conversion. See Rev. Rule. 80-105, 1980-1 C.B. 78. The Bank and Stock Bank will each be a party to a reorganization within the meaning of Code Section 368(b). Rev. Rul. 72-206, 1972-1 C.B. 104. 2. No gain or loss will be recognized by Stock Bank on the receipt of money from Holding Company in exchange for its shares or by Holding Company upon the receipt of money from the sale of Holding Company Conversion Stock. Code Section 1032(a). 3. The assets of the Bank will have the same basis in the hands of Stock Bank as they had in the hands of the Bank immediately prior to the Conversion. Code Section 362(b). 4. The holding period of the Bank's assets to be received by Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion. Code Section 1223(2). 5. No gain or loss will be recognized by the account holders of the Bank upon the issuance to them of withdrawable deposit accounts in Stock Bank in the same dollar amount and under the same terms as their deposit accounts in the Bank 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 Stock Bank, in exchange for their deemed ownership interests in the Bank. Code Section 354(a). 6. The basis of the account holders' deposit accounts in the Stock Bank will be the same as the basis of their deposit accounts in the Bank surrendered in exchange therefor. The basis of each Eligible Account Holder's or Supplemental Eligible Account Holder's interests in the Liquidation Account of the Stock Bank will be zero, that being the cost of such property. 7. It is more likely than not that the fair market value of the non-transferable subscription rights to purchase Holding Company Conversion 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 Holding Company Conversion Stock. No Board of Directors The Provident Bank October 31, 2002 Page 8 taxable income will be realized by the Eligible Account Holders, Supplemental Eligible Account Holders or other eligible subscribers as a result of the exercise of the nontransferable subscription rights. Rev. Rul. 56-572, 1956-2 C.B. 182. 8. It is more likely than not that the basis of the Holding Company Conversion Stock to its stockholders will be the purchase price thereof, increased by the basis, if any, of the subscription rights exercised. (Section 1012 of the Code). The stockholder's holding period will commence upon the exercise of the subscription rights. (Section 1223(6) of the Code). 9. For purposes of Section 381 of the Code, the Stock Bank will be treated as if there had been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the Conversion merely because of the transfer of assets of the Bank to the Stock Bank, and the tax attributes of the Bank will be taken into account by the Stock Bank as if there had been no reorganization. (Treas. Reg. 1.381(b)-(1)(a)(2)). 10. The part of the taxable year of the Bank before the reorganization and the part of the taxable year of Stock Bank after the reorganization will constitute a single taxable year of Stock Bank. See Rev. Rul. 57-276, 1957-1 C.B. 126. Consequently, the Bank will not be required to file a federal income tax return for any portion of such taxable year solely by reason of the Conversion. Treas. Reg. 1.381(b)-1(a)(2). 11. The tax attributes of the Bank enumerated in Code Section 381(c) will be taken into account by Stock Bank. Treas. Reg. 1.381(b)-1(a)(2). In addition, the Federal Opinion noted the following: Notwithstanding any reference to Code Section 381 above, no opinion is expressed or intended to be expressed herein as to the effect, if any, of this transaction on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Bank or its successor, Stock Bank, under the Code. Our opinion under paragraph 7 above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. Our opinion under paragraphs 7 and 8 is based on the position that the subscription rights to purchase shares of Holding Company Conversion Stock received by Eligible Account Holders and Supplemental Eligible Account Holders have a fair Board of Directors The Provident Bank October 31, 2002 Page 9 market value of zero. We understand that the subscription rights will be granted at no cost to the recipients, will be legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of Holding Company Conversion Stock at the same price to be paid by members of the general public in any Community Offering. We also note that the Internal Revenue Service has not in the past concluded that subscription rights to purchase Holding Company Conversion Stock have value. If the subscription rights are subsequently found to have value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Holding Company and/or Stock Bank may be taxable on the distribution of the subscription rights. Our opinions in this letter are limited to those specifically set forth under the heading OPINIONS. KPMG expresses no opinion with respect to any other federal, state, or foreign tax or legal aspect of the transaction described herein. No inference should be drawn on any other matter. Specifically, while KPMG relies upon the Federal Opinion as described above, no opinion is expressed as to whether the Subscription Rights constitute valuable property. In addition, this Opinion does not address the tax consequences of the contribution of Company Common Stock to the Foundation. OPINIONS Based on the facts, assumptions and representations set forth in the Federal Opinion and restated herein as we understand them to be, and subject to any conditions or limitations herein, including the Scope of the Opinion above, it is our opinion that the New Jersey CBT consequences described below should prevail (i.e., there is a greater than 70 percent likelihood that those consequences should prevail) if challenged. We have no reservations with respect to the state tax technical aspects of this opinion, however as a matter of general policy, "should" represents our highest level of comfort in opinions where state tax conformity is dependant on the federal opinion, and where all of the facts have not been reviewed by us in order to form a federal opinion. In addition, based on the facts, assumptions and representations set forth in the Federal Opinion and restated herein as we understand them to be, and subject to any conditions or limitations herein, including the Scope of the Opinion above, it is our opinion that the New Jersey GIT consequences described below more likely than not should prevail (i.e., there is a greater than 50 percent likelihood that those consequences should prevail) if challenged. Since it is the opinion of Luse, Gorman, Pomerenck & Schick, P.C., that for federal income tax purposes, it is "more likely than not" that the nontransferable Board of Directors The Provident Bank October 31, 2002 Page 10 subscription rights to purchase common stock have no value, this New Jersey opinion, in its reliance on the Federal Opinion, is limited to that same level of comfort. The following opinions, although similar to the conclusions set forth in the Federal Opinion, are specific to the tax consequences of the Conversion under New Jersey tax law, and are thus independent and separate from the conclusions set forth in the Federal Opinion. 1. 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 the Conversion should be treated as a reorganization, and Bank or the Stock Bank should not recognize any gain or loss for New Jersey CBT purposes. 2. 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, no gain or loss should be recognized for New Jersey CBT purposes by the Stock Bank on the receipt of money from the Holding Company in exchange for its shares or by the Holding Company upon the receipt of money from the sale of Holding Company Conversion stock. 3. 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 CBT purposes the assets of the Bank will have the same basis in the hands of Stock Bank as they had in the hands of the Bank immediately prior to the Conversion. 4. 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 CBT purposes the holding period of the Bank's assets to be received by Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion. 5. 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 GIT purposes no gain or loss will be recognized by the account holders of the Bank upon the issuance to them of withdrawable deposit accounts in Stock Bank in the same dollar amount and under the same terms as their deposit accounts in the Bank and no gain or loss will be recognized by Eligible Account Holders or Supplemental Eligible Account Holders (as defined in the Plan) upon receipt by them of an interest in the Liquidation Account (as defined in the Plan) of Stock Bank, in exchange for their deemed ownership interests in the Bank. Board of Directors The Provident Bank October 31, 2002 Page 11 6. 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 GIT purposes the basis of the account holders' deposit accounts in the Stock Bank will be the same as the basis of their deposit accounts in the Bank surrendered in exchange therefor. In addition, the basis of each Eligible Account Holder's or Supplemental Eligible Account Holder's interests in the Liquidation Account of the Stock Bank will be zero, that being the cost of such property. 7. 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 GIT purposes it is more likely than not that the fair market value of the non-transferable subscription rights to purchase Holding Company Conversion 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 Holding Company Conversion 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. 8. 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 GIT purposes it is more likely than not that the basis of the Holding Company Conversion 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. 9. 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 CBT purposes the Stock Bank will be treated as if there had been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the Conversion merely because of the transfer of assets of the Bank to the Stock Bank, and the tax attributes of the Bank will be taken into account by the Stock Bank as if there had been no reorganization. 10. 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 CBT purposes the part of the taxable year of the Bank before the reorganization and the part of the taxable year of Stock Bank after the reorganization will constitute a single taxable year of Stock Bank. Consequently, the Board of Directors The Provident Bank October 31, 2002 Page 12 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. 11. 