As filed with the Securities and Exchange Commission on August 16, 2002
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 (Applied For)
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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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.
Marc P. Levy, Esq. Robert C. Azarow, Esq.
Luse Gorman Pomerenk & Schick, P.C. Thacher Proffitt & Wood
5335 Wisconsin Avenue, N.W., Suite 400 11 West 42nd Street
Washington, D.C. 20015 New York, New York 10024
(202) 274-2000 (212) 789-1200
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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: [ ]
(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) 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.
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PROVIDENT FINANCIAL SERVICES, INC.
Proposed Holding Company for The Provident Bank
46,667,000 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.
TERMS OF THE OFFERING
Price: $10.00 per share
Minimum Maximum
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Number of shares ........................................................ 34,493,000 46,667,000
Gross proceeds .......................................................... $344,930,000 $466,670,000
Estimated underwriting commissions and other expenses ................... $ 6,428,000 $ 7,548,000
Estimated net proceeds to Provident Financial Services, Inc. ............ $338,502,000 $459,122,000
Estimated net proceeds per share to Provident Financial Services, Inc.... $ 9.81 $ 9.84
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We may sell up to 53,667,050 shares because of regulatory considerations, demand for the shares, or changes in market or economic conditions without the resolicitation of subscribers.
This investment involves a degree of risk, including the possible loss of principal.
Please read the "Risk Factors" beginning on page 13.
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.
We are offering the common stock on a best efforts basis, subject to certain conditions. 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. 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. The
offering period is expected to expire on , 2002. We may extend this
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expiration date without notice to you, until , 2003. The minimum number
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of shares that you may purchase is 25 shares. Once submitted, orders are
irrevocable unless the offering is terminated or extended beyond , 2003.
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If the offering is extended beyond , 2003, subscribers will have the
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right to modify or rescind their purchase orders. 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. If the offering is terminated, subscribers will have their funds returned promptly, with interest at our passbook savings rate.
For assistance, please contact the conversion center at (___) - .
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Sandler O'Neill & Partners, L.P.
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TABLE OF CONTENTS
TERMS OF THE OFFERING..........................................................1
SUMMARY........................................................................1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA................................11
RISK FACTORS..................................................................13
FORWARD LOOKING STATEMENTS....................................................20
THE PROVIDENT BANK............................................................21
PROVIDENT FINANCIAL SERVICES, INC.............................................21
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING...........................21
OUR POLICY REGARDING DIVIDENDS................................................23
MARKET FOR THE COMMON STOCK...................................................24
REGULATORY CAPITAL COMPLIANCE.................................................25
CAPITALIZATION................................................................26
PRO FORMA DATA................................................................27
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE FOUNDATION............................................33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................34
BUSINESS OF PROVIDENT FINANCIAL SERVICES, INC.................................52
BUSINESS OF THE PROVIDENT BANK................................................53
FEDERAL AND STATE TAXATION....................................................86
REGULATION....................................................................88
MANAGEMENT...................................................................106
THE CONVERSION AND OFFERING..................................................121
RESTRICTIONS ON ACQUISITION OF PROVIDENT FINANCIAL
SERVICES, INC. AND THE PROVIDENT BANK.....................................144
DESCRIPTION OF CAPITAL STOCK.................................................150
TRANSFER AGENT AND REGISTRAR.................................................151
LEGAL AND TAX MATTERS........................................................151
EXPERTS......................................................................151
REGISTRATION REQUIREMENTS....................................................151
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION..................................152
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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. References in this document to "we", "us" and "our" refer to Provident Financial Services, Inc. or The Provident Bank as the context dictates. In certain instances where appropriate, "we", "us" or "our" refer collectively to Provident Financial Services, Inc. and The Provident Bank.
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 48 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.
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. We have been able to maintain high asset quality by focusing 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 Control. 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 (except for the acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year).
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 for sale up to 46,667,000 shares of its common stock to the public.
The conversion is 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;
. additional resources to develop and enhance The Provident Bank's technology and delivery channels; and
. better capital management tools, including the ability to pay cash 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.
Terms of the Offering
We are offering between 34,493,000 and 46,667,000 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 53,667,050 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 53,667,050, 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; and
(3) Officers, employees and directors of The Provident Bank who are not depositors entitled to purchase shares in category (1) above.
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.
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 has estimated that as of August 2, 2002 the pro forma market value of Provident Financial Services, Inc. ranged from a minimum of $361,486,640 to a maximum of $485,870,000, with a midpoint of $425,000,000. Based on this valuation and the $10.00 per share price, the number of shares of common stock being issued by Provident Financial Services, Inc. will range from 34,493,000 shares to 46,667,000 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 and cash, with common stock representing 80% of the contribution and the balance in cash. 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 1.1% on a price-to-earnings basis and a discount of 50.3% on a price-to-book basis and 54.3% 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
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Provident Financial Services, Inc.
Pro forma data based on financial data as of
June 30, 2002
Maximum number of shares 16.33x 67.70% 69.91%
Minimum number of shares 12.38x 59.14% 61.41%
Valuation of peer group companies as of
August 2, 2002
Averages 16.77x 145.99% 158.04%
Medians 16.16x 136.24% 153.12%
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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 $555,870,500. If this occurs, the maximum number of shares sold to depositors and the public 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;
. 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 2,759,440 and 3,733,360 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."
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
Termination of the Offering
Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares
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
How We Intend to Use the Proceeds We Raise from the Offering
Assuming we sell 46,667,000 shares in the offering, we intend to distribute the net proceeds as follows:
. $229.6 million will be invested in The Provident Bank in exchange for 100% of the outstanding shares of The Provident Bank; and
. $229.6 million will be retained by Provident Financial Services, Inc., of which $37.3 million will be loaned by Provident Financial Services, Inc. to the ESOP to fund its purchase of common stock and $18.7 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 except for the pending acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year.
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. 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."
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
Individuals Eligible % of Based on Midpoint
Plan to Receive Awards Shares Issued/(1)/ of Offering Range
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Employee stock ownership plan All employees 8% $32,464,000
Recognition and retention plan Directors and officers 4% $16,232,000
Stock option plan Directors, officers and 10% /(2)/
employees
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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 that the nontransferable subscription rights to purchase common stock have no value. Whether or not the subscription rights in fact have value for tax purposes is
dependent upon all of the facts and circumstances that occur. If the Internal Revenue Service determines that subscription rights granted to eligible subscribers are deemed to have an ascertainable value, receipt of such rights would most likely be taxable 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 Provident Financial Services, Inc. could recognize gain on such distribution. 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 tax basis to the shareholders of the common stock purchased in the conversion will be the amount paid for the common stock, and that the conversion will not be a taxable event for us. This opinion, however, is not binding on the Internal Revenue Service. We also have received an opinion from KPMG LLP that, more likely than not, the conversion will not be a taxable event for us under New Jersey income tax laws. 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"
How You May Obtain Additional Information Regarding the Conversion
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
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(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
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For the Six Months
Ended June 30, For the Year Ended December 31,
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2002 2001 2001 2000 1999 1998 1997
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(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
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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
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Net interest income after provision for
loan losses............................ 54,979 44,210 94,556 87,770 86,702 77,143 71,087
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Non-interest income..................... 11,978 10,423 21,236 18,276 15,688 15,005 12,186
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Non-interest expenses................... 44,626 38,116 80,629 75,865 71,853 60,985 52,735
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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
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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
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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
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At or For
the Six Months
Ended June 30, At or For the Year Ended December 31,
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2002(1) 2001(1) 2001 2000 1999 1998 1997
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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
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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. 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 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.
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.
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. An increase in tax expense, if any, would be included during the quarter ending September 30, 2002.
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 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.
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.
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 $27,594,400 at the minimum of the offering range and $42,933,640 at the adjusted maximum of the offering range. This cost may be greater if the employee stock ownership plan purchases the shares in the open market following completion of the conversion because depositors subscribe for all shares in the offering. We will record annual employee stock ownership plan expenses in an amount equal to the fair value of shares committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
We also intend to implement a recognition and retention plan after the
conversion. Under this plan, our officers and directors could be awarded, at no
cost to them, shares of common stock in an aggregate amount equal to 4% of the
shares sold in the offering. The recognition and retention plan cannot be
implemented until at least six months after the conversion, and if it is adopted
within 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 $13,797,200 at the minimum of the offering range and $21,466,820 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 3.95% 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.
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 except for the pending acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year.
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.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:
. statements of our goals, intentions and expectations;
. statements regarding our business plans and prospects and growth and operating strategies;
. statements regarding the asset quality of our loan and investment portfolios; and
. estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
. significantly increased competition among depository and other financial institutions;
. inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
. general economic conditions, either nationally or in our market areas, that are worse than expected;
. adverse changes in the securities markets;
. legislative or regulatory changes that adversely affect our business;
. our ability to enter new markets successfully and capitalize on growth opportunities;
. changes in consumer spending, borrowing and savings habits;
. changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and
. changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We discuss these uncertainties and others in "Risk Factors" beginning on page 13.
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 48 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."
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 $338.5 million and $459.1 million, or $528.5 million if the offering is increased by 15%.
Provident Financial Services, Inc. intends to distribute the net proceeds from the offering as follows:
53,667,050 Shares
34,493,000 Shares 46,667,000 Shares (Adjusted
(Minimum) (Maximum) Maximum)
----------------- ----------------- -----------------
(In thousands)
Gross proceeds............................... $ 344,930 $ 466,670 $ 536,671
Less: Expenses............................... (6,428) (7,548) (8,192)
--------- --------- ---------
Estimated net proceeds....................... $ 338,502 $ 459,122 $ 528,479
Less:
Net proceeds to Bank...................... (169,251) (229,561) (264,239)
Loan to our Employee Stock Ownership Plan.. (27,594) (37,334) (42,934)
Purchase of shares for Recognition and
Retention Plan.......................... (13,797) (18,667) (21,467)
Net cash proceeds retained by Provident
Financial Services........................ $ 127,860 $ 173,560 $ 199,839
========= ========= =========
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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 "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 46,667,000 shares in the offering, we intend to distribute the net proceeds as follows:
. $229.6 million will be invested in The Provident Bank in exchange for 100% of the outstanding shares of The Provident Bank; and
. $229.6 million will be retained by Provident Financial Services, Inc., of which $37.3 million will be loaned by Provident Financial Services, Inc. to the ESOP to fund its purchase of common stock and $18.7 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 except for the pending acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year.
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 (except for the acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year);
. to enhance our technology and delivery channels;
. to invest in securities; and
. for general corporate purposes.
OUR POLICY REGARDING DIVIDENDS
Provident Financial Services, Inc. will consider the payment of a cash dividend no earlier than the completion of the first calendar quarter of 2003. 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
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.
REGULATORY CAPITAL COMPLIANCE
At June 30, 2002, The Provident Bank exceeded all applicable regulatory capital requirements. Set forth below is a summary of our capital under accounting principles accepted in the United States of America, as of June 30, 2002, and our compliance with the applicable regulatory capital standards, on a historical and pro forma basis assuming that the indicated number of shares were sold as of such date and receipt by The Provident Bank of 50% of the net proceeds. The capital table below does not reflect the capital requirements that will be applicable to Provident Financial Services, Inc. as a registered bank holding company. For a discussion of the applicable regulatory capital requirements, see "Regulation--Federal Banking Regulation--Capital Requirements."
Historical at June 30,
2002
----------------------
Percent
of
Amount Assets(2)
-------- ---------
(Dollars in thousands)
GAAP capital................ $310,568 10.13%
======== ======
Leverage capital:
Capital level(3)......... $279,979 9.39%
Requirement(4)........... 119,217 4.00
-------- ------
Excess................ $160,762 5.39%
======== ======
Risk-based capital:
Tier 1 capital level(3).. $279,979 13.84%
Requirement(5)........... 80,914 4.00
-------- ------
Excess................ $199,065 9.84%
======== ======
Total capital level(3)... $301,937 14.93%
Requirement(5)........... 161,827 8.00
-------- ------
Excess................ $140,110 6.93%
======== ======
Pro Forma at June 30, 2002, Based Upon the Sale at $10.00 per Share of
-----------------------------------------------------------------------------------------
53,667,050
34,493,000 40,580,000 46,667,000 Shares
Shares Shares Shares (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(1)
-------------------- -------------------- -------------------- --------------------
Percent Percent Percent Percent
of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
GAAP capital................ $434,289 13.50% $456,478 14.07% $479,328 14.65% $505,606 15.30%
======== ===== ======== ===== ======== ===== ======== =====
Leverage capital:
Capital level(3)......... $403,700 12.89% $425,889 13.48% $448,739 14.08% $475,017 14.76%
Requirement(4)........... 125,269 4.00 126,352 4.00 127,461 4.00 128,736 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess................ $278,431 8.89% $299,537 9.48% $321,278 10.08% $346,281 10.76%
======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital:
Tier 1 capital level(3).. $403,700 19.66% $425,889 20.69% $448,739 21.74% $475,017 22.94%
Requirement(5)........... 82,124 4.00 82,341 4.00 82,562 4.00 82,817 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess................ $321,576 15.66% $343,548 16.69% $366,177 17.74% $392,200 18.94%
======== ===== ======== ===== ======== ===== ======== =====
Total capital level(3)... $425,658 20.73% $447,847 21.76% $470,697 22.80% $496,975 24.00%
Requirement(5)........... 164,248 8.00 164,681 8.00 165,125 8.00 165,635 8.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess................ $261,410 12.73% $283,166 13.76% $305,572 14.80% $331,340 16.00%
======== ===== ======== ===== ======== ===== ======== =====
|
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
--------------------------------------------------
53,667,050
34,493,000 40,580,000 46,667,000 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)......... -- 3,615 4,250 4,859 5,559
Additional paid-in capital(3)........... -- 351,444 413,762 473,463 542,120
Retained earnings(4).................... 302,561 302,561 302,561 302,561 302,561
Less:
Expense of contribution to foundation... -- (20,696) (24,000) (24,000) (24,000)
Plus:
Tax benefit of contribution to
foundation(5)........................... -- 7,657 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).... -- (27,594) (32,464) (37,334) (42,934)
Common stock acquired by the recognition
and retention plan(7)................ -- (13,797) (16,232) (18,667) (21,467)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity................. $ 310,568 $ 611,197 $ 664,764 $ 717,769 $ 778,726
========== ========== ========== ========== ==========
|
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 $338.5 million and $459.1 million, or $528.5 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 $4,245,000 at the maximum offering range. No fee will be paid with respect to shares of common stock contributed to the charitable foundation and shares purchased by the ESOP and by our directors, officers and employees, and their immediate families; and
. total expenses, excluding fees and expenses paid to Sandler O'Neill & Partners, L.P., will be approximately $3.3 million.
We calculated the pro forma consolidated net income and stockholders' equity of Provident Financial Services, Inc. for the six months ended June 30, 2002 and for the year ended December 31, 2001, as if the common stock had been sold at the beginning of those periods and the net proceeds had been invested at 2.06% for the six months ended June 30, 2002 and at 2.06% for the year ended December 31, 2001. We chose these yields because they represent the yields on one-year U.S. Government securities for the corresponding periods. We believe these rates more accurately reflect pro forma reinvestment rates than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average of the yield on interest-earning assets and the cost of deposits for these periods. We assumed a tax rate of 37.0% for both periods. This results in an annualized after-tax yield of 1.30% for the six months ended June 30, 2002 and 1.30% for the year ended December 31, 2001.
We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders' equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares purchased by the ESOP. We computed per share amounts for each period as if the common stock was outstanding at the beginning of the periods, but we did not adjust per share historical or pro forma stockholders' equity to reflect the earnings on the estimated net proceeds.
The pro forma tables do not reflect the possible issuance of additional shares, up to 10% of the shares sold in the offering, pursuant to our proposed stock option plan. The pro forma
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.
At or For the Six Months Ended June 30, 2002
-------------------------------------------------------------------------
53,667,050
34,493,000 40,580,000 46,667,000 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............................... $344,930 $405,800 $466,670 $536,671
Plus: shares contributed to foundation....... 16,557 19,200 19,200 19,200
-------- -------- -------- --------
Pro forma market capitalization.............. $361,487 $425,000 $485,870 $555,871
======== ======== ======== ========
Gross proceeds............................... $344,930 $405,800 $466,670 $536,671
Less: offering expenses and commissions...... (6,428) (6,988) (7,548) (8,192)
-------- -------- -------- --------
Estimated net proceeds....................... 338,502 398,812 459,122 528,479
Less: cash contribution to foundation........ (4,139) (4,800) (4,800) (4,800)
Less: common stock purchased by ESOP(1) ..... (27,594) (32,464) (37,334) (42,934)
Less: common stock purchased by recognition
and retention plan(2)..................... (13,797) (16,232) (18,667) (21,467)
-------- -------- -------- --------
Estimated net proceeds, as adjusted....... $292,972 $345,316 $398,321 $459,278
======== ======== ======== ========
Consolidated net income(3):
Historical................................ $ 15,026 $ 15,026 $ 15,026 $ 15,026
Plus: Pro forma income on net proceeds,
as adjusted............................... 1,901 2,241 2,585 2,980
Less: Pro forma ESOP adjustment(1)........... (290) (341) (392) (451)
Less: Pro forma recognition and retention
plan adjustment(2)........................ (869) (1,023) (1,176) (1,352)
-------- -------- -------- --------
Pro forma net income(3)................ $ 15,768 $ 15,903 $ 16,043 $ 16,203
======== ======== ======== ========
Per share net income(3):
Historical................................ $ 0.45 $ 0.38 $ 0.33 $ 0.29
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)......... $ 0.47 $ 0.40 $ 0.35 $ 0.31
======== ======== ======== ========
Stockholders' equity:
Historical................................... $310,568 $310,568 $310,568 $310,568
Estimated net proceeds....................... 338,502 398,812 459,122 528,479
Plus: shares contributed to foundation.... 16,557 19,200 19,200 19,200
Less: shares contributed to foundation.... (16,557) (19,200) (19,200) (19,200)
Less: cash contributed to foundation...... (4,139) (4,800) (4,800) (4,800)
Plus: tax benefit of contribution to
foundation............................. 7,657 8,880 8,880 8,880
Less: common stock acquired by ESOP(1).... (27,594) (32,464) (37,334) (42,934)
Less: common stock acquired by
recognition and retention plan(2)... (13,797) (16,232) (18,667) (21,467)
-------- -------- -------- --------
Pro forma stockholders' equity (4)(5)..... $611,197 $664,764 $717,769 $778,726
======== ======== ======== ========
Stockholders' equity per share(6):
Historical................................... $ 8.59 $ 7.31 $ 6.39 $ 5.59
Estimated net proceeds....................... 9.36 9.38 9.45 9.51
Plus: shares contributed to foundation.... 0.46 0.45 0.40 0.35
Less: shares contributed to foundation.... (0.46) (0.45) (0.40) (0.35)
Less: cash contributed to foundation...... (0.11) (0.11) (0.10) (0.09)
Plus: tax benefit of contribution to
foundation............................. 0.21 0.21 0.18 0.16
Less: common stock acquired by ESOP(1).... (0.76) (0.76) (0.77) (0.77)
Less: common stock acquired by
recognition and retention plan(2)... (0.38) (0.38) (0.38) (0.39)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(5)............................ $ 16.91 $ 15.65 $ 14.77 $ 14.01
======== ======== ======== ========
Offering price to pro forma net income per
share(7).................................. 10.64x 12.50x 14.29x 16.13x
======== ======== ======== ========
Offering price as a percentage of pro
forma stockholders' equity per share(6)... 59.14% 63.90% 67.70% 71.38%
======== ======== ======== ========
Offering price as a percentage of pro forma
tangible stockholder's equity per
share(9).................................. 61.41% 66.15% 69.91% 73.52%
======== ======== ======== ========
|
(footnotes on following page)
At of For the Year Ended December 31, 2001
-------------------------------------------------------------------------
53,667,050
34,493,000 40,580,000 46,667,000 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............................... $344,930 $405,800 $466,670 $536,671
Plus: shares contributed to foundation...... 16,557 19,200 19,200 19,200
-------- -------- -------- --------
Pro forma market capitalization.............. $361,487 $425,000 $485,870 $555,871
======== ======== ======== ========
Gross proceeds............................... $344,930 $405,800 $466,670 $536,671
Less: offering expenses and commissions...... (6,428) (6,988) (7,548) (8,192)
-------- -------- -------- --------
Estimated net proceeds....................... 338,502 398,812 459,122 528,479
Less: cash contribution to foundation........ (4,139) (4,800) (4,800) (4,800)
Less: common stock purchased by ESOP(1) ..... (27,594) (32,464) (37,334) (42,934)
Less: common stock purchased by
recognition and retention plan(2) .. (13,797) (16,232) (18,667) (21,467)
-------- -------- -------- --------
Estimated net proceeds, as adjusted.......... $292,972 $345,316 $398,321 $459,278
======== ======== ======== ========
Consolidated net income(3):
Historical................................ $ 24,080 $ 24,080 $ 24,080 $ 24,080
Plus: Pro forma income on net proceeds,
as adjusted......................... 3,802 4,482 5,169 5,961
Less: Pro forma ESOP adjustment(1)........... (579) (682) (784) (902)
Less: Pro forma recognition and
retention plan adjustment(2)........ (1,738) (2,045) (2,352) (2,705)
-------- -------- -------- --------
Pro forma net income(3)................ $ 25,565 $ 25,835 $ 26,113 $ 26,434
======== ======== ======== ========
Per share net income(3):
Historical................................ $ 0.72 $ 0.61 $ 0.54 $ 0.47
Plus: Pro forma income on net proceeds,
as adjusted............................... 0.11 0.11 0.11 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)... $ 0.76 $ 0.65 $ 0.58 $ 0.52
======== ======== ======== ========
Stockholders' equity:
Historical................................... $292,130 $292,130 $292,130 $292,130
Estimated net proceeds....................... 338,502 398,812 459,122 528,479
Plus: shares contributed to foundation.... 16,557 19,200 19,200 19,200
Less: shares contributed to foundation.... (16,557) (19,200) (19,200) (19,200)
Less: cash contributed to foundation...... (4,139) (4,800) (4,800) (4,800)
Plus: tax benefit of contribution to
foundation....................... 7,657 8,880 8,880 8,880
Less: common stock acquired by ESOP(1).... (27,594) (32,464) (37,334) (42,934)
Less: common stock acquired by
recognition and retention
plan(2).......................... (13,797) (16,232) (18,667) (21,467)
-------- -------- -------- --------
Pro forma stockholders' equity (4)(5).. $592,759 $646,326 $699,331 $760,288
======== ======== ======== ========
Stockholders' equity per share(6):
Historical................................... $ 8.08 $ 6.87 $ 6.01 $ 5.26
Estimated net proceeds....................... 9.36 9.38 9.45 9.51
Plus: shares contributed to foundation.... 0.46 0.45 0.40 0.35
Less: shares contributed to foundation.... (0.46) (0.45) (0.40) (0.35)
Less: cash contributed to foundation...... (0.11) (0.11) (0.10) (0.09)
Plus: tax benefit of contribution to
foundation....................... 0.21 0.21 0.18 0.16
Less: common stock acquired by ESOP(1).... (0.76) (0.76) (0.77) (0.77)
Less: common stock acquired by
recognition and retention
plan(2).......................... (0.38) (0.38) (0.38) (0.39)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(5)......................... $ 16.40 $ 15.21 $ 14.39 $ 13.68
======== ======== ======== ========
Offering price to pro forma net income
per share................................. 13.16x 15.38x 17.24x 19.23x
======== ======== ======== ========
Offering price as a percentage of pro
forma stockholders' equity per share(6)... 60.98% 65.75% 69.49% 73.10%
======== ======== ======== ========
Offering price as a percentage of pro
forma tangible stockholders' equity
per share(8).............................. 63.25% 68.25% 71.94% 75.46%
======== ======== ======== ========
|
(footnotes on following page)
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 $361.5 million, $425.0 million and $485.9 million with the foundation, as compared with $374.0 million, $440.0 million and $506.0 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
----------------------- -----------------------
With Without With Without
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount...................... $ 344,930 $ 374,000 $ 405,800 $ 440,000
Pro forma market capitalization................ 361,487 374,000 425,000 440,000
Total assets................................... 3,366,906 3,388,701 3,420,473 3,446,174
Total liabilities.............................. 2,755,709 2,755,709 2,755,709 2,755,709
Pro forma stockholders' equity................. 611,197 632,992 664,764 690,465
Pro forma net income........................... 15,768 15,862 15,903 16,012
Pro forma stockholders' equity per share....... 16.91 16.92 15.65 15.69
Pro forma net income per share................. 0.47 0.46 0.40 0.39
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............. 59.14% 59.10% 63.90% 63.73%
Offering price to pro forma net income per
share...................................... 10.64x 10.87x 12.50x 12.82x
Pro forma financial ratios:
Return on assets............................. 0.94% 0.94% 0.93% 0.93%
Return on equity............................. 5.16 5.01 4.78 4.64
Equity/assets................................ 18.15 18.68 19.44 20.04
Maximum Adjusted Maximum
----------------------- -----------------------
With Without With Without
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount...................... $ 466,670 $ 506,000 536,671 581,900
Pro forma market capitalization................ 485,870 506,000 555,871 581,900
Total assets................................... 3,473,478 3,503,647 3,534,435 3,569,741
Total liabilities.............................. 2,755,709 2,755,709 2,755,709 2,755,709
Pro forma stockholders' equity................. 717,769 747,938 778,726 814,032
Pro forma net income........................... 16,043 16,164 16,203 16,338
Pro forma stockholders' equity per share....... 14.77 14.78 14.01 13.99
Pro forma net income per share................. 0.35 0.34 0.31 0.30
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............. 67.70% 67.66% 71.38% 71.48%
Offering price to pro forma net income per
share...................................... 14.29x 14.71x 16.13x 16.67x
Pro forma financial ratios:
Return on assets............................. 0.92% 0.92% 0.92% 0.92%
Return on equity............................. 4.47 4.32 4.16 4.01
Equity/assets................................ 20.66 21.35 22.03 22.80
|
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 4,293,364 shares with a $42.9 million loan that is expected to be repaid over 30 years, resulting in an annual expense (pre-tax) of approximately $1.4 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 2,146,682 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 $4.3 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
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. We have been able to maintain high asset quality by focusing 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
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.
Expense Control. 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
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 (except for the acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year).
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. Certificate of deposit accounts are generally short term. As of June 30, 2002, 84% of all time deposits had maturities of one year or less. The use of Federal Home Loan Bank advances to fund large commercial real estate loans at acceptable spreads has enabled us to lock in low cost, longer-term liabilities, reducing our exposure to rising interest rates.
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 Percent
Interest Rates Amount Change Change Value Ratio Change
-------------- -------- --------- ------- ----------- -------
(Basis Points) (Dollars in thousands)
-100 $552,067 $ 21,592 4.07% 16.61% 3.10%
Static 530,475 -- -- 16.11 --
+100 489,121 (41,354) (7.80)% 15.09 (6.33)%
+200 445,803 (84,672) (15.96)% 13.98 (13.22)%
+300 399,684 (130,791) (24.66)% 12.75 (20.86)%
|
The above table indicates that as of June 30, 2002, in the event of an immediate and sustained 200 basis point increase in interest rates, we would experience a 15.96% or $84.7 million reduction in the present value of equity. If rates were to decrease 100 basis points, we would experience a 4.07% or $21.6 million increase in our present value of equity.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While we 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.
For the Six Months Ended June 30,
-----------------------------------
2002
At June 30, 2002 -----------------------------------
-------------------- Average Average
Outstanding Yield/ Outstanding Interest Yield/
Balance Rate Balance Earned/Paid Rate
----------- ------ ----------- ----------- -------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and short-term
investments.......................... $ 70,406 1.64% $ 103,477 $ 890 1.72%
Investment securities (1)............... 110,131 4.53 113,982 2,693 4.72
Securities available for sale........... 728,509 5.26 596,917 16,540 5.54
Net loans (2)........................... 1,919,729 7.10 1,929,574 68,149 7.06
---------- ---------- -------
Total interest-earning assets........ 2,828,775 6.30 2,743,950 88,272 6.43
---- ------- ----
Non-interest earning assets............. 237,502 215,883
---------- ----------
Total assets......................... $3,066,277 $2,959,833
========== ==========
Interest-bearing liabilities:
Savings deposits........................ $ 823,530 1.81 $ 785,557 6,873 1.75
Money market accounts................... 88,913 1.81 89,532 851 1.90
Interest bearing checking............... 264,955 1.19 250,961 1,519 1.21
Time accounts........................... 1,087,081 3.23 1,065,741 18,741 3.52
Borrowings.............................. 194,925 4.18 191,195 4,109 4.30
---------- ---- ---------- -------
Total interest-bearing liabilities... 2,459,404 2.57 2,382,986 32,093 2.69
---- ------- ----
Non-interest bearing liabilities........ 296,305 283,348
---------- ----------
Total liabilities.................... 2,755,709 2,666,334
Equity.................................. 310,568 293,499
---------- ----------
Total liabilities and equity......... $3,066,277 $2,959,833
========== ==========
Net interest income........................ $56,179
=======
Net interest rate spread................... 3.73% 3.74%
==== ====
Net interest earning assets................ $ 369,371 $ 360,964
========== ==========
Net interest margin (3).................... 4.09%
====
Ratio of interest-earning assets
to total interest-bearing
liabilities............................. 1.15x 1.15x
========== ==========
For the Six Months Ended June 30,
-----------------------------------
2001
-----------------------------------
Average Average
Outstanding Interest Yield/
Balance Earned/Paid Rate
----------- ----------- -------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and short-term
investments.......................... $ 24,233 $ 580 4.79%
Investment securities (1)............... 116,568 2,993 5.13
Securities available for sale........... 392,849 11,744 5.98
Net loans (2)........................... 1,958,118 75,410 7.70
---------- -------
Total interest-earning assets........ 2,491,768 90,727 7.28
------- ----
Non-interest earning assets............. 191,891
----------
Total assets......................... $2,683,659
==========
Interest-bearing liabilities:
Savings deposits........................ 664,881 $ 8,241 2.48
Money market accounts................... 72,665 831 2.29
Interest bearing checking............... 202,893 1,561 1.54
Time accounts........................... 1,062,738 29,802 5.61
Borrowings.............................. 177,178 4,882 5.51
---------- -------
Total interest-bearing liabilities... 2,180,355 45,317 4.16
------- ----
Non-interest bearing liabilities........ 233,465
----------
Total liabilities.................... 2,413,820
Equity.................................. 269,839
----------
Total liabilities and equity......... $2,683,659
==========
Net interest income........................ $45,410
=======
Net interest rate spread................... 3.12%
====
Net interest earning assets................ $ 311,413
==========
Net interest margin (3).................... 3.64%
====
Ratio of interest-earning assets
to total interest-bearing
liabilities............................. 1.14x
==========
|
(footnotes on following page)
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
----------- ----------- ------- ----------- ----------- -------
Interest-earning assets:
Federal funds sold and short-term investments ... $ 32,558 $ 1,114 3.42% $ 5,444 $ 325 5.97%
Investment securities (1) ....................... 112,659 5,784 5.13 140,926 7,589 5.39
Securities available for sale ................... 437,147 25,337 5.80 351,439 21,577 6.14
Net loans(2) .................................... 1,961,612 148,744 7.58 1,933,075 150,029 7.76
---------- -------- ---------- --------
Total interest-earning assets ............. 2,543,976 180,979 7.11 2,430,884 179,520 7.39
-------- ---- -------- ----
Non-interest earning assets ..................... 196,863 182,705
---------- ----------
Total assets .............................. $2,740,839 $2,613,589
========== ==========
Interest-bearing liabilities:
Savings deposits ............................. $ 690,324 15,966 2.31 633,128 16,143 2.55
Money market accounts ........................ 72,735 1,612 2.22 83,738 1,975 2.36
Interest-bearing checking .................... 213,441 3,091 1.45 195,258 2,932 1.50
Time accounts ................................ 1,060,920 54,620 5.15 1,018,213 56,259 5.53
Borrowings ................................... 176,688 9,234 5.23 210,144 12,381 5.89
---------- -------- ---------- --------
Total interest-bearing liabilities ........ 2,214,108 84,523 3.82% 2,140,481 89,690 4.19%
-------- ---- -------- ----
Non-interest bearing liabilities ................ 249,913 223,339
---------- ----------
Total liabilities ......................... 2,464,021 2,363,820
Equity ....................................... 276,818 249,769
---------- ----------
Total liabilities and equity .............. $2,740,839 $2,613,589
========== ==========
Net interest income ............................. $ 96,456 $ 89,830
======== ========
Net interest rate spread ........................ 3.29% 3.20%
==== ====
Net interest earning assets ..................... $ 329,868 $ 290,403
========== ==========
Net interest margin (3) ......................... 3.79% 3.70%
==== ====
Ratio of interest-earning assets to total
interest-bearing liabilities ................. 1.15x 1.14x
========== ==========
For the Year Ended December 31,
-----------------------------------
1999
-----------------------------------
Average Average
Outstanding Interest Yield/
Balance Earned/Paid Rate
----------- ----------- -------
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
==========
|
(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.