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 CBT purposes the tax attributes of the Bank enumerated in Code Section 381(c) will be taken into account by Stock Bank, with the exception of net operating losses ("NOLs"). Based on the facts, assumptions and representation #26, the Bank has represented that it does not have any NOLs at the time of the Conversion. No opinion is expressed or intended to be expressed herein as to the effect, if any, of this transaction on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Bank or its successor, Stock Bank, under the CBT. Law and Analysis Savings Institution Tax The Bank, for New Jersey corporate income tax purposes, historically filed and paid tax pursuant to the Saving Institution Tax (the "SIT"). However, pursuant to the Business Tax Reform Act ("BTRA") enacted in July 2002, the SIT was repealed, retroactively, to taxable years beginning on or after January 1, 2002. Therefore, because a state chartered savings bank is within the definitions of a taxpayer for CBT purposes (resulting from changes in BTRA), the New Jersey tax ramifications of the Conversion must be analyzed pursuant to the CBT rules and regulations. N.J.S.A. 54:10A-4(s). CBT Opinion #1 The New Jersey CBT uses federal taxable income as the starting point for the computation of its tax base. N.J.S.A. Sec. 54:10A-4(k). Federal taxable income is the income that a taxpayer reports on its federal income tax return filed with the Internal Revenue Service ("IRS"). N.J.S.A. 54:10A-4(k). The CBT taxes corporate taxpayers on their federal taxable income after certain adjustments have been made to that income. N.J.S.A. 54:10A-4(k). The adjustments are enumerated in N.J.S.A. 54:10A-4(k). There are no New Jersey provisions that modify a taxpayer's federal taxable income with respect to reorganizations pursuant to Section 368(a)(1)(F) of the Code. Board of Directors The Provident Bank October 31, 2002 Page 13 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, the Conversion should be treated as a tax-free reorganization for the Bank, since New Jersey follows the federal tax-free treatment of reorganizations pursuant to Section 368(a)(1)(F) of the Code by incorporating the federal provisions by reference in the CBT statutes. See also Formal Opinion 1960 No. 2, Opinion of the Attorney General, February 10, 1960. Opinions #2, #3, and #4 Likewise, since New Jersey follows the federal tax treatment under section 1032(a) of the Code, 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, no gain or loss should be recognized for New Jersey CBT purposes by the Stock Bank on the receipt of money from the Holding Company in exchange for its shares or by the Holding Company upon the receipt of money from the sale of Holding Company Conversion stock. N.J.S.A. Sec. 54:10A-4(k). In addition, for New Jersey CBT purposes, the assets of the Bank will have the same basis in the hands of Stock Bank as they had in the hands of the Bank immediately prior to the Conversion and the holding period of the Bank's assets to be received by Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion. N.J.S.A. Sec. 54:10A-4(k). Opinion #5 The New Jersey GIT, as provided for in N.J.S.A. 54A:2-1, imposes a tax on the New Jersey gross income of individuals, estates and trusts. New Jersey defines gross income and its categories in N.J.S.A. 54A:5-1. Included in this definition is net gains or income from disposition of property. N.J.S.A. 54A:5-1(c) provides that "the term `net gains or net income' shall not include gains or income from transactions to the extent to which nonrecognition is allowed for federal income tax purposes. The term `sale, exchange or other disposition' shall not include the exchange of stock or securities in a corporation a party to a reorganization in pursuance of a plan of reorganization, solely for stock or securities in such corporation or in another corporation a party to the reorganization and the transfer of property to a corporation by one or more persons solely in exchange for stock or securities in such corporation if immediately after the exchange such person or persons are in control of the corporation." A reorganization is defined in N.J.S.A. 54A:5-1(c)(iv) as a transfer by a corporation of all or a part of its assets to another corporation where, immediately after the transfer, the transferor and/or one or more of its shareholders, including persons who were shareholders immediately before the transfer, is in control of the corporation to which the assets are transferred. Board of Directors The Provident Bank October 31, 2002 Page 14 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, than for New Jersey GIT purposes, no gain or loss will be recognized by the account holders of the Bank upon the issuance to them of withdrawable deposit accounts in Stock Bank in the same dollar amount and under the same terms as their deposit accounts in the Bank 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 Stock Bank, in exchange for their deemed ownership interests in the Bank. N.J.S.A. 54A:5-1(c)(viii). Opinions #6 #7 and #8 Likewise, since New Jersey follows the federal tax treatment under section 354(a) of the Code, 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, no gain or loss should be recognized for New Jersey GIT purposes and the basis of the account holders' deposit accounts in the Stock Bank will be the same as the basis of their deposit accounts in the Bank surrendered in exchange therefor. In addition for New Jersey GIT purposes, 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 Holding Company Conversion Stock. N.J.S.A. 54A:5-1(c)(iv). No taxable income will be realized by the Eligible Account Holders or other eligible subscribers as a result of the exercise of the nontransferable subscription rights. N.J.S.A. 54A:5-1(c)(viii). Furthermore, it is more likely than not that the basis of the Holding Company Conversion Stock to its stockholders will be the purchase price thereof, increased by the basis, if any, of the subscription rights exercised. N.J.S.A. 54A:5-1(c)(viii). The stockholder's holding period will commence upon the exercise of the subscription rights. Our conclusions are based on the conclusion in the Federal Opinion that the subscription rights to purchase shares of Holding Company Conversion Stock received by the Eligible Account Holders or Supplemental Eligible Account Holders have a fair market value of zero. As noted in the Federal Opinion, the IRS has not, in the past, reached a different conclusion with respect to the value of nontransferable subscription rights and, commencing in 1993, the IRS has specifically declined to issue advanced rulings on the value of nontransferable subscription rights whenever the issue has been raised in a ruling request. Since the Federal Opinion is at a "more likely than not" level of comfort for this conclusion, this New Jersey opinion is also at a "more likely than not" level of comfort. If the fair market value of the non-transferable subscription rights to purchase Holding Company Conversion Stock is deemed to have an ascertainable value, the depositors Board of Directors The Provident Bank October 31, 2002 Page 15 would recognize New Jersey taxable income equal to the amount of such value recognized for Federal income tax purposes. Opinion #9 As noted above, the New Jersey CBT uses federal taxable income as the starting point for the computation of its tax base. N.J.S.A. Sec. 54:10A-4(k). In addition, for New Jersey CBT purposes, the taxable year of a taxpayer will be the same as for federal income tax purposes. N.J.S.A. 54:10A-15(i). 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 CBT purposes the Stock Bank will be treated as if there had been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the Conversion merely because of the transfer of assets of the Bank to the Stock Bank, and the tax attributes of the Bank will be taken into account by the Stock Bank as if there had been no reorganization. Opinion #10 As noted above, the New Jersey CBT uses federal taxable income as the starting point for the computation of its tax base. N.J.S.A. Sec. 54:10A-4(k). In addition, for New Jersey CBT purposes, a taxpayer will be required to file a return if the accounting period of the return is less than 12 months. N.J.A.C. 18:7-12.1(a). 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 CBT purposes the part of the taxable year of the Bank before the reorganization and the part of the taxable year of Stock Bank after the reorganization will constitute a single taxable year of Stock Bank. Consequently, the 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. Opinion #11 As noted above, the New Jersey CBT uses federal taxable income as the starting point for the computation of its tax base. N.J.S.A. Sec. 54:10A-4(k). CBT taxes corporate taxpayers on their federal taxable income after certain adjustments have been made to that income. N.J.S.A. 54:10A-4(k). The adjustments are enumerated in N.J.S.A. 54:10A-4(k). Board of Directors The Provident Bank October 31, 2002 Page 16 There are no New Jersey provisions that modify a taxpayer's federal taxable income with respect to reorganizations pursuant to Section 368(a)(1)(F) of the Code. 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 CBT purposes the tax attributes of the Bank enumerated in Code Section 381(c) will be taken into account by Stock Bank, with the exception of NOLs. Based on the facts, assumptions and representation #26, the Bank has represented that it does not have any NOLs at the time of the Conversion. Material New Jersey Tax Consequences CBT 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 CBT purposes: 1. The Conversion should be treated as a reorganization, and Bank or the Stock Bank should not recognize any gain or loss for New Jersey CBT purposes; 2. No gain or loss should be recognized for New Jersey CBT purposes by the Stock Bank on the receipt of money from the Holding Company in exchange for its shares or by the Holding Company upon the receipt of money from the sale of Holding Company Conversion stock; 3. The assets of the Bank will have the same basis in the hands of Stock Bank as they had in the hands of the Bank immediately prior to the Conversion; 4. The holding period of the Bank's assets to be received by Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion; 5. The Stock Bank will be treated as if there had been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the Conversion merely because of the transfer of assets of the Bank to the Stock Bank, and the tax attributes of the Bank will be taken into account by the Stock Bank as if there had been no reorganization; 6. The part of the taxable year of the Bank before the reorganization and the part of the taxable year of Stock Bank after the reorganization will constitute a single Board of Directors The Provident Bank October 31, 2002 Page 17 taxable year of Stock Bank. Consequently, the 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; 7. The tax attributes of the Bank enumerated in Code Section 381(c) will be taken into account by Stock Bank, with the exception of net operating losses ("NOLs"). Based on the facts, assumptions and representation #26, the Bank has represented that it does not have any NOLs at the time of the Conversion. No opinion is expressed or intended to be expressed herein as to the effect, if any, of this transaction on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Bank or its successor, Stock Bank, under the CBT. GIT 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 GIT purposes: 1. No gain or loss will be recognized by the account holders of the Bank upon the issuance to them of withdrawable deposit accounts in Stock Bank in the same dollar amount and under the same terms as their deposit accounts in the Bank and no gain or loss will be recognized by Eligible Account Holders or Supplemental Eligible Account Holders (as defined in the Plan) upon receipt by them of an interest in the Liquidation Account (as defined in the Plan) of Stock Bank, in exchange for their deemed ownership interests in the Bank; 2. The basis of the account holders' deposit accounts in the Stock Bank will be the same as the basis of their deposit accounts in the Bank surrendered in exchange therefor. In addition, the basis of each Eligible Account Holder's or Supplemental Eligible Account Holder's interests in the Liquidation Account of the Stock Bank will be zero, that being the cost of such property; 3. It is more likely than not that the fair market value of the non-transferable subscription rights to purchase Holding Company Conversion 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 Holding Company Conversion Stock. No taxable income will be realized by the Eligible Account Holders or Board of Directors The Provident Bank October 31, 2002 Page 18 Supplemental Eligible Account Holders as a result of the exercise of the nontransferable subscription rights; 4. It is more likely than not that the basis of the Holding Company Conversion 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 noted above, in connection with the transactions described herein the Bank has engaged Special Legal Counsel. In this regard, Bank has requested a tax opinion from Special Legal Counsel as to the Federal income tax consequences of these transactions. Bank has specifically not engaged KPMG to render any opinion regarding any tax consequence of these transactions except those that relate to New Jersey CBT and GIT consequences and Bank has instructed KPMG that for purposes of rendering its opinion regarding New Jersey CBT and GIT consequences, it should rely solely on the Federal Opinion of Special Legal Counsel for any matter related to federal taxation. Thus, any and all references to the consequences of these transactions under federal income tax rules that are contained herein are made solely in reliance on the Federal Opinion and no such reference is intended to be, nor should it be interpreted as, an opinion of KPMG on any matter related to federal income tax. All opinions herein are limited solely to those relating to New Jersey CBT or GIT and those are made in reliance on the Federal Opinion. Our advice in this document is limited to the conclusions specifically set forth herein and is based on the completeness and accuracy of the above-stated facts, assumptions and representations. If any of the foregoing facts, assumptions or representations is not entirely complete or accurate, it is imperative that we be informed immediately, as the inaccuracy or incompleteness could have a material effect on our conclusions. In rendering our advice, we are relying upon the Federal Opinion, New Jersey CBT and GIT statutes, the regulations thereunder, and the judicial and administrative interpretations thereof. These authorities are subject to change, retroactively and/or prospectively, and any such changes could affect the validity of our conclusions. We will not update our advice for subsequent changes or modifications to the law and regulations or to the judicial and administrative interpretations thereof. Board of Directors The Provident Bank October 31, 2002 Page 19 CONSENT We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1 ("Registration Statement") of the Holding Company filed with the Securities and Exchange Commission with respect to the Conversion, as an exhibit to the Application for Approval to Convert to a Stock Savings Bank ("Application") of the Bank filed with the New Jersey Department of Banking and Insurance with respect to the Conversion and as an exhibit to the Notice of Intent to Convert to Stock Form ("Notice") filed with the FDIC with respect to the Conversion, and any amendments thereto, as applicable. We also hereby consent to the references to this firm in the prospectus which is a part of the Registration Statement, the Application and the Notice. /s/ KPMG LLP EX-10.1 7 dex101.txt EXHIBIT 10.1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Agreement is made effective as of_____ __, 2002 (the "Effective Date"), by and between Provident Financial Services, Inc. (the "Company"), a Delaware corporation, and ___________(the "Executive"). References to the "Bank" mean The Provident Bank, a New Jersey chartered savings bank and wholly-owned subsidiary of the Company. The Company and the Bank are sometimes collectively referred to as the "Employers." WHEREAS, the Executive has served as an officer of the Bank since _____ and as an officer of the Company since its formation as the holding company for the Bank; and WHEREAS, the Company wishes to assure itself of the services of Executive as an officer of the Bank and of the Company for the period provided in this Agreement; and WHEREAS, in order to induce the Executive to remain in the employ of the Bank and to provide further incentive to achieve the financial and performance objectives of the Bank and the Company, the parties desire to specify the severance benefits which shall be due the Executive in the event that his employment with the Bank or the Company is terminated under specified circumstances; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, Executive agrees to serve as _________________of the Bank and the Company. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank or the Company. Failure to reelect Executive as __________________of the Company and the Bank without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERM AND DUTIES. (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be thirty-six (36) full calendar months; provided, however, if written notice of nonrenewal is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any anniversary date, the employment of Executive hereunder shall cease at the end of thirty-six (36) months following such anniversary date. On an annual basis prior to the deadline for the notice period referenced above, the board of directors of the Company (the "Board of Directors") shall conduct a performance review of Executive for purposes of determining whether to provide notice of nonrenewal. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence approved by the Board of Directors, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Company and the Bank; provided, however, that, with the approval of the Board of the Company or the Bank, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (it being understood that membership in and service on boards or committees of social, religious, charitable or similar organizations does not require Board approval pursuant to this Section 2(b)). For purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement as set forth in Exhibit A hereto. 3. COMPENSATION, BENEFITS AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $_____ per year ("Base Salary"). Such Base Salary shall be payable biweekly, or with such other frequency as officers and employees are generally paid. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review may be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all participating employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident insurance plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank or the Company in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank or the Company in which Executive is eligible to participate. Nothing paid to the 2 Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank or the Company shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. Without limiting the foregoing, the Bank shall provide the Executive with an automobile suitable to the position of _____, and such automobile may be used by the Executive in carrying out his duties under this Agreement, including commuting between his residence and his principal place of employment, and other personal use. The Bank shall reimburse the executive for the cost of maintenance and servicing such automobile and for instance, gasoline and oil for such automobile. The Bank or the Company shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, fees for memberships in a country club, a health club, and such other clubs and organizations as the Executive and the Board shall mutually agree are necessary and appropriate for business purposes, and travel and entertainment expenses, incurred in connection with the performance of his duties under this Agreement, upon presentation to the Bank of an itemized account of such expenses in such form as the Bank may reasonably require. The Executive shall be responsible for the payment of any taxes on account of his personal use of the automobile provided by the Bank or the Company and on account of any other benefit provided herein. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than a termination following a Change in Control, as defined in Section 5(a) hereof, or a termination for Cause, as defined in Section 8 hereof, or a termination upon Retirement as defined in Section 7 hereof, or a termination for disability as set forth in Section 6 hereof; and (ii) Executive's resignation from the Company's and the Bank's employ, upon any of the following: (A) failure to elect or reelect or to appoint or reappoint Executive as ______________of the Company and the Bank, or to nominate (and as to the Bank, elect) Executive to the Board of Directors of Bank and the Company, unless consented to by the Executive, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Sections 1 and 2 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location that is more than 25 miles from the location of the Bank's principal executive offices as of the date of this Agreement, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under 3 this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Section 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Company shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or three (3) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination. At the election of the Executive, which election is to be made annually by January 31 (or as to the first year, within thirty days of the date of the Agreement) of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made in a lump sum without reduction for present value. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees. Such coverage shall cease thirty-six (36) months following the Event of Termination. In the alternative, the Company shall pay to the Executive a cash amount equal to the Executive's cost of obtaining such benefits on his own, adjusted for any federal or state income taxes the Executive has to pay on the cash amount. 