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
-------------------------------- --------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
------------------- Increase/ ------------------- Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------- -------- ---------- ------- ------- ----------
(In thousands)
Interest-earning assets:
Federal funds sold and
short-term investments ...... $ 1,502 $ (1,192) $ 310 $ 982 $ (193) $ 789
Investment securities .......... (65) (235) (300) (1,465) (340) (1,805)
Securities available for
sale ........................ 7,215 (2,419) 4,796 5,023 (1,262) 3,761
Loans .......................... (1,086) (6,175) (7,261) 2,195 (3,480) (1,285)
------- -------- -------- ------- ------- -------
Total interest-earning
assets ................ $ 7,566 (10,021) (2,455) 6,735 (5,275) 1,460
------- -------- -------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits ............... $ 3,178 (4,546) (1,368) 1,392 (1,569) (177)
Money market accounts .......... 337 (317) 20 (249) (114) (363)
Interest-bearing checking ...... 679 (721) (42) 267 (107) 160
Time accounts .................. 251 (11,312) (11,061) 2,298 (3,937) (1,639)
Borrowings ..................... 932 (1,705) (773) (1,841) (1,306) (3,147)
------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities ............. $ 5,377 $(18,601) (13,224) 1,867 (7,033) (5,166)
------- -------- -------- ------- ------- -------
Net interest income ............ $ 2,189 $ 8,580 $ 10,769 $ 4,868 $ 1,758 $ 6,626
======= ======== ======== ======= ======= =======
Year Ended December 31,
--------------------------------
2000 vs. 1999
--------------------------------
Increase/(Decrease)
Due to Total
------------------- Increase/
Volume Rate (Decrease)
------- ------- ----------
(In thousands)
Interest-earning assets:
Federal funds sold and
short-term investments ...... $ (511) $ 91 $ (420)
Investment securities .......... (2,808) (296) (3,104)
Securities available for
sale ........................ (1,312) 690 (622)
Loans .......................... 16,890 731 17,621
------- ------- --------
Total interest-earning
assets ................ 12,259 1,216 13,475
------- ------- --------
Interest-bearing liabilities:
Savings deposits ............... 425 1,230 1,655
Money market accounts .......... (450) (44) (494)
Interest-bearing checking ...... 139 (87) 52
Time accounts .................. 2,357 4,918 7,275
Borrowings ..................... 3,258 701 3,959
------- ------- --------
Total interest-bearing
liabilities ............. 5,729 6,718 12,447
------- ------- --------
Net interest income ............ $ 6,530 $(5,502) $ 1,028
======= ======= ========
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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. 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. 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.
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.
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 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 $21.9 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. We used the same methodology in assessing the adequacy of the allowance for both periods.
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 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 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.
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 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 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. 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.
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 $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.
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.
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 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.
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 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 except for the pending acquisition of two branches from another financial institution that we anticipate completing in the third quarter of this year.
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 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 48 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 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.
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 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 multifamily 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 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 "--Mortgage Warehouse Loans."
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
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Residential mortgage loans.... $ 737,821 38.43% $ 795,442 39.88% $ 905,825 46.33%
Commercial mortgage loans..... 422,569 22.01 412,280 20.67 380,237 19.45
Multi-family mortgage loans... 94,158 4.90 95,456 4.78 95,387 4.88
Construction loans............ 92,898 4.84 80,717 4.05 75,980 3.89
---------- ------ ---------- ------ ---------- ------
Total mortgage loans....... 1,347,446 70.18 1,383,895 69.38 1,457,429 74.55
---------- ------ ---------- ------ ---------- ------
Mortgage warehouse loans...... 146,994 7.66 167,905 8.42 66,949 3.42
Commercial loans.............. 151,999 7.92 141,491 7.09 121,540 6.22
Consumer loans................ 294,176 15.32 322,219 16.15 328,831 16.82
---------- ------ ---------- ------ ---------- ------
Total other loans.......... 593,169 30.90 631,615 31.66 517,320 26.46
---------- ------ ---------- ------ ---------- ------
Premium on purchased loans.... 2,266 0.12 2,566 0.13 3,264 0.17
Less net deferred fees........ (1,194) (0.06) (1,531) (0.07) (2,823) (0.15)
Less: Allowance Loan Loss..... (21,958) (1.14) (21,909) (1.10) (20,198) (1.03)
---------- ------ ---------- ------ ---------- ------
Total loans, net........... $1,919,729 100.00% $1,994,636 100.00% $1,954,992 100.00%
========== ====== ========== ====== ========== ======
At December 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Residential mortgage loans.... $ 884,680 47.15% $ 843,210 50.19% $ 791,216 56.53%
Commercial mortgage loans..... 387,435 20.64 300,478 17.88 197,061 14.08
Multi-family mortgage loans... 96,476 5.14 88,598 5.27 65,494 4.68
Construction loans............ 69,946 3.73 25,510 1.52 16,298 1.16
---------- ------ ---------- ------ ---------- ------
Total mortgage loans....... 1,438,537 76.66 1,257,796 74.86 1,070,069 76.45
---------- ------ ---------- ------ ---------- ------
Mortgage warehouse loans...... 47,719 2.54 85,477 5.09 36,131 2.58
Commercial loans.............. 85,357 4.55 68,556 4.08 51,804 3.70
Consumer loans................ 324,431 17.29 287,531 17.11 257,884 18.43
---------- ------ ---------- ------ ---------- ------
Total other loans.......... 457,507 24.38 441,564 26.28 345,819 24.71
---------- ------ ---------- ------ ---------- ------
Premium on purchased loans.... 2,925 0.16 1,109 0.07 1,527 0.11
Less net deferred fees........ (3,742) (0.20) (2,997) (0.18) (2,804) (0.20)
Less: Allowance Loan Loss..... (18,794) (1.00) (17,381) (1.03) (15,036) (1.07)
---------- ------ --------- ------ ---------- ------
Total loans, net........... $1,876,433 100.00% $1,680,091 100.00% $1,399,575 100.00%
========== ====== ========== ====== ========== ======
|
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 Ten
Through Three Five Through Beyond
Within One Three Through Through Twenty Twenty
Year Years Five 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
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 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 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.
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 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.
Commercial Real Estate Loans. The Provident Bank originates loans secured by mortgages on various commercial income producing 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.
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.
Multifamily 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 FHA, 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 mitigate risk by knowing our customers, hiring outside specialized auditors on a periodic basis to audit 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.
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.
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.
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.
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.
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
========== ======== ========== ========== ==========
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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
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.
The collection procedures for commercial real estate and commercial loans include our sending periodic late notices and letters to a borrower once a loan is past due. We attempt to make direct contact with a borrower once a loan is 15 days past due, usually by telephone. The Chief Lending Officer reviews all commercial real estate and commercial loan delinquencies on a weekly basis. Delinquent commercial real estate and commercial loans will be transferred to our Special Loan Department for further action if the delinquency is not cured within a reasonable period of time, typically 30 to 90 days. Our Chief Lending Officer has the authority to transfer performing commercial real estate or commercial loans to the Special Loan Department if, in his opinion, a credit problem exists or is likely to occur.
Loans deemed uncollectible are proposed for charge-off on a monthly basis. The recommendation is then submitted to our Chief Lending Officer, Executive Vice President - Customer Management Group and Chief Executive Officer for approval.
Delinquent Loans and Non-performing Loans and Assets. Our policies require that the Chief Lending Officer continuously monitor the status of the loan portfolios and report to the Board of Managers on a monthly basis. These reports include information on impaired loans, delinquent loans, criticized and classified assets, and foreclosed real estate. An impaired loan is defined as a loan for which it is probable, based on current information, that we will not collect amounts due under the contractual terms of the loan agreement. We have defined the population of impaired loans to be all commercial loans as well as residential mortgage loans greater than $500,000. Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. At June 30, 2002, the impaired loan portfolio totaled $1.4 million.
With the exception of first mortgage loans insured or guaranteed by the FHA or VA or for which the borrower has obtained private mortgage insurance, accruing income is stopped on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectibility of such interest or principal is doubtful. When accruing has stopped, loans are designated as non-accrual loans and the outstanding interest previously credited is reversed. A non-accrual loan is returned to accrual status when factors indicating doubtful collection no longer exist and the loan has been brought current.
Federal and state regulations as well as our policy require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. Under our internal risk rating system, we currently classify problem and potential problem assets as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that we will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not
warranted. Assets which do not currently expose The Provident Bank to sufficient risk to 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
same date we had no loans classified as "doubtful" or "loss." In addition, as of June 30, 2002 we had $577,000 of loans designated "special mention."
The following table sets forth delinquencies in our loan portfolio as of the dates indicated.
At June 30, 2002 At December 31, 2001
------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Residential mortgage loans ... 25 $ 854 60 $3,604 27 $1,176 75 $4,171
Commercial mortgage loans .... -- -- -- -- 1 188 2 345
Multi-family mortgage loans .. -- -- -- -- -- -- -- --
Construction loans ........... -- -- -- -- -- -- 4 1,071
--- ------ --- ------ -- ------ --- ------
Total mortgage loans ...... 25 854 60 3,604 28 1,364 81 5,587
Mortgage warehouse loans ..... -- -- -- -- -- -- -- --
Commercial loans ............. 1 48 -- -- 2 1,520 12 1,084
Multi-family mortgage loans .. -- -- -- -- -- -- -- --
Consumer loans ............... 30 582 55 1,023 34 444 82 1,413
--- ------ --- ------ -- ------ --- ------
Total loans ............... 56 $1,484 115 $4,627 64 $3,328 175 $8,084
=== ====== === ====== == ====== === ======
|
At December 31, 2000 At December 31, 1999
------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- --------
(Dollars in thousands)
Residential mortgage loans ... 27 $1,218 74 $2,413 41 $ 589 102 $3,466
Commercial mortgage loans .... -- -- 2 144 3 2,684 1 146
Multi-family mortgage loans .. -- -- -- 25 -- -- -- --
Construction loans ........... -- -- 1 5,166 -- -- 1 1,195
--- ------ --- ------ -- ------ --- ------
Total mortgage loans ...... 27 1,218 77 7,748 44 3,273 104 4,807
Mortgage warehouse loans ..... -- -- -- -- -- -- -- --
Commercial loans ............. 2 138 3 274 1 90 2 1,641
Consumer loans ............... 30 377 60 1,458 34 653 57 1,586
--- ------ --- ------ -- ------ --- ------
Total loans ............... 59 $1,733 140 $9,480 79 $4,016 163 $8,034
=== ====== === ====== == ====== === ======
|
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%
====== ====== ====== ====== ====== ======
|
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.
The factors that we consider in establishing the allowance for loan losses 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.
The primary process for establishing the adequacy of the allowance for loan losses is 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. 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, 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 PEWS report with the committee and the risk rating is confirmed and/or modified.
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. The bank uses a five-year moving average of charge-off and recovery experience as a tool to assist in the development of the loan loss provision which is added to the allowance.
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.
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.
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 ultimate 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.
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%
======= ======= ======= ======= ======= ======= =======
|
Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management's assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may be taken nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.
At December 31,
-------------------------------------------------
At June 30, 2002 2001 2000
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount of Loans in Amount of Loans in Amount of Loans in
Allowance Each Allowance Each Allowance Each
for Loan Category to for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans Losses Total Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Residential mortgage loans ... $ 1,710 37.98% $ 1,598 39.43% $ 1,464 45.83%
Commercial mortgage loans .... 4,696 21.76 5,436 20.44 4,695 19.25
Multi-family mortgage loans .. 906 4.85 992 4.73 993 4.83
Construction loans ........... 1,437 4.78 1,528 4.00 1,981 3.85
Mortgage warehouse loans ..... 1,663 7.57 2,612 8.33 1,155 3.39
Commercial loans ............. 2,067 7.83 2,281 7.02 1,744 6.15
Consumer loans ............... 3,206 15.23 3,615 16.05 3,805 16.70
Unallocated .................. 6,273 -- 3,847 -- 4,361 --
------- ------ ------- ------ ------- ------
Total ...................... $21,958 100.00% $21,909 100.00% $20,198 100.00%
======= ====== ======= ====== ======= ======
|
At December 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount of Loans in Amount of Loans in Amount of Loans in
Allowance Each Allowance Each Allowance Each
for Loan Category to for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans Losses Total Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Residential mortgage loans ... $ 1,627 46.57% $ 2,329 49.51% $ 1,474 55.76%
Commercial mortgage loans .... 4,795 20.44 3,918 17.70 3,121 13.93
Multi-family mortgage loans .. 1,047 5.09 864 5.22 722 4.63
Construction loans ........... 1,997 3.73 792 1.52 433 1.16
Mortgage warehouse loans ..... 477 2.52 855 5.04 361 2.55
Commercial loans ............. 1,675 4.50 1,171 4.04 1,294 3.66
Consumer loans ............... 3,551 17.15 3,500 16.97 2,855 18.31
Unallocated .................. 3,625 -- 3,952 -- 4,776 --
------- ------ ------- ------ ------- ------
Total ...................... $18,794 100.00% $17,381 100.00% $15,036 100.00%
======= ====== ======= ====== ======= ======
|
Investment Activities
General. Our investment policy is approved annually by the Board of Managers. The Chief Financial Officer and the Treasurer are authorized by the Board to implement the investment policy and establish investment strategies. The Chief Financial Officer, Treasurer and Assistant Treasurer are authorized to make investment decisions consistent with the investment policy. Investment transactions are reported to the Executive Committee of the Board of Managers on a monthly basis.
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
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
|
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%
======= ==== ======== ==== ======== ====
At June 30, 2002
-----------------------------------------
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%
======== ==== ======== ====
|
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
======== ======== ======== ======== ==========
|
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
Less Than One to Three Four Four to Five Years
One Year Two Years Years Years Five Years or More
--------- --------- ------- -------- ---------- ----------
(In thousands)
Rate:
1.00 to 2.00%... $ 33,018 $ 37 $ -- $ -- $ 10 $ --
2.01 to 3.00%... 622,054 4,929 -- -- -- 15
3.01 to 4.00%... 155,649 52,627 13,669 239 4,271 --
4.01 to 5.00%... 36,485 23,267 12,349 2,304 19,728 920
5.01 to 6.00%... 41,501 14,090 2,192 4,249 840 1,126
6.01 to 7.00%... 29,639 8,688 1,656 1,501 -- --
Over 7.01%... -- 6 20 -- -- 2
-------- -------- ------- ------ ------- ------
Total .... $918,346 $103,644 $29,886 $8,293 $24,849 $2,063
======== ======== ======= ====== ======= ======
At December 31,
------------------------------------
At
June 30,
2002 2001 2000 1999
---------- ---------- ---------- ----------
Rate:
1.00 to 2.00%... $ 33,065 $ 2,913 $ 9 $ --
2.01 to 3.00%... 626,998 270,298 18 646
3.01 to 4.00%... 226,455 363,796 114 6,078
4.01 to 5.00%... 95,053 194,786 40,498 401,848
5.01 to 6.00%... 63,998 154,084 588,850 592,970
6.01 to 7.00%... 41,484 66,632 404,155 9,838
Over 7.01%... 28 28 633 1,698
---------- ---------- ---------- ----------
Total .... $1,087,081 $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
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 ertain information as to our borrowings at the dates indicated.
At December 31,
At June 30, ------------------------------
2002 2001 2000 1999
----------- -------- -------- --------
(Dollars in thousands)
FHLB advances......................... $152,131 $144,664 $132,240 $145,270
FHLB line of credit................... -- -- 7,000 39,300
Securities sold under agreements to
repurchase......................... 42,794 51,103 40,663 32,071
-------- -------- -------- --------
Total borrowings................... $194,925 $195,767 $179,903 $216,641
======== ======== ======== ========
Weighted average interest rate of FHLB
advances........................... 5.14% 5.90% 6.11% 6.02%
Weighted average interest rate of FHLB
line of credit..................... N/A 5.50% 6.93% 5.77%
Weighted average interest rate of
securities sold under agreements to
repurchase......................... 1.58% 3.07% 4.21% 3.89%
|
Financial Management and Trust Services
The Provident Bank offers a full range of trust and financial management services primarily to individuals. These services include wealth management services, such as investment management and investment advisory accounts, as well as custody accounts. We also serve as trustee for living and testamentary trusts. Our trust officers also provide estate settlement services when The Provident Bank has been named executor or guardian of an estate. At June 30, 2002 the book value of assets under administration was $191.7 million and the number of accounts under administration was 507.
Subsidiary Activities
Provident Mortgage Corporation is a wholly-owned subsidiary of The Provident Bank. It was established as a New Jersey corporation to provide mortgage banking services as a successor to Residential Home Funding Corp., a mortgage company specializing in FHA-insured loans and VA-guaranteed loans and, to a lesser extent, alternative residential loan products. We acquired Residential Home Funding Corp. in July 2001. All loans originated by the mortgage company are sold to established investors with the loan servicing released.
Provident Investment Services, Inc. is a wholly-owned subsidiary of The Provident Bank. It was established as a New Jersey corporation to provide life, health, property and casualty insurance in the State of New Jersey and conducts non-deposit investment product and insurance sales.
Provident Title, LLC is a joint venture in which The Provident Bank has a 49% interest and Investor's Title Agency, Inc. has a 51% interest. Provident Title, LLC is licensed to sell title insurance in the State of New Jersey. It commenced business in October 2001.
PSB Funding Corporation is a majority owned subsidiary of The Provident Bank. It was established as a New Jersey corporation to engage in real estate activities (including the
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 48 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. The Provident Bank is in the process of assuming certain deposits and assets of two additional full-service branches in Ocean County, New Jersey, from another financial institution. This acquisition is subject to regulatory approval, which is anticipated during the third quarter of 2002. It is anticipated The Provident Bank will consolidate one of these branches with an existing branch. 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 20th Owned 1972 N/A $ 334.9
464-472 Avenue C
Bayonne, New Jersey 07002
Bayonne 26th Owned 1976 N/A $ 335.4
569 Broadway
Bayonne, New Jersey 07002
Belleville Owned 1973 N/A $ 408.8
208-218 Washington Street
Belleville, New Jersey 07109
Bergen/Harrison Owned 1960 N/A $ 250.4
533 Bergen Avenue
Jersey City, New Jersey 07304
Bergen Journal Square Leased 12/28/01 1/31/07 $ 55.8
895 Bergen Avenue
Jersey City, New Jersey 07306
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Original Year Date of
Leased or Leased or Lease
Location Owned Acquired Expiration Net Book Value
-------------------------------- --------- ------------- ---------- --------------
(In thousands)
Berkeley Leased 7/5/94 7/31/04 $ 105.8
Holiday Plaza 2
1 Plaza Drive
Toms River, New Jersey 08753
Bloomfield Owned 1960 N/A $1,069.4
11 Broad Street
Bloomfield, New Jersey 07003
Brick Township Leased 2/1/94 1/31/04 $ 78.8
1930 Route 88
Brick, New Jersey 08724
Bridgewater Leased 1/1/01 10/31/05 $ 464.7
715 Promenade Boulevard, Unit 2
Bridgewater, New Jersey 08807
Brookdale Owned 1968 N/A $ 609.2
1260 Broad Street
Bloomfield, New Jersey 07003
Clark Owned 1998 N/A $ 704.1
10 Westfield Avenue
Clark, New Jersey 07066
Denville Leased 6/1/99 5/31/04 $ 101.2
490 East Main Street
Denville, New Jersey 07834
Dumont Owned 1971 N/A $ 359.5
21 Washington Avenue
Dumont, New Jersey 07628
Dunellen Owned 1978 N/A $ 641.0
333 North Avenue
Dunellen, New Jersey 08812
East Brunswick Leased 11/1/84 9/30/11 $ 511.2
308 Rues Lane
East Brunswick, New Jersey 08816
East Windsor Owned 1978 N/A $ 454.6
Rte 130 & Dutch Neck Road
East Windsor, New Jersey 08520
Freehold (2) Leased 1996 5/31/10 $ 274.9
4331 Route 9 and Pond Road
Freehold, New Jersey 07728
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Original Year Date of
Leased or Leased or Lease
Location Owned Acquired Expiration Net Book Value
-------------------------------- --------- ------------- ---------- --------------
(In thousands)
Greenbrook Owned 1978 N/A $ 245.2
930 N. Washington Avenue
Green Brook, New Jersey 08812
Greenville Owned 1963 N/A $ 423.4
1553 Kennedy Boulevard
Jersey City, New Jersey 07305
Heights Owned 1964 N/A $1,312.1
3670 Kennedy Boulevard
Jersey City, New Jersey 07307
Hillsborough Owned 1992 N/A $ 962.5
425 Route 206
Hillsborough, New Jersey 08876
Hoboken Leased 5/12/95 5/31/05 $ 65.5
77 River Street
Hoboken, New Jersey 07030
Kearny Owned 1998 N/A $ 740.5
249 Kearney Avenue
Kearny, New Jersey 07032
Keyport Leased 11/12/98 11/30/03 $ 128.2
c/o Stop and Shop Supermarket
100 Highway 35
Keyport, New Jersey 07735
Lafayette Owned 1960 N/A $ 53.0
350 Communipaw Avenue
Jersey City, New Jersey 07304
Leonia Leased 2/1/72 1/31/07 $ 16.3
320-322 Broad Avenue
Leonia, New Jersey 07605
Main Leased 4/1/88 3/31/08 $ 139.8
239 Washington Street
Jersey City, New Jersey 07302
Manasquan Leased 3/1/00 2/28/07 $ 306.3
Highway 71 and 205 Main Street
Manasquan, New Jersey 08736
Monroe Leased 6/1/97 5/31/07 $ 145.9
170 Overlook Drive
Monroe, New Jersey 08343
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Original Year Date of
Leased or Leased or Lease
Location Owned Acquired Expiration Net Book Value
-------------------------------- --------- ------------- ---------- --------------
(In thousands)
Montgomery Leased 12/1/95 6/30/03 $ 75.1
2162 Route 206 South
Belle Mead, New Jersey 08502
Morris Plains Leased 2/1/88 1/31/06 $ 146.4
Routes 10 & 202
Morris Plains, New Jersey 07950
New Providence Owned 1996 N/A $1,223.0
65 South Street
New Providence, New Jersey 07974
Ocean Grove (2) Leased 1992 1/22/18 $ 162.7
40 Main Street
Ocean Grove, New Jersey 07756
Ocean Township Leased 4/1/98 3/31/18 $ 877.9
1502 Route 35 South
Ocean Township, New Jersey 07712
Oradell (3) Leased 7/1/97 6/30/02 $ 92.7
550 Kinderkamack Road
Oradell, New Jersey 07649
Piscataway Leased 3/15/99 3/31/04 $ 282.6
Centennial Square Shopping Plaza
1297 Centennial Avenue, Unit 1
Piscataway, New Jersey 08854
Point Pleasant Owned 2002 N/A $2,045.1
604-610 Laurel Avenue
Pt. Pleasant, New Jersey 08742
Roseland Leased 4/1/98 3/31/08 $ 95.9
161 Eagle Rock Avenue
Roseland, New Jersey 07068
South Freehold Leased 4/1/98 3/31/03 $ 24.3
3585 Route 9 North
Freehold, New Jersey 07728
South Orange Owned 1995 N/A $ 783.6
159 South Orange Avenue
South Orange, New Jersey 07079
Teaneck Leased 1/1/76 12/31/05 $ 123.5
464 Cedar Lane
Teaneck, New Jersey 07666
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Original Year Date of
Leased or Leased or Lease
Location Owned Acquired Expiration Net Book Value
-------------------------------- --------- ------------- ---------- --------------
(In thousands)
Toms River Leased 7/5/94 7/31/04 $ 155.2
Bellcrest Plaza
953 Fischer Boulevard
Toms River, New Jersey 08753
Union City Owned 1974 N/A $ 869.2
3720 Bergenline Avenue
Union City, New Jersey 07087
Wall Leased 11/15/86 11/30/11 $ 183.9
Route 35 & New Bedford Road
Wall Township, New Jersey 07719
West New York - 55th Street Owned 1970 N/A $1,019.0
5410 Bergenline Avenue
West New York, New Jersey 07093
West New York - 60th Street Owned 1971 N/A $ 542.8
6002 Broadway and 60th Street
West New York, New Jersey 07093
West New York - 62nd Street Owned 1985 N/A $ 574.0
6141 Bergenline Avenue
West New York, New Jersey 07093
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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.
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
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 files 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 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
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.
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.
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
. up to 45% of pretax net unrealized holding gains on available for sale equity securities with readily determinable fair market values.
Allowance for possible loan losses includible in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be included in total capital cannot exceed 100% of Tier 1 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution's exposure to declines in the economic value of a bank's capital due to changes in interest rates when assessing the bank's capital adequacy. Under such a risk assessment, examiners will evaluate a bank's capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. According to the agencies, applicable considerations include:
. the quality of the bank's interest rate risk management process;
. the overall financial condition of the bank; and
. the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold additional capital. The agencies also issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies' evaluation of interest rate risk in connection with capital adequacy.
The FDIC adopted regulations, effective April 1, 2002, establishing minimum regulatory capital requirements for equity investments in non-financial companies. The regulations apply a series of marginal capital charges that range from 8% to 25% depending upon the size of the aggregate equity investment portfolio of the banking organization relative to its Tier 1 capital. The capital charge would be applied by making a deduction, which would be based on the adjusted carrying value of the equity investment from the organization's Tier 1 capital. We do not believe this new capital requirement will have a material adverse effect upon our operations. However, we will have to take this requirement into consideration should we, at some point in the future, decide to invest in non-financial companies.
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% $403,700 12.89% $125,269 4.0%
Tier 1 risk-based capital ............ 279,979 13.84 403,700 19.66 82,124 4.0
Total risk-based capital ............. 301,937 14.93 425,658 20.73 164,248 8.0
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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
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
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.
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.
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
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. Under the Community Reinvestment Act, any insured depository institution, including The Provident Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the FDIC, in connection with its examination of a savings bank, to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications for additional branches and acquisitions.
Among other things, the current Community Reinvestment Act regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:
. a lending test, to evaluate the institution's record of making loans in its service areas;
. 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.
The Community Reinvestment Act requires the FDIC to provide a written evaluation of an institution's Community Reinvestment Act performance utilizing a four-tiered descriptive rating system and requires public disclosure of an institution's Community Reinvestment Act rating. The Provident Bank received a "satisfactory" rating in its Community Reinvestment Act examination conducted by the FDIC as of April 9, 1999.
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.
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%;
. 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 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-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 11th, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act 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, 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.
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";
. 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.
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. and The Provident Bank Who Are Not Directors."
Name Age(1) Position
----------------- ------ ------------------------------------------------------------
Paul M. Pantozzi 57 Chairman of the Board, Chief Executive Officer and President
Kevin J. Ward 53 Executive Vice President and Chief Operating Officer
Linda A. Niro 47 Senior Vice President and Chief Financial Officer
John F. Kuntz 46 General Counsel and Corporate Secretary
Kenneth J. Wagner 51 Senior Vice President-Investor Relations
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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 70. 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
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The Business Background of Our Directors. The business experience for the past five years of each of our directors is as follows:
Paul M. Pantozzi. Mr. Pantozzi has been the Chief Executive Officer and President of The Provident Bank since 1993 and Chairman since 1998.
J. Martin Comey. Mr. Comey is retired. He previously served as Vice President of the Schering Plough Corp. of Madison, New Jersey.
Geoffrey M. Connor. Mr. Connor is a practicing attorney and Partner in the Princeton, New Jersey office of the law firm of Reed Smith LLP.
Frank L. Fekete. Mr. Fekete is a certified public accountant and the Managing Partner of the accounting firm of Mandel, Fekete & Bloom, CPAs, located in Jersey City, New Jersey.
Carlos Hernandez. Mr. Hernandez is President of New Jersey City University, located in Jersey City, New Jersey.
William T. Jackson. Mr. Jackson is Executive Director of Bayview/New York Cemetery located in Jersey City, New Jersey.
David Leff. Mr. Leff is retired. He was previously a Partner in the law firm of Eichenbaum, Kantrowitz, Leff & Gulko, located in Paramus, New Jersey.
Arthur R. McConnell. Mr. McConnell is the President of McConnell Realty, located in Atlantic Highlands, New Jersey.
Edward O'Donnell. Mr. O'Donnell is President of Tradelinks Transport, Inc., a transportation consulting company located in Westfield, New Jersey. From March 1995 to July 1999, Mr. O'Donnell was a Director and Executive Vice President of NPR, Inc. (Navieras), a transportation company located in Edison, New Jersey.
Daniel T. Scott. Mr. Scott is the Chairman and Chief Executive Officer of Scott Printing Corp., located in New Providence, New Jersey, and of Unz & Co., Inc., Central Avenue Corporation and Scott On-Site, Inc.
Thomas E. Sheenan. Mr. Sheenan is the President of Sheenan Funeral Home located in Dunellen, New Jersey.
Meetings of the Board of Directors and Committees
Our Board of Directors meets on a monthly basis and may hold additional special meetings. During 2001, the Board of Managers of The Provident Bank held twelve regular meetings and one annual meeting.
The Board of Directors of Provident Financial Services, Inc. did not meet in 2001. Following the offering, the Board of Directors of Provident Financial Services, Inc. is expected to meet quarterly, or more often as may be necessary. The Board of Directors initially is expected to have a standing executive committee, compensation committee, audit committee and a nominating/corporate governance committee. Each of the compensation committee, audit committee and nominating/corporate governance committee will be comprised solely of independent directors within the meaning of the rules of the New York Stock Exchange. The Board of Directors may, by resolution, designate one or more additional committees.