5. CHANGE IN CONTROL. (a) Change in Control. "Change in Control" shall mean the occurrence of any of the following events: (i) approval by the shareholders of the Company of a transaction that would result and does result in the reorganization, merger or consolidation of the Company, with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the 4 Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the shareholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company or the Bank, or approval by the shareholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, members of the Company's Board of Directors who belong to any of the following groups do not aggregate at least a majority of the Company's Board of Directors: (A) individuals who were members of the Company's Board of Directors on the Effective Date of this Agreement; or (B) individuals who first became members of the Company's Board of Directors after the Effective Date of this Agreement either: (I) upon election to serve as a member of the Company's Board of Directors by the affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (II) upon election by the shareholders of the Company to serve as a member of the Company's Board of Directors, but only if nominated for election by the affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first nomination; provided that such individual's election or nomination did not result from an actual or threatened election contest or other actual or threatened solicitation of proxies or consents other than by or on behalf of the Company's Board of Directors; or (v) any event which would be described in Section 5(a)(i), (ii), (iii), (iv), or (v), if the term "Bank" were substituted for the term "Company" therein and the term "Bank's Board of 5 Directors" were substituted for the term "Company's Board of Directors" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank or a subsidiary of either of them, by the Company, the Bank, any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 5, the term "person" shall include the meaning assigned to it under Sections 13(d)(3) or 14(d) of the Exchange Act. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control shall have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from his resignation or his dismissal), unless such termination is (A) because of his death or Retirement, or, (B) for Disability. Upon a Change in Control, and for a period of one year thereafter, Executive shall have the right to elect to terminate his employment with the Bank, for any reason, and receive the benefits provided for in this Section 5. (c) Upon the occurrence of a Change in Control followed by the termination of Executive's employment by the Bank or the Company (including a termination referred to in the last sentence of Section 5(b) above), the Executive, or, in the event of his subsequent death (subsequent to such termination), his beneficiary or beneficiaries, or his estate, as the case may be, shall receive as severance pay or liquidated damages, or both, an amount equal to three times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the termination. The foregoing severance/liquidated damages payment(s), as well as all other benefits described in this Agreement that would be payable upon a Change of Control, shall be made to the Executive's surviving spouse, or if no surviving spouse, to his estate, in the event that the Company or the Bank enters into an agreement as to a Change in Control of the Company or the Bank, and Executive shall die after such agreement is executed but prior to consummation of the Change in Control, which payments shall commence upon, and shall be contingent upon, the actual consummation of the Change in Control. At the election of the Executive pursuant to Section 4(b), such payment may be made in a lump sum or paid quarterly during the thirty-six (36) months following the Executive's termination. (d) Upon the occurrence of a Change in Control followed by the termination of Executive's employment, the Bank will cause to be continued life, health and disability insurance coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank or the Company for Executive prior to his severance, except to the extent such coverage is changed in its application to all employees of the Bank or not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months from the date of Executive's termination of employment. In the alternative, the Company shall pay to the Executive a cash amount equal to the Executive's cost of obtaining such benefits on his own, adjusted for any federal or state income taxes the Executive has to pay on the cash amount. 6 6. TERMINATION FOR DISABILITY. (a) Termination of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. The provisions of paragraph 6(b) and (c) shall apply upon the termination Executive's employment for "Disability. (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to the 3/4 of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees or not available on an individual basis to an employee terminated for Disability. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. 7. TERMINATION UPON RETIREMENT. Termination of the Executive's employment based on "Retirement" shall mean termination of Executive's employment at age 65 or in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement, and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 8. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institution and commercial banking industry. For purposes of this paragraph, no act or failure to act on the part of Executive 7 shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Executive's employment shall not be terminated in accordance with this paragraph for any act or action or failure to act which is undertaken or omitted in accordance with a resolution of the Board of Directors or upon advice of the Company's counsel. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board of Directors at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable by Executive at any time subsequent to such Termination for Cause (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 9. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 or 5 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the 8 other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 19 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 10. NON-COMPETITION AND POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b), (c) and (d) of this Section 10. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Employers and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Employers. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Employers or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the New Jersey Department of Banking and Insurance, the Federal Deposit Insurance Corporation, or other bank regulatory agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available or which Executive is otherwise legally required to disclose. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Employers will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Employers or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Employers from pursuing any other remedies available to the Employers for such breach or threatened breach, including the recovery of damages from Executive. (d) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Employers for a period of one (1) year following such termination in any city, town or county in which the Bank has an office or has filed an application for regulatory approval to establish an office, determined as of the 9 effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, its business and property in the event of Executive's breach of this Section 10(d) agree that in the event of any such breach by Executive, the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employers, employees and all persons acting for or with Executive. Executive represents and admits that Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Company. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT;BINDING ON SUCCESSORS. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except 10 by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. MISCELLANEOUS PROVISIONS. (a) The Company's Board of Directors may terminate the Executive's employment at any time, but any termination, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 17. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware but only to the extent not superseded by federal law. 19. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within twenty-five miles of Jersey City, New Jersey, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11 20. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company, provided that the dispute or interpretation has been settled by Executive and the Company or resolved in the Executive's favor. 21. INDEMNIFICATION. The Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 22. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Company: ___________________________________ ___________________________________ ___________________________________ ___________________________________ To the Bank: ___________________________________ ___________________________________ ___________________________________ ___________________________________ To the Executive: ___________________________________ ___________________________________ ___________________________________ ___________________________________ 12 SIGNATURES IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officers, and Executives has signed this Agreement, on the day and date first above written. ATTEST: PROVIDENT FINANCIAL SERVICES, INC. __________________________ By:______________________________ Secretary WITNESS: EXECUTIVE: __________________________ By:______________________________ Secretary 13 EX-23.2 8 dex232.txt EXHIBIT 23.2 EXHIBIT 23.2 Independent Auditors' Consent The Board of Managers The Provident Bank: We consent to the use of our report dated March 20, 2002, with respect to the 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, included herein and to the reference to our firm under the headings "Legal And Tax Matters," "Federal and State Tax Consequences of the Conversion" and "Experts" in the prospectus. We consent to the use of our report dated September 6, 2002, with respect to the 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, and the supplemental schedule of assets held for investment purposes at end of year as of December 30, 2001, included herein. /s/KPMG LLP Short Hills, New Jersey October 31, 2002 EX-23.3 9 dex233.txt EXHIBIT 23.3 EXHIBIT 23.3 [LETTERHEAD OF RP FINANCIAL, LC.] October 31, 2002 Board of Managers The Provident Bank 830 Bergen Avenue Jersey City, New Jersey 07306-4599 Members of the Board: We hereby consent to the use of our firm's name in the registration statement on Form S-1, applications for the conversion and holding company formation and any amendments thereto, for The Provident Bank ("Provident") in which Provident will become a wholly-owned subsidiary of Provident Financial Services, Inc. ("Provident Financial"), and Provident Financial will sell its Common Stock to the public. We also hereby consent to the inclusion of, summary of and references to our Appraisal Report and our statement concerning subscription rights in such filings including the Prospectus of Provident Financial Services, Inc. as amended. Sincerely, /s/RP FINANCIAL, LC. EX-99.2 10 dex992.txt EXHIBIT 99.2 EXHIBIT 99.2 [LETTERHEAD OF RP FINANCIAL, LC.] October 18, 2002 Board of Directors/Board of Managers Provident Financial Services, Inc. The Provident Bank 830 Bergen Avenue Jersey City, New Jersey 07306-4599 Members of the Board: At your request, we have completed and hereby provide an updated independent appraisal ("Appraisal Update") of the estimated pro forma market value of the Common Stock that will be offered in connection with the mutual-to-stock conversion ("Reorganization") described below. This Appraisal Update is furnished pursuant to the conversion regulations promulgated by the Department of Banking and Insurance of the State of New Jersey (the "Department"), the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve Board ("FRB"). This Appraisal has been prepared in accordance with the written valuation guidelines promulgated by the Office of Thrift Supervision ("OTS"), most recently updated as of October 21, 1994. Such valuation guidelines are relied upon by the previously referenced agencies in evaluating conversion appraisals in the absence of such specific written valuation guidelines separately issued by the respective agencies. The Appraisal Update has been prepared to reflect updated financial information through September 30, 2002 and changes in stock market conditions since the original appraisal report dated as of August 2, 2002 ("Original Appraisal"). The Original Appraisal is incorporated herein by reference. As in the preparation of our Original Appraisal, we believe the data and information used herein is reliable; however, we cannot guarantee the accuracy and completeness of such information. Description of Reorganization The Board of Managers of The Provident Bank, Jersey City, New Jersey ("Provident" or the "Bank") has adopted a Plan of Conversion, incorporated herein by reference, pursuant to which the Bank will reorganize from a New Jersey chartered mutual savings bank into a New Jersey chartered stock savings bank. The Reorganization will be accomplished under the laws of the State of New Jersey and the regulations of the Department and the FDIC, and other applicable laws and regulations. In the Reorganization, Provident will become a wholly-owned subsidiary of Provident Financial Services, Inc. ("Provident Financial" or the "Holding Board of Directors/Board of Managers October 18, 2002 Page 2 Company"), a Delaware corporation. Concurrently, Provident Financial will sell, in the Subscription and Community Offerings, Holding Company common stock in the amount equal to the appraised value of the Bank. Immediately following the conversion, the only significant assets of the Holding Company will be the capital stock of the Bank and the net conversion proceeds remaining after purchase of the Bank's common stock by the Holding Company. Provident Financial will use 50 percent of the net conversion proceeds to purchase the Bank's common stock. A portion of the net conversion proceeds retained by the Holding Company will be loaned to the ESOP to fund the ESOP's stock purchases in the offering, and the remainder will be reinvested into investment securities. Concurrent with the Reorganization, Provident Financial will form a charitable foundation called The Provident Bank Foundation ("Foundation"). The Foundation will be funded in an amount equal to 6 percent of the stock offering with a maximum of $24 million, with the form of funding to be 80 percent conversion stock and 20 percent cash. Limiting Factors and Considerations Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such 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 who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the pro forma market value thereof. RP Financial's Appraisal Update was determined based on the financial condition and operations of Provident as of September 30, 2002, the date of the financial data included in the "Recent Developments" section of the regulatory applications and prospectus. RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy that prohibits the company, its principals or employees from purchasing stock of its client institutions. The valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the Bank's financial performance and condition, management policies, and current conditions in the equity markets for thrift shares. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. Board of Directors/Board of Managers October 18, 2002 Page 3 Discussion of Relevant Considerations 1. Financial Results Table 1 presents summary balance sheet and income statement data through September 30, 2002. The overall composition of Provident's updated balance sheet was generally comparable to the June 30, 2002, data, with the Bank experiencing modest balance sheet growth during the quarter, which was attributable to expansion of the loan portfolio with a portion of funds also deployed into investment securities. The asset growth was funded through deposits and expanded use of borrowed funds. Growth Trends. Provident's total assets increased by approximately $96 million over the three months ended September 30, 2002, partially as a result of higher loan balances attributable to ongoing growth of the commercial loan portfolio. Additionally, balances of cash and investment securities increased modestly during the quarter. Despite interim deposit growth, the Bank supplemented its funding sources with expanded utilization of borrowed funds. Equity increased during the quarter ended September 30, 2002, as a result of interim earnings and favorable market value adjustments on securities classified as available for sale. Loan Receivable. Loans receivable increased from $1.9 billion, as of June 30, 2002, to $2.0 billion, as of September 30, 2002, to equal 62.36 percent of total assets. Net loans increased by $52 million with portfolio growth focused in commercial loans including both C&I and mortgage loans. Growth in non-residential loans more than offset shrinkage in the 1-4 family mortgage loan portfolio. This trend reflects the lower emphasis on such lending by the Bank as well as the impact of accelerated loan repayments and greater loan sales of 1-4 family loans in the recent declining interest rate environment. Cash, Investments and Mortgage-Backed Securities. The balance of cash and cash equivalents decreased modestly over the quarter ended September 30, 2002 by $62.2 million, to equal $84.4 million or 2.66 percent of assets. Conversely, investment securities reflected moderate growth over the quarter ended September 30, 2002, with increases in both the held to maturity ("HTM") and available for sale ("AFS") portfolios. This trend generally reflects the impact of the redeployment of funds from the balance of cash and cash equivalents. As of September 30, 2002, securities classified as available for sale and held to maturity equaled $780.3 million and $120.3 million, respectively. Provident had an unrealized gain of $13.6 million on investments held as available-for-sale, as of September 30, 2002. Board of Directors/Board of Managers October 18, 2002 Page 4 Table 1 The Provident Bank Recent Financial Data
At June 30, 2002 At September 30, 2002 ---------------- --------------------- % of % of Amount Assets Amount Assets ------ ------ ------ ------ ($000) (%) ($000) (%) Balance Sheet Data - ------------------ Assets $3,066,277 100.00% $3,162,258 100.00% Cash and cash equivalents 146,604 4.78 84,377 2.67 Investment securities-HTM 110,131 3.59 120,295 3.80 Investment securities-AFS 728,509 23.76 780,341 24.68 FHLB stock 11,514 0.38 11,514 0.36 Goodwill & core deposit value 22,654 0.74 22,884 0.72 Loans receivable (net) 1,919,729 62.61 1,972,055 62.36 Deposits 2,526,611 82.40 2,591,826 81.96 Borrowed funds 194,925 6.36 216,666 6.85 Total equity 310,568 10.13 319,859 10.11 12 Months Ended 6/30/02 12 Months Ended 9/30/02 ----------------------- ----------------------- % of Avg. % of Avg. Amount Assets Amount Assets ------ ------ ------ ------ ($000) (%) ($000) (%) Summary Income Statement - ------------------------ Interest income $ 178,524 6.26% $ 178,016 6.02% Interest expense (71,299) (2.50) (66,342) (2.24) ---------- ----- --------- ----- Net interest income $ 107,225 3.76% $ 111,674 3.78% Provision for loan losses (1,900) (0.07) (12,550) (0.42) ---------- ----- --------- ----- Net interest income after provisions $ 105,325 3.69% $ 99,124 3.35% Other operating income 21,640 0.76 22,692 0.77 Operating expense (87,139) (3.05) (87,959) (2.97) ---------- ----- --------- ----- Net operating income $ 39,826 1.40% $ 33,857 1.14% Gain on equity securities 959 0.03 885 0.03 Gain on sale of fixed assets 192 0.01 192 0.01 ---------- ----- --------- ----- Total non-operating income/(expense) $ 1,151 0.04% $ 1,077 0.04% Net income before tax 40,977 1.44 34,934 1.18% Income taxes (12,742) (0.45) (8,910) (0.30) ---------- ----- --------- ----- Net income before change in acct. principle $ 28,235 0.99% $ 26,024 0.88% Cumulative effect of change in acct. principle (519) (0.02) (519) (0.02) ---------- ----- --------- ----- Net income $ 27,716 0.97% $ 25,505 0.86% Net income (before cumul. effect of acct chng) $ 28,235 0.99% $ 26,024 0.88 Adjustment for "normalized" tax rate (1) -- (1,920) (0.06) Deduct: Non-recurring income (1,151) (0.04) (1,077) (0.04) Add: Non-recurring loan loss provision -- -- 10,925 0.37 Tax effect (2) 426 0.01 (3,644) (0.12) ---------- ----- --------- ----- Estimated core net income $ 27,510 0.96% $ 30,308 1.02%
(1) Reflects the required adjustment to the tax expense to yield a tax expense equal to the long-term estimated recurring average rate of 31 percent of pre-tax income. (2) Reflects an estimated 37 percent marginal tax rate for each period applied to non recurring income and loan loss provision expense. Source: Provident's audited and unaudited financial statements and RP Financial calculations. Board of Directors/Board of Managers October 18, 2002 Page 5 Bank Owned Life Insurance. As of September 30, 2002, the cash surrender value of bank owned life insurance ("BOLI") totaled $46.9 million, which reflects a modest increase since the prior quarter end. The balance of the BOLI reflects the value of life insurance contracts on selected members of the Bank's management and has been purchased with the intent to offset various benefit program expenses on a tax advantaged basis. The increase in the cash surrender value of the BOLI is recognized as an addition to other non-interest income. Funding. Total deposits increased by $65.2 million, or 2.6 percent, to equal $2.6 billion at September 30, 2002. The increase reflected growth in savings and transaction accounts as certificates of deposits actually decreased modestly. Borrowed funds increased by $21.7 million over the most recent quarter primarily reflected expanded use of FHLB borrowings. Equity. Total equity increased by approximately $9.3 million during the quarter to equal $319.9 million, or 10.11 percent of assets. The increase in equity reflects $3.7 million of retained earnings during the quarter and a $5.6 million increase in the unrealized gain on available-for-sale ("AFS") securities. Asset Quality. Non-performing assets increased to $12.9 million as of September 30, 2002, as compared to $4.8 million as of June 30, 2002. The increase was primarily the result of the placing of $8.7 million of mortgage warehouse line loans on non-accrual status in September 2002 and classification of other loans within one lending relationship as noted below. In this regard, in September 2002, management became aware of alleged fraudulent activity involving one of the Bank's mortgage warehouse clients. Based on management's assessment of the known facts, 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. Based on the reclassifications, the loan loss provision attributable to this lending relationship was $10.9 million for the quarter ended September 30, 2002, which substantially offset the chargeoff of the loan loss allowance account. The allowance for