The Board of Directors of The Provident Bank currently maintains an Executive Committee, Examining Committee (to be renamed the Audit Committee) and Managers Trust Committee.
The Executive Committee consists of Directors Comey, Jackson, Pantozzi, Scott and a fifth director that changes on a monthly basis, with Mr. Pantozzi serving as Chair. The Executive Committee exercises general control and supervision of all matters pertaining to The Provident Bank, subject at all times to the direction of the Board of Directors. The Executive Committee met twenty-nine times during the year ended December 31, 2001.
The Examining Committee consists of Directors Fekete, Leff, McConnell, O'Donnell and Sheenan, with Director Fekete serving as Chair. The Examining Committee reviews the annual audit prepared by the independent accountants, recommends the appointment of accountants,
reviews the internal audit function and reviews internal accounting controls. The Examining Committee met five times during the year ended December 31, 2001.
The Managers Trust Committee consists of Directors Hernandez, Connor and Pantozzi, as well as the Executive Vice President, Customer Management Group and the Vice President and Senior Trust Officer, with Director Hernandez serving as Chair. The Managers Trust Committee oversees the operations of the Trust Department of The Provident Bank. The Managers Trust Committee met four times during the year ended December 31, 2001.
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 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 is authorized to suspend payment if it is not deemed well capitalized by the FDIC or does not meet 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. For the year ended December 31, 2001, The Provident Bank paid $4,000 to former board members under this plan.
Voluntary Fee Deferral Plan for the Board of Managers. The Provident Bank maintains the Board of Managers Voluntary Fee Deferral Plan, a non-qualified plan which provides for the deferral of board fees by non-employee members of The Provident Bank's Board of Managers. Board members may elect to defer board fees to a future year as determined by that board member, so long as the distribution of such fees does not begin beyond the year of the board member's normal retirement date. Deferred fees are credited to an account established for the benefit of each participant which receives interest at the prevailing prime rate. A participating board member may receive the deferral payments pursuant to his election in a lump sum or over a three year period, except in the event of a change in control, death or disability, under which circumstances a lump sum payment shall be made. In connection with the conversion and offering, the plan has been amended to allow current board members a one-time election to invest their account balances in shares of Provident Financial Services, Inc. common stock. 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.
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 All Other
Compensation LTIP Compensation
Name and Principal Position Year Salary Bonus(2) (3) Payouts (4)
------------------------------ ---- -------- -------- ------------ ------- ------------
Paul M. Pantozzi 2001 $500,000 $375,000 $53,440 -- $51,503
Chairman, Chief Executive
Officer and President
Kevin J. Ward 2001 255,000 99,450 -- -- 31,302
Executive Vice President
and Chief Operating Officer
Glenn H. Shell 2001 225,000 92,250 -- -- 27,405
Executive Vice President,
Customer Management Group
Gregory French 2001 177,692/(1)/ 101,425 -- -- 27,202
Senior Vice President,
Market Development Group
C. Gabriel Haagensen 2001 185,000 50,413 -- -- 22,432
Executive Vice President,
Human Capital Management
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Employment Agreements
Provident Financial Services, Inc. will enter into employment agreements
with Messrs. Pantozzi, Ward and Shell. 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 so that the remaining term is thirty-six
months. If timely written 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 Provident Financial Services, Inc. terminates the
executive's employment for reasons other than for cause, 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, or (iii) a relocation where the
employee is required to perform services at a location more than 25 miles from
The Provident Bank's principal executive offices as of the effective date of the
employment agreement and be entitled to the severance benefits described above.
The agreement provides that following a change in control (as defined in the
agreement), the executive will receive the severance payments and insurance
benefits described above if he resigns during the one-year period following the
change in control or if he is terminated during the remaining term of the
employment agreement following the change in control. Messrs. Pantozzi, Ward and
Shell would receive an aggregate of $2,805,024, $1,109,250 and $992,250,
respectively, pursuant to their employment agreements upon a change in control
of Provident Financial Services, Inc., based upon current levels of
compensation.
Under each employment agreement, if an executive becomes disabled or incapacitated to the extent that the executive is unable to perform his duties, he will be entitled to 75% of his base salary and all comparable insurance benefits until the earlier of: (i) return to full-time employment; (ii) employment by another employer; (iii) age 65; or (iv) death. Upon retirement at age 65 or in accordance with any retirement policy established with his consent, the executive is entitled to benefits under such retirement policy and other plans to which he is a party but shall not be entitled to any benefit payments specifically as a result of the employment agreement.
Change in Control Agreements
Provident Financial Services, Inc. will enter into change in control agreements with six other officers including Messrs. Kuntz, French and Haagensen and Ms. Niro, which provide certain benefits in the event of a change in control of The Provident Bank or Provident Financial Services, Inc. Each of the change in control agreements provides for a term of 24 months. Commencing on each anniversary date, the Board of Directors may extend any change in control agreement for an additional year. The change in control agreements enable Provident Financial Services, Inc. to offer to designated officers certain protections against termination without cause in the event of a "change in control." For these purposes, a "change in control" is defined generally to mean: (i) approval by shareholders of a plan of reorganization, merger or consolidation of The Provident Bank or Provident Financial Services, Inc. where The Provident Bank or Provident Financial Services, Inc. is not the surviving entity; (ii) changes to the Board of Directors of The Provident Bank or Provident Financial Services, Inc. whereby individuals who constitute the current Board cease to constitute a majority of the Board, subject to certain exceptions; (iii) the acquisition of all or substantially all of the assets of Provident Financial Services, Inc. or the beneficial ownership of 20% or more of the voting securities of Provident Financial Services, Inc.; or (iv) a complete liquidation or dissolution of Provident Financial Services, Inc. or The Provident Bank or approval by the shareholders of Provident Financial Services, Inc. of a plan for such dissolution or liquidation. These protections against termination without cause in the event of a change in control are frequently offered by other financial institutions, and Provident Financial Services, Inc. may be at a competitive disadvantage in attracting and retaining key employees if it does not offer similar protections. Although the change in control agreements may have the effect of making a takeover more expensive to an acquiror, we believe that the benefits of enhancing our ability to attract and retain qualified management persons by offering the change in control agreements outweighs any disadvantage of such agreements.
Following a change in control of Provident Financial Services, Inc. or The Provident Bank, an officer is entitled to a payment under the change in control agreement if the officer's employment is involuntarily terminated during the term of such agreement, other than for cause, as defined, or if the officer voluntarily terminates employment during the term of such agreement for good reason. Good reason is 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 payments pursuant to the severance agreement, he will receive a cash payment up to a maximum of two 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 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 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.
In the event a non-married participant dies before his termination of service after both attaining age 55 and completing 20 years of service, his beneficiary will be entitled to one-half of the amount payable to the participant assuming the participant retired on the first day of the month following his death, and assuming that the beneficiary had been his spouse with a 50% joint and survivor benefit and that the beneficiary had been born on the same day as the participant. Payments made to beneficiaries of non-married participants cease upon the earlier of the beneficiary's death or the receipt of the 120th monthly payment.
If the total value of a pension payable directly to a participant or to any other beneficiary under the Pension Plan is less than $5,000, as determined by the Pension Plan's actuary, payment of such value shall automatically be made in a single sum in lieu of such pension.
The following table indicates the annual retirement benefit that would be payable under the Pension Plan 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.
Remuneration 15 20 25 30 35
--------------------- ------- ------- ------- ------- -------
$125,000 $13,164 $17,554 $21,943 $26,331 $26,331
150,000 16,289 21,720 27,151 32,581 32,581
175,000 19,414 25,886 32,359 38,831 38,831
200,000 and above(1) 22,539 30,054 37,568 45,081 45,081
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(1) 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.
Under the Pension Plan, 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.
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. 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, we intend to amend the Supplemental Executive Savings Plan 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 may also require 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.
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. Provident Financial Services, Inc. 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, are eligible to participate. 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 four years of credited service but will vest entirely upon completion of five years of credited service. 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 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.
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.
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 aggregate price of the shares of common stock to be issued in the conversion will be between $361,486,640 and $485,870,000, 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.
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 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 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 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 will have a pro rata interest in the total liquidation account for the account holder's deposit accounts based on the proportion that the aggregate balance of such person's qualifying deposit accounts on March 31, 2001 (the eligibility record date) bears to the aggregate balance of all qualifying deposit accounts of all eligible account holders. For this purpose, qualifying deposit accounts include all savings, time, demand, interest bearing demand, money market and passbook accounts maintained at The Provident Bank (excluding any escrow accounts).
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 March 31, 2001 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 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.
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 certain federal tax matters that are material to the conversion. The opinion is based, in part, on factual representations made by us. With regard to the conversion, Luse Gorman Pomerenk & Schick, P.C. has opined as follows:
1. No gain or loss will be recognized by The Provident Bank in its mutual or stock form by reason of the conversion;
2. No gain or loss will be recognized by The Provident Bank or Provident Financial Services, Inc. on the receipt by The Provident Bank of money from Provident Financial Services, Inc. in exchange for shares of The Provident Bank's capital stock or by Provident Financial Services, Inc. upon the receipt of money from the sale of its common stock;
3. The basis of the assets of The Provident Bank in the stock form will be the same as immediately prior to the conversion;
4. The holding period of the assets of The Provident Bank in the stock form will include the holding period of The Provident Bank in the mutual form;
5. No gain or loss will be recognized by The Provident Bank's account holders upon the issuance to them of accounts in The Provident Bank immediately after the conversion, in the same dollar amounts and on the same terms and conditions as their accounts at The Provident Bank in its mutual form, plus an interest in the liquidation account;
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 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) above is based on the position that subscription rights to be received by eligible account holders do not have any economic value at the time of distribution or at the time the subscription rights are exercised. In that regard, Luse Gorman Pomerenk & Schick, P.C. 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. The firm also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Luse Gorman 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, the issue of whether or not the nontransferable subscription rights have value 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.
We also have received advice from KPMG, LLP that the New Jersey State income tax consequences of the proposed transaction are consistent with the federal income tax consequences.
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.
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 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 36,148,664, 42,500,000 and 48,587,000 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 3.95% 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 $361.5 million, $425.0 million and $485.9 million with the foundation, as compared with $374.0 million, $440.0 million and $506.0 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 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;
(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.
The Stock Offering
Provident Financial Services, Inc. is offering between 34,493,000 and 46,667,000 shares of the common stock (subject to adjustment to up to 53,667,050) 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; and (iii) 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 _____ __, 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. RP Financial will receive a fee of $100,000, which amount does not include a fee of $20,000 to be paid to RP Financial for assistance in the preparation of a business plan. We have agreed to indemnify RP Financial and its employees and affiliates against certain losses (including any losses in connection with claims under the federal securities laws) arising out of its services as appraiser, except where RP Financial's liability results from its negligence or bad faith.
The independent valuation was prepared by RP Financial in reliance upon the information contained in the prospectus, including the financial statements. RP Financial 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;
. a comparative evaluation of the operating and financial statistics of The Provident Bank with those of other publicly traded bank holding companies;
. the aggregate size of the offering;
. the impact of the conversion on our stockholders' equity and earnings potential;
. the proposed dividend policy of Provident Financial Services, Inc.; and
. the trading market for securities of comparable institutions and general conditions in the market for such securities.
Two of the factors 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. The P/E ratio represents the price per share of stock divided by earnings, or net income, per share. The P/E ratio and the price-to-book ratio constitute pro forma information calculated using the assumptions under "Pro Forma Data."
On the basis of the foregoing, RP Financial advised us that as of August 2, 2002, the estimated pro forma market value of the common stock ranged from a minimum of $361,486,640 to a maximum of $485,870,000, with a midpoint of $425,000,000 (the estimated valuation range). 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 34,493,000 shares to 46,667,000 shares, with a midpoint of 40,580,000
shares. In addition, up to 1,920,000 shares, are being contributed to the charitable foundation as part of the conversion.
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.
Following commencement of the subscription offering, the maximum of the estimated valuation range may be increased by up to 15%, to up to $536,670,500, which will result in a corresponding increase in the maximum of the offering range to up to 53,667,050 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 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 $536,670,500 and a corresponding increase in the offering range to more than 53,667,050 shares, or a decrease in the minimum of the estimated valuation range to less than $361,486,640 and a corresponding decrease in the offering range to fewer than 34,493,000 shares, then Provident
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 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; and
(3) Employees, officers and directors of The Provident Bank who are not depositors entitled to purchase shares in category (1) 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 (46,667,000 shares), a depositor had $25,000 on deposit as of March 31, 2001, and there were $1.0 billion of qualifying 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) $466,670 of common stock, which is one-tenth of one percent of a $466,670,000 offering; and
(iii) $17,500 of common stock, or 1,750 shares, which is the product of: 15
x (46,667,000 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. In the event the number of shares sold is increased above the maximum of the estimated valuation range, the ESOP shall have a priority right to purchase any shares exceeding that amount up to 8% of the common stock. If the ESOP's subscription is not filled in its entirety, the employee stock ownership plan may purchase shares in the open market or may purchase shares directly from Provident Financial Services, Inc.
Priority 3: Employees, officers and directors. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by eligible account holders and the tax-qualified employee plans, and subject to the maximum purchase limitations, each employee, officer and director who is not an eligible depositor in category (1) above will receive a nontransferable subscription right to purchase up to $500,000 of common stock (50,000 shares).
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.
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.
Public Offering Alternative
As an alternative to a syndicated community offering, we may offer for sale shares of common stock not sold in the subscription offering, the community offering or the syndicated community offering to or through underwriters. Certain provisions restricting the purchase and transfer of common stock shall not be applicable to sales to underwriters for purposes of such public offering. Any underwriter shall agree to purchase such shares from Provident Financial Services, Inc. with a view to reoffering them to the general public, subject to certain terms and conditions described in the plan of conversion. If the public offering is utilized, then Provident Financial Services, Inc. will amend the registration statement filed with the Securities and Exchange Commission, of which this prospectus is a part, to reflect the specific terms of such public offering alternative, including, without limitation, the terms of any underwriting agreements, commission structure and plan of distribution.
Procedure For Purchasing Shares
Prospectus Delivery. To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date, prospectuses may not be mailed any later than five days prior to such date or be hand delivered any later than two days prior to such date. Order forms may only be distributed with a prospectus.
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.
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.
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.
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.
Plan of Distribution and Marketing Arrangements
Offering materials have been distributed to certain persons by mail, with additional copies made available through our conversion center and Sandler O'Neill & Partners, L.P. 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. 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 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. Sandler O'Neill & Partners, L.P. will assist us in the offering as follows: (i) in training and educating our employees regarding the mechanics and regulatory requirements of the offering; (ii) in conducting informational meetings for employees, customers and the general public; (iii) in coordinating the selling efforts in our local communities; and (iv) in soliciting orders for common stock. 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. 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.
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 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.
The term "associate" is used above to indicate any of the following relationships with a person:
. any corporation or organization, other than Provident Financial Services, Inc. or The Provident Bank or a majority-owned subsidiary of Provident Financial Services, Inc. or The Provident Bank, of which the person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity security;
. any trust or other estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or in a similar fiduciary capacity; and
. the parents, spouse, sisters, brothers or children of such person, and anyone married to the foregoing.
As used above, the term "acting in concert" means:
. knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement;
. a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise; or
. 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. In addition, under NASD guidelines, members of the NASD and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities.
We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for shares reside. However, no shares will be offered or sold under the plan of conversion to any person who resides in a foreign country or resides in a state of the United States in which a small number of persons otherwise eligible to subscribe for shares under the plan of conversion reside or as to which we determine that compliance with the securities laws of the state would be impracticable for reasons of cost or otherwise, including, but not limited to, a requirement that we (including any of our officers, directors or employees) register, under the securities laws of the state, as a broker, dealer, salesman or agent. No payments will be made in lieu of the granting of subscription rights to any person.
Restrictions on Sale of Stock by Directors and Officers
All shares of the common stock purchased by our directors and executive officers in the offering will be subject to the restriction that such shares may not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares (i) following the death of the original purchaser or (ii) by reason of an exchange of securities in connection with a merger or acquisition approved by the applicable regulatory authorities. 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
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 1.40%, 1.19%, 1.04%, and 0.90% 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
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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 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:
(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.
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:
(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 Restrictions
Federal Change in Bank Control Act. Federal law provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a bank holding company unless the Federal Reserve Board has been given 60 days prior written notice. For this purpose, the term "control" means the acquisition of the ownership, control or holding of the power to vote 25% or more of any class of a bank holding company's voting stock, and the term "person" includes an individual, corporation, partnership, and various other entities. In addition, an acquiring person is presumed to acquire control if the person acquires the ownership, control or holding of the power to vote of 10% or more of any class of the holding company's voting stock if (a) the bank holding company's shares are registered pursuant to Section 12 of the Exchange Act or (b) no other person will own, control or hold the power to vote a greater percentage of that class of voting securities. Accordingly, the prior approval of the Federal Reserve Board would be required before any person could acquire 10% or more of the common stock of Provident Financial Services, Inc.
The Federal Reserve Board may prohibit an acquisition of control if:
. it would result in a monopoly or substantially lessen competition;
. the financial condition of the acquiring person might jeopardize the financial stability of the institution; or
. the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by such person.
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 36,148,664 and 48,587,000 shares, with an adjusted maximum of 55,587,050 shares, of common stock, including shares contributed to the foundation, and no shares of preferred stock in the conversion. Each share of the common stock will have the same relative rights as, and will be identical in all respects with, each other share of the common stock, except as noted otherwise in this prospectus. Upon payment of the purchase price for the common stock, in accordance with the plan of conversion, all such stock will be duly authorized, fully paid, validly issued, and non-assessable.
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 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 nonassessable.
Preferred Stock. None of the 50,000,000 authorized shares of preferred stock of Provident Financial Services, Inc. will be issued in the conversion. Provident Financial Services, Inc.'s Board of Directors is authorized, without stockholder approval, to issue serial preferred stock and to fix and state voting powers, designations, preferences or other special rights of such shares. If and when issued, the serial preferred stock may rank senior to the common stock as to dividend rights, liquidation preferences, or both, and may have full, limited or no voting rights. Accordingly, the issuance of preferred stock could adversely affect the voting and other rights of holders of common stock.
TRANSFER AGENT AND REGISTRAR
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.
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.
You may obtain a copy of 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.
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.
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
March 20, 2002
|
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.
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.
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.
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 5 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.
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)
46,667,000 Shares Common Stock
(Subject to Increase to up to 53,667,050 Shares)
PROSPECTUS
Sandler O'Neill & Partners, L.P.
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)........................................... 51,141
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 (1)......................... 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 ............................................................. $8,201,135
==========
----------
|
(1) Actual expenses based upon the registration and sale of 55,587,050 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 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 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick
8.2 Form of 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
10.6 Supplemental Executive Savings Plan
10.7 Retirement Plan for the Board of Managers of The Provident Bank
10.8 Board of Managers Voluntary Fee Deferral Plan
10.9 Voluntary Bonus Deferral Plan for the Chairman
10.10 Voluntary Bonus Deferral Plan
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 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
----------
|
* To be filed supplementally or by amendment. ** Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T.
(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 August 16, 2002.
Provident Financial Services, Inc.
By: /s/ Paul M. Pantozzi
-------------------------------------
Paul M. Pantozzi
Chief Executive Officer and President
(Duly Authorized Representative)
|
POWER OF ATTORNEY
We, the undersigned directors and officers of Provident Financial Services, Inc. (the "Company") hereby severally constitute and appoint Paul M. Pantozzi as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said Paul M. Pantozzi may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company's Common Stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said Paul M. Pantozzi shall do or cause to be done by virtue thereof.
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 August 16, 2002
----------------------------- Officer and President (Principal
Paul M. Pantozzi Executive Officer)
/s/ Linda A. Niro Senior Vice President and Chief August 16, 2002
----------------------------- Financial Officer (Principal
Linda A. Niro Financial and Accounting Officer)
/s/ J. Martin Comey Director August 16, 2002
-----------------------------
J. Martin Comey
/s/ Geoffrey M. Connor Director August 16, 2002
-----------------------------
Geoffrey M. Connor
/s/ Frank L. Fekete Director August 16, 2002
-----------------------------
Frank L. Fekete
|
/s/ Carlos Hernandez Director August 16, 2002 ----------------------------- Carlos Hernandez /s/ William T. Jackson Director August 16, 2002 ----------------------------- William T. Jackson /s/ David Leff Director August 16, 2002 ----------------------------- David Leff /s/ Arthur R. McConnell Director August 16, 2002 ----------------------------- Arthur R. McConnell /s/ Edward O' Donnell Director August 16, 2002 ----------------------------- Edward O'Donnell /s/ Daniel T. Scott Director August 16, 2002 ----------------------------- Daniel T. Scott /s/ Thomas E. Sheenan Director August 16, 2002 ----------------------------- Thomas E. Sheenan |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
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 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 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick
8.2 Form of 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
10.6 Supplemental Executive Savings Plan
10.7 Retirement Plan for the Board of Managers of The Provident Bank
10.8 Board of Managers Voluntary Fee Deferral Plan
10.9 Voluntary Bonus Deferral Plan for the Chairman
10.10 Voluntary Bonus Deferral Plan
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 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
----------
|
* To be filed supplementally or by amendment. ** Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T.
Exhibit 1.1
[LETTERHEAD OF SANDLER O'NEILL & PARTNERS, L.P.]
May 1, 2002
The Provident Bank
830 Bergen Avenue
Jersey City, NJ 07306
Attention: Mr. Kevin J. Ward
Executive Vice President and Chief Operating Officer
Ladies and Gentlemen:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") is pleased to act as an independent financial advisor to The Provident Bank (the "Bank") in connection with the Bank's proposed conversion from mutual to stock form (the "Conversion"), including the offer and sale of certain shares of the common stock of the proposed new holding company for the Bank (the "Holding Company") to the Bank's eligible account holders in a Subscription Offering, to members of the Bank's community in a Direct Community Offering and, under certain circumstances, to the general public in a Syndicated Community Offering (collectively, the "Offerings"). For purposes of this letter, the term "Actual Purchase Price" shall mean the price at which the shares of the Holding Company's common stock are sold in the Conversion. This letter is to confirm the terms and conditions of our engagement.
ADVISORY SERVICES
Sandler O'Neill will act as a consultant and advisor to the Bank and the Holding Company and will work with the Bank's management, counsel, accountants and other advisors in connection with the Conversion and the Offerings. We anticipate that our services will include the following, each as may be necessary and as the Bank may reasonably request:
1. Consulting as to the securities marketing implications of any aspect of the Plan of Conversion or related corporate documents;
2. Reviewing with the Board of Managers the financial and securities marketing implications of the independent appraiser's appraisal of the common stock;
3. Reviewing all offering documents, including the Prospectus, stock order forms and related offering materials (it being understood that preparation and filing of such
The Provident Bank
May 1, 2002
documents will be the responsibility of the Bank and the Holding Company and their counsel);
4. Assisting in the design and implementation of a marketing strategy for the Offerings;
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting Bank management in scheduling and preparing for meetings with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be requested to promote the successful completion of the Conversion.
SYNDICATED COMMUNITY OFFERING
If any shares of the Holding Company's common stock remain available after the expiration of the Subscription Offering and the Direct Community Offering, at the request of the Bank and subject to the continued satisfaction of the conditions set forth in the second paragraph under the caption "Definitive Agreement" below, Sandler O'Neill will seek to form a syndicate of registered dealers to assist in the sale of such common stock in a Syndicated Community Offering on a best efforts basis, subject to the terms and conditions set forth in a selected dealers agreement. Sandler O'Neill will endeavor to limit the aggregate fees to be paid by the Bank under any such selected dealers agreement to an amount competitive with gross underwriting discounts charged at such time for underwritings of comparable amounts of stock sold at a comparable price per share in a similar market environment, which shall not exceed 5.5% of the aggregate Actual Purchase Price of the shares sold under such agreements. Sandler O'Neill will endeavor to distribute the common stock among dealers in a fashion which best meets the distribution objectives of the Bank and the requirements of the Plan of Conversion, which may result in limiting the allocation of stock to certain selected dealers. It is understood that in no event shall Sandler O'Neill be obligated to act as a selected dealer or to take or purchase any shares of the Holding Company's common stock.
FEES
If the Conversion is consummated, the Bank agrees to pay Sandler O'Neill for its services hereunder the fees set forth below:
1. a fee of one percent (1.0%) of the aggregate Actual Purchase Price of the shares of common stock sold in the Subscription Offering and Direct Community Offering,
The Provident Bank
May 1, 2002
excluding in each case shares (i) purchased by any employee benefit plan of the Holding Company or the Bank established for the benefit of their respective directors, officers and employees, (ii) purchased by any director, officer or employee of the Holding Company or the Bank or members of their immediate families, and (iii) contributed to any charitable foundation established by the Bank in connection with the Conversion; and
2. with respect to any shares of the Common Stock sold by an NASD
member firm (including Sandler O'Neill) under any selected
dealers agreement in the Syndicated Community Offering, (a) the
sales commission payable to the selected dealer under such
agreement, (b) any sponsoring dealer's fees, and (c) a management
fee to Sandler O'Neill of one percent (1.00%), which fees in (a),
(b) and (c) in the aggregate shall not exceed 5.5% of the
aggregate Actual Purchase Price of the shares sold under such
agreements.
If (i) Sandler O'Neill's engagement hereunder is terminated for any of the reasons provided for under the second paragraph of the section of this letter captioned "Definitive Agreement," or (ii) the Conversion is terminated by the Bank, no fees shall be payable by the Bank to Sandler O'Neill hereunder; however, the Bank shall reimburse Sandler O'Neill for its reasonable out-of-pocket expenses (including legal fees and expenses) incurred in connection with its engagement hereunder.
All fees payable to Sandler O'Neill hereunder shall be payable in cash at the time of the closing of the Conversion. In recognition of the long lead times involved in the conversion process, the Bank agrees to make an advance payment to Sandler O'Neill in the amount of $50,000, which shall be payable upon execution of this letter and which shall be credited against any fees or reimbursement of expenses payable hereunder.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill hereunder and the expenses to be borne by the Bank pursuant to the following paragraph, the Bank agrees to reimburse Sandler O'Neill, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, regardless of whether the Conversion is consummated, including, without limitation, legal fees and expenses, promotional, syndication, and travel expenses, up to an aggregate maximum of $75,000; provided, however, that Sandler O'Neill shall document such expenses to the reasonable satisfaction of the Bank. The provisions of this paragraph are not intended to apply to or in any way impair the indemnification provisions of this letter.
As is customary, the Bank will bear all other expenses incurred in connection with the
The Provident Bank
May 1, 2002
Conversion and the Offerings, including, without limitation, (i) the cost of obtaining all securities and bank regulatory approvals, including any required NASD filing fees; (ii) the cost of printing and distributing the offering materials; (iii) the costs of blue sky qualification (including fees and expenses of blue sky counsel) of the shares in the various states; (iv) listing fees; and (v) all fees and disbursements of the Bank's and the Holding Company's counsel, accountants, conversion agent and other advisors. In the event Sandler O'Neill incurs any such fees and expenses on behalf of the Bank or the Holding Company, the Bank will reimburse Sandler O'Neill for such fees and expenses whether or not the Conversion is consummated; provided, however, that Sandler O'Neill shall not incur any substantial expenses on behalf of the Bank or the Holding Company pursuant to this paragraph without the prior written approval of the Bank.
DUE DILIGENCE REVIEW
Sandler O'Neill's obligation to perform the services contemplated by this letter shall be subject to the satisfactory completion of such investigation and inquiries relating to the Bank and the Holding Company, and their respective directors, officers, agents and employees, as Sandler O'Neill and its counsel in their sole discretion may deem appropriate under the circumstances. In this regard, the Bank agrees that, at its expense, it will make available to Sandler O'Neill all information which Sandler O'Neill reasonably requests, and will allow Sandler O'Neill the opportunity to discuss with the Bank's and the Holding Company's management the financial condition, business and operations of the Bank and the Holding Company. The Bank and the Holding Company acknowledge that Sandler O'Neill will rely upon the accuracy and completeness of all information received from the Bank and the Holding Company and their directors, managers, officers, employees, agents, independent accountants and counsel.
BLUE SKY MATTERS
Sandler O'Neill and the Bank agree that the Bank's counsel shall serve as counsel with respect to blue sky matters in connection with the Offerings, and that the Bank will cause such counsel to prepare a Blue Sky Memorandum related to the Offerings including Sandler O'Neill's participation therein and shall furnish Sandler O'Neill a copy thereof addressed to Sandler O'Neill or upon which such counsel shall state Sandler O'Neill may rely.
CONFIDENTIALITY
Other than disclosure to other firms made part of any syndicate of selected dealers or as required by law or regulation or legal process, Sandler O'Neill agrees that it will treat as confidential
The Provident Bank
May 1, 2002
all material, non-public information relating to the Bank obtained in connection with its engagement hereunder (the "Confidential Information"), whether or not the Conversion is consummated. As used in this paragraph, the term "Confidential Information" shall not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by Sandler O'Neill, (ii) was available to Sandler O'Neill on a non-confidential basis prior to its disclosure to Sandler O'Neill by the Bank, or (iii) becomes available to Sandler O'Neill on a non-confidential basis from a person other than the Bank who is not otherwise known to Sandler O'Neill to be bound not to disclose such information pursuant to a contractual, legal or fiduciary obligation.
INDEMNIFICATION
Since Sandler O'Neill will be acting on behalf of the Bank and the Holding Company in connection with the Conversion and the Offerings, the Holding Company and the Bank agree to indemnify and hold Sandler O'Neill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 (Sandler O'Neill and each such person being an "Indemnified Party") harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the Conversion or the Offerings or the engagement of Sandler O'Neill pursuant to, or the performance by Sandler O'Neill of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable legal fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party; provided, however, that the Bank and the Holding Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (i) arises out of or is based upon any untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make not misleading any statements contained in any final proxy statement or prospectus, or any amendment or supplement thereto, or any of the applications, notices, filings or documents related thereto made in reliance on and in conformity with written information furnished to the Bank by Sandler O'Neill expressly for use therein, or (ii) is primarily attributable to the gross negligence or bad faith of Sandler O'Neill.
If indemnification is to be sought hereunder by an Indemnified Party, then such Indemnified Party shall promptly notify the Bank of the commencement of any action or proceeding or investigation in respect thereof but failure to so notify the Bank shall not relieve the Bank from any liability which it may have otherwise than on account of this agreement. The Bank shall be entitled to assume the defense of any action for which indemnification is sought hereunder with counsel of its choice at its expense (in which case it shall not thereafter be responsible for the fees and expenses
The Provident Bank
May 1, 2002
of any separate counsel retained by Sandler O'Neill or any other Indemnified
Party except as set forth below); provided, however, that such counsel shall be
satisfactory to Sandler O'Neill in the exercise of its reasonable judgment.