loan losses was $21.3 million or 1.07 percent of total loans at September 30, 2002, compared to $22.0 million or 1.13 percent at June 30, 2002. Income and Expense Trends. Provident's trailing 12 month earnings decreased in the most recent period, from $27.7 million for the 12 months ended June 30, 2002, to $25.5 million for the 12 months ended September 30, 2002. The benefit of stronger net interest income and modest growth of non-interest income were offset by higher loan loss provisions and, to a lesser extent, higher operating costs. As discussed above, management attributes the higher loan loss provisions to fraud-related losses in the mortgage warehouse loan portfolio. In our calculation of core earnings, we have treated the loan loss provisions as a non-recurring item, and earnings have been adjusted to exclude non-operating items on a tax-effected basis for valuation purposes. The largest adjustment is for the expense of the fraud related loan loss provision of $10.9 million. Other adjustment to earnings have been made to exclude the impact of non-recurring gains on sale and tax adjustments related to the increase in the state income tax rate from 3 percent to 9 percent. Importantly, Provident's effective tax rate reduced from 31.10 percent for the twelve months ended June 30, 2002, to 25.51 percent for the twelve months ended September 30, 2002. In this regard, the Bank's effective tax rate was reduced by a tax benefit of $983,000 Board of Directors/Board of Managers October 18, 2002 Page 6 recorded in the quarter ended September 30, 2002, notwithstanding the fact that the Bank reported positive pre-tax net income equal to $2.7 million during the period. Management has indicated that, over the long term, it expects to post an average tax rate in the range of 31 percent of pre-tax income. The lower figure for the most recent twelve months is a temporary anomaly primarily related to the tax impact of the chargeoff for uncollectible loans. Adjusting the tax expense to reflect a normalized income tax provision yields a core earnings figure for the twelve months ended September 30, 2002, equal to $30.3 million, or 1.02 percent of average assets. Net Interest Income. Provident's net interest income increased for the most recent trailing twelve month period in dollar terms but was relatively unchanged as a percent of average assets. Specifically, net interest income increased by $4.4 million to $111.7 million while the net interest margin increased slightly to equal 3.78 percent of average assets. Management attributes the improving spreads to an easing of monetary policy by the Federal Reserve ("Fed"), which has steepened the yield curve and facilitated a relatively steep reduction in Provident's funding costs, and the ongoing benefit of the gradual restructuring of the Bank's balance sheet to include a higher proportion of commercial mortgage and C&I loans. Loan Loss Provisions. Provisions for loan losses increased to $12.6 million, or 0.42 percent of average assets. The increase is primarily due to an additional provision of $10.9 million established to address losses realized in the mortgage warehouse loan portfolio. Non-Interest Income. Non-interest income increased by $1.1 million for the most recent period to equal $22.7 million, or 0.77 percent of average assets, reflecting the impact of Provident's balance sheet growth, expansion of overall business volumes, gains on the sale of loans, and continued growth of fee generating products such as commercial lending and transaction accounts. Operating Expenses. Provident's operating expenses have been increasing due to a variety of factors including asset growth and the employment of additional lending staff. For the most recent twelve month period, operating expenses totaled $88.0 million, or 2.97 percent of average assets. Further upward pressure will be placed on the Bank's operating expense ratio in the forthcoming year due to planned expansion. The Bank completed an acquisition of two branch offices in September and Provident plans to continue to open offices on a de novo basis in the future (the Bank's business plan contemplates opening 6 to 12 branches over the first three years following the conversion). Also, there are expected to be increased costs associated with operating as a publicly-traded company, including expenses related to the stock benefit plans. Efficiency Ratio. Provident's efficiency ratio (operating expenses as a percent of the sum of net interest income and other operating income) of approximately 65.46 percent for the most recent twelve months reflects a small decrease (i.e. improvement) from the 67.62 percent ratio for the twelve months ended June 30, 2002. Non-Operating Income/Expense. Non-operating income and expense items have decreased slightly based on updated financial data to equal $1.1 million, or 0.04 percent of average assets. The only significant non-operating items in the Bank's most recent trailing Board of Directors/Board of Managers October 18, 2002 Page 7 twelve month earnings consisted of gains on securities equal to $0.9 million and gains on the sale of real estate equal to $0.2 million. Taxes. Provident's tax rate approximated 25.5 percent for the twelve months ended September 30, 2002, which was lower than the tax rate of 31.1 percent tax rate reported for the twelve months ended June 30, 2002. The reduction in the tax rate reflects adjustments to the Bank's taxes, a result of the net tax benefit being recorded for the most recent quarter given the Bank's expectation for lower level of annualized earnings for 2002 as a result of the chargeoff for uncollectible loans. Additionally, Provident's taxes reflect the impact of a one-time adjustment to the deferred tax asset for state taxes to reflect the current New Jersey corporate tax rate of 9 percent, which is higher than the 3 percent rate which formerly applied. 2. Peer Group Financial Comparisons Tables 2 and 3 present the most updated financial characteristics and operating results available for Provident, the Peer Group and all publicly-traded savings institutions. American Financial Holdings of Connecticut was included in the Peer Group in our Original Appraisal but has entered into a definitive agreement to be acquired by another financial institution. Accordingly, we have excluded this institution from this updated valuation analysis and have adjusted the comparable figures from the Original Appraisal to exclude this institution. Financial Condition. The balance sheet ratios for Provident and the Peer Group reflected modest change since the Original Appraisal. Relative to the Peer Group, the Bank's interest-earning assets composition continued to reflect a modestly higher level of loans and a lower level of MBS and cash and investments. The Peer Group's capital ratio is comparable to the Bank's pre-conversion equity base equal to 10.2 percent and 10.1 percent of assets, respectively. However, with the addition of stock proceeds, Provident's pro forma capital position is expected to increase to levels in excess of the Peer Group average. Provident's higher pro forma capital will provide greater leverage potential than the Peer Group, although in the intermediate term the higher capital will lead to a disadvantage in terms of return on equity ("ROE"). Provident's funding liabilities continue to reflect a strategy that is more dependent upon retail deposits, as the Bank's deposits equaled 82.0 percent of assets versus the 68.4 percent Peer Group average. The Peer Group has relied on a higher level of borrowed funds (6.9 percent for the Bank versus 19.3 percent of assets on average for the Peer Group). Provident's interest-earning assets ("IEA") position (including cash and equivalents) decreased modestly to equal 93.9 percent of assets which fell below the Peer Group average of 95.5 percent. The Bank continues to maintain a higher ratio of interest-bearing liabilities ("IBL") due to lower capitalization, equal to 88.9 percent of assets, relative to the Peer Group's ratio of 87.7 percent. As a result, Provident's IEA/IBL ratio of 105.6 percent is currently at a disadvantage to the Peer Group average of 108.9 percent, but this disadvantage will be diminished or eliminated on a post-offering basis. Updated growth rates for Provident and the Peer Group indicate that the Bank continues to generate stronger asset growth (12.67 percent versus 7.27 percent for the Peer Group), primarily supported by expansion of the investment portfolio. Cash flow from loan principal repayments (loans increased by less than 1 percent) and deposit growth flowed into cash and investments for Provident (47.54 percent growth) while the growth rates for loan and investments were more balanced for the Peer Group companies (4.89 percent and 7.77 percent growth, respectively). The Bank's deposits increased at a rate of 11.49 percent in comparison to average growth of 9.59 percent turned in by the Peer Group while the growth rate of borrowings also exceeded the Peer Group average (26.52 percent versus 3.29 percent). The Bank's equity increased at an 11.28 percent rate, versus shrinkage of 1.03 percent on average for the Peer Group. The relatively strong equity growth for the Bank contrasts with reduction of equity reported by the Peer Group notwithstanding the relatively comparable ROA levels and is reflective of the impact of dividend and capital management strategies implemented by the Peer Group companies. The increase in capital realized from conversion proceeds, as well as potential dividend payments on the newly-issued common stock, coupled with possible stock repurchases will pose further limitations on the Bank's capital growth rate following the stock offering. However, given Provident's significant pro forma capital position, the need for further growth of the Bank's capital is substantially diminished. Income and Expense Trends. Provident and the Peer Group reported profitability ratios of 0.86 percent and 0.96 percent, respectively (see Table 3), for the most recent twelve month period. Provident's core profitability in relation to the Peer Group continues to be characterized by a higher level of net interest income and non-interest income, the benefits of which are offset by the higher level of operating expense reported by the Bank. Reported earnings in comparison to the Peer Group have diminished, primarily as a result of loan loss provisions established in connection with non-performing mortgage warehouse loans. On a core earnings basis, excluding non-recurring income and expenses and adjusted for a normalized tax rate, the Bank's ROA equaled 1.02 percent of average assets versus an estimated average rate of core income of 0.91 percent for the Peer Group. Neither Provident's nor the Peer Group's updated net interest margin changed significantly. The net interest income ratio equaled 3.78 percent and 3.23 percent of average assets for Provident and Peer Group, respectively. The Bank's 40 basis point lower interest income ratio and lower asset yields are more than offset by a favorable cost of funds, reflecting the favorable funding structure (i.e., comparatively lower level of CDs) and more limited use of wholesale borrowings. Loan loss provisions were a larger factor in the Bank's earnings, amounting to 0.42 percent