Notwithstanding the Bank's election to assume the defense of such action,
Sandler O'Neill or any other Indemnified Party shall have the right to employ
separate counsel and to participate in the defense of such action and the Bank
shall bear the reasonable fees, costs and expenses of such separate counsel if
(i) the use of such counsel chosen by the Bank to represent Sandler O'Neill or
any other Indemnified Party would present such counsel with a conflict of
interest (in which case the Bank shall not have the right to assume the defense
of such action on Sandler O'Neill's or the Indemnified Party's behalf); (ii) the
actual or potential defendants in, or targets of, any such action include both
the Bank and Sandler O'Neill, and Sandler O'Neill shall have reasonably
concluded that there may be legal defenses available to Sandler O'Neill or the
Indemnified Party which are different from or additional to those available to
the Bank (in which case the Bank shall not have the right to assume the defense
of such action on Sandler O'Neill's or the Indemnified Party's behalf); (iii)
the Bank shall not have employed counsel reasonably satisfactory to Sandler
O'Neill to represent Sandler O'Neill or the Indemnified Party within a
reasonable time after notice of the institution of such action; or (iv) the Bank
shall authorize in writing Sandler O'Neill or any other Indemnified Party to
employ separate counsel at the Bank's expense. It is expressly understood that
the Bank shall only be obligated to pay for one separate counsel (in addition to
any required local counsel) in any one action or proceeding or group of related
actions or proceedings for all Indemnified parties collectively. The Bank will
not be liable under this letter agreement for any amount paid by Sandler O'Neill
or any other Indemnified Party to settle any claims or actions if the settlement
is entered into without the Bank's consent, which shall not be unreasonably
withheld.
DEFINITIVE AGREEMENT
Sandler O'Neill and the Bank agree that (a) except as set forth in clause (b), the foregoing represents the general intention of the Bank and Sandler O'Neill with respect to the services to be provided by Sandler O'Neill in connection with the Offerings, which will serve as a basis for Sandler O'Neill commencing activities, and (b) the only legal and binding obligations of the Bank, the Holding Company and Sandler O'Neill with respect to the subject matter hereof shall be (1) the Bank's obligation to reimburse costs and expenses pursuant to the section captioned "Costs and Expenses," (2) those set forth under the captions "Confidentiality" and "Indemnification," and (3) as set forth in a duly negotiated and executed definitive Agency Agreement to be entered into prior to the commencement of the Subscription Offering relating to the services of Sandler O'Neill in connection with the Offerings. Such Agency Agreement shall be in form and content satisfactory to Sandler O'Neill, the Bank and the Holding Company and their respective counsel and shall contain standard indemnification provisions consistent herewith.
The Provident Bank
May 1, 2002
Sandler O'Neill's execution of such Agency Agreement shall also be
subject to (i) Sandler O'Neill's satisfaction with its investigation of the
Bank's business, financial condition and results of operations, (ii) preparation
of offering materials that are satisfactory to Sandler O'Neill and its counsel,
(iii) compliance with all relevant legal and regulatory requirements to the
reasonable satisfaction of Sandler O'Neill's counsel, (iv) agreement that the
price established by the independent appraiser is reasonable and (v) market
conditions at the time of the proposed offering. Sandler O'Neill may terminate
this agreement if such Agency Agreement is not entered into prior to March 31,
2003.
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler O'Neill the duplicate copy of this letter enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Thomas P. Duke
-----------------------------------------
Thomas P. Duke
Vice President
|
Accepted and agreed to as of
the date first above written:
The Provident Bank
By: /s/ Kevin J. Ward
-------------------------------
Kevin J. Ward
Executive Vice President and Chief Operating Officer
|
[LETTERHEAD OF SANDLER O'NEILL & PARTNERS, L.P.]
May 1, 2002
Mr. Kevin J. Ward
Executive Vice President and Chief Operating Officer
The Provident Bank
830 Bergen Avenue
Jersey City, NJ 07306
Dear Mr. Ward:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") is pleased to act as conversion agent for The Provident Bank (the "Bank") in connection with the Bank's proposed conversion from mutual to stock form (the "Conversion"). This letter is to confirm the terms and conditions of our engagement.
SERVICES AND FEES
In our role as Conversion Agent, we anticipate that our services will include the services outlined below, each as may be necessary and as the Bank may reasonably request:
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
V. Subscription Services
Each of these services is further described in Appendix A to this agreement.
For its services hereunder, the Bank agrees to pay Sandler O'Neill a fee of $100,000. This fee is based upon the requirements of current regulations and the Plan of Conversion as currently contemplated and an uncontested solicitation of proxies. Any unusual or additional items or duplication of service required as a result of a material change in the regulations or the Plan of
Mr. Kevin J. Ward
May 1, 2002
Conversion, any opposition to the proxy solicitation by a third party or a material delay or other similar events may result in extra charges which will be covered in a separate agreement if and when they occur.
All fees under this agreement shall be payable in cash, as follows: (a) $10,000 payable upon execution of this agreement by the Bank, which shall be non-refundable; and (b) the balance upon the completion of the Conversion.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill hereunder, the Bank agrees to reimburse Sandler O'Neill, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder regardless of whether the Conversion is consummated, including, without limitation, travel, lodging, food, telephone, postage, listings, forms and other similar expenses, up to a maximum of $10,000; provided, however, that Sandler O'Neill shall document such expenses to the reasonable satisfaction of the Bank. The provisions of this paragraph are not intended to apply to or in any way impair the indemnification provisions of this agreement. It is understood that all out-of-pocket and overhead expenses associated with the operation of the Conversion Center will be borne by the Bank.
RELIANCE ON INFORMATION PROVIDED
The Bank will provide Sandler O'Neill with such information as Sandler O'Neill may reasonably require to carry out its duties. The Bank recognizes and confirms that Sandler O'Neill (a) will use and rely on such information in performing the services contemplated by this agreement without having independently verified the same, and (b) does not assume responsibility for the accuracy or completeness of the information. The Bank will also inform Sandler O'Neill within a reasonable period of time of any changes in the Plan which require changes in Sandler O'Neill's services. If a substantial expense results from any such change, the parties shall negotiate an equitable adjustment in the fee.
LIMITATIONS
Sandler O'Neill, as Conversion Agent hereunder, (a) shall have no duties or obligations other than those specifically set forth herein; (b) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any order form or any stock certificates or the shares represented thereby, and will not be required to and will make no
Mr. Kevin J. Ward
May 1, 2002
representations as to the validity, value or genuineness of the offer; (c) shall
not be liable to any person, firm or corporation including the Bank by reason of
any error of judgment or for any act done by it in good faith, or for any
mistake of law or fact in connection with this agreement and the performance
hereof unless caused by or arising out of its own bad faith or gross negligence;
(d) will not be obliged to take any legal action hereunder which might in its
judgment involve any expense or liability, unless it shall have been furnished
with reasonable indemnity satisfactory to it; and (e) may rely on and shall be
protected in acting in reliance upon any certificate, instrument, opinion,
notice, letter, telex, telegram, or other document or security delivered to it
and in good faith believed by it to be genuine and to have been signed by the
proper party or parties.
Anything in this agreement to the contrary notwithstanding, in no event shall Sandler O'Neill be liable to the Bank for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if Sandler O'Neill has been advised of the likelihood of such loss or damage and regardless of form of action.
INDEMNIFICATION
The Bank agrees to indemnify and hold Sandler O'Neill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons (Sandler O'Neill and each such person being an "Indemnified Party") harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the engagement of Sandler O'Neill pursuant to, and the performance by Sandler O'Neill of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party. The Bank will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted primarily from Sandler O'Neill's bad faith or gross negligence.
MISCELLANEOUS
The following addresses shall be sufficient for written notices to each other:
If to you: The Provident Bank
830 Bergen Avenue
Jersey City, NJ 07306
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Mr. Kevin J. Ward
May 1, 2002
Page 4
Attention: Mr. Kevin J. Ward
with a copy to: John F. Kuntz, Esq.
General Counsel
The Provident Bank
830 Bergen Avenue
Jersey City, NJ 07306
If to us: Sandler O'Neill & Partners, L.P.
919 Third Avenue, 6/th/ Floor
New York, New York 10022
Attention: Ms. Catherine A. Lawton
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The Agreement and appendix hereto constitute the entire Agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties. This Agreement is governed by the laws of the State of New York.
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler O'Neill the duplicate copy of this letter enclosed herewith.
Very truly yours, Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Thomas P. Duke
---------------------------------
Thomas P. Duke
Vice President
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Accepted and agreed to as of
the date first above written:
The Provident Bank
By: /s/ Kevin J. Ward
-----------------------------------
Kevin J. Ward
Executive Vice President and
Chief Operating Officer
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APPENDIX A
OUTLINE OF CONVERSION AGENT SERVICES
I. Consolidation of Accounts
1. Consolidate files in accordance with regulatory guidelines.
2. Accounts from various files are all linked together. The resulting
central file can then be maintained on a regular basis.
3. Our EDP format will be provided to your data processing people.
II. Proxy/Order Form/Request Card Preparation
1. Vote calculation.
2. Any combination of proxies, request cards and stock order forms for
voting and ordering stock.
3. Target group identification for subscription offering.
III. Organization and Supervision of Conversion Center
1. Advising on and supervising the physical organization of the
Conversion Center, including materials requirements.
2. Assist in the training of all Bank personnel who will be staffing the
conversion center.
3. Establish reporting procedures.
4. On-site supervision of the Conversion Center during the
solicitation/offering period.
IV. Special Meeting Services *
1. Direct proxy solicitation.
2. Proxy and ballot tabulation.
3. Act as or support inspector of election, it being understood that
Sandler O'Neill will not act as inspector of election in the case of
a contested election.
4. Delete voting record date accounts closed prior to special meeting.
5. Produce final report of vote.
* To the extent independent third parties are required by any regulatory agency to perform such services, it is understood and agreed that Sandler O'Neill will subcontract for such services and that the Bank will reimburse Sandler O'Neill for such reasonable fees and expenses incurred as a result of such regulatory requirement.
V. Subscription Services
1. Produce list of depositors by state (Blue Sky report).
2. Production of subscription rights and research books.
3. Stock order form processing.
4. Acknowledgment letter to confirm receipt of stock order.
5. Daily reports and analysis.
6. Proration calculation and share allocation in the event of an
oversubscription.
7. Produce charter shareholder list.
8. Interface with Transfer Agent for Stock Certificate issuance.
9. Refund and interest calculations.
10. Confirmation letter to confirm purchase of stock.
11. Notification of full/partial rejection of orders.
12. Production of 1099/Debit tape.
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, 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
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.
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
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. 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, 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.
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 10 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.
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, 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 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.
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 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, 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 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: Directors, Officers and Employees
Each Director, Officer and Employee of the Holding Company and the Bank, who is not Eligible Account Holders, 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 and the ESOP.
D. Community Offering, Syndicated Offering and Public Offering
1. Subject to the rights of persons exercising subscription rights in the Subscription Offering, Conversion Stock 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 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. 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.
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.
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 (i) following the death of the original purchaser, or (ii) resulting from an exchange of securities in a merger or acquisition approved by the applicable regulatory authorities.
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, 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, 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, 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, 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 and the Directors, Officers and Employees;
(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 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 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.
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.
13. Liquidation Account
For purposes of granting to 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 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 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 and the denominator is the total amount of the Qualifying Deposits of all 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 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 (ii) the amount of the Qualifying Deposit in such Deposit Account on the 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 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.
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.
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. Any amendments to the Plan made after approval by the Voting Depositors with the concurrence of the Commissioner 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 knowingly 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
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
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
PROVIDENT FINANCIAL SERVICES, INC.
FIRST: The name of the Corporation is Provident Financial Services, Inc. (hereinafter referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent at that address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is two hundred fifty million (250,000,000) consisting of:
1. Fifty million (50,000,000) shares of Preferred Stock, par value one cent ($.01) per share (the "Preferred Stock"); and
2. Two hundred million (200,000,000) shares of Common Stock, par value one cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate of Incorporation or the bylaws of the Corporation, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal
to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast subject to this Section C of this Article FOURTH, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit.
2. The following definitions shall apply to this Section C of this Article FOURTH:
(a) "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate of Incorporation.
(b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this Certificate of Incorporation; provided, however, that a person shall, in any event, also be deemed the "beneficial owner" of any Common Stock:
(1) which such person or any of its Affiliates beneficially owns, directly or indirectly; or
(2) which such person or any of its Affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more clauses of Section A of Article EIGHTH) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such Affiliate is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation;
and provided further, however, that (1) no Director or Officer of this Corporation (or any Affiliate of any such Director or Officer) shall, solely by reason of any or all of such Directors or Officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by another such Director or Officer (or any Affiliate thereof), and (2) neither any employee stock ownership plan or similar plan of this Corporation or any subsidiary of this Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage of beneficial ownership of Common Stock of a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.
(c) A "person" shall mean any individual, firm, corporation, or other entity.
3. The Board of Directors shall have the power to construe and apply the provisions of this Section C of Article FOURTH and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock beneficially owned by any person, (ii) whether a person is an Affiliate of another, (iii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this section to the given facts, or (v) any other matter relating to the applicability or effect of this Section C of Article FOURTH.
4. The Board of Directors shall have the right to demand that
any person who is reasonably believed to beneficially own Common Stock in excess
of the Limit (or holds of record Common Stock beneficially owned by any person
in excess of the Limit) supply the Corporation with complete information as to
(i) the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, and (ii) any other
factual matter relating to the applicability or effect of this Section C of
Article FOURTH as may reasonably be requested of such person.
5. Except as otherwise provided by law or expressly provided in this Section C of Article FOURTH, the presence, in person or by proxy, of holders of a majority of the shares of capital stock of the Corporation entitled to vote at the meeting (after giving effect, if required,
to the provisions of this Section C of Article FOURTH ) shall constitute a quorum at all meetings of the stockholders (unless or except to the extent that the presence of a larger number may be required by law), and every reference in this Certificate of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock (after giving effect, if required, to the provisions of this Section C of Article FOURTH).
6. Any constructions, applications, or determinations made by the Board of Directors pursuant to this Section C of Article FOURTH in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders.
7. In the event any provision (or portion thereof) of this
Section C of Article FOURTH shall be found to be invalid, prohibited or
unenforceable for any reason, the remaining provisions (or portions thereof) of
this Section C of Article FOURTH shall remain in full force and effect, and
shall be construed as if such invalid, prohibited or unenforceable provision had
been stricken herefrom or otherwise rendered inapplicable, it being the intent
of this Corporation and its stockholders that such remaining provision (or
portion thereof) of this section remain, to the fullest extent permitted by law,
applicable and enforceable as to all stockholders, including stockholders owning
an amount of stock over the Limit, notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. Stockholders shall not be permitted to cumulate their votes for the election of Directors.
C. Subject to the rights of any class or series of Preferred Stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directorships (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) (the "Whole Board") or (ii) as otherwise provided in the Bylaws.
SIXTH:
A. The number of Directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board. The Directors shall be divided into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter. At each annual meeting of stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.
B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been chosen expires. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of Directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any Director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH of this Certificate of Incorporation ("Article FOURTH")), voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require the approval of the majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to adopt, amend or repeal any provisions of the Bylaws of the Corporation.
EIGHTH:
A. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in this section:
1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% or more of the combined assets of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% of the combined Fair Market Value of the then-outstanding common stock of the Corporation and its Subsidiaries, except pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of an Interested Stockholder; or
5. any reclassification or combination of securities, or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportional share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by an Interested Stockholder or any Affiliate of an Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting power of the then-outstanding shares of stock of the Corporation entitled to vote in the election of Directors (the "Voting Stock") (after giving effect to the provision of Article FOURTH), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote (after giving effect, if required, to the provisions of Section C of Article FOURTH), or such vote as is required by law or by this Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, all of the conditions specified in either of the following paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by two-thirds of the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following:
(1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher.
(2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article EIGHTH as the "Determination Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested
Stockholder has previously acquired any shares of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date, or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher;
(2) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and
(3) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher.
(c) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has paid for shares of such class of Voting Stock. If the Interested Stockholder has previously paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with subparagraph B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (1) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding stock
having preference over the Common Stock as to dividends or
liquidation; (2) there shall have been (i) no reduction in the
annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock), except
as approved by a majority of the Disinterested Directors, and
(ii) an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of
the Common Stock, unless the failure to so increase such annual
rate is approved by a majority of the Disinterested Directors;
and (3)
neither such Interested Stockholder or any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities.
2. "Interested Stockholder" shall mean any person (other than the Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.
3. For purposes of this Article EIGHTH, "beneficial ownership" shall be determined in the manner provided in Section C of Article FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph 2 of this section, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy of the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the Board of Directors.
7. "Fair Market Value" means: (a) in the case of stock, the highest closing sales price of the stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, Fair Market Value shall be the highest sales price reported during the 30-day period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock, and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock.
9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in
subparagraphs (a) and (b) of paragraph 2 of Section B of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares.
D. A majority of the Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry: (a) whether a person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person is an Affiliate or Associate of another; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value equaling or exceeding 25% of the combined Fair Market Value of the common stock of the Corporation and its Subsidiaries. A majority of the Directors shall have the further power to interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any offer of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer on: the Corporation's present and future customers and employees and those of its Subsidiaries (as defined in Article EIGHTH hereof); the communities in which the Corporation and its Subsidiaries operate or are located; the ability of the Corporation to fulfill its corporate objectives as a savings or bank holding company; and the ability of its subsidiary bank to fulfill its corporate objectives under applicable statutes and regulations.
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.
ELEVENTH: A Director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to
any vote of the holders of any class or series of the stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to amend or repeal this Article TWELFTH, Section C of Article FOURTH, Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH or Article TENTH.
THIRTEENTH: The name and mailing address of the sole incorporator are as follows:
Name Mailing Address
---- ---------------
John J. Gorman 5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
|
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and accordingly, have hereto set my hand this 13th day of August, 2002.
/s/ John J. Gorman ------------------ John J. Gorman Incorporator |
Exhibit 3.2
BYLAWS
OF
PROVIDENT FINANCIAL SERVICES, INC.
ARTICLE I - STOCKHOLDERS
SECTION 1. ANNUAL MEETING.
A. An annual meeting of the stockholders, for the election of Directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders.
B. Nominations of persons for election to the Board of Directors
and the proposal of business to be transacted by the stockholders may be made at
an annual meeting of stockholders (a) pursuant to the Corporation's notice with
respect to such meeting, (b) by or at the direction of the Board of Directors or
(c) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in the following
paragraph, who is entitled to vote at the meeting and who has complied with the
notice procedures set for the in this section.
C. For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of the foregoing
paragraph, (1) the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation, (2) such business must be proper matter for
stockholder action under the General Corporation Law of the State of Delaware,
(3) if the stockholder, or the beneficial owner on whose behalf any such
proposal or nomination is made, has provided the Corporation with a Solicitation
Notice, as that term is defined in subclause (c)(iii) of this paragraph, such
stockholder or beneficial owner must, in the case of a proposal, have delivered
a proxy statement and form of proxy to holders of at least the percentage of the
Corporation's voting shares required under applicable law to carry any such
proposal, or, in the case of a nomination or nominations, have delivered a proxy
statement and form of proxy to holders of a percentage of the Corporation's
voting shares reasonably believed by such stockholder or beneficial holder to be
sufficient to elect the nominee or nominees proposed to be nominated by such
stockholder, and must, in either case, have included in such materials the
Solicitation Notice and (4) if no Solicitation Notice relating thereto has been
timely provided pursuant to this section, the stockholder or beneficial owner
proposing such business or nomination must not have solicited a number of
proxies sufficient to have required the delivery of such a Solicitation Notice
under this section. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than 90 days prior to the date of the Corporation's proxy materials for the
preceding year's annual meeting of stockholders ("Proxy Statement Date");
provided, however, that if the date of the annual meeting is advanced more than
30 days prior to or delayed by more than 30 days after the anniversary of the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not later than the close of business on the 10th day following the
day on
which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person as would be required to be disclosed in solicitations of
proxies for the elections such nominees as directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
such person's written consent to serve as a director if elected; (b) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of such business, the reasons for conducting such business at
the meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the Corporation that are owned
beneficially and of record by such stockholder and such beneficial owner and
(iii) whether either such stockholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders if, in the case of a proposal, at
least percentage of the Corporation's voting shares required under applicable
law to carry the proposal or, in the case of a nomination or nominations, a
sufficient number of holders of the Corporation's voting shares to elect such
nominee or nominees (an affirmative statement of such intent, a "Solicitation
Notice").
D. Notwithstanding anything in the second sentence of the third paragraph of this Section 1 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 85 days prior to the Proxy Statement Date, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.
E. Only persons nominated in accordance with the procedures set forth in this Section 1 shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chairman of the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defectively proposed business or nomination shall not be presented for stockholder action at the meeting and shall be disregarded.
F. For purposes of these Bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones New Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
G. Notwithstanding the foregoing provisions of this Section 1, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to matters set forth in this Section 1. Nothing in this
Section 1 shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
SECTION 2. SPECIAL MEETINGS.
A. Special meetings of the stockholders, other than those required by statute, may be called at any time by the Board of Directors acting pursuant to a resolution adopted by a majority of the Whole Board. For purposes of these Bylaws, the term "Whole Board" shall mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships. The Board of Directors may postpone or reschedule any previously scheduled special meeting.
B. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of record of the Corporation who is a stockholder of record at the time of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 1 of this Article I. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by the third paragraph of Section 1 of this Article I shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected as such meeting.
C. Notwithstanding the foregoing provisions of this Section 2, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 2. Nothing in this Section 2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 3. NOTICE OF MEETINGS.
Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of
the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting.
SECTION 4. QUORUM.
At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation), shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of those represented in person or by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation) shall constitute a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present in person or by proxy constituting a quorum, then except as otherwise required by law, those present in person or by proxy at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting.
SECTION 5. ORGANIZATION.
Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints.
SECTION 6. CONDUCT OF BUSINESS.
The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders, will vote at the meeting shall be announced at the meeting.
SECTION 7. PROXIES AND VOTING.
At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Any facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph, may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of Directors but excepting where otherwise required by law or by the governing documents of the Corporation, may be made by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedures established for the meeting. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability.
All elections of Directors shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast affirmatively or negatively.
SECTION 8. STOCK LIST.
A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting in the manner provided by law.
The stock list shall also be open to the examination of any such stockholder during the whole time of the meeting as provided by law. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.
SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
Subject to the rights of the holders of any class of series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS NUMBER AND TERM OF OFFICE.
The business and affairs of the Corporation shall be under the direction of its Board of Directors. The number of Directors who shall constitute the Whole Board shall be such number as the Board of Directors shall from time to time have designated, except in the absence of such
designation such number shall be eleven (11). The Board of Directors shall annually elect a Chairman of the Board from among its members who shall, when present, preside at its meetings.
The Directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided, with respect to the time for which they severally hold office, into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years, thereafter, with each Director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each Director to hold office until his or her successor shall have been duly elected and qualified.
SECTION 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS.
Subject to the rights of the holders of any class or series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office (and not by stockholders), though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such Director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent Director.
SECTION 3. REGULAR MEETINGS.
Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all Directors. A notice of each regular meeting shall not be required.
SECTION 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
by the Chairman of the Board or the Chief Executive Officer and shall be held at
such place, on such date, and at such time as they, or he or she, shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each Director by whom it is not waived by mailing written notice not less than
five (5) days before the meeting or by telegraphing or telexing or by facsimile
transmission or electronic transmission of the same not less than twenty-four
(24) hours before the meeting. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at a special meeting.
SECTION 5. QUORUM.
At any meeting of the Board of Directors, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof.
SECTION 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting.
SECTION 7. CONDUCT OF BUSINESS.
At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the Directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic from if the minutes are maintained in electronic form.
SECTION 8. POWERS.
The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power:
(1) To declare dividends, from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith;
(4) To remove any Officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any Officer upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other benefit plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs.
SECTION 9. COMPENSATION OF DIRECTORS.
Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as Directors, including, without limitation, their services as members of committees of the Board of Directors.
SECTION 10. QUALIFICATION.
No director shall serve beyond the Annual Meeting of Stockholders following his attaining the age of 70, regardless of whether or not his term has expired.
ARTICLE III - COMMITTEES
SECTION 1. COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for these committees and any others provided for herein, elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member.
SECTION 2. CONDUCT OF BUSINESS.
Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing or by electronic transmission,
and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic from if the minutes are maintained in electronic form.
SECTION 3. NOMINATING COMMITTEE
The Board of Directors may appoint a Nominating Committee of the Board, consisting of not less than three (3) members. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these Bylaws in order to determine compliance with such Bylaw and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV - OFFICERS
SECTION 1. GENERALLY.
(a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a Chairman of the Board, a Chief Executive Officer and President, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may choose such other officers as it may deem proper. The Chairman of the Board shall be chosen from among the Directors. Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next annual election of Officers and until their respective successors are chosen but any Officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of Directors then constituting the Board of Directors (without prejudice to contract rights under any employment agreement that may have been entered into).
(c) All Officers chosen by the Board of Directors shall have such powers and duties as generally pertain to their respective Offices, subject to the specific provisions of this ARTICLE IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof.
SECTION 2. CHAIRMAN OF THE BOARD OF DIRECTORS.
The Chairman of the Board shall, subject to the provisions of these Bylaws and to the direction of the Board of Directors, serve in general executive capacity and unless the Board has designated another person, when present, shall preside at all meetings of the stockholders of the Corporation. The Chairman of the Board shall perform all duties and have all powers which are commonly incident to the office of Chairman of the Board or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized.
SECTION 3. CHIEF EXECUTIVE OFFICER AND PRESIDENT.
The Chief Executive Officer and President (the "Chief Executive Officer") shall have general responsibility for the management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the offices of Chief Executive Officer and President or which are delegated to him or her by the Board of Directors. Subject to the direction of the Board of Directors, the Chief Executive Officer shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision of all of the other Officers (other than the Chairman of the Board), employees and agents of the Corporation.
SECTION 4. VICE PRESIDENT.
The Vice President or Vice Presidents shall perform the duties of the Chief Executive Officer in his absence or during his inability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. A Vice President or Vice Presidents may be designated as Executive Vice President or Senior Vice President.
SECTION 5. SECRETARY.
The Secretary or Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such office and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. Subject to the direction of the Board of Directors, the Secretary shall have the power to sign all stock certificates.
SECTION 6. TREASURER.
The Treasurer shall be the Comptroller of the Corporation and shall have the responsibility for maintaining the financial records of the Corporation. The Treasurer may be designated the Chief Financial Officer. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Subject to the direction of the Board of Directors, the Treasurer shall have the power to sign all stock certificates.
SECTION 7. ASSISTANT SECRETARIES AND OTHER OFFICERS.
The Board of Directors may appoint one or more Assistant Secretaries and such other Officers who shall have such powers and shall perform such duties as are provided in these Bylaws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the Chief Executive Officer.
SECTION 8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
Unless otherwise directed by the Board of Directors, the Chief Executive Officer or any Officer of the Corporation authorized by the Chief Executive Officer shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to, any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
SECTION 1. CERTIFICATES OF STOCK.
Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the Board or the Chief Executive Officer, and by the Secretary or an Assistant Secretary, or any Treasurer or Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile.
SECTION 2. TRANSFERS OF STOCK.
Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor.
SECTION 3. RECORD DATE.
In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next day preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity.
SECTION 5. REGULATIONS.
The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish.
ARTICLE VI - NOTICES
SECTION 1. NOTICES.
If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the Delaware General Corporation Law.
SECTION 2. WAIVERS.
A written waiver of any notice, signed by a stockholder, Director, Officer, employee or agent, or waiver by electronic transmission by such person, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director, Officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
SECTION 1. FACSIMILE SIGNATURES.
In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.
SECTION 2. CORPORATE SEAL.
The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or an assistant to the Treasurer.
SECTION 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS.
Each Director, each member of any committee designated by the Board of Directors, and each Officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its Officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such Director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
SECTION 4. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 of every year.
SECTION 5. TIME PERIODS.
In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any meeting of the Board. The stockholders shall also have power to amend, alter or repeal these Bylaws at any meeting of stockholders provided notice of the proposed change was given in the notice of the meeting; provided, however, that, notwithstanding any other provisions of the Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, the Certificate of Incorporation, any Preferred Stock Designation or these Bylaws, the affirmative votes of the holders of at least 80% of the voting power of all the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to alter, amend or repeal any provisions of these Bylaws.
Exhibit 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
FULLY PAID AND NON-ASSESSABLE
PAR VALUE $0.01 EACH
THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO
RESTRICTIONS, SEE REVERSE SIDE
THIS CERTIFIES that is the owner of
SHARES OF COMMON STOCK
Provident Financial Services, Inc.
a Delaware corporation
The shares evidenced by this certificate are transferable only on the books of Provident Financial Services, Inc. by the holder hereof, in person or by attorney, upon surrender of this certificate properly endorsed. The capital stock evidenced hereby is not an account of an insurable type and is not insured by the Federal Deposit Insurance Corporation or any other Federal or state governmental agency.
IN WITNESS WHEREOF, Provident Financial Services, Inc. has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its seal to be hereunto affixed.
By [SEAL] By
-------------------- -----------------------
JOHN F. KUNTZ PAUL M. PANTOZZI
CORPORATE SECRETARY CHIEF EXECUTIVE OFFICER
AND PRESIDENT
|
The Board of Directors of Provident Financial Services, Inc. (the "Company") is authorized by resolution or resolutions, from time to time adopted, to provide for the issuance of more than one class of stock, including preferred stock in series, and to fix and state the voting powers, designations, preferences, limitations and restrictions thereof. The Company will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.
The shares evidenced by this Certificate are subject to a limitation contained in the Certificate of Incorporation to the effect that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of shares held in excess of the Limit.
The shares represented by this Certificate may not be cumulatively voted on any matter. The Certificate of Incorporation requires the affirmative vote of the holders of at least 80% of the voting stock of the Corporation, voting together as a single class, to approve certain transactions and to amend certain provisions of the Certificate of Incorporation.
The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations.
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
----------- -----------
(Cust) (Minor)
TEN ENT - as tenants by the entireties
Under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common ---------------------------------
(State)
|
Additional abbreviations may also be used though not in the above list
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
Dated,
-----------------------------
In the presence of Signature:
------------------------------ -------------------------------------
|
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
EXHIBIT 5
[LUSE GORMAN POMERENK & SCHICK LETTERHEAD]
(202) 274-2000
August 16, 2002
Provident Financial Services, Inc.
830 Bergen Avenue
Jersey City, New Jersey
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 55,587,050 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. In making our examination of any documents, we have assumed that all parties had the corporate power and authority to enter into and perform all obligations thereunder, and, as to such parties, we have also assumed the due authorization by all requisite action, the due execution and delivery of such documents and the validity and binding effect and enforceability thereof.
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.
Provident Financial Services, Inc.
August 16, 2002
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).
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 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 |
EXHIBIT 8.1
[Luse Gorman Pomerenk & Schick Letterhead]
FORM OF
FEDERAL TAX OPINION
(202) 274-2000
___________, 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 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. 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 55,587,050 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 (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
The Provident Bank
_____________, 2002
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 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 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 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.
The Provident Bank
_____________, 2002
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.
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, and (iii) 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 proforma market value of the Bank, as converted. The estimated proforma 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.
The Provident Bank
_____________, 2002
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.
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 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).
The Provident Bank
_____________, 2002
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 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 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 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. (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.
The Provident Bank
_____________, 2002
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 Other Members 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 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.
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,
LUSE GORMAN POMERENK & SCHICK,
A PROFESSIONAL CORPORATION
Exhibit 8.2
The Provident Bank
___, 2002
[KPMG LLP Letterhead]
___, 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 ___, 2002, 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.
The Provident Bank
___, 2002
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 (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, and (iii) 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.
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
The Provident Bank
___, 2002
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 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.
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").
The Provident Bank
___, 2002
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.
16. Bank's 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, 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
The Provident Bank
___, 2002
deposits in Bank. No interest in the liquidation account of Stock Bank will be received by any 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, 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 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.
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 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.
The Provident Bank
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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.
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 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.
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The basis of each 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 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 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
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purchase shares of Holding Company Conversion Stock received by Eligible Account Holders and Other Members 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 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. 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. 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.
The Provident Bank
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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 (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.
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 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 upon the distribution to them of the nontransferable subscription rights to purchase Holding Company Conversion Stock. No taxable income will be
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realized by the 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 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 Provident Bank
___, 2002
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.
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).
The Provident Bank
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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.
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 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 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.
The Provident Bank
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It should be noted, however, that if the fair market value to the non-transferable subscription rights to purchase Holding Company Conversion 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.
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). 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.
The Provident Bank
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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.
* * *
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.
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
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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.
KPMG LLP
Exhibit 10.1
EMPLOYMENT AGREEMENT
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.
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.
(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 of the Company ("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.
(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
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.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
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
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
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. 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
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
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
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 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.
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:
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:
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Secretary
WITNESS: EXECUTIVE:
By:
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Secretary
|
Exhibit 10.2
CHANGE IN CONTROL AGREEMENT
WITNESSETH
WHEREAS, the Executive is presently an officer of the Bank;
WHEREAS, the Company desires to be ensured of the Executive's continued active participation in the business of the Bank and the Company; 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 agreements herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings set forth below for the purposes of this Agreement:
(a) Annual Compensation. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of aggregate base salary and other cash compensation paid to the Executive (including cash compensation deferred at the election of the Executive) by the Employers or any subsidiary thereof (i) during the calendar year in which the Date of Termination occurs (determined on an annualized basis), or (ii) either of the two calendar years immediately preceding the calendar year in which the Date of Termination occurs, whichever is greater.
(b) Cause. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, willful misconduct, 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. For purposes of this paragraph, no act or failure to act on the Executive's part 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 interests of the Employers. Executive's employment shall not be terminated for "Cause" 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 Company's board of directors ("Board of Directors") or upon advice of the Company's counsel.
(c) 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 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:
(1) 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
(2) 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 1(c)(i), (ii),
(iii) or (iv) if the term "Bank" were substituted for the term "Company" therein
and the term "Bank's Board of 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 1(c), the term
"person" shall include the meaning assigned to it under Sections 13(d)(3) or
14(d)(2) of the Exchange Act.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause, the date on which the Notice of Termination is given, and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination.
(f) Disability. Termination by the Employers 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.
(g) Good Reason. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control based on:
(i) Without the Executive's express written consent, the assignment by the Company or the Bank to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control, or a material change in the Executive's reporting responsibilities, titles or offices as an officer and employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason;
(ii) Without the Executive's express written consent, a reduction in the Executive's base salary as in effect immediately prior to the date of the Change in Control or as the same may be increased from time to time thereafter or a reduction in the package of fringe benefits provided to the Executive as in effect immediately prior to the date of the Change in Control;
(iii) A change in the Executive's principal place of employment by a distance in excess of 25 miles from its location immediately prior to the Change in Control;
(iv) Any purported termination of the Executive's employment for Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or
(v) The failure by the Company to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 10 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's employment by the Employers for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) specifies a Date of Termination, which [shall be not less than thirty (30) nor more than ninety (90) days] after such Notice of Termination is given, except in the case of the Employers' termination of the Executive's employment for Cause, which shall be effective immediately; and (iv) is given in the manner specified in Section 11 hereof.
(j) Retirement. "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.
2. Term of Agreement. The term of this Agreement shall be for thirty-six
(36) months, commencing on the date of this Agreement (the "Effective Date").
Commencing on the first anniversary of the Effective Date, on each annual
anniversary thereafter, the term of this Agreement shall extend for an
additional twelve (12) months, unless the Boards of Directors of the Employers
gives notice in accordance with Section 11 hereof of a determination not to
extend the term of this Agreement. Such written notice of the election not to
extend must be given not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
3. Benefits Upon Termination. If the Executive's employment by the Company or the Bank is terminated subsequent to a Change in Control and during the term of this Agreement by (i) the Company or Bank for other than Cause, Disability, Retirement or the Executive's death or (ii) the Executive for Good Reason, then the Company shall:
(a) pay to the Executive, in a lump sum as of the Date of Termination, a cash severance amount equal to three (3) times the Executive's Annual Compensation, and
(b) provide, for a period ending at the expiration of the remaining term of this Agreement as of the Date of Termination, at no cost to the Executive, coverage of Executive (and family, if applicable) under all group insurance, life insurance, health and accident insurance and disability insurance and other insurance programs or arrangements offered by the Bank in which the Executive was entitled to participate immediately prior to the Date of Termination; provided that in the event that the Executive's participation in any insurance plan, program or arrangement as to which Executive was participating prior to a Date of Termination is prohibited, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date 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.
4. Limitation of Benefits under Certain Circumstances. If the payments and benefits pursuant to Section 3 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers, would constitute a "parachute payment" under Section 280G of the Code, the payments and benefits payable by the Employers pursuant to Section 3 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits payable by the Employers under Section 3 being non-deductible to the Employers pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and benefits to be made pursuant to Section 3 shall be based upon the opinion of independent counsel selected by the Employers' independent public accountants and paid by the Employers. Such counsel shall be reasonably acceptable to the Employers and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment under any circumstances other than as specified in this Section 4, or a reduction in the payments and benefits specified in Section 3 below zero.
5. No Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise. The amount of severance to be provided pursuant to Section 3(a) hereof shall not be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise.
6. Withholding. All payments required to be made by the Employers hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Employers may reasonably determine should be withheld pursuant to any applicable law or regulation.
7. Nature of Employment and Obligations.
(a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Employers and the Executive, and the Employers may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof.
(b) Nothing contained herein shall create or require the Employers to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Employers hereunder, such right shall be no greater than the right of any unsecured general creditor of the Employers.
8. Source of Payments. It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Company.
9. No Attachment.
(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, the Executive, the Bank, the Company and their respective successors and assigns.
10. Assignability. The Company may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which either of the Employers may hereafter merge or consolidate or to which either of the Employers may transfer all or substantially all of its respective assets, if in any such case said corporation, bank or other entity shall expressly in writing assume all obligations of the Company hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or their rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder.
11. 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:
12. Amendment; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Company to sign on their behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
13. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware.
14. Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
15. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
17. Miscellaneous Provisions.
(a) The Employers may terminate the Executive's employment at any time, but any termination by the Employers, other than termination for Cause, shall not prejudice the Executive's right to compensation or other benefits under this Agreement. The Executive shall not have the right to receive compensation or other benefits for any period after termination for Cause as defined in Section 1(b) hereof.
(b) Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.(S)1828(k)) and the regulations promulgated thereunder, including 12 C.F.R. Part 359.
18. Reinstatement of Benefits Under Section 17(b). In the event the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 17(b) hereof (the "Notice") during the term of this Agreement and a Change in Control, as defined herein, occurs, the Employers will assume their obligation to pay and the Executive will be entitled to receive all of the termination benefits provided for under Section 2 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice.
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 Company within fifty (50) miles from the location of the Company's main office, 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 the 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, other than in the case of a termination for Cause.
20. Payment of Costs and Legal Fees. All reasonable costs and legal fees paid or incurred by the Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank (which payments are guaranteed by the Company pursuant to Section 8 hereof) if the Executive is successful on the merits pursuant to a legal judgment, arbitration or settlement.
21. Confidentiality. Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Company and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Company. 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 Company 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 Company, and Executive may disclose any information regarding the Company or the Company which is otherwise publicly available or which exercise is otherwise legally required to disclose. In the event of a breach or threatened breach by the Executive of the provisions of this Section 21, the Company 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 Company 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 Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive.
22. Entire Agreement. This Agreement embodies the entire agreement between the Company and the Executive with respect to the matters agreed to herein. All prior agreements between the Company and the Executive with respect to the matters agreed to herein are hereby superseded and shall have no force or effect, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to 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.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written.
By:
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Attest:
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By:
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Attest: EXECUTIVE
EXHIBIT 10.4
THE PROVIDENT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective January 1, 2002)
THE PROVIDENT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed on the ________ day of ______________, 2002, by The Provident Bank, a New Jersey-chartered stock savings bank (the "Bank"),
W I T N E S S E T H T H A T
WHEREAS, the board of directors of the Bank has resolved to adopt an employee stock ownership plan for eligible employees of the Bank and subsidiaries of the Bank, in accordance with the terms and conditions presented set forth herein;
NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth the terms and conditions pertaining to contributions by the Employer and the payment of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
By:
------------------------- ---------
Secretary President
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CONTENTS
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PAGE NO.
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Section 1. Plan Identity................................................................ 1
1.1 Name......................................................................... 1
1.2 Purpose...................................................................... 1
1.3 Effective Date............................................................... 1
1.4 Fiscal Period................................................................ 1
1.5 Single Plan for All Employers................................................ 1
1.6 Interpretation of Provisions................................................. 1
Section 2. Definitions.................................................................. 1
Section 3. Eligibility for Participation................................................ 7
3.1 Initial Eligibility.......................................................... 7
3.2 Definition of Eligibility Year............................................... 7
3.3 Terminated Employees......................................................... 8
3.4 Certain Employees Ineligible................................................. 8
3.5 Participation and Reparticipation............................................ 8
3.6 Omission of Eligible Employee................................................ 8
Section 4. Contributions and Credits.................................................... 8
4.1 Discretionary Contributions.................................................. 8
4.2 Contributions for Stock Obligations.......................................... 9
4.3 Conditions as to Contributions............................................... 9
4.4 Rollover Contributions....................................................... 9
Section 5. Limitations on Contributions and Allocations................................. 10
5.1 Limitation on Annual Additions............................................... 10
5.2 Effect of Limitations........................................................ 11
5.3 Limitations as to Certain Participants....................................... 11
Section 6. Trust Fund and Its Investment................................................ 12
6.1 Creation of Trust Fund....................................................... 12
6.2 Stock Fund and Investment Fund............................................... 12
6.3 Acquisition of Stock......................................................... 13
6.4 Participants' Option to Diversify............................................ 14
Section 7. Voting Rights and Dividends on Stock......................................... 14
7.1 Voting and Tendering of Stock................................................ 14
7.2 Dividends on Stock........................................................... 15
Section 8. Adjustments to Accounts...................................................... 16
8.1 Adjustments for Transactions................................................. 16
8.2 Valuation of Investment Fund................................................. 16
8.3 Adjustments for Investment Experience........................................ 16
Section 9. Vesting of Participants' Interests........................................... 16
9.1 Deferred Vesting in Accounts................................................. 16
9.2 Computation of Vesting Years................................................. 17
9.3 Full Vesting Upon Certain Events............................................. 17
9.4 Full Vesting Upon Plan Termination........................................... 18
9.5 Forfeiture, Repayment, and Restoral.......................................... 18
9.6 Accounting for Forfeitures................................................... 19
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9.7 Vesting and Nonforfeitability................................................ 19
Section 10. Payment of Benefits.......................................................... 19
10.1 Benefits for Participants.................................................... 19
10.2 Time for Distribution........................................................ 20
10.3 Marital Status............................................................... 21
10.4 Delay in Benefit Determination............................................... 21
10.5 Accounting for Benefit Payments.............................................. 21
10.6 Options to Receive and Sell Stock............................................ 21
10.7 Restrictions on Disposition of Stock......................................... 22
10.8 Continuing Loan Provisions; Creations of Protections and Rights.............. 22
10.9 Direct Rollover of Eligible Distribution..................................... 23
10.10 Waiver of 30-Day Period After Notice of Distribution......................... 23
Section 11. Rules Governing Benefit Claims and Review of Appeals......................... 24
11.1 Claim for Benefits........................................................... 24
11.2 Notification by Committee.................................................... 24
11.3 Claims Review Procedure...................................................... 24
Section 12. The Committee and its Functions.............................................. 25
12.1 Authority of Committee....................................................... 25
12.2 Identity of Committee........................................................ 25
12.3 Duties of Committee.......................................................... 25
12.4 Valuation of Stock........................................................... 25
12.5 Compliance with ERISA........................................................ 26
12.6 Action by Committee.......................................................... 26
12.7 Execution of Documents....................................................... 26
12.8 Adoption of Rules............................................................ 26
12.9 Responsibilities to Participants............................................. 26
12.10 Alternative Payees in Event of Incapacity.................................... 26
12.11 Indemnification by Employers................................................. 26
12.12 Nonparticipation by Interested Member........................................ 27
Section 13. Adoption, Amendment, or Termination of the Plan.............................. 27
13.1 Adoption of Plan by Other Employers.......................................... 27
13.2 Plan Adoption Subject to Qualification....................................... 27
13.3 Right to Amend or Terminate.................................................. 27
Section 14. Miscellaneous Provisions..................................................... 27
14.1 Plan Creates No Employment Rights............................................ 28
14.2 Nonassignability of Benefits................................................. 28
14.3 Limit of Employer Liability.................................................. 28
14.4 Treatment of Expenses........................................................ 28
14.5 Number and Gender............................................................ 29
14.6 Nondiversion of Assets....................................................... 28
14.7 Separability of Provisions................................................... 28
14.8 Service of Process........................................................... 28
14.9 Governing State Law.......................................................... 28
14.10 Employer Contributions Conditioned on Deductibility.......................... 28
14.11 Unclaimed Accounts........................................................... 29
14.12 Qualified Domestic Relations Order........................................... 29
Section 15. Top-Heavy Provisions......................................................... 30
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15.1 Top-Heavy Plan............................................................... 30 15.2 Super Top-Heavy Plan......................................................... 30 15.3 Definitions.................................................................. 30 15.4 Top-Heavy Rules of Application............................................... 31 15.5 Minimum Contributions........................................................ 33 15.6 Minimum Vesting.............................................................. 33 15.7 Top-Heavy Provisions Control in Top-Heavy Plan............................... 33 |
THE PROVIDENT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
SECTION 1. PLAN IDENTITY.
1.1 Name. The name of this Plan is "The Provident Bank Employee Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and conditions under which contributions made pursuant to the Plan will be credited and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is January 1, 2002.
1.4 Fiscal Period. This Plan shall be operated on the basis of a January 1 to December 31 fiscal year for the purpose of keeping the Plan's books and records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated as a single plan with respect to all participating Employers for the purpose of crediting contributions and forfeitures and distributing benefits, determining whether there has been any termination of Service, and applying the limitations set forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and the Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its assets invested primarily in qualifying employer securities of one or more Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a manner consistent with this intent and shall be administered at all times and in all respects in a nondiscriminatory manner.
SECTION 2. DEFINITIONS.
The following capitalized words and phrases shall have the meanings specified when used in this Plan and in the Trust Agreement, unless the context clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under this Plan as expressed in terms of a separate account balance which is periodically adjusted to reflect his Employer's contributions, the Plan's investment experience, and distributions and forfeitures.
"Active Participant" means a Participant who has satisfied the eligibility requirements under Section 3 and who has at least 1,000 Hours of Service during the current Plan Year. However, a Participant shall not qualify as an Active Participant unless (i) he is in active Service with an Employer as of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or (iii) his Service terminated during the Plan Year by reason of Disability, death, Early Retirement or Normal Retirement.
"Bank" means The Provident Bank and any entity which succeeds to the
business of The Provident Bank and adopts this Plan as its own pursuant to
Section 13.1 of the Plan.
"Beneficiary" means the person or persons who are designated by a Participant to receive benefits payable under the Plan on the Participant's death. In the absence of any designation or if all the designated Beneficiaries shall die before the Participant dies or shall die before all benefits have been paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or his estate if he is not survived by a Spouse. The Committee may rely upon the advice of the Participant's executor or administrator as to the identity of the Participant's Spouse.
"Break in Service" means any Plan Year, or, for the initial eligibility computation period under Section 3.2, the 12-consecutive month period beginning on the first day of which an Employee has an Hour of Service, in which an Employee has 500 or fewer Hours of Service. Solely for this purpose, an Employee shall be considered employed for his normal hours of paid employment during a Recognized Absence (said Employee shall not be credited with more than 501 Hours of Service to avoid a Break in Service), unless he does not resume his Service at the end of the Recognized Absence. Further, if an Employee is absent for any period (i) by reason of the Employee's pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason of the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) for purposes of caring for such child for a period beginning immediately after such birth or placement, the Employee shall be credited with the Hours of Service which would normally have been credited but for such absence, up to a maximum of 501 Hours of Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of this Plan in accordance with Section 12.
"Company" means Provident Financial Services, Inc., the holding company of the Bank, and any successor entity which succeeds to the business of the Company.
"Compensation" (a) means such Participant's wages as defined in Code
Section 3401(a) and all other payments of compensation by the Employer (in the
course of the Employer's trade or business) for a Plan Year for which the
Employer is required to furnish the Participant a written statement under Code
Sections 6041(d), 6051(a)(3) and 6052. Compensation must be determined without
regard to any rules under Code Section 3401(a) that limit the remuneration
included in wages based on the nature or location of the employment or the
services performed (such as the exception for agricultural labor in Code Section
3401(a)(2)).
(b) For purposes of this definition and notwithstanding the above, Compensation shall be determined by:
(i) excluding commissions, except that commissions shall be
included for dedicated salespeople but not in excess of
the highest dollar amount of commissions that could be
received which, when added to other includible wages and
payments, is one dollar ($1) less than the Highly Paid
Employee dollar limit for the determination year (and not
for the preceding year), as determined under Code Section
414(q)(1) (e.g., the Highly Paid Employee dollar limit for
the determination year 2001 is $85,000 and for 2002 is
$90,000).
(ii) excluding bonuses.
(iii) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(B) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions.
(c) Compensation in excess of $200,000 (as indexed) shall be disregarded for all Participants. For purposes of this sub-section, the $200,000 limit shall be referred to as the "applicable limit" for the Plan Year in question. The $200,000 limit shall be adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code, effective for the Plan Year that begins within the applicable calendar year. For purposes of the applicable limit, 415 Compensation shall be prorated over short Plan Years.
"Disability" means the inability to do any substantial amount of work of any sort because of a physical or mental condition which can be medically determined and which can be expected to last more than a year. The Committee may require a medical examination by a physician chosen by the Committee. However, if the disabled individual is eligible for Social Security disability benefits, he will automatically satisfy the requirements for Disability under the Plan.
"Early Retirement" means retirement on or after a Participant's attainment of age 55 and the completion of ten (10) years of credited Service with an Employer.
"Effective Date" means January 1, 2002.
"Employee" means any individual who is or has been employed or self-employed by an Employer. "Employee" also means an individual employed by a leasing organization who, pursuant to an agreement between an Employer and the leasing organization, has performed services for the Employer and any related persons (within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for more than one year, if such services are performed under the primary direction or control of the Employer. However, such a "leased employee" shall not be considered an Employee if (i) he participates in a money purchase pension plan sponsored by the leasing organization which provides for immediate participation, immediate full vesting, and an annual contribution of at least 10 percent of the Employee's 415 Compensation, and (ii) leased employees do not constitute more than 20 percent of the Employer's total work force (including leased employees, but excluding Highly Paid Employees and any other Employees who have not performed services for the Employer on a substantially full-time basis for at least one year).
"Employer" means the Bank, Provident Investment Services, Inc., or any affiliate within the purview of section 414(b), (c) or (m) and 415(h) of the Code, or any other corporation, partnership, or proprietorship that adopts this Plan with the Bank's consent pursuant to Section 13.1, and any entity which succeeds to the business of any Employer and adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and each January 1 and July 1 of each Plan Year after the Effective Date.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406, as amended).
"415 Compensation"
(a) shall mean wages, as defined in Code Section 3401(a) for purposes of income tax withholding at the source.
(b) Any elective deferral as defined in Code Section 402(g)(3)
(any Employer contributions made on behalf of a Participant to the
extent not includible in gross income and any Employer contributions to
purchase an annuity contract under Code Section 403(b) under a salary
reduction agreement) and any amount which is contributed or deferred by
the Employer at the election of the Participant and which is not
includible in gross income of the Participant by reason of Code Section
125 (Cafeteria Plan), Code Section 457 or 132(f)(4) shall also be
included in the definition of 415 Compensation.
(c) 415 Compensation in excess of $200,000 (as indexed) shall be disregarded for all Participants. For purposes of this sub-section, the $200,000 limit shall be referred to as the "applicable limit" for the Plan Year in question. The $200,000 limit shall be adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code, effective for the Plan Year which begins within the applicable calendar year. For purposes of the applicable limit, 415 Compensation shall be prorated over short Plan Years.
"Highly Paid Employee" for any Plan Year means an Employee who, during
either that or the immediately preceding Plan Year was at any time a five
percent owner of the Employer (as defined in Code Section 416(i)(1)) or, during
the immediately preceding Plan Year, had 415 Compensation exceeding $90,000 and
was among the most highly compensated one-fifth of all Employees (the $90,000
amount is adjusted at the same time and in the same manner as under Code Section
415(d), provided, however, the base period is the calendar quarter ending
September 30, 1996). For these purposes, "the most highly compensated one-fifth
of all Employees" shall be determined by taking into account all individuals
working for all related Employer entities described in the definition of
"Service", but excluding any individual who has not completed six months of
Service, who normally works fewer than 17 1/2 hours per week or in fewer than
six months per year, who has not reached age 21, whose employment is covered by
a collective bargaining agreement, or who is a nonresident alien who receives no
earned income from United States sources. The applicable year for which a
determination is being made is called a "determination year" and the preceding
12 month period is called a look back year.
"Hours of Service" means hours to be credited to an Employee under the following rules:
(a) Each hour for which an Employee is paid or is entitled to be paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid or is entitled to be paid for a period of vacation, holidays, illness, disability, lay-off, jury duty, temporary military duty, or leave of absence is an Hour of Service. However, except as otherwise specifically provided, no more than 501 Hours of Service shall be credited for any single continuous period which an Employee performs no duties. No more than 501 Hours of Service will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Further, no Hours of Service shall be credited on account of payments made solely under a plan maintained to comply with worker's compensation, unemployment compensation, or disability insurance laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of damages) is either awarded or agreed to by an Employer is an Hour of Service. However, no more than 501 Hours of Service shall be credited for any single continuous period during which an Employee would not have performed any duties. The same Hours of Service will not be credited both under paragraph (a) or (b) as the case may be, and under this paragraph (c). These hours will be credited to the employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award agreement or payment is made.
(d) Hours of Service shall be credited in any one period only under one of the foregoing paragraphs (a), (b) and (c); an Employee may not get double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 45 Hours of Service for each weekly pay period in which he has at least one Hour of Service. However, an Employee shall be credited only for his normal working hours during a paid absence.
(f) Hours of Service to be credited on account of a payment to an Employee (including back pay) shall be recorded in the period of Service for which the payment was made. If the period overlaps two or more Plan Years, the Hours of Service credit shall be allocated in proportion to the respective portions of the period included in the several Plan Years. However, in the case of periods of 31 days or less, the Administrator may apply a uniform policy of crediting the Hours of Service to either the first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be counted as required by Section 2530.200b-2(b) and (c) of the Department of Labor's regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of assets other than Stock. Notwithstanding the above, assets from the Investment Fund may be used to purchase Stock in the open market or otherwise, or used to pay on the Stock Obligation, and shares so purchased will be allocated to a Participant's Stock Fund.
"Normal Retirement" means retirement on or after the Participant's Normal Retirement Date.
"Normal Retirement Date" means the later of (i) the date on which a Participant attains age 65 and (ii) the Participant's fifth year of credited Service.
"Participant" means any Employee who is an Active Participant participating in the Plan, or Employee or former Employee who was previously an Active Participant and still has a balance credited to his Account.
"Plan Year" means the twelve-month period commencing January 1 and ending December 31, 2002 and each period of 12 consecutive months beginning on January 1 of each succeeding year.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence for a limited period, but only if an Employer grants such leave on a nondiscriminatory basis; or
(b) an Employee is temporarily laid off by an Employer because of a change in business conditions; or
(c) an Employee is on active military duty, but only to the extent that his employment rights are protected by the Military Selective Service Act of 1967 (38 U.S.C. Sec. 2021).
"Service" means an Employee's period(s) of employment or self-employment with an Employer, excluding for initial eligibility purposes any period in which the individual was a nonresident alien and did not receive from an Employer any earned income which constituted income from sources within the United States. An Employee's Service shall include any Service which constitutes Service with a predecessor Employer within the meaning of Section 414(a) of the Code, provided, however, that Service with an acquired entity shall not be considered Service under the Plan unless required by applicable law or agreed to by the parties to such transaction. An Employee's Service shall also include any Service with an entity which is not an Employer, but only either (i) for a period after 1975 in which the other entity is a member of a controlled group of corporations or is under common control with other trades and businesses within the meaning of Section 414(b) or 414(c) of the Code, and a member of the controlled group or one of the trades and businesses is an Employer, (ii) for a period after 1979 in which the other entity is a member of an affiliated service group within the meaning of Section 414(m) of the Code, and a member of the affiliated service group is an Employer, or (iii) all Employers aggregated with the Employer under Section 414(o) of the Code (but not until the Proposed Regulations under Section 414(o) become effective). Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.
"Spouse" means the individual, if any, to whom a Participant is lawfully married on the date benefit payments to the Participant are to begin, or on the date of the Participant's death, if earlier. A former Spouse shall be treated as the Spouse or surviving Spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code.
"Stock" means shares of the Company's voting common stock or preferred stock meeting the requirements of Section 409(e)(3) of the Code issued by an Employer which is a member of the same controlled group of corporations within the meaning of Code Section 414(b).
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which satisfies the requirements set forth in
Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying Employer securities as defined in Treasury Regulationsss.54.4975-12;
(ii) to repay such Stock Obligation; or
(iii) to repay a prior exempt loan.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a co-mingled trust fund with assets of other qualified retirement plans, "Trust Agreement" shall be deemed to include the trust agreement governing that co-mingled trust fund. With respect to the allocation of investment responsibility for the assets of the Trust Fund, the provisions of Article II of the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons or individuals selected from time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund consisting of the Plan's holding of Stock which have been acquired in exchange for one or more Stock obligations and which have not yet been allocated to the Participant's Accounts in accordance with Section 4.2.
"Valuation Date" means the last day of the Plan Year and each other date as of which the Committee shall determine the investment experience of the Investment Fund and adjust the Participants' Accounts accordingly.
"Valuation Period" means the period following a Valuation Date and ending with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant pursuant to Section 9.2 for purposes of determining his vested interest in his Account.
SECTION 3. ELIGIBILITY FOR PARTICIPATION.
3.1 Initial Eligibility. An Employee shall enter the Plan as of the Entry Date coincident with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee is not in active Service with an Employer on the date he would otherwise first enter the Plan, his entry shall be deferred until the next day he is in Service.
3.2 Definition of Eligibility Year. An "Eligibility Year" means an applicable eligibility period (as defined below) in which the Employee has completed 1,000 Hours of Service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the 12-consecutive month period beginning on the first day on which he has an Hour of Service, and
(b) his subsequent eligibility periods will be 12-consecutive month periods beginning on each January 1 after that first day of Service.
3.3 Terminated Employees. No Employee shall have any interest or rights under this Plan if he is never in active Service with an Employer on or after the Effective Date.
3.4 Certain Employees Ineligible.
(a) No Employee shall participate in the Plan while his Service is covered by a collective bargaining agreement between an Employer and the Employee's collective bargaining representative if (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative and (ii) the collective bargaining agreement does not provide for the Employee's participation in the Plan.
(b) Leased Employees are not eligible to participate in the Plan.
(c) An eligible Employee may elect not to participate in the Plan, provided, however, such election is made solely to meet the requirements of Code Section 409(n). For an election to be effective for a particular Plan Year, the Employee or Participant must file the election in writing with the Plan Administrator no later than the last day of the Plan Year for which the election is to be effective. The Employer may not make a contribution under the Plan for the Employee or for the Participant for the Plan Year for which the election is effective, nor for any succeeding Plan Year, unless the Employee or Participant re-elects to participate in the Plan. The Employee or Participant may elect again not to participate, but not earlier than the first Plan Year following the Plan Year in which the re-election was first effective.
3.5 Participation and Reparticipation. Subject to the satisfaction of the foregoing requirements, an Employee shall participate in the Plan during each period of his Service from the date on which he first becomes eligible until his termination. For this purpose, an Employee who returns before five (5) consecutive Breaks in Service who previously satisfied the initial eligibility requirements or who returns after five (5) consecutive one year Breaks in Service with a vested Account balance in the Plan shall re-enter the Plan as of the date of his return to Service with an Employer.
3.6 Omission of Eligible Employee. If, in any Plan Year, any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Employee in the amount which the said Employer would have contributed regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code.
SECTION 4. CONTRIBUTIONS AND CREDITS.
4.1 Discretionary Contributions. The Employer shall from time to time contribute, with respect to a Plan Year, such amounts as it may determine from time to time. The Employer shall have no obligation to contribute any amount under this Plan except as so determined in its sole discretion. The Employer's contributions and available forfeitures for a Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in proportion to their amounts of Compensation earned during that portion of the Plan Year that such persons are Participants in the Plan.
4.2 Contributions for Stock Obligations. If the Trustee, upon instructions from the Committee, incurs any Stock Obligation upon the purchase of Stock, the Employer may contribute for each Plan Year an amount sufficient to cover all payments of principal and interest as they come due under the terms of the Stock Obligation. If there is more than one Stock Obligation, the Employer shall designate the one to which any contribution is to be applied. Investment earnings realized on Employer contributions and any dividends paid by the Employer on Stock held in the Unallocated Stock Account, shall be applied to the Stock Obligation related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on contributions, or dividends on unallocated Stock are used as payments under a Stock Obligation, a certain number of shares of the Stock acquired with that Stock Obligation which is then held in the Unallocated Stock Fund shall be released for allocation among the Participants. The number of shares released shall bear the same ratio to the total number of those shares then held in the Unallocated Stock Fund (prior to the release) as (i) the principal and interest payments made on the Stock Obligation in the current Plan Year bears to (ii) the sum of (i) above, and the remaining principal and interest payments required (or projected to be required on the basis of the interest rate in effect at the end of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of interest under a Stock Obligation may be ignored in calculating the number of shares to be released in each year if (i) the Stock Obligation provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years, (ii) the interest included in any payment is ignored only to the extent that it would be determined to be interest under standard loan amortization tables, and (iii) the term of the Stock Obligation, by reason of renewal, extension, or refinancing, has not exceeded 10 years from the original acquisition of the Stock.
4.3 Conditions as to Contributions. Employers' contributions shall in all events be subject to the limitations set forth in Section 5. Contributions may be made in the form of cash, or securities and other property to the extent permissible under ERISA, including Stock, and shall be held by the Trustee in accordance with the Trust Agreement. In addition to the provisions of Section 13.3 for the return of an Employer's contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or based upon a good faith but erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the contribution was originally made, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take account of any adverse investment experience within the Trust Fund in order that the balance credited to each Participant's Account is not less that it would have been if the contribution had never been made.