of average assets for the Peer Group versus loan loss provisions equal to 0.17 percent of assets on average for the Peer Group. On a normalized basis excluding $10.9 million of provisions established by Provident in the most recent quarter which were related to fraud, loan loss provisions were equal to 0.05 percent of average assets which is below the Peer Group average. Sources of non-interest operating income were higher for the Bank in comparison to the Peer Group, equal to 0.77 percent and 0.56 percent, respectively. Factors contributing to the Bank's higher level of non-interest income include the higher proportion of fee generating deposits (i.e., consumer and commercial transaction accounts) and expansion into non-traditional areas such as the offering of brokerage and insurance products. The higher level of net interest income and non-interest income generated by the Bank is substantially offset by Provident's higher operating expenses. Specifically, the Bank's operating expense ratio before goodwill amortization, equal to 2.89 percent of average assets, remains above the Peer Group average of 2.26 percent. As discussed in the Original Appraisal, factors contributing to the higher expense ratio primarily include the relatively higher costs associated with Provident's diversification efforts as well as the significant investments in people and infrastructure the Bank has been incurring to posture itself for the future. The Bank's operating expense ratio will likely continue to trend higher than the Peer Group over the near term given management's indicated strategic direction. The efficiency ratio remains less favorable for Provident, equal to 65.5 percent versus 62.6 percent for the Peer Group on average. The Bank's efficiency ratio is expected to improve on a post-conversion basis with the reinvestment of the net conversion proceeds net of the cost related to the stock-based benefit plans. Non-operating income, consisting of the gains realized on the distribution of common stock equaled 0.04 percent of average assets for Provident, while non-operating gains average 0.10 percent of average assets for the Peer Group. Such income and expense items are believed to be largely non-recurring for the Bank and will be excluded from the core earnings analysis in the valuation section to follow. Provident's effective tax rate of 25.51 percent declined relative to the average tax rate of 36.86 percent posted by the Peer Group. A portion of the reduction is related to a one-time tax benefit of $1.1 million, applied to the Bank's deferred tax assets to reflect the current New Jersey corporate tax rate of 9 percent, which is higher than the 3 percent rate which formerly applied. Additionally, the Bank's tax rate has been impacted by the one-time provisions and loan chargeoffs. These transactions caused the effective tax rate to diminish relative to normalized levels approximating 31 percent for the last two fiscal years and the twelve months ended June 30, 2002, as reflected in the Original Appraisal. 3. Stock Market Conditions Since the date of the Original Appraisal, the overall stock market has generally experienced significant volatility but little net change overall. Weak economic data provided for further declines in stocks in early-August, but the downward trend was reversed on growing speculation of a rate cut by the Federal Reserve and news of a proposed $30 billion bailout for Brazil's financial crisis. In mid-August, the Federal Reserve's decision to leave interest rates unchanged prompted a sharp one-day sell-off in the broader market, which was followed by a sharp one-day increase in the major indexes on technical factors as investors took profits in bonds and shifted some money into stocks. The DJIA closed above 9000 in late-August, as stocks continued to rebound from oversold conditions in July. However, after five consecutive weekly gains in the DJIA, blue chip stocks declined in the last week of August on profit taking and cautious comments from bellwether technology stocks. The decline in the broader stock market continued during September and the first week of October, primarily on the basis of weak economic reports and slackening consumer demand. Additionally, the weak economy has continued to raise significant investor concerns regarding the direction of future corporate earnings. However, such concerns among investors apparently diminished during the week ended October 18, 2002, as favorable earnings reports from such bellwether companies as IBM, Citigroup and Microsoft led to the largest weekly gain in the Dow since the week ended September 28/th/ of last year. On October 18, 2002, the Dow Jones Industrial Average closed at 8322.40 which is substantially unchanged since the date of the Original Appraisal and the NASDAQ Composite Index closed at 1287.86 or 3.2 percent higher since the date of the Original Appraisal. The market for thrift issues has generally paralleled the broader market since the date of the Original Appraisal and closed slightly lower as of October 18, 2002, relative to the levels prevailing as of the Original Appraisal. Thrift stock prices reflect limited change, notwithstanding the downward trend in market interest rates which typically bodes well for thrift earnings. In this regard, many investors have become concerned about long term earnings levels of many savings institutions as loan portfolio yields have continued to decline in response to lower interest rates (sparked by high refinancing activity) and the potential interest rate risk if rates increase rapidly in the future. On October 18, 2002, the SNL Index for all publicly-traded thrifts closed at 1050.8, a decrease of 0.5 percent since the date of the Original Appraisal. The median updated pricing measures for all publicly-traded thrifts and the Peer Group reflect opposing trends. Overall, since the date of the Original Appraisal, the comparative changes in the earning-based pricing measures for the Peer Group and all publicly-traded thrifts indicate a decline in the range of 4 to 6 percent reflecting the impact of improving earnings coupled with limited change in stock prices. The P/B and P/TB ratios of the Peer Group increased by 7.1 percent and 3.3 percent, respectively since the date of the Original Appraisal. By comparison, the change in the pricing ratios of all publicly-traded thrifts was limited. A comparative pricing analysis of all publicly-traded thrifts and the Peer Group is shown in Table 4, based on market prices as of August 2, 2002 and October 18, 2002. The "new issue" market is separate and distinct from the market for seasoned issues like the Peer Group companies. Accordingly, as discussed in the Original Appraisal, RP Financial has considered the pro forma pricing and trading level of recently converted companies in this updated appraisal. Over the last three months, three standard conversion offerings, one MHC offering and one second-step conversion have been completed (see Table 5). Table 4 Median Pricing Characteristics At August 2, At October 18, Percent 2002 (1) 2002 Change -------- ---- ------ Peer Group - ---------- Price/Earnings (x) 15.74x 15.06x (4.3)% Price/Core Earnings (x) 16.80 15.88 (5.5) Price/Book (%) 143.81% 153.96% 7.1 Price/Tangible Book (%) 152.36 157.42 3.3 Price/Assets (%) 14.75 14.74 (0.1) Price/Share ($) (2) --- --- 0.9 Market Capitalization (2) --- --- (0.1) All Publicly-Traded Thrifts - --------------------------- Price/Earnings (x) 13.73x 13.09x (4.7)% Price/Core Earnings (x) 15.61 14.89 (4.6) Price/Book (%) 117.71% 117.73% 0.0 Price/Tangible Book (%) 122.73 121.96 (0.6) Price/Assets (%) 11.80 12.14 (2.9) Other - ----- SNL Thrift Index 1056.2 1050.8 (0.5)% (1) The Peer Group average excludes American Financial Holdings of CT which has executed a definitive agreement to merge with another financial institution. (2) Reflects the median of the percentage change for the Peer Group companies on an individual basis. Since the Original Appraisal, there have been two standard conversion offerings that are particularly relevant to the Bank's conversion offering based on their respective offering size and assets. First PacTrust Bancorp, Chula Vista, California, completed its conversion offering on August 23, 2002, at the supermaximum of the offering range. First PacTrust Bancorp's pro forma P/E multiple equaled 28.0 times and its pro forma P/TB equaled 76.3 percent and the issue had appreciated 17 percent from the offering level as of October 18, 2002. TierOne Corporation, Lincoln, Nebraska completed its conversion offering on October 2, 2002, at the supermaximum of the offering range. TierOne Corporation's pro forma P/E multiple equaled 13.8 times and its pro forma P/TB equaled 69.8 percent and the issue had appreciated 38 percent from the offering level as of October 18, 2002. Valuation Adjustments In the Original Appraisal, we made the following adjustments to Provident's pro forma value based upon our comparative analysis to the Peer Group:
Original Key Valuation Parameters Valuation Adjustment ------------------------ -------------------- Financial Condition Moderate Upward Profitability, Growth and Viability of Earnings Moderate Downward Asset Growth Slight Upward Primary Market Area No Adjustment Dividends Slight Upward Liquidity of the Shares No Adjustment Marketing of the Issue Moderate Downward Management No Adjustment Effect of Government Regulations and Regulatory Reform No Adjustment
The updated financial condition and earnings of Provident and the Peer Group led us to conclude that the valuation adjustments for financial condition and profitability, growth, and viability of earnings should remain unchanged from the Original Appraisal. We have excluded the impact of the Bank's recent fraud related loss as a non-recurring event for purposes of our earnings based valuation approaches. At the same time, we believe investors may evaluate the various areas of credit risk exposure as described in the Original Appraisal as a result. The factors concerning the valuation parameters of asset growth, primary market area, dividends, liquidity of the shares, management and effect of government regulation and regulatory reform did not change since the Original Appraisal date. Accordingly, those parameters were not discussed further in this Appraisal Update. The broad market indices reflect limited change since the date of the Original Appraisal but have been marked by a high degree of volatility. Similarly, the Peer Group's prices and those for all publicly-traded thrifts reflect limited change on balance, notwithstanding their improving earnings levels, which have led to declines in the earnings based valuation multiples. While activity in the new issue market has been limited, the two relatively large recent full stock conversion offerings that have been completed have been well received and have traded above their IPO prices in initial trading activity. In light of this, we have reduced the valuation adjustment for marketing of the issue from "Moderate Downward" to "Slight Downward" (some downward adjustment remains appropriate given the large size of the Provident offering). Overall, taking into account the foregoing factors, we believe that an increase in the Bank's estimated pro forma valuation is appropriate. This conclusion is based primarily on the strength of the new issue market. Valuation Approaches In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, the pro forma market value approach, we considered the three key pricing ratios in valuing Provident's to-be-issued stock -- price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches. All valuation approaches were performed on a pro forma basis including the effects of the conversion proceeds. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in Provident's prospectus for reinvestment rate, the effective tax rate, offering expenses and stock benefit plan assumptions (summarized in Exhibits 2 and 3). In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group. Consistent with the Original Appraisal, this Update continues to be based primarily on fundamental analysis techniques applied to the Peer Group, including the P/E approach, the P/B approach and the P/A approach. Based on the foregoing, RP Financial concluded that as of October 18, 2002, the pro forma market value of the Bank's conversion stock was $470,000,000 at the midpoint. This value includes 1,920,000 shares issued to the Foundation, equal to a value of $19,200,000 based on a per share value of $10.00 at issuance. The offering amount at the midpoint is equivalent to $450,800,000, or 45,080,000 shares at $10.00 per share. The updated value reflects a 10.6 percent increase relative to the midpoint valuation established in the Original Appraisal. P/E Approach. The application of the P/E valuation method requires calculating Provident's pro forma market value by applying a valuation P/E multiple to the pro forma earnings base. In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items on a tax-effected basis. In deriving Provident's core earnings, the adjustments made to reported earnings eliminated, on a tax effected basis, gains on the sale of investment securities and the expense related to non-recurring loan loss provisions on a tax effected basis. The derivation of Provident's core earnings was shown in the bottom panel of Table 1 and reflects a core earnings base of $30.3 million for the Bank. Comparable adjustments were made to the Peer Group's earnings in the calculation of core earnings. Based on the reported and estimated core earnings and incorporating the impact of the pro forma assumptions discussed previously, the Bank's pro forma reported and core P/E multiples at the $470.0 million midpoint value equaled 16.79 and 14.57 times, respectively. The reported earnings multiple reflects an 11.5 percent premium to the Peer Group median versus a 10.8 percent discount in the Original Appraisal, which is reflective of the impact of the non-recurring loan loss provisions which have caused reported earnings to decline. On a core earnings basis, Provident's 14.57 times multiple reflects an 8.3 percent discount relative to the Peer Group median, which reflects a reduction from the 15.8 percent discount established in the Original Appraisal. P/B Approach. The application of the P/B valuation method requires calculating Provident's pro forma market value by applying a valuation P/B ratio to the Bank's pro forma book value. Based on the $470.0 million midpoint valuation, Provident's pro forma P/B and P/TB ratios equaled 65.90 percent and 68.08 percent at the midpoint of the valuation range, respectively. In comparison to the median P/B and P/TB ratios for the Peer Group of 153.96 percent and 157.42 percent, the Bank's ratios reflected a discount of 57.2 on a P/B basis and a discount of 56.8 percent on a P/TB basis. At the supermaximum of the valuation range, the Bank's P/TB ratio equaled 75.33 percent, which is discounted from the Peer Group median by 52.2 percent. P/A Approach. The P/A valuation methodology determines market value by applying a valuation P/A ratio to Provident's pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the midpoint of the valuation range, Provident's value equaled 13.18 percent of pro forma assets. Comparatively, the Peer Group companies exhibited a median P/A ratio of 14.74 percent, which implies a 10.6 percent discount being applied to the Bank's pro forma P/A ratio, as compared to 18.6 percent in the Original Appraisal. Valuation Conclusion Based on the foregoing, it is our opinion that, as of October 18, 2002, the estimated aggregate pro forma market value of Provident's common stock, including the contribution to the Foundation immediately following the offering, has increased to $470,000,000 at the midpoint. This updated valuation reflects a 10.6 percent increase relative to the valuation midpoint established in the Original Appraisal. The resulting range of value pursuant to regulatory guidelines and the corresponding number of shares based on the Board determined $10.00 per share offering price is set forth below. The pro forma valuation calculations relative to the Peer Group are shown in Table 6 and are detailed in Exhibit 2 and Exhibit 3.
Offering Foundation Total Shares Aggregate Valuation Range Amount Contribution Issued Market Value --------------- ----- ------------ ------ ------------ (Shares) (Shares) (Shares) ($) Minimum 38,318,000 1,839,264 40,157,264 $401,572,640 Midpoint 45,080,000 1,920,000 47,000,000 470,000,000 Maximum 51,842,000 1,920,000 53,762,000 537,620,000 Supermaximum 59,618,300 1,920,000 61,538,000 615,383,000
Respectfully submitted, RP FINANCIAL, LC. /s/ William E. Pommerening Chief Executive Officer /s/ James P. Hennessey Senior Vice President INSERT TABLE 6 [Certain portions of the Updated Appraisal Report are being filed in paper pursuant to a continuing hardship exception in accordance with Sections 202 of Regulations S-T] EX-99.3 11 dex993.txt EXHIBIT 99.3 [LETTERHEAD OF RP FINANCIAL,LC.] October 18, 2002 Board of Managers The Provident Bank 830 Bergen Avenue Jersey City, New Jersey 07306-4599 Re: Plan of Conversion The Provident Bank Members of the Board: All capitalized terms not otherwise defined in this letter have the meanings given such terms in the Plan of Conversion (the "Plan") adopted by the Board of Managers of The Provident Bank ("Provident" or the "Bank") whereby the Bank will convert from a state chartered mutual savings bank to a state chartered stock savings bank and issue all of the Bank's outstanding capital stock to Provident Financial Services, Inc. ("Provident Financial"). Simultaneously, Provident Financial will issue shares of common stock. We understand that in accordance with the Plan, subscription rights to purchase shares of common stock in Provident Financial are to be issued to: (1) Eligible Account Holders; (2) ESOP; (3) Supplemental Eligible Account Holders; and (4) employees, officers and directors of the Bank who are not eligible depositors. Based solely upon our observation that the subscription rights will be available to such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of common stock at the same price as will be paid by members of the general public in the community offering, but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that, as a factual matter: (1) the subscription rights will have no ascertainable market value; and, (2) the price at which the subscription rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance. Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Provident Financial's value alone. Accordingly, no assurance can be given that persons who subscribe to shares of common stock in the subscription offering will thereafter be able to buy or sell such shares at the same price paid in the subscription offering. Sincerely, /s/ RP FINANCIAL, LC. EX-99.7 12 dex997.txt EXHIBIT 99.7 EXHIBIT 99.7 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 _______________ [ ], 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 __ 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 ________[ ], 2002. 2 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 ........................................................................... iii Irrevocability of Transfer Direction .................................................................. iii 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 Common Stock in In connection with the conversion and the Offering: Priorities stock offering, The Provident Bank is establishing the Provident 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 i 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 Common Stock in In connection with the conversion of The the Conversion of The Provident Bank Provident Bank, the Plan will permit you to direct the trustee to transfer all or part of the funds which represent your 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 ii 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 Transfer You will receive a Change of Investment Election Form on which 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. You can make your election on a dollar or percentage basis, as discussed above. If you wish to use all or part of your account balance in the Plan to purchase common stock issued in the offering, you should indicate that decision on the Change of Investment Election Form. If you do not wish to make an election at this time, you do not need to take any action. Time for Directing Transfer If you wish to purchase common stock with your Plan account balances, you must return your Change of Investment Election 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 Change of Investment Election Form must be received by Ann Marie Callahan no later than 12:00 noon on __________, 2002, if you wish to purchase stock in the offering. Irrevocability of Transfer You may not change your special election to transfer amounts iii Direction 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 Purchase Common You will be able to purchase stock after the Stock offering through your investment in the Provident 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. iv Nature of a Participant's The trustee will hold Provident Financial Interest in the Common Stock Services, Inc. common stock in the name of the Plan. The trustee will allocate the shares of Provident Financial 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 Common Stock The Plan provides that you may direct the trustee as to 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. v 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 2 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 3 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. 4 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. 5 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. 6 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 __ 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 30/th/. 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 30/th/, you must file an election with the plan administrator no later than November 30th of that year. 7 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. 8 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. 9 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 10 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, 11 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. 12 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 -- ========= ======== 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 -----END PRIVACY-ENHANCED MESSAGE-----