4.4 Rollover Contributions. This Plan shall not accept a direct rollover or rollover contribution of an "eligible rollover distribution" as such term is defined in Section 10.9-1 of the Plan.
SECTION 5. LIMITATIONS ON CONTRIBUTIONS AND ALLOCATIONS.
5.1 Limitation on Annual Additions. Notwithstanding anything herein to the contrary, allocation of Employer contributions for any Plan Year shall be subject to the following:
5.1-1 If allocation of Employer contributions in accordance with
Section 4.1 will result in an allocation of more than one-third the
total contributions for a Plan Year to the Accounts of Highly Paid
Employees, then allocation of such amount shall be adjusted so that
such excess will not occur.
5.1-2 After adjustment, if any, required by the preceding
paragraph, the annual additions during any Plan Year to any
Participant's Account under this and any other defined contribution
plans maintained by the Employer or an affiliate (within the purview of
Section 414(b), (c) and (m) and Section 415(h) of the Code, which
affiliate shall be deemed the Employer for this purpose) shall not
exceed the lesser of $40,000 (or such other dollar amount which results
from cost-of-living adjustments under Section 415(d) of the Code) (the
"dollar limitation") or 100 percent of the Participant's 415
Compensation for such limitation year (the "percentage limitation").
The percentage limitation shall not apply to any contribution for
medical benefits after separation from service (within the meaning of
Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise
treated as an annual addition. In the event that annual additions
exceed the aforesaid limitations, they shall be reduced in the
following priority:
(i) Any excess amount at the end of the Plan Year that cannot be allocated to the Participant's Account shall be reallocated to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year. The reallocation shall be made in accordance with Section 4.1 of the Plan as if the Participant whose Account otherwise would receive the excess amount is not eligible for an allocation of Employer contributions.
(ii) If the allocation or reallocation of the excess amounts causes the limitations of Code section 415 to be exceeded with respect to each Participant for the limitation year, then the excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions for all remaining Participants in the next limitation year and each succeeding limitation year if necessary.
(iii) If a suspense account is in existence at any time during a limitation year, it will not participate in any allocation of investment gains and losses. All amounts held in suspense accounts must be allocated to Participants' Accounts before any contributions may be made to the Plan for the limitation year.
(iv) If a suspense account exists at the time of Plan termination, amounts held in the suspense account that cannot be allocated shall revert to the Employer.
5.1-3 For purposes of this Section 5.1, the "annual addition" to
a Participant's Accounts means the sum of (i) Employer contributions,
(ii) Employee contributions, if any, and (iii) forfeitures. Annual
additions to a defined contribution plan also include amounts
allocated, after March 31, 1984, to an individual medical account, as
defined in Section 415(l)(2) of the Internal Revenue Code, which is
part of a pension or annuity plan maintained by the Employer, amounts
derived from contributions paid or accrued after December 31, 1985, in
taxable years ending after such date, which are
attributable to post-retirement medical benefits allocated to the
separate account of a Key Employee under a welfare benefit fund, as
defined in Section 419A(d) of the Internal Revenue Code, maintained by
the Employer. For these purposes, annual additions to a defined
contribution plan shall not include the allocation of the excess
amounts remaining in the Unallocated Stock Fund subsequent to a sale of
stock from such fund in accordance with a transaction described in
Section 8.1 of the Plan.
5.1-4 Notwithstanding the foregoing, if no more than one-third of the Employer contributions to the Plan for a year which are deductible under Section 404(a)(9) of the Code are allocated to Highly Paid Employees (within the meaning of Section 414(q) of the Internal Revenue Code), the limitations imposed herein shall not apply to:
(i) forfeitures of Employer securities (within the meaning of
Section 409 of the Code) under the Plan if such securities were
acquired with the proceeds of a loan described in Section 404(a)(9)(A)
of the Code), or
(ii) Employer contributions to the Plan which are deductible under Section 404(a)(9)(B) and charged against a Participant's Account.
5.1-5 If the Employer contributes amounts, on behalf of Employees covered by this Plan, to other "defined contribution plans" as defined in Section 3(34) of ERISA, the limitation on annual additions provided in this Section shall be applied to annual additions in the aggregate to this Plan and to such other plans. Reduction of annual additions, where required, shall be accomplished first by reductions under such other plan pursuant to the directions of the named fiduciary for administration of such other plans or under priorities, if any, established under the terms of such other plans and then by allocating any remaining excess for this Plan in the manner and priority set out above with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month period beginning each January 1.
5.2 Effect of Limitations. The Committee shall take whatever action may be necessary from time to time to assure compliance with the limitations set forth in Section 5.1. Specifically, the Committee shall see that each Employer restrict its contributions for any Plan Year to an amount which, taking into account the amount of available forfeitures, may be completely allocated to the Participants consistent with those limitations. Where the limitations would otherwise be exceeded by any Participant, further allocations to the Participant shall be curtailed to the extent necessary to satisfy the limitations. Where an excessive amount is contributed on account of a mistake as to one or more Participants' compensation, or there is an amount of forfeitures which may not be credited in the Plan Year in which it becomes available, the amount shall be corrected in accordance with Section 5.1-2 of the Plan. If it is determined at any time that the Committee and/or Trustee has erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating net gain or loss pursuant to Sections 8.2 and 8.3, then the Committee, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.
5.3 Limitations as to Certain Participants. Aside from the limitations set forth in Section 5.1, if the Plan acquires any Stock in a transaction as to which a selling shareholder or the estate of a deceased
shareholder is claiming the benefit of Section 1042 of the Code, the Committee
shall see that none of such Stock, and no other assets in lieu of such Stock,
are allocated to the Accounts of certain Participants in order to comply with
Section 409(n) of the Code.
This restriction shall apply at all times to a Participant who owns (taking into account the attribution rules under Section 318(a) of the Code, without regard to the exception for employee plan trusts in Section 318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation which issued the Stock acquired by the Plan, or another corporation within the same controlled group, as defined in Section 409(l)(4) of the Code (any such class of stock hereafter called a "Related Class"). For this purpose, a Participant who owns more than 25 percent of any Related Class at any time within the one year preceding the Plan's purchase of the Stock shall be subject to the restriction as to all allocations of the Stock, but any other Participant shall be subject to the restriction only as to allocations which occur at a time when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder claiming the benefit of Section 1042 and any other Participant who is related to such a shareholder within the meaning of Section 267(b) of the Code, during the period beginning on the date of sale and ending on the later of (1) the date that is ten years after the date of sale, or (2) the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with the sale.
This restriction shall not apply to any Participant who is a lineal descendant of a selling shareholder if the aggregate amounts allocated under the Plan for the benefit of all such descendants do not exceed five percent of the Stock acquired from the shareholder.
5.4 Erroneous Allocations. No Participant shall be entitled to any annual additions or other allocations to his Account in excess of those permitted under Section 5. If it is determined at any time that the administrator and/or Trustee have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating investment adjustments, or in excluding or including any person as a Participant, then the administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.
SECTION 6. TRUST FUND AND ITS INVESTMENT.
6.1 Creation of Trust Fund. All amounts received under the Plan from Employers and investments shall be held as the Trust Fund pursuant to the terms of this Plan and of the Trust Agreement between the Bank and the Trustee. The benefits described in this Plan shall be payable only from the assets of the Trust Fund, and none of the Bank, any other Employer, its board of directors or trustees, its stockholders, its officers, its employees, the Committee, and the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund.
6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee shall be divided into the Stock Fund, consisting entirely of Stock, and the Investment Fund, consisting of all assets of the Trust other than Stock. The Trustee shall have no investment responsibility for the Stock Fund, but shall accept any Employer contributions made in the form of Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Stock in accordance with the instructions of the Committee. The Trustee shall have
full responsibility for the investment of the Investment Fund, except to the extent such responsibility may be delegated from time to time to one or more investment managers pursuant to Section 2.3 of the Trust Agreement, or to the extent the Committee directs the Trustee to purchase Stock with the assets in the Investment Fund.
6.3 Acquisition of Stock. From time to time the Committee may, in its sole discretion, direct the Trustee to acquire Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for such Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 12.4. The Committee may direct the Trustee to finance the acquisition of Stock by incurring or assuming indebtedness to the seller or another party which indebtedness shall be called a "Stock Obligation". The term "Stock Obligation" shall refer to a loan made to the Plan by a disqualified person within the meaning of Section 4975(e)(2) of the Code, or a loan to the Plan which is guaranteed by a disqualified person. A Stock Obligation includes a direct loan of cash, a purchase-money transaction, and an assumption of an obligation of a tax-qualified employee stock ownership plan under Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term "guarantee" shall include an unsecured guarantee and the use of assets of a disqualified person as collateral for a loan, even though the use of assets may not be a guarantee under applicable state law. An amendment of a Stock Obligation in order to qualify as an "exempt loan" is not a refinancing of the Stock Obligation or the making of another Stock Obligation. The term "exempt loan" refers to a loan that satisfies the provisions of this paragraph. A "non-exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not be payable on demand except in the event of default, and shall bear a reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a collateral pledge of either the Stock acquired in exchange for the Stock Obligation, or the Stock previously pledged in connection with a prior Stock Obligation which is being repaid with the proceeds of the current Stock Obligation. No other assets of the Plan and Trust may be used as collateral for a Stock Obligation, and no creditor under a Stock Obligation shall have any right or recourse to any Plan and Trust assets other than Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must provide for the release of pledged Stock in connection with payments on the Stock obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock Obligation shall be made by the Trustee only from Employer cash contributions designated for such payments, from earnings on such contributions, and from cash dividends received on Stock, in the last case, however, subject to the further requirements of Section 7.2.
6.3-5 In the event of default of a Stock Obligation, the value of Plan assets transferred in satisfaction of the Stock Obligation must not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975 of the Code, a Stock Obligation must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of said Stock Obligation. For purposes of this paragraph, the making of a guarantee does not make a person a lender.
6.4 Participants' Option to Diversify. The Committee shall provide for a procedure under which each Participant may, during the qualified election period, elect to "diversify" a portion of the Employer Stock allocated to his Account, as provided in Section 401(a)(28)(B) of the Code. An election to diversity must be made on the prescribed form and filed with the Committee within the period specified herein. For each of the first five (5) Plan years in the qualified election period, the Participant may elect to diversify an amount which does not exceed 25% of the number of shares allocated to his Account since the inception of the Plan, less all shares with respect to which an election under this Section has already been made. For the last year of the qualified election period, the Participant may elect to have up to 50 percent of the value of his Account committed to other investments, less all shares with respect to which an election under this Section has already been made. The term "qualified election period" shall mean the six (6) Plan Year period beginning with the first Plan Year in which a Participant has both attained age 55 and completed 10 years of participation in the Plan. A Participant's election to diversify his Account may be made within each year of the qualified election period and shall continue for the 90-day period immediately following the last day of each year in the qualified election period. Once a Participant makes such election, the Plan must complete diversification in accordance with such election within 90 days after the end of the period during which the election could be made for the Plan Year. In the discretion of the Committee, the Plan may satisfy the diversification requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount subject to the diversification election.
6.4-2 The Plan may offer the Participant at least three other
distinct investment options, if available under the Plan. The other
investment options shall satisfy the requirements of Regulations under
Section 404(c) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
6.4-3 The Plan may transfer the portion of the Participant's
Account subject to the diversification election to another qualified
defined contribution plan of the Employer that offers at least three
investment options satisfying the requirements of the Regulations under
Section 404(c) of ERISA.
SECTION 7. VOTING RIGHTS AND DIVIDENDS ON STOCK.
7.1 Voting and Tendering of Stock. The Trustee generally shall vote all shares of Stock held under the Plan in accordance with the written instructions of the Committee. However, if any Employer has registration-type class of securities within the meaning of Section 409(e)(4) of the Code, or if a matter submitted to the holders of the Stock involves a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all assets of an entity, then (i) the shares of Stock which have been allocated to Participants' Accounts shall be voted by the Trustee in accordance with the Participants' written instructions, and (ii) the Trustee shall vote any unallocated Stock and allocated Stock for which it has received no voting instructions in the same proportions as it votes the allocated Stock for which it has received instructions from Participants; provided, however, that if an exempt loan, as defined in Section 4975(d) of the Code, is outstanding and the Plan is in default on such exempt loan, as default is defined in the loan documents, then to the extent that such loan documents require the lender to exercise voting rights with respect
to the unallocated shares, the loan documents will prevail. In the event no shares of Stock have been allocated to Participants' Accounts at the time Stock is to be voted and any exempt loan which may be outstanding is not in default, each Participant shall be deemed to have one share of Stock allocated to his or her Account for the sole purpose of providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated shares of Stock must be voted by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employers shall provide the Trustee, in a timely manner, with the same notices and other materials as are provided to other holders of the Stock, which the Trustee shall distribute to the Participants. The Participants shall be provided with adequate opportunity to deliver their instructions to the Trustee regarding the voting of Stock allocated to their Accounts. The instructions of the Participants' with respect to the voting of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by the Trustee in the same manner as set forth above with respect to the voting of Stock. Notwithstanding any provision hereunder to the contrary, Stock must be tendered by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received by the Trustee in the form of additional Stock shall be retained in the Stock Fund, and shall be allocated among the Participant's Accounts and the Unallocated Stock Fund in accordance with their holdings of the Stock on which the dividends have been paid. Dividends on Stock credited to Participants' Accounts which are received by the Trustee in the form of cash shall, at the direction of the Employer paying the dividends, either (i) be credited to the Accounts in accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be distributed immediately to the Participants in proportion with the Participants' Stock Fund Account balance (iii) be distributed to the Participants within 90 days of the close of the Plan Year in which paid in proportion with the Participants' Stock Fund Account balance or (iv) be used to make payments on the Stock Obligation. If dividends on Stock allocated to a Participant's Account are used to repay the Stock Obligation, Stock with a fair market value equal to the dividends so used must be allocated to such Participant's Account in lieu of the dividends. Dividends on Stock held in the Unallocated Stock Fund which are received by the Trustee in the form of cash shall be allocated to Participants' Investment Fund Accounts (pro rata based on the Participant's Account balance in relation to all Participants' Account balances) and shall be applied as soon as practicable to payments of principal and interest under the Stock Obligation incurred with the purchase of the Stock.
SECTION 8. ADJUSTMENTS TO ACCOUNTS.
8.1 Adjustments for Transactions. An Employer contribution pursuant
to Section 4.1 shall be credited to the Participants' Accounts as of the last
day of the Plan Year for which it is contributed, in accordance with Section
4.1. Stock released from the Unallocated Stock Fund upon the Trust's repayment
of a Stock Obligation pursuant to Section 4.2 shall be credited to the
Participants' Accounts as of the last day of the Plan Year in which the
repayment occurred, pro rata based on the cash applied from such Participant's
Account relative to the cash applied from all Participants' Accounts. Any excess
amounts remaining in the suspense account following a sale of Stock from the
Unallocated Stock Fund to repay a Stock Obligation shall be allocated as of the
last day of the Plan Year in which the repayment occurred among the
Participants' Accounts in proportion to 415 Compensation. Any benefit which is
paid to a Participant or Beneficiary pursuant to Section 10 shall be charged to
the Participant's Account as of the first day of the Valuation Period in which
it is paid. Any forfeiture or restoral shall be charged or credited to the
Participant's Account as of the first day of the Valuation Period in which the
forfeiture or restoral occurs pursuant to Section 9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date, the Trustee shall prepare a balance sheet of the Investment Fund, recording each asset (including any contribution receivable from an Employer) and liability at its fair market value. Any liability with respect to short positions or options and any item of accrued income or expense and unrealized appreciation or depreciation shall be included; provided, however, that such an item may be estimated or excluded if it is not readily ascertainable unless estimating or excluding it would result in a material distortion. The Committee shall then determine the net gain or loss of the Investment Fund since the preceding Valuation Date, which shall mean the entire income of the Investment Fund, including realized and unrealized capital gains and losses, net of any expenses to be charged to the general Investment Fund and excluding any contributions by the Employer. The determination of gain or loss shall be consistent with the balance sheets of the Investment Fund for the current and preceding Valuation Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the Investment Fund during a Valuation Period, as determined pursuant to Section 8.2, shall be allocated as of the last day of the Valuation Period among the Participants' Accounts in proportion to the opening balance in each Account, as adjusted for benefit payments and forfeitures during the Valuation Period, without regard to whatever Stock may be credited to an Account. Any cash dividends received on Stock credited to Participant's Accounts shall be allocated as of the last day of the Valuation Period among the Participants' Accounts based on the opening balance in each Participant's Stock Fund Account.
SECTION 9. VESTING OF PARTICIPANTS' INTERESTS.
9.1 Deferred Vesting in Accounts. A Participant's vested interest in his Account shall be based on his Vesting Years in accordance with the following table, subject to the balance of this Section 9:
Vesting Percentage of Years..... Interest Vested ----- --------------- Fewer than 5 0% 5 or more 100% |
9.2 Computation of Vesting Years. For purposes of this Plan, a "Vesting Year" means generally a Plan Year in which an Employee has at least 1,000 Hours of Service, beginning with the first Plan Year in which the Employee has completed an Hour of Service with the Employer, and including Service with other Employers as provided in the definition of "Service." Notwithstanding the above, an Employee who was employed with the Bank in its pre-conversion mutual form (the "Mutual Bank") shall receive credit for vesting purposes for each calendar year of continuous employment with the Mutual Bank in which such Employee completed 1,000 Hours of Service, up to a maximum of five years (such years shall also be referred to as "Vesting Years"). An Employee who was employed with Provident Investment Services shall receive credit for vesting purposes for each calendar year of continuous employment with the Provident Investment Services in which such Employee completed 1,000 Hours of Service, up to a maximum of five Vesting Years. However, a Participant's Vesting Years shall be computed subject to the following conditions and qualifications:
9.2-1 A Participant's Vesting Years shall not include any Service prior to the date on which an Employee attains age 18.
9.2-2 A Participant's vested interest in his Account accumulated before five (5) consecutive Breaks in Service shall be determined without regard to any Service after such five consecutive Breaks in Service. Further, if a Participant has five (5) consecutive Breaks in Service before his interest in his Account has become vested to some extent, pre-Break years of Service shall not be required to be taken into account for purposes of determining his post-Break vested percentage.
9.2-3 In the case of a Participant who has 5 or more consecutive 1-year Breaks in Service, the Participant's pre-Break Service will count in vesting of the Employer-derived post-break accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in the accrued benefit attributable to Employer contributions at the time of separation from Service, or
(ii) upon returning to Service the number of consecutive 1-year Breaks in Service is less than the number of years of Service.
9.2-4 Notwithstanding any provision of the Plan to the contrary, effective January 1, 1998, calculation of service for determining Vesting Years with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.
9.2-5 If any amendment changes the vesting schedule, including an automatic change to or from a top-heavy vesting schedule, any Participant with three (3) or more Vesting Years may, by filing a written request with the Employer, elect to have his vested percentage computed under the vesting schedule in effect prior to the amendment. The election period must begin not later than the later of sixty (60) days after the amendment is adopted, the amendment becomes effective, or the Participant is issued written notice of the amendment by the Employer or the Committee.
9.3 Full Vesting Upon Certain Events.
9.3-1 Notwithstanding Section 9.1, a Participant's interest in his Account shall fully vest on the Participant's Normal Retirement Date. The Participant's interest shall also fully vest in the event that his Service is terminated by Early Retirement, Disability or by death.
9.3-2 The Participant's interest in his Account shall also fully vest in the event of a "Change in Control" of the Bank, or the Company. For these purposes, "Change in Control" shall mean an event of a nature that; (i) would be required to be reported in response to Item 1a of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Bank Holding Company Act of 1956, as amended, and applicable rules and regulations promulgated thereunder as in effect at the time of the Change in Control (collectively, the "BHCA"); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "Person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Company representing 25% or more of the Bank's or the Company's outstanding securities except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by the Bank's employee stock ownership plan and trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that this sub-section (b) shall not apply if the Incumbent Board is replaced by the appointment by a Federal banking agency of a conservator or receiver for the Bank and, provided further that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company, or similar transaction in which the Bank or Company is not the surviving institution occurs.
9.3-3 Upon a Change in Control described in 9.3-2, the Plan
shall be terminated and the Plan Administrator shall direct the Trustee
to sell a sufficient amount of Stock from the Unallocated Stock Fund to
repay any outstanding Stock Obligation in full. The proceeds of such
sale shall be used to repay such Stock Obligation. After repayment of
the Stock Obligation, all remaining shares in the Unallocated Stock
Fund (or the proceeds thereof, if applicable) shall be deemed to be
earnings and shall be allocated in accordance with the requirements of
Section 8.1.
9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1, a Participant's interest in his Account shall fully vest upon termination of this Plan or upon the permanent and complete discontinuance of contributions by his Employer. In the event of a partial termination, the interest of each affected Participant shall fully vest with respect to that part of the Plan which is terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service terminates before his interest in his Account is fully vested, that portion which has not vested shall be forfeited if he either (i) receives a distribution of his entire vested interest pursuant to Section 10.1, or (ii) incurs a one-year Break in Service. If a Participant's Service terminates prior to having any portion of his Account become vested, such Participant shall be deemed to have received a distribution of his vested interest as of the Valuation Date next following his termination of Service.
If a Participant who has suffered a forfeiture of the nonvested portion of his Account returns to Service before he has five (5) consecutive Breaks in Service, the nonvested portion shall be restored, provided that, if the Participant had received a distribution of his vested Account balance, the amount distributed shall be repaid prior to such restoral. The Participant may repay such amount at any time within five years after he has returned to Service. The amount repaid shall be credited to his Account at the time it is repaid; an additional amount equal to that portion of his Account which was previously forfeited shall be restored to his Account at the same time from other Employees' forfeitures and, if such forfeitures are insufficient, from a special contribution by his Employer for that year. If the Participant did not receive a distribution of his vested Account balance, any forfeiture restored shall include earnings that would have been credited to the Account but for the forfeiture. A Participant who was deemed to have received a distribution of his vested interest in the Plan shall have his Account restored as of the first day on which he performs an Hour of Service after his return.
9.6 Accounting for Forfeitures. If a portion of a Participant's
Account is forfeited, Stock allocated to said Participant's Account shall be
forfeited only after other assets are forfeited. If interests in more than one
class of Stock have been allocated to a Participant's Account, the Participant
must be treated as forfeiting the same proportion of each class of Stock. A
forfeiture shall be charged to the Participant's Account as of the first day of
the first Valuation Period in which the forfeiture becomes certain pursuant to
Section 9.5. Except as otherwise provided in that Section, a forfeiture shall be
added to the contributions of the terminated Participant's Employer which are to
be credited to other Participants pursuant to Section 4.1 as of the last day of
the Plan Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his Account which has become vested shall be nonforfeitable for any reason.
SECTION 10. PAYMENT OF BENEFITS.
10.1 Benefits for Participants. For a Participant whose Service ends for any reason, distribution will be made to or for the benefit of the Participant or, in the case of the Participant's death, his Beneficiary, by payment in accordance with Section 10.2, either, or a combination of the following methods:
10.1.1 By payment in a lump sum, in accordance with Section 10.2; or
10.1.2 By payment in a series of substantially equal annual installments over a period not to exceed five (5) years, provided the maximum period over which the distribution of a Participant's Account may be made shall be extended by 1 year, up to five (5) additional years, for each $160,000 (or fraction thereof) by which such Participant's Account balance exceeds $800,000 (the aforementioned figures are subject to cost-of-living adjustments prescribed by the Secretary of the Treasury pursuant to Section 409(o)(2) of the Code).
The Participant shall elect the manner in which his vested Account balance will be distributed to him. If a Participant so desires, he may direct how his benefits are to be paid to his Beneficiary. If a deceased Participant did not file a direction with the Committee, the Participant's benefits shall be distributed to his Beneficiary in a lump sum. Notwithstanding any provision to the contrary, if the value of a Participant's vested Account balance at the time of any distribution, does not equal or exceed $5,000, then such Participant's vested Account shall be distributed in a lump sum within 60
days after the end of the Plan Year in which employment terminates. If the value of a Participant's vested Account balance is, or has ever been, in excess of $5,000, then his benefits shall not be paid prior to the later of the time he has attained Normal Retirement or age 62 unless he elects an early payment date in a written election filed with the Committee. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a modified election is delivered to the Committee. Failure of a Participant to consent to a distribution prior to the later of Normal Retirement or age 62 shall be deemed to be an election to defer commencement of payment of any benefit under this section.
10.2 Time for Distribution.
10.2.1 If the Participant and, if applicable, with the consent of the Participant's spouse, elects the distribution of the Participant's Account balance in the Plan, distribution shall commence as soon as practicable following his termination of Service, but no later than one year after the close of the Plan Year:
(i) in which the Participant separates from service by reason of attainment of Normal Retirement Age under the Plan, Disability, or death; or
(ii) which is the fifth Plan Year following the year in which the Participant resigns or is dismissed, unless he is reemployed before such date.
10.2.2 Unless the Participant elects otherwise, the distribution of the balance of a Participant's Account shall commence not later than the 60th day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the Employer.
10.2.3 Notwithstanding anything to the contrary, (1) with respect to a 5-percent owner (as defined in Code Section 416), distribution of a Participant's Account shall commence (whether or not he remains in the employ of the Employer) not later than the April 1 of the calendar year next following the calendar year in which the Participant attains age 70 1/2, and (2) with respect to all other Participants, payment of a Participant's benefit will commence not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2, or, if later, the year in which the Participant retires. A Participant's benefit from that portion of his Account committed to the Investment Fund shall be calculated on the basis of the most recent Valuation Date before the date of payment.
10.2.4 Distribution of a Participant's Account balance after his death shall comply with the following requirements:
(i) If a Participant dies before his distributions have commenced, distribution of his Account to his Beneficiary shall commence not later than one year after the end of the Plan Year in which the Participant died; however, if the Participant's Beneficiary is his surviving Spouse, distributions may commence on the date on which the Participant would have attained age 70 1/2. In either case, distributions shall be completed within five years after they commence.
(ii) If the Participant dies after distribution has commenced pursuant to Section 10.1.2 but before his entire interest in the Plan has been distributed to him, then the remaining portion of that interest shall, in accordance with Section 401(a)(9) of the Code, be distributed at least as rapidly as under the method of distribution being used under Section 10.1.2 at the date of his death.
(iii) If a married Participant dies before his benefit
payments begin, then unless he has specifically elected otherwise the
Committee shall cause the balance in his Account to be paid to his
Spouse. No election by a married Participant of a different Beneficiary
shall be valid unless the election is accompanied by the Spouse's
written consent, which (i) must acknowledge the effect of the election,
(ii) must explicitly provide either that the designated Beneficiary may
not subsequently be changed by the Participant without the Spouse's
further consent, or that it may be changed without such consent, and
(iii) must be witnessed by the Committee, its representative, or a
notary public. (This requirement shall not apply if the Participant
establishes to the Committee's satisfaction that the Spouse may not be
located.)
10.3 Marital Status. The Committee, the Plan, the Trustee, and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committee's good faith and reasonable reliance upon information obtained from a Participant and his Employer as to his marital status.
10.4 Delay in Benefit Determination. If the Committee is unable to determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall in any event be paid within 60 days after they can first be determined, with whatever makeup payments may be appropriate in view of the delay.
10.5 Accounting for Benefit Payments. Any benefit payment shall be charged to the Participant's Account as of the first day of the Valuation Period in which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of virtually all Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by-laws of the Employers issuing Stock, a terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participant's entire vested interest in his Account in the form of Stock. In that event, the Committee shall apply the Participant's vested interest in the Investment Fund to purchase sufficient Stock from the Stock Fund or from any owner of Stock to make the required distribution. In all other cases, the Participant's vested interest in the Stock Fund shall be distributed in shares of Stock, and his vested interest in the Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any
person who has received Stock from the Plan or from such a Participant by reason
of the Participant's death or incompetency, by reason of divorce or separation
from the Participant, or by reason of a rollover contribution described in
Section 402(a)(5) of the Code, shall have the right to require the Employer
which issued the Stock to purchase the
Stock for its current fair market value (hereinafter referred to as the "put right"). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Stock is distributed by the Plan, and, if not exercised in that period, during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Stock's current fair market value. However, the put right shall not apply to the extent that the Stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. Similarly, the put option shall not apply with respect to the portion of a Participant's Account which the Employee elected to have reinvested under Code Section 401(a)(28)(B). If the put right is exercised, the Trustee may, if so directed by the Committee in its sole discretion, assume the Employer's rights and obligations with respect to purchasing the Stock. Notwithstanding anything herein to the contrary, in the case of a plan established by a bank (as defined in Code Section 581), the put option shall not apply if prohibited by a federal or state law and Participants are entitled to elect their benefits be distributed in cash.
If a Participant elects to receive his distribution in the form of a lump sum pursuant to Section 10.1.1 of the Plan, the Employer or the Trustee, as the case may be, may elect to pay for the Stock in equal periodic installments, not less frequently than annually, over a period not longer than five years from the day after the put right is exercised, with adequate security and interest at a reasonable rate on the unpaid balance, all such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default.
If a Participant elects to receive his distribution in the form of an installment payment pursuant to Section 10.1.2 of the Plan, the Employer or the Trustee, as the case may be, shall pay for the Stock distributed in the installment distribution over a period which shall not exceed 30 days after the exercise of the put right.
Nothing contained herein shall be deemed to obligate any Employer to register any Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Stock. The put right described herein may only be exercised by a person described in the second preceding paragraph, and may not be transferred with any Stock to any other person. As to all Stock purchased by the Plan in exchange for any Stock Obligation, the put right shall be nonterminable. The put right for Stock acquired through a Stock Obligation shall continue with respect to such Stock after the Stock Obligation is repaid or the Plan ceases to be an employee stock ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of Stock which is traded on an established market, a Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall, prior to any sale or other transfer of the Stock to any other person, first offer the Stock to the issuing Employer and to the Plan at the greater of (i) its current fair market value, or (ii) the purchase price offered in good faith by an independent third party purchaser. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or gratuitous. Either the Employer or the Trustee may accept the offer within 14 days after it is delivered. Any Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 10.7, as well as any other restrictions upon the transfer of the Stock imposed by federal and state securities laws and regulations.
10.8 Continuing Loan Provisions; Creations of Protections and Rights. Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no shares of Employer Stock held or distributed by the
Trustee may be subject to a put, call or other option, or buy-sell arrangement. The provisions of this Section shall continue to be applicable to such Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 Direct Rollover of Eligible Distribution. A Participant or distributee may elect, at the time and in the manner prescribed by the Trustee or the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the Participant or distributee in a direct rollover.
10.9-1 An "eligible rollover" is any distribution that does not
include: any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the Participant and the Participant's
Beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Code
Section 401(a)(9); any hardship distribution described in Section
401(k)(2)(B)(i)(IV) of the Code; and the portion of any distribution
that is not included in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer
securities). A portion of a distribution shall not fail to be an
eligible rollover distribution merely because the portion consists of
after-tax employee contributions which are not includible in gross
income. However, such portion may be transferred only to an individual
retirement account or annuity described in section 408(a) or (b) of the
Code, or to a qualified defined contribution plan described in section
401(a) or 403(a) of the Code that agrees to separately accounting for
the portion of such distribution which is includible in gross income
and the portion of such distribution which is not so includible.
10.9-2 An "eligible retirement plan" is an individual retirement
account described in Code Section 408(a), an individual retirement
annuity described in Code Section 408(b), an annuity plan described in
Code Section 403(a), or a qualified trust described in Code Section
401(a), that accepts the distributee's eligible rollover distribution.
In the case of distributions after December 31, 2001, an eligible
retirement plan shall also include an annuity contract described in
Section 403(b) of the Code and an eligible plan under Section 457(b) of
the Code which is maintained by a state, or any agency or
instrumentality of a state or political subdivision of a state and
which agrees to separately account for amounts transferred into such
plan from this plan. In the case of an eligible rollover distribution
to a surviving Spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
10.9-3 A "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee.
10.9-4 The term "distributee" shall refer to a deceased Participant's Spouse or a Participant's former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p).
10.10 Waiver of 30-Day Period After Notice of Distribution. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that:
(i) the Trustee or Committee, as applicable, clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular option), and
(ii) the Participant, after receiving the notice, affirmatively elects a distribution.
SECTION 11. RULES GOVERNING BENEFIT CLAIMS AND REVIEW OF APPEALS.
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies for the payment of benefits shall file a claim for his benefits with the Committee on a form provided by the Committee. The claim, including any election of an alternative benefit form, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the day before the date on which benefits become payable, he shall be presumed to have filed a claim for payment for the Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2.
11.2 Notification by Committee. Within 90 days after receiving a claim for benefits (or within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which the denial is based;
(iii) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and
(iv) an explanation of the claims review procedures set forth in Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a Participant or Beneficiary receives notice from the Committee that his claim for benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committee's determination. In connection with his appeal the Participant or Beneficiary or his representative may inspect or purchase copies of pertinent documents and records to the extent not inconsistent with other Participants' and Beneficiaries' rights of privacy. Within 60 days after receiving a notice of appeal from a prior determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committee's final decision with respect to his claim, including the reasons for such decision and the particular Plan provisions upon which it is based.
SECTION 12. THE COMMITTEE AND ITS FUNCTIONS.
12.1 Authority of Committee. The Committee shall be the "plan administrator" within the meaning of ERISA and shall have exclusive responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically (i) allocated to the Bank, the Employers, or the Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other persons by the Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other parties by operation of law. The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. The Committee shall have no investment responsibility with respect to the Investment Fund except to the extent, if any, specifically provided in the Trust Agreement. In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or some other capacity) and may pay their reasonable expenses and compensation.
12.2 Identity of Committee. The Committee shall consists of three or more individuals selected by the Bank. Any individual, including a director, trustee, shareholder, officer, or Employee of an Employer, shall be eligible to serve as a member of the Committee. The Bank shall have the power to remove any individual serving on the Committee at any time without cause upon 10 days written notice, and any individual may resign from the Committee at any time upon 10 days written notice to the Bank. The Bank shall notify the Trustee of any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may be necessary to implement the Plan and shall furnish whatever reports may be required from time to time by the Bank. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the filing with the appropriate government agencies of all reports and returns required of the Plan under ERISA and other laws.
Further, the Committee shall have exclusive responsibility and authority with respect to the Plan's holdings of Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Stock and the creation and satisfaction of Stock Obligations. The Committee shall at all times act consistently with the Bank's long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Stock. Subject to the direction of the board as to the application of Employer contributions to Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as to Participants' rights under certain circumstances to have their Accounts invested in Stock or in assets other than Stock, the Committee shall determine in its sole discretion the extent to which assets of the Trust shall be used to repay Stock Obligations, to purchase Stock, or to invest in other assets to be selected by the Trustee or an investment manager. No provision of the Plan relating to the allocation or vesting of any interests in the Stock Fund or the Investment Fund shall restrict the Committee from changing any holdings of the Trust, whether the changes involve an increase or a decrease in the Stock or other assets credited to Participants' Accounts. In determining the proper extent of the Trust's investment in Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents and to pay their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan, subject to the requirements of Code
Section 401(a)(28)(c).
Such value shall be determined as of each Valuation Date, and on any other date as of which the Plan purchases or sells such Stock. The Committee shall use generally accepted methods of valuing stock of similar corporations for purposes of arm's length business and investment transactions, and in this connection the Committee shall obtain, and shall be protected in relying upon, the valuation of such Stock as determined by an independent appraiser experienced in preparing valuations of similar businesses.
12.5 Compliance with ERISA. The Committee shall perform all acts necessary to comply with ERISA. Each individual member or employee of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be governed by the affirmative vote of a number of members which is a majority of the total number of members currently appointed, including vacancies.
12.7 Execution of Documents. Any instrument executed by the Committee shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and regulations of uniform applicability as it deems necessary or appropriate for the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine which Employees qualify to enter the Plan. The Committee shall furnish to each eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be available pursuant to Sections 6 and 10, and the Committee shall provide for the payment of benefits in the proper form and amount from the assets of the Trust Fund. The Committee may decide in its sole discretion to permit modifications of elections and to defer or accelerate benefits to the extent consistent with applicable law and the best interests of the individuals concerned.
12.10 Alternative Payees in Event of Incapacity. If the Committee finds at any time that an individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, or a custodian for him under the Uniform Gifts to Minors Act, or, in the case of an incompetent, to his spouse, or his legal guardian, the payments to be used for the individual's benefit. The Committee and the Trustee shall not be obligated to inquire as to the actual use of the funds by the person receiving them under this Section 12.10, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment.
12.11 Indemnification by Employers. Except as separately agreed in writing, the Committee, and any member or employee of the Committee, shall be indemnified and held harmless by the Employer, jointly and severally, to the fullest extent permitted by ERISA, and subject to and conditioned upon compliance with 12 C.F.R. Section 545.121, to the extent applicable, against any and all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon it or him in connection with any claim made against it or him or in which it or he may be involved by reason of its or his being, or having been, the Committee, or a member or employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the Committee who also is a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits, unless his abstention would leave the Committee incapable of acting on the matter.
SECTION 13. ADOPTION, AMENDMENT, OR TERMINATION OF THE PLAN.
13.1 Adoption of Plan by Other Employers. With the consent of the Bank, any entity may become a participating Employer under the Plan by (i) taking such action as shall be necessary to adopt the Plan, (ii) becoming a party to the Trust Agreement establishing the Trust Fund, and (iii) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to the entity's Employees.
13.2 Plan Adoption Subject to Qualification. Notwithstanding any other provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a), the Plan may be amended retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure qualification under Section 401(a). If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) either as originally adopted or as amended, each Employer's contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification and the Plan as amended is held by the Internal Revenue Service not to qualify under Section 401(a), the amendment may be modified retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure approval of the amendment under Section 401(a).
13.3 Right to Amend or Terminate. The Bank intends to continue this Plan as a permanent program. However, each participating Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employer's Employees, and the Bank reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of each Employer. No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall (i) reduce any Participant's or Beneficiary's proportionate interest in the Trust Fund, (ii) reduce or restrict, either directly or indirectly, the benefit provided any Participant prior to the amendment, or (iii) divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Bank, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan as amended from time to time and the Committee's instructions.
SECTION 14. MISCELLANEOUS PROVISIONS.
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be interpreted as giving any Employee the right to be retained as an Employee by an Employer, or as limiting or affecting the rights of an Employer to control its Employees or to terminate the Service of any Employee at any time and for any reason, subject to any applicable employment or collective bargaining agreements.
14.2 Nonassignability of Benefits. No assignment, pledge, or other anticipation of benefits from the Plan will be permitted or recognized by the Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall not be subject to attachment, garnishment, or other legal process for debts or liabilities of any Participant or Beneficiary, to the extent permitted by law. This prohibition on assignment or alienation shall apply to any judgment, decree, or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony, or property rights to a present or former spouse, child or other dependent of a Participant pursuant to a state domestic relations or community property law, unless the judgment, decree, or order is determined by the Committee to be a qualified domestic relations order within the meaning of Section 414(p) of the Code, as more fully set forth in Section 14.12 hereof.
14.3 Limit of Employer Liability. The liability of the Employer with respect to Participants under this Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and the Trustee in connection with administering this Plan and Trust Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employer or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be interpreted to include the plural, and the plural the singular. Any use of the masculine, feminine, or neuter shall be interpreted to include the masculine, feminine, or neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections 5.2 and 14.12, under no circumstances shall any portion of the Trust Fund be diverted to or used for any purpose other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the Plan shall be the president of the Bank, or such other person as may be designated from time to time by the Bank.
14.9 Governing State Law. This Plan shall be interpreted in accordance with the laws of the State of New Jersey to the extent those laws are applicable under the provisions of ERISA.
14.10 Employer Contributions Conditioned on Deductibility. Employer
Contributions to the Plan are conditioned on deductibility under Code Section
404. In the event that the Internal Revenue Service shall determine that all or
any portion of an Employer Contribution is not deductible under that Section,
the nondeductible portion shall be returned to the Employer within one year of
the disallowance of the deduction.
14.11 Unclaimed Accounts. Neither the Employer nor the Trustees shall
be under any obligation to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Employer or the Trustees, by certified or
registered mail addressed to his last known address of record with the Employer,
shall notify any Participant or Beneficiary that he is entitled to a
distribution under this Plan, and the notice shall quote the provisions of this
Section. If the Participant or Beneficiary fails to claim his benefits or make
his whereabouts known in writing to the Employer or the Trustees within seven
(7) calendar years after the date of notification, the benefits of the
Participant or Beneficiary under the Plan will be disposed of as follows:
(a) If the whereabouts of the Participant is unknown but the whereabouts of the Participant's Beneficiary is known to the Trustees, distribution will be made to the Beneficiary.
(b) If the whereabouts of the Participant and his Beneficiary are unknown to the Trustees, the Plan will forfeit the benefit, provided that the benefit is subject to a claim for reinstatement if the Participant or Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the Trustees shall operate as a complete discharge of all obligations of the Trustees, to the extent of the distributions so made.
14.12 Qualified Domestic Relations Order. Section 14.2 shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and such other domestic relations orders permitted to be so treated under the provisions of the Retirement Equity Act of 1984. Further, to the extent provided under a "qualified domestic relations order," a former Spouse of a Participant shall be treated as the Spouse or surviving Spouse for all purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Committee shall promptly notify the Participant and any other alternate payee of the receipt of such order and the Plan's procedures for determining the qualified status of domestic relations orders, and
(b) Within a reasonable period after receipt of such order, the Employer or the Committee shall determine whether such order is a qualified domestic relations order and notify the Participant and each alternate payee of such determination. The Employer or the Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders.
During any period in which the issue of whether a domestic relations
order is a qualified domestic relations order is being determined (by the
Employer or Committee, by a court of competent jurisdiction, or otherwise), the
Employer or the Committee shall segregate in a separate account in the Plan or
in an escrow account the amounts which would have been payable to the alternate
payee during such period if the order had been determined to be a qualified
domestic relations order. If within eighteen (18) months the order (or
modification thereof) is determined to be a qualified domestic relations order,
the Employer or the Committee shall pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto. If within eighteen
(18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic
relations order is not resolved, then the Employer or the Committee shall pay
the segregated amounts (plus any interest thereon) to the person or persons who
would have been entitled to such amounts if there had been no order. Any
determination that an order is a qualified domestic
relations order which is made after the close of the eighteen (18) month period shall be applied prospectively only. The term "alternate payee" means any Spouse, former Spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefit payable under a Plan with respect to such Participant.
SECTION 15. TOP-HEAVY PROVISIONS.
15.1 Top-Heavy Plan. This Plan is top-heavy if any of the following conditions exist:
(a) If the top-heavy ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any required aggregation group or permissive aggregation group;
(b) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate top-heavy ratio for the group of Plans exceeds sixty percent (60%); or
(c) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%).
15.2 Super Top-Heavy Plan This Plan will be a super top-heavy Plan if any of the following conditions exist:
(a) If the top-heavy ratio for this Plan exceeds ninety percent (90%) and this Plan is not part of any required aggregation group or permissive aggregation group.
(b) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate top-heavy ratio for the group of Plans exceeds ninety percent (90%), or
(c) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds ninety percent (90%).
15.3 Definitions.
In making this determination, the Committee shall use the following definitions and principles:
15.3-1 The "Determination Date", with respect to the first Plan Year of any plan, means the last day of that Plan Year, and with respect to each subsequent Plan Year, means the last day of the preceding Plan Year. If any other plan has a Determination Date which differs from this Plan's Determination Date, the top-heaviness of this Plan shall be determined on the basis of the other plan's Determination Date falling within the same calendar years as this Plan's Determination Date.
15.3-2 A "Key Employee" means any Employee or former employee (including any deceased Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Employer having annual 415 Compensation greater than $130,000 (as adjusted under section
416(i)(1) of the Code for Plan Years beginning after December 31, 2002, a 5-percent owner of the Employer, or a 1-percent owner of the Employer having annual 415 Compensation of more than $150,000. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
15.3-3 A "Non-key Employee" means an Employee who at any time during the five years ending on the top-heavy Determination Date for the Plan Year has received compensation from an Employer and who has never been a Key Employee, and the Beneficiary of any such Employee.
15.3-4 A "required aggregation group" includes (a) each qualified Plan of the Employer in which at least one Key Employee participates in the Plan Year containing the Determination Date and (b) any other qualified Plan of the Employer which enables a Plan described in (a) to meet the requirements of Code Sections 401(a)(4) and 410. For purposes of the preceding sentence, a qualified Plan of the Employer includes a terminated Plan maintained by the Employer within the period ending on the Determination Date. In the case of a required aggregation group, each Plan in the group will be considered a top-heavy Plan if the required aggregation group is a top-heavy group. No Plan in the required aggregation group will be considered a top-heavy Plan if the required aggregation group is not a top-heavy group. All Employers aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after the Code Section 414(o) regulations become effective) are considered a single Employer.
15.3-5 A "permissive aggregation group" includes the required aggregation group of Plans plus any other qualified Plan(s) of the Employer that are not required to be aggregated but which, when considered as a group with the required aggregation group, satisfy the requirements of Code Sections 401(a)(4) and 410 and are comparable to the Plans in the required aggregation group. No Plan in the permissive aggregation group will be considered a top-heavy Plan if the permissive aggregation group is not a top-heavy group. Only a Plan that is part of the required aggregation group will be considered a top-heavy Plan if the permissive aggregation group is top-heavy.
15.4 Top-Heavy Rules of Application.
For purposes of determining the value of Account balances and the present value of accrued benefits the following provisions shall apply:
15.4-1 The value of Account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date.
15.4-2 For purposes of testing whether this Plan is top-heavy, the present value of an individual's accrued benefits and an individual's Account balances is counted only once each year.
15.4-3 The Account balances and accrued benefits of a Participant who is not presently a Key Employee but who was a Key Employee in a Plan Year beginning on or after January 1, 1984 will be disregarded.
15.4-4 Employer contributions attributable to a salary reduction or similar arrangement will be taken into account. Employer matching contributions also shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the Plan.
15.4-5 When aggregating Plans, the value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year.
15.4-6 The present values of accrued benefits and the amounts of account balances of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the 1-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "five (5) year period" for "one (1) year period."
15.4-7 Accrued benefits and Account balances of an individual shall not be taken into account for purposes of determining the top-heavy ratios if the individual has performed no services for the Employer during the one (1) year period ending on the applicable Determination Date. Compensation for purposes of this subparagraph shall not include any payments made to an individual by the Employer pursuant to a qualified or non-qualified deferred compensation plan.
15.4-8 The present value of the accrued benefits or the amount of the Account balances of any Employee participating in this Plan shall not include any rollover contributions or other transfers voluntarily initiated by the Employee except as described below. If this Plan transfers or rolls over funds to another Plan in a transaction voluntarily initiated by the Employee, then this Plan shall count the distribution for purposes of determining Account balances or the present value of accrued benefits. A transfer incident to a merger or consolidation of two or more Plans of the Employer (including Plans of related Employers treated as a single Employer under Code Section 414), or a transfer or rollover between plans of the Employer, shall not be considered as voluntarily initiated by the Employee.
15.5 Top-Heavy Ratio.
If the Employer maintains one (1) or more defined contribution plans (including any simplified Employee pension plan) and the Employer has never maintained any defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of the Account balances of all Key Employees as of the Determination Date, and the denominator of which is the sum of the Account balances of all Employees as of the Determination Date. Both the numerator and denominator of the top-heavy ratio shall be increased to reflect any contribution which is due but unpaid as of the Determination Date.
If the Employer maintains one (1) or more defined contribution plans (including any simplified Employee pension plan) and the Employer maintains or has maintained one (1) or more defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the
numerator of which is the sum of Account balances under the defined contribution
plans for all Key Employees and the present value of accrued benefits under the
defined benefit plans for all Key Employees, and the denominator of which is the
sum of the Account balances under the defined contribution plans for all
Employees and the present value of accrued benefits under the defined benefit
plans for all Employees. For these purposes, the accrued benefit of a
Participant other than a Key Employee in a defined benefit plan shall be
determined under (a) the method, if any, that uniformly applies for accrual
purposes under all defined benefit plans maintained by the Employer, or (b) if
there is no such method, as if such benefit accrued not more rapidly than the
slowest accrual rate permitted under the fractional rule of Section
411(b)(1)(C).
15.6 Minimum Contributions. For any Top-Heavy Year, each Employer shall make a special contribution on behalf of each Participant to the extent that the total allocations to his Account pursuant to Section 4 is less than the lesser of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation received by any Key Employee for that year. For purposes of the special contribution of this Section 15.2, a Key Employee's 415 Compensation shall include amounts the Key Employee elected to defer under a qualified 401(k) arrangement. Such a special contribution shall be made on behalf of each Participant who is employed by an Employer on the last day of the Plan Year, regardless of the number of his Hours of Service, and shall be allocated to his Account.
If the Employer maintains a qualified plan in addition to this Plan and more than one such plan is determined to be Top-Heavy, a minimum contribution or a minimum benefit shall be provided in one of such other plans, including a plan that consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are met. If the Employer has both a Top-Heavy defined benefit plan and a Top-Heavy defined contribution plan and a minimum contribution is to be provided only in the defined contribution plan, then the sum of the Employer contributions and forfeitures allocated to the Account of each Non-key Employee shall be equal to at least five percent (5%) of such Non-key Employee's 415 Compensation for that year.
15.7 Minimum Vesting. For any Plan Year in which this Plan is Top-Heavy, a Participant's vested interest in his Account shall be based on the following "top-heavy table":
Vesting Percentage of
Years Interest Vested
----- ---------------
Fewer than 3 years 0%
3 or more 100%
|
15.8 Top-Heavy Provisions Control in Top-Heavy Plan. In the event this Plan becomes top-heavy and a conflict arises between the top-heavy provisions herein set forth and the remaining provisions set forth in this Plan, the top-heavy provisions shall control.
Exhibit 10.5
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
OF
The Provident Bank
WHEREAS, The Provident Bank, a New Jersey savings bank (the "Bank") has established and presently maintains in effect a retirement plan for its employees, called The Provident Bank Pension Plan (the "Retirement Plan") which is qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Code contains certain limitations in Sections 401(a)(17) and 415 upon the maximum amount of compensation which may be considered in computing benefit accruals under defined benefit plans qualified under the Code and upon the maximum retirement benefits which may be paid from defined benefit plans qualified under the Code, respectively;
WHEREAS, under the terms of the Retirement Plan, certain employees of the Bank covered thereby would be, or might be expected to become, entitled to retirement benefits which exceed the limitations imposed by Sections 401(a)(17) and 415 of the Code upon defined benefit plans and which could, if paid pursuant to the Retirement Plan, cause the plan to cease to be qualified;
WHEREAS, under the terms of the Retirement Plan, deferred compensation is excluded in determining retirement benefits;
WHEREAS, the Bank desires to provide such excess benefits for employees affected, and to include deferred compensation in the determination of such excess benefits, in a manner consistent with both the Code and with the Bank's present policies with respect to its employees;
NOW, THEREFORE, the Bank hereby adopts in accordance with resolutions of its Board of Managers at its meeting of December 21, 1989, the "Supplemental Executive Retirement Plan of the Provident Bank" (the "Plan"), effective January 1, 1990 with retroactive application to January 1, 1998, as hereinafter set forth:
1. Participation in this Plan shall be limited to a select group of
management or highly compensated employees of the Bank whose benefits
under the Retirement Plan are affected by Section 401(a)(17) or
Section 415 of the Code and who are designated by the Board of
Managers of the Bank to participate in this Plan (hereinafter
"Employee").
2. The Bank will pay to or in respect of each Employee an
amount equal to the amount which would have been payable under the terms of the Retirement Plan but for the limitations under Sections 401(a)(17) and 415 of the Code less the amount payable under the terms of the Retirement Plan. Such amount, which shall be determined including any deferred compensation, shall be paid commencing no later than ninety (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 Employees and a single life annuity for single Employees.
3. Any benefits payable under this Plan shall become vested under the same terms and conditions as the respective benefits provided under the Retirement Plan.
4. The Bank shall be under no obligation to establish any fund in order to provide for the payment of the amounts due under this Plan and any amounts payable hereunder shall be made from the general assets of the Bank. Appropriate payroll and other taxes shall be withheld from all payments made under the terms of this Plan.
5. The Board of Managers may amend the Plan at any time and from time to time in such manner as it shall determine and any amendment may be given retroactive effect, except
that no amendment may reduce or eliminate any benefit which accrued to any Employee under the Plan prior to the date of the amendment without the consent of the affected Employee. The Plan shall terminate upon the termination of the Retirement Plan, unless sooner terminated by the Board of Managers of the Bank.
6. Except as otherwise provided by law, the right of any Employee to any benefit or payment hereunder is expressly made subject to the condition and limitation that it shall not be subject to alienation, assignment, attachment, execution, or other process.
7. In the event it becomes necessary or appropriate to interpret the Plan, the Bank hereby delegates the authority to interpret the provisions of the Plan to those persons, who, from time to time, have such authority with respect to, and under the Retirement Plan.
8. In the event that any claim for benefits, which must initially be submitted in writing to the Board of Managers, is denied (in whole or in part) hereunder, the claimant shall receive from the Bank notice in writing, written in a manner calculated to be understood by the claimant, setting forth the specific reasons for the
denial, with specific reference to pertinent provisions of this Plan. The interpretations and construction hereof by the Board of Managers shall be binding and conclusive on all persons and for all purposes. Any disagreements about such interpretations and construction shall be submitted to an arbitrator subject to the rules and procedures established by the American Arbitration Association. No member of the Board of Managers shall be liable to any person for any action taken hereunder except those actions undertaken with lack of good faith.
9. The Plan shall be interpreted and construed in accordance with the laws of the State of New Jersey.
Approved by:
/s/ Paul M. Pantozzi ------------------------------------- PAUL M. PANTOZZI, PRESIDENT |
DATED : March 29, 1990
Exhibit 10.6
SUPPLEMENTAL EXECUTIVE SAVINGS PLAN
OF
THE PROVIDENT BANK
WHEREAS, The Provident Bank, a New Jersey savings bank (the "Bank") has established and presently maintains in effect a savings plan for its employees, called The Provident Bank Employee Savings Incentive Plan (the "Savings Plan") which is qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Code contains certain limitations in Sections 401(a)(17),
401(m), and 415 upon the maximum amount of compensation which may be considered
in computing annual additions under defined contribution plans qualified under
the Code and upon the maximum annual additions which may be allocated under
defined contribution plans qualified under the Code, respectively;
WHEREAS, under the terms of the Savings Plan, certain employees of the
Bank covered thereby would be, or might be expected to become, entitled to
annual additions which exceed the limitations imposed by Sections 401(a)(17),
401(m), and 415 of the Code upon defined contribution plans and which could, if
paid pursuant to the Savings Plan, cause the plan to cease to be qualified;
WHEREAS, under the terms of the Savings Plan, deferred compensation in the form of deferred raises is excluded in determining annual additions;
WHEREAS, the Bank desires to provide such excess benefits for employees affected, and to include deferred compensation in the form of deferred raises in the determination of such excess benefits, in a manner consistent with both the Code and with the Bank's present policies with respect to its employees;
WHEREAS, effective January 1, 1990, with retroactive applications to January 1, 1988, the Bank adopted the Supplemental Executive Savings Plan of The Provident Bank, and
WHEREAS, in accordance with resolutions of its Board of Managers at the meetings of December 17, 1992 and June 23, 1994, the Bank restated the Supplemental Executive Savings Plan in 1995;
WHEREAS, the Bank desires to add a "Change in Control" provision, change the investment strategy of the Plan, and to allow participants to make contributions on a pre-tax basis;
NOW, THEREFORE, in accordance with resolutions of its Board of Managers at the meeting of December 18, 1997 the Bank restates the Supplemental Executive Savings Plan as hereinafter set
forth:
1. Participation in this Plan shall be limited to a select group of
management or highly compensated employees of the Bank whose benefits
under the Savings Plan are affected by Section 401(a)(17), 401(m), or
Section 415 of the Code and who are designated by the Board of
Managers to participate in this Plan (hereinafter "Employee").
2. The Bank will pay to or in respect of each Employee an amount equal to
the amount which would have been payable under the terms of the
Savings Plan but for the limitations under Sections 401(a)(17),
401(m), and 415 of the Code less the amount payable under the terms of
the Savings Plan. The Bank will also pay to or in respect of each
Employee an amount equal to the amount which would have been payable
under the terms of the Savings Plan for any deferred compensation in
the form of deferred raises. Such amounts, which shall be contingent
upon the Employee deferring 5% of his Compensation, on a pre-tax
basis, (minus the amount actually contributed to the Savings Plan) to
this Plan, shall be paid commencing no later than ninety (90) days
following termination of employment, but in no event before age 60, in
180 monthly installments.
3. The accounts of Participants who are not employed by The Provident Bank on or after January 1, 1998 shall be allocated earnings once a month at the same rate as the Provident prime rate. The Bank shall establish a Fund in order to provide for the payment of the amounts due under this Plan to employees who are employed by The Provident Bank on or after January 1, 1998. The Fund shall be held separate and apart from other assets of the Bank and shall be used exclusively for the uses and purposes herein set forth. The Employees, their beneficiaries, and the Plan shall not have any preferred claim on, or any beneficial ownership interest in, any assets of the Fund prior to the time such assets are to be paid to the Employee or his beneficiary as set forth in the Plan. All rights created under the Plan shall be deemed unsecured contractual rights of the Employees against the Bank until such time as the Employees or their beneficiaries are entitled to receipt of their separate account.
4. The Fund shall be invested by the Board of Managers, in its sole discretion, after consulting with the eligible Employees (those who are employed by The Provident Bank on or after January 1, 1998) in a portfolio of assets. The portfolio of assets shall consist of any combination of stocks, bonds, notes, mutual funds, certificates of
deposit, money-market funds, or other cash equivalent investments. A separate account shall be maintained in the name of each eligible employee which account shall reflect the amount of each Employee's contributions and the Bank's contributions on his behalf and any distributions to such Employee. From time to time, the value of each account shall be adjusted to reflect its proportionate share of the net increment or decrement in the portfolio of assets due to all interest, dividends and other income received, as well as any realized and unrealized gains and losses. For purposes of making any distribution under paragraph 2 above the value of an eligible Employee's interest in the portfolio shall be its value (adjusted as aforesaid) as of the last day of the month next preceding the month distribution occurs. Appropriate payroll and other taxes shall be withheld from all payments made under the terms of this Plan.
5. Any benefits payable under this Plan which are attributable to the Bank's contributions and the earnings on these contributions shall become vested under the same terms and conditions as the respective benefits provided under the Savings Plan. Any benefits payable under this Plan which are attributable to the Employee's contributions and the earnings on these contributions
shall be immediately 100% vested.
6. The undistributed balance, if any, of each Employee's separate account shall be distributed to his Beneficiary upon his death. The Employee's Beneficiary shall be the person who is his beneficiary in the Savings Plan.
7. Notwithstanding any other provision of this Plan, the undistributed
balance of each Employee's separate account shall be distributed to
him within 60 days after the date of a "Change in Control" as
hereafter defined. For purposes hereof, a "Change in Control" shall be
deemed to have occurred if The Provident Bank is merged or
consolidated with, or acquired or controlled by, any person, company
or financial institution; provided, however, that no Change in Control
shall be deemed to have occurred as a result of the following events:
(a) a merger or consolidation of The Provident Bank with one or more
financial institutions in which The Provident Bank is the "receiving
savings bank" (as defined in N.J.S.A. 17:9A-205 (B)(2)), or in which
The Provident Bank is otherwise deemed to be the successor entity; (b)
a conversion of The Provident Bank into a capital stock savings bank
pursuant to federal or state law, provided that the capital stock
savings bank (or its parent
holding company) is not "controlled" by any person or company, as defined in the federal Bank Holding Company Act (other than mutual holding company formed by The Provident Bank); (c) the formation of a mutual holding company and subsidiary capital stock savings bank by The Provident Bank, provided that at least a majority of the capital of the subsidiary capital stock savings bank or its parent holding company is owned by the mutual holding company; or (d) a charter conversion by The Provident Bank into any other form of state or federally-chartered financial institution.
8. The Board of Managers may amend the Plan at any time and from time to time in such manner as it shall determine and any amendment may be given retroactive effect, except that no amendment may reduce or eliminate any benefit which accrued to any Employee under the Plan prior to the date of the amendment without the consent of the affected Employee. The Plan shall terminate upon the termination of the Savings Plan, unless sooner terminated by the Board of Managers.
9. Except as otherwise provided by law, the right of any Employee to any benefit or payment hereunder is expressly made subject to the condition and limitation that it
shall not be subject to alienation, assignment, attachment, execution, or other process.
10. If the Board of Managers determines that an eligible member (or the designated beneficiary of an eligible member) is unable to manage his affairs, it may, in its sole discretion, pay any amount due to such person to the individual or institution then providing for the care, maintenance and support of such person, unless prior to such payment claim shall be made therefore by a duly appointed guardian, committee or other legal representative designated to receive such payment on behalf of such person.
11. In the event it becomes necessary or appropriate to interpret the Plan, the Bank hereby delegates the authority to interpret the provisions of the Plan to those persons, who, from time to time, have such authority with respect to, and under the Savings Plan.
12. In the event that any claim for benefits, which must initially be submitted in writing to the Board of Managers, is denied (in whole or in part) hereunder, the claimant shall receive from the Bank notice in writing, written in a manner calculated to be understood by the
claimant, setting forth the specific reasons for the denial, with specific reference to pertinent provisions of this Plan. The interpretations and construction hereof by the Board of Managers shall be binding and conclusive on all persons and for all purposes. Any disagreements about such interpretations and construction shall be submitted to an arbitrator subject to the rules and procedures established by the American Arbitration Association. No member of the Board of Managers shall be liable to any person for any action taken hereunder except those actions undertaken with lack of good faith.
13. Whenever used hereto, the term "Board of Managers" shall mean the Board of Managers of The Provident Bank. Whenever the context shall require, the masculine gender shall be construed to include the feminine and the singular number the plural.
14. Whenever used hereto, the term "Compensation" shall mean, for any applicable period, the total earnings of a Participant and shall include deferred compensation in the form of deferred raises. However, compensation shall exclude bonuses, commissions, severance pay, reimbursements for expenses and any other fringe benefits.
15. The Plan shall be interpreted and construed in accordance with the laws of the State of New Jersey.
Approved by:
/s/ Paul M. Pantozzi
----------------------------------------------------
PAUL M. PANTOZZI, CHAIRMAN, CHIEF EXECUTIVE OFFICER,
and PRESIDENT
DATED: March 17, 1998
|
Exhibit 10.7
RETIREMENT PLAN
FOR THE BOARD OF MANAGERS
OF
THE PROVIDENT BANK
WHEREAS. The Provident Bank, a New Jersey savings bank (the "Bank") desires to provide retirement benefits for eligible .members of their Board of Managers ("Managers"); NOW. THEREFORE, the Bank hereby adopts the "Retirement Plan For The Board Of Managers Of The Provident Bank" (the "Plan"), effective January 1, 1992 as hereinafter set forth:
1. Eligibility
All Managers who are not employees of the Bank are eligible for Participation in the Plan. Even though a Manager participates in the Plan, no benefits shall be paid under this Plan to a Manager unless he or she meets the age requirements outlined in this Plan and unless he or she has been a Manager for at least ten years.
2. Normal Retirement Benefits
A Manager who ceases to be a Manager on or after the first Annual Meeting of the Bank after the Manager has attained his or her 70th birthday, and after having been a Manager for at least ten years, shall receive on each subsequent January1, April 1, July 1, and October 1 for the remainder of his or her lifetime (but not to exceed 40 quarterly payments) a payment from the Bank in an amount determined as follows:
Full Years Of
Service As Quarterly
A Manager After 1991 Payment
1 $125.00
2 250.00
3 375.00
4 500.00
-1-
|
Full Years Of
Service As Quarterly
A Manager After 1991 Payment
5 $ 625.00
6 750.00
7 875.00
8 1,000.00
9 1,125.00
10 or more 1,250.00
|
3. Early Retirement Benefit
A Manager who ceases to be a Manager at or after attaining age 65, but
prior to the first Annual Meeting of the Bank after the Manager has
attained his or her 70th birthday, and after having been a Manager for
at least ten years, shall receive the quarterly payments outlined in
Section 2 above commencing on the first day of the calendar quarter
immediately following the first Annual Meeting of the Bank after the
Manager has attained his or her 70th birthday. Alternatively, such
Manager may elect to have quarterly payments commence on the first day
of any calendar quarter coincident with or next following the date he
ceases to be a Manager, in which case each payment shall be reduced to
reflect the fact that the payments commence prior to the first day of
the calendar quarter immediately following the first Annual Meeting of
the Bank after the Manager would have attained his or her 70th
birthday. The reduction shall be 2.5% for each calendar quarter by
which the date payments commence precedes the first day of the
calendar quarter immediately following the first Annual Meeting of the
Bank after the Manager would have attained his or her 70th birthday.
The quarterly payments made to a Manager who retires early in
accordance with this Section shall be made for the remainder of his or
her lifetime (but not to exceed 40 quarterly payments).
4. Lump Sum Death Benefit
In the event that a Manager dies before ceasing to be a Manager or before age 65 or before having been a Manager for at least ten years, no benefits will be payable from this Plan to his or her surviving beneficiary. In the event that a Manager who has met the eligibility requirements for benefits outlined in Sections 2 or 3 above dies after he or she has ceased to be a Manager, a lump sum amount shall be paid to his or her beneficiary equal to four times the amount of the quarterly payment which the Manager was receiving (or would have started receiving on the first day of the calendar quarter next following his or her death if payments have not yet commenced), except that if such deceased Manager has received more than 36 quarterly payments, the lump sum amount paid shall equal (a) 40 minus the number of quarterly payments made to the deceased Manager times (b) the amount of the quarterly payment which the Manager was receiving.
5. General Provisions
5.1 Benefits under this Plan shall be paid out of the general assets of the Bank.
5.2 The Board of Managers of the Bank may amend or terminate the Plan at any time and from time to time in such manner as it shall determine. Any amendment may be given retroactive effect, except that no amendment may reduce or eliminate any benefit which accrued to any Manager under the Plan prior to the date of the amendment without the consent of the affected Manager.
5.3 Except as otherwise provided by law, the right of any Manager to any benefit or payment hereunder is expressly made subject
to the condition and limitation that it shall not be subject to alienation, assignment, attachment, execution, or other process.
5.4 In the event it becomes necessary or appropriate to interpret the Plan, the Bank hereby delegates the authority to interpret the provisions of the Plan to those persons, who from time to time, have such authority with respect to and under The Provident Bank Pension Plan.
5.5 In the event that any claim for benefits, which must initially be submitted in writing to the Board of Managers of the Bank, is denied (in whole or in part) hereunder, the claimant shall receive from the Bank notice in writing, written in a manner calculated to be understood by the claimant, setting forth the specific reasons for denial, with specific reference to pertinent provisions of this Plan. The interpretations and construction hereof by the Board of Managers shall be binding and conclusive on all persons and for all purposes. Any disagreements about such interpretations and construction shall be submitted to an arbitrator subject to the rules and procedures established by the American Arbitration Association. No member of the Board of Managers shall be liable to any person for any action taken hereunder except those actions undertaken with lack of good faith.
5.6 The Plan shall be interpretated and construed in accordance with the laws of the State of New Jersey.
Dated: June 18, 1992
EXCERPT FROM THE MINUTES OF THE BOARD OF MANAGERS
MEETING HELD OCTOBER 22, 1992
On motion made and duly seconded the Board of Managers unanimously adopted the following resolution:
BE IT RESOLVED that the Board of Managers deem it advisable to amend the Retirement Plan for the Board of Managers for the Provident Bank (the Plan) by providing that in the event that Provident is deemed to be "undercapitalized" as set forth in the applicable FDIC capital regulations or fails to satisfy the minimum capital requirement established from time to time by the New Jersey Department of Banking then Provident's obligations under the Plan shall cease until such time as Provident is deemed to be "well capitalized" under the applicable FDIC capital regulations and satisfies the minimum capital requirements of the Department of Banking at which time the Plan will be resumed.
Mary Louise Festa Corporate Secretary
Exhibit 10.8
THE PROVIDENT BANK
BOARD OF MANAGERS VOLUNTARY FEE DEFERRAL PLAN
The Provident Bank ("Bank"), amends and restates this Board of Managers Voluntary Fee Deferral Plan ("Plan") effective October 23, 1997 , to enable any non-employee member of the Board of Managers ("eligible member") to defer future fees payable to them for their service as a member of the Bank Board of Managers.
1. Election to Defer. Any eligible member may participate in this Plan by executing a form of deferral election, a copy of which is annexed hereto as Exhibit "A", under which each calendar year the eligible member can elect irrevocably to defer the receipt of all (but not less than all) of any fees that may be paid to the member. In no event shall any deferral of fees be permitted which the eligible member would otherwise have the unrestricted right to receive currently. Except for the first year of the Plan, any election by an eligible member to defer future fees shall be made in the calendar year next preceding the calendar year the fees would be earned. Subject to the provisions of the Plan, an eligible member's election shall specify in the deferral election form when and in what manner distribution shall be made of any deferred fees. If the eligible member fails to choose a year of distribution, it shall be deemed to be the year of his normal retirement. If the eligible member fails to specify a form of payment, he shall be deemed to have
elected a lump-sum distribution.
2. Period of Deferral. An eligible member may defer his fees to a future year as selected by him. However, in no event shall any fee otherwise payable on account of any year after 1997 be deferred so that the distribution begins beyond the year of the eligible member's normal retirement from the Board of Managers.
3. Investment and Adjustment of Deferred Fees. Subject to Paragraph 6, any fees deferred pursuant to an eligible member's election as aforesaid shall be credited to a separate account maintained in the name of such member. The value of each account shall be credited monthly with interest at the then prevailing Wall Street Prime Rate. For purposes of making any distribution under paragraph 4 below the value of an eligible member's interest in the account shall be its value, adjusted with interest as aforesaid, as of the last day of the month next preceding the month distribution occurs.
4. Payment of Deferred Fees. Except as otherwise provided in this paragraph, or in the case of a "Change in Control" described in paragraph 5, the amount of an eligible member's separate account (adjusted as provided in paragraph 3) shall be distributed to the eligible member in a lump-sum or in annual installments after such number of years or after retiring from the Board of Managers as he may elect in accordance with paragraph 2, or, in the event of his death or total disability, in a lump-sum to the member or to the person
or persons designated by the eligible member to receive such distribution. An eligible member who wishes to receive a distribution of his separate account in installments may elect to receive it in annual installments over a period of three (3) years. If distribution is to be made in annual installments, the amount of each installment shall be equal to the adjusted value of the eligible member's separate account determined in accordance with paragraph 3 above multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining to be made. If an eligible member's service is terminated but he has not attained age 65, the undistributed balance of his account shall be paid to him in a single lump sum within a reasonable time following termination of service. If an eligible member's service is terminated on or after age 65, he shall receive the balance of his separate account at such time and in such form as he has elected or, the Board of Managers may, in its sole discretion, after receipt of a written request by such member, pay the undistributed balance of such member's separate account in a single lump sum within a reasonable time following termination of service.
5. Distribution in the Event of a Change in Control. Notwithstanding any other provision of this Plan or of any election made by an eligible member with respect to the period of any fee deferral or the form and timing of any distributions from his separate account, the undistributed
balance thereof shall be distributed to him within 60 days after the date of a "Change in Control" as hereafter defined. For purposes hereof, a "Change in Control" shall be deemed to have occurred if The Provident Bank is merged or consolidated with, or acquired or controlled by, any person, company or financial institution; provided, however, that no Change in Control shall be deemed to have occurred as a result of the following events: (a) a merger or consolidation of The Provident Bank with one or more financial institutions in which The Provident Bank is the "receiving savings bank" (as defined in N.J.S.A. 17:9A-205 (B)(2)), or in which The Provident Bank is otherwise deemed to be the successor entity; (b) a conversion of The Provident Bank into a capital stock savings bank pursuant to federal or state law, provided that the capital stock savings bank (or its parent holding company) is not "controlled" by any person or company, as defined in the federal Bank Holding Company Act (other than mutual holding company formed by The Provident Bank); (c) the formation of a mutual holding company and subsidiary capital stock savings bank by The Provident Bank, provided that at least a majority of the capital of the subsidiary capital stock savings bank or its parent holding company is owned by the mutual holding company; or (d) a charter conversion by The Provident Bank into any other form of state or federally-chartered financial institution.
6. Rights of Eligible Member or Other Distributee.
Nothing contained herein, and no action taken pursuant to the provisions hereof shall create, or be deemed to create a trust of any kind, or to establish any fiduciary relationship between the Bank and any eligible member or other distributee. All payments made pursuant to this Plan shall be made from the general assets of the Bank. A separate account established hereunder shall be for record keeping purposes. Fees which have been deferred will be recorded as a liability on the Bank's general ledger when earned, but no funds shall be set aside for payment of the liability. Deferred fees shall be subject to the claims of the Bank's general creditors at all times prior to distribution. To the extent that any person acquires a right to receive payments from the Bank under the provisions hereof, such right shall be no greater than the right of an unsecured general creditor of the Bank.
7. Designation of Beneficiary. An eligible member may designate one or more person or persons to receive the undistributed balance of his deferred fees in the event of his death by executing and delivering to the Bank a beneficiary designation form, a copy of which is annexed hereto as Exhibit "B", and may change and successively change any such designation by executing a subsequent beneficiary designation form. Unless the beneficiary designation form indicates otherwise, any designation of beneficiary shall be deemed to apply to the undistributed balance of all of the eligible
member's prior deferrals. If there is no valid beneficiary designation on file with the Bank on the date of death of the eligible member, the undistributed balance of deferred fees shall be paid to the personal representative of his estate.
8. Nonassignability of Benefits. Neither the eligible member nor any other person shall have any power or right to assign, anticipate, hypothecate or otherwise encumber any deferred fees payable by the Bank hereunder, nor shall any such fees be transferable by operation of law in the event of the bankruptcy or insolvency of the eligible member or other person.
9. Administration of the Plan. The Board of Managers shall have the exclusive authority to manage and control the operation and administration of the Plan and shall be the named fiduciary as described in section 402(a) of the Employee Retirement Income Security Act of 1974. The Board of Managers shall make all determinations regarding the right of any person to receive a benefit under the Plan and to determine the amount and time of distribution thereof in accordance with the provisions of this Plan and the eligible member's election. The interpretation and construction of this Plan by the Board of Managers, and any action taken hereunder, shall be binding and conclusive upon the eligible member and any other person claiming any rights hereunder. The Board of Managers may from time to time delegate to such person or persons or to such
committee as it shall designate any one or more of its administrative duties under the Plan.
10. Right to Amend and Terminate the Plan. The Bank reserves the right to amend the Plan in whole or in part and to terminate the Plan at any time, provided that no such action shall affect the rights of any eligible member or other person to receive payment of benefits in accordance with the terms of the Plan as in effect on the day immediately preceding the effective date of such amendment or termination.
11. Special Terms, Gender and Number. Whenever used herein, the term "Board of Managers" shall mean the Board of Managers of The Provident Bank. The term "normal retirement" means the date of the Board of Managers Annual Meeting after the manager attains his seventieth birthday. The term "total disability" shall mean a physical or mental condition that renders an eligible member incapable of carrying out the ordinary duties and responsibilities of his usual occupation. Whenever the context shall require, the masculine gender shall be construed to include the feminine and the singular number the plural.
12. Incompetency. If the Board of Managers determines that an eligible member (or the designated beneficiary of an eligible member) is unable to manage his affairs, it may, in its sole discretion, pay any amount due to such person to the individual or institution then providing for the care,
maintenance and support of such person, unless prior to such payment claim shall be made therefor by a duly appointed guardian, committee or other legal representative designated to receive such payment on behalf of such person.
13. Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of New Jersey to the extent not inconsistent with applicable federal law.
IN WITNESS WHEREOF, The Provident Bank has adopted this Plan effective as of October 23, 1997.
THE PROVIDENT BANK
By: /s/ Paul M. Pantozzi
-----------------------
Its President
|
Exhibit 10.9
THE PROVIDENT BANK
VOLUNTARY BONUS DEFERRAL PLAN FOR THE CHAIRMAN
The Provident Bank ("Bank"), establishes this Voluntary Bonus Deferral Plan For the Chairman ("Plan") effective October 22, 1998 , to enable eligible employees to defer some part, or all, of any future bonus which is determined in January for the previous year by the Board of Managers.
1. Election to Defer. An eligible employee may participate in this Plan by executing a form of deferral election, a copy of which is annexed hereto as Exhibit "A", under which each calendar year the eligible employee can elect irrevocably to defer the receipt of either one-quarter (1/4), one-half (1/2) or all of any eligible bonus that may be awarded to the employee in the following calendar year. In no event shall any bonus deferral be permitted with respect to any bonus previously or concurrently awarded and which the eligible employee would otherwise have the unrestricted right to receive currently. Except for the first year of the Plan, any election by an eligible employee to defer a future bonus shall be made in the calendar year next preceding the calendar year of the bonus award. Subject to the provisions of the Plan, an eligible employee's election shall specify in the deferral election form when and in what manner distribution shall be made of any deferred bonus awards and shall further designate the person or persons to receive distribution thereof in the event of his death.
2. Period of Deferral. An eligible employee may defer a bonus award for a period of 5 years or until attainment of age 65, but in no event shall any amount be deferred beyond the April 1 following the taxable year in which such employee attains age 65.
3. Investment and Adjustment of Bonus Awards. The Bank shall establish a Fund in order to provide for the payment of the amounts due under this Plan. The Fund shall be held separate and apart from other assets of the Bank and shall be used exclusively for the uses and purposes herein set forth. The Employees, their beneficiaries, and the Plan shall not have any preferred claim on, or any beneficial ownership interest in, any assets of the Fund prior to the time such assets are to be paid to the Employee or his beneficiary as set forth in the Plan. All rights created under the Plan shall be deemed unsecured contractual rights of the Employees against the Bank until such time as the Employees or their beneficiaries are entitled to receipt of their separate account.
The Fund shall be invested by the Board of Managers, in its sole discretion, after consulting with the eligible Employees, in a portfolio of assets. The portfolio of assets shall consist of any combination of stocks, bonds, notes, mutual funds, certificates of deposit, money-market funds, or other cash equivalent investments. From time to time the value of the portfolio shall be adjusted to reflect all
interest paid or accrued thereon, as well as any realized and unrealized gains and losses. A separate account shall be maintained in the name of each eligible employee which account shall be credited with the amount of such employee's deferred bonuses. From time to time, the value of each account shall be adjusted to reflect its proportionate share of the net increment or decrement in the portfolio of assets established hereunder. For purposes of making any distribution under paragraph 4 below the value of an eligible employee's interest in the portfolio shall be its value (adjusted as aforesaid) as of the last day of the month next preceding the month distribution occurs. Appropriate payroll and other taxes shall be withheld from all payments made under the terms of this Plan.
4. Payment of Deferred Bonus Awards. Except as otherwise provided in this paragraph, or in the case of a hardship distribution described in paragraph 5 or a "Change in Control" described in paragraph 6, the amount of an eligible employee's separate account (adjusted as provided in paragraph 3) shall always be 100% vested and shall be distributed to the eligible employee in a lump-sum or in semi-annual installments after such number of years or after attaining such age as he may elect in accordance with paragraph 2, or, in the event of his death or total disability, in a lump-sum to the employee or to the person or persons designated by the eligible employee to receive such distribution. An eligible employee
who wishes to receive a distribution of his separate account in installments may elect to receive it over either three (3) or five (5) years in semi-annual installments payable on April 1 and October 1. If distribution is to be made in semi-annual installments, the amount of each installment shall be equal to the adjusted value of the eligible employee's separate account determined in accordance with paragraph 3 above multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining to be made. If an eligible employee's service is terminated for reasons other than death or disability prior to his attainment of age 62, the undistributed balance of such employee's separate account shall be paid to him in a single lump sum within a reasonable time following termination of service. If an eligible employee's service is terminated for reasons other than his death or total disability after he attains age 62, the Board of Managers may, in its sole discretion, after receipt of a written request by such employee, pay the undistributed balance of such employee's separate account in a single lump sum within a reasonable time following termination of service. The preceding two sentences shall govern notwithstanding that such payment would be made prior to the year it is otherwise due in full or scheduled to commence in installments in accordance with such employee's election.
5. Hardship Distributions. Notwithstanding the provisions of paragraphs 1 and 4 hereof, upon request of an
eligible employee the Board of Managers, in its sole discretion, may permit the distribution of some portion or all of his separate account prior to the time or times otherwise specified in such employee's deferral election. Such distribution shall only be permitted upon a finding by the Board of Managers of a demonstrated financial hardship of the eligible employee. The term "demonstrated financial hardship" means a financial need of the eligible employee attributable to unreimbursed medical expenses exceeding $5,000 incurred in behalf of the eligible employee, his spouse, children or any other dependents included in such employee's federal income tax return. Any distribution made pursuant to this paragraph shall, in all cases, be limited by the Board of Managers to the amount of the demonstrated financial need.
6. Distribution in the Event of a Change in Control. Notwithstanding any other provision of this Plan or of any election made by an eligible employee with respect to the period of any bonus deferral or the form and timing of any distributions from his separate account, the undistributed balance thereof shall be distributed to him within 60 days after the date of a "Change in Control" as hereafter defined. For purposes hereof, a "Change in Control" shall be deemed to have occurred if The Provident Bank is merged or consolidated with, or acquired or controlled by, any person, company or financial institution; provided, however, that no Change in Control shall be deemed to have occurred as a result of the
following events: (a) a merger or consolidation of The Provident Bank with one or more financial institutions in which The Provident Bank is the "receiving savings bank" (as defined in N.J.S.A. 17:9A-205 (B)(2)), or in which The Provident Bank is otherwise deemed to be the successor entity; (b) a conversion of The Provident Bank into a capital stock savings bank pursuant to federal or state law, provided that the capital stock savings bank (or its parent holding company) is not "controlled" by any person or company, as defined in the federal Bank Holding Company Act (other than mutual holding company formed by The Provident Bank); (c) the formation of a mutual holding company and subsidiary capital stock savings bank by The Provident Bank, provided that at least a majority of the capital of the subsidiary capital stock savings bank or its parent holding company is owned by the mutual holding company; or (d) a charter conversion by The Provident Bank into any other form of state or federally-chartered financial institution.
7. Rights of Eligible Employee or Other Distributee. Nothing contained herein, and no action taken pursuant to the provisions hereof shall create, or be deemed to create a trust of any kind, or to establish any fiduciary relationship between the Bank and any eligible employee or other distributee. All payments made pursuant to this Plan shall be made from the general assets of the Bank. To the extent that any person acquires a right to receive payments from the Bank
under the provisions hereof, such right shall be no greater than the right of an unsecured general creditor of the Bank. The Bank shall retain and exercise all rights of ownership of any assets of the portfolio established in accordance with paragraph 3 hereof, and neither the eligible employee nor any other person shall have any claim or right to any of such funds or other property.
8. Nonassignability of Benefits. Neither the eligible employee nor any other person shall have any power or right to assign, anticipate, hypothecate or otherwise encumber any deferred bonus awards payable by the Bank hereunder, nor shall any such awards be transferable by operation of law in the event of the bankruptcy or insolvency of the eligible employee or other person.
9. Administration of the Plan. The Board of Managers shall have the exclusive authority to manage and control the operation and administration of the Plan and shall be the named fiduciary as described in section 402(a) of the Employee Retirement Income Security Act of 1974. The Board of Managers shall make all determinations regarding the right of any person to receive a benefit under the Plan and to determine the amount and time of distribution thereof in accordance with the provisions of this Plan and the eligible employee's election. The interpretation and construction of this Plan by the Board of Managers, and any action taken hereunder, shall be binding and conclusive upon the eligible employee and any
other person claiming any rights hereunder. The Board of Managers may from time to time delegate to such person or persons or to such committee as it shall designate any one or more of its administrative duties under the Plan.
In the event that any claim for benefits, which must initially be submitted in writing to the Board of Managers of the Bank, is denied (in whole or in part) hereunder, the claimant shall receive from the Bank notice in writing, written in a manner calculated to be understood by the claimant, setting forth the specific reasons for the denial, with specific reference to pertinent provisions of this Plan. The interpretations and construction hereof by the Board of Managers shall be binding and conclusive on all persons and for all purposes. Any disagreements about such interpretations and construction shall be submitted to an arbitrator subject to the rules and procedures established by the American Arbitration Association. No member of the Board of Managers shall be liable to any person for any action taken hereunder except those actions undertaken with lack of good faith.
10. Right to Amend and Terminate the Plan. The Board of Managers reserves the right to amend the Plan in whole or in part and to terminate the Plan at any time, provided that no such action shall affect the rights of any eligible employee or other person to receive payment of benefits in accordance with the terms of the Plan as in effect on the day immediately preceding the effective date of such amendment or termination.
11. Special Terms, Gender and Number. Whenever used herein, the term "Board of Managers" shall mean the Board of Managers of The Provident Bank. The term "total disability" shall mean a physical or mental condition that renders an eligible employee incapable of carrying out the ordinary duties and responsibilities of his usual occupation. Whenever the context shall require, the masculine gender shall be construed to include the feminine and the singular number the plural.
12. Incompetency. If the Board of Managers determines that an eligible employee (or the designated beneficiary of an eligible employee) is unable to manage his affairs, it may, in its sole discretion, pay any amount due to such person to the individual or institution then providing for the care, maintenance and support of such person, unless prior to such payment claim shall be made therefor by a duly appointed guardian, committee or other legal representative designated to receive such payment on behalf of such person.
13. Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of New Jersey to the extent not inconsistent with applicable federal law.
IN WITNESS WHEREOF, The Provident Bank has adopted this Deferred Bonus Plan effective as of October 22, 1998.
THE PROVIDENT BANK
By: /s/ Paul M. Pantozzi
------------------------------
Paul M. Pantozzi
|
Its Chairman, Chief Executive Officer, and President
Exhibit 10.10
THE PROVIDENT BANK
VOLUNTARY BONUS DEFERRAL PLAN
The Provident Bank ("Bank"), establishes this Voluntary Bonus Deferral Plan ("Plan") effective January 25, 1996 , to enable eligible employees to defer some part, or all, of any future bonus awarded to them under the Bank's Management Incentive Bonus Program ("MIBP").
1. Election to Defer. An eligible employee may participate in this Plan by executing a form of deferral election, a copy of which is annexed hereto as Exhibit "A", under which each calendar year the eligible employee can elect irrevocably to defer the receipt of either one-half (1/2) or all of any bonus that may be awarded to the employee under the MIBP in the following calendar year. In no event shall any bonus deferral be permitted with respect to any bonus previously or concurrently awarded under the MIBP and which the eligible employee would otherwise have the unrestricted right to receive currently. Except for the first year of the Plan, any election by an eligible employee to defer a future bonus shall be made in the calendar year next preceding the calendar year of the bonus award. Subject to the provisions of the Plan, an eligible employee's election shall specify in the deferral election form when and in what manner distribution shall be made of any deferred bonus awards and shall further designate the person or persons to receive distribution thereof in the event of his death.
2. Period of Deferral. An eligible employee may defer a bonus award for a period of 5 years, 10 years, or until attainment of age 60 or 65 as he may elect, but in no event shall any amount be deferred beyond the taxable year in which such employee attains age 65.
3. Investment and Adjustment of Bonus Awards. Any award deferred pursuant to an eligible employee's election as aforesaid shall be invested by the Board of Managers, 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. From time to time the value of the portfolio shall be adjusted to reflect all interest paid or accrued thereon, as well as any realized and unrealized gains and losses. A separate account shall be maintained in the name of each eligible employee which account shall be credited with the amount of such employee's deferred bonuses. From time to time, the value of each account shall be adjusted to reflect its proportionate share of the net increment or decrement in the portfolio of assets established hereunder. For purposes of making any distribution under paragraph 4 below the value of an eligible employee's interest in the portfolio shall be its value (adjusted as aforesaid) as of the last day of the month next preceding the month distribution occurs.
4. Payment of Deferred Bonus Awards. Except as
otherwise provided in this paragraph, or in the case of a hardship distribution described in paragraph 5 or a "Change in Control" described in paragraph 6, the amount of an eligible employee's separate account (adjusted as provided in paragraph 3) shall be distributed to the eligible employee in a lump-sum or in annual installments after such number of years or after attaining such age as he may elect in accordance with paragraph 2, or, in the event of his death or total disability, in a lump-sum to the employee or to the person or persons designated by the eligible employee to receive such distribution. An eligible employee who wishes to receive a distribution of his separate account in installments may elect to receive it in either three (3) or five (5) annual installments. If distribution is to be made in annual installments, the amount of each installment shall be equal to the adjusted value of the eligible employee's separate account determined in accordance with paragraph 3 above multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining to be made. If an eligible employee's service is terminated for reasons other than death or disability prior to his attainment of age 62, the undistributed balance of such employee's separate account shall be paid to him in a single lump sum within a reasonable time following termination of service. If an eligible employee's service is terminated for reasons other than his death or total disability after he attains age 62,
the Board of Managers may, in its sole discretion, after receipt of a written request by such employee, pay the undistributed balance of such employee's separate account in a single lump sum within a reasonable time following termination of service. The preceding two sentences shall govern notwithstanding that such payment would be made prior to the year it is otherwise due in full or scheduled to commence in installments in accordance with such employee's election.
5. Hardship Distributions. Notwithstanding the provisions of paragraphs 1 and 4 hereof, upon request of an eligible employee the Board of Managers, in its sole discretion, may permit the distribution of some portion or all of his separate account prior to the time or times otherwise specified in such employee's deferral election. Such distribution shall only be permitted upon a finding by the Board of Managers of a demonstrated financial hardship of the eligible employee. The term "demonstrated financial hardship" means a financial need of the eligible employee attributable to (a) unreimbursed medical expenses exceeding $5,000 incurred in behalf of the eligible employee, his spouse, children or any other dependents included in such employee's federal income tax return, or (b) the cost of tuition and other expenses incurred in connection with the post-secondary education of the eligible employee or any of his dependents, or (c) expenses incurred in the purchase of the eligible employee's primary residence. Any distribution made pursuant
to this paragraph shall, in all cases, be limited by the Board of Managers to the amount of the demonstrated financial need.
6. Distribution in the Event of a Change in Control. Notwithstanding any other provision of this Plan or of any election made by an eligible employee with respect to the period of any bonus deferral or the form and timing of any distributions from his separate account, the undistributed balance thereof shall be distributed to him within 60 days of the date of a "Change in Control" as hereafter defined. For purposes hereof, a "Change in Control" shall be deemed to have occurred if The Provident Bank is merged or consolidated with, or acquired or controlled by, any person, company or financial institution; provided, however, that no Change in Control shall be deemed to have occurred as a result of the following events: (a) a merger or consolidation of The Provident Bank with one or more financial institutions in which The Provident Bank is the "receiving savings bank" (as defined in N.J.S.A. 17:9A-205 (B)(2)), or in which The Provident Bank is otherwise deemed to be the successor entity; (b) a conversion of The Provident Bank into a capital stock savings bank pursuant to federal or state law, provided that the capital stock savings bank (or its parent holding company) is not "controlled" by any person or company, as defined in the federal Bank Holding Company Act (other than mutual holding company formed by The
Provident Bank); (c) the formation of a mutual holding company and subsidiary capital stock savings bank by The Provident Bank, provided that at least a majority of the capital of the subsidiary capital stock savings bank or its parent holding company is owned by the mutual holding company; or (d) a charter conversion by The Provident Bank into any other form of state or federally-chartered financial institution.
7. Rights of Eligible Employee or Other Distributee. Nothing contained herein, and no action taken pursuant to the provisions hereof shall create, or be deemed to create a trust of any kind, or to establish any fiduciary relationship between the Bank and any eligible employee or other distributee. All payments made pursuant to this Plan shall be made from the general assets of the Bank. To the extent that any person acquires a right to receive payments from the Bank under the provisions hereof, such right shall be no greater than the right of an unsecured general creditor of the Bank. The Bank shall retain and exercise all rights of ownership of any assets of the portfolio established in accordance with paragraph 3 hereof, and neither the eligible employee nor any other person shall have any claim or right to any of such funds or other property.
8. Nonassignability of Benefits. Neither the eligible employee nor any other person shall have any power or right to assign, anticipate, hypothecate or otherwise encumber any deferred bonus awards payable by the Bank hereunder, nor shall
any such awards be transferable by operation of law in the event of the bankruptcy or insolvency of the eligible employee or other person.
9. Administration of the Plan. The Board of Managers shall have the exclusive authority to manage and control the operation and administration of the Plan and shall be the named fiduciary as described in section 402(a) of the Employee Retirement Income Security Act of 1974. The Board of Managers shall make all determinations regarding the right of any person to receive a benefit under the Plan and to determine the amount and time of distribution thereof in accordance with the provisions of this Plan and the eligible employee's election. The interpretation and construction of this Plan by the Board of Managers, and any action taken hereunder, shall be binding and conclusive upon the eligible employee and any other person claiming any rights hereunder. The Board of Managers may from time to time delegate to such person or persons or to such committee as it shall designate any one or more of its administrative duties under the Plan.
10. Right to Amend and Terminate the Plan. The Bank reserves the right to amend the Plan in whole or in part and to terminate the Plan at any time, provided that no such action shall affect the rights of any eligible employee or other person to receive payment of benefits in accordance with the terms of the Plan as in effect on the day immediately preceding the effective date of such amendment or termination.
11. Special Terms, Gender and Number. Whenever used herein, the term "Board of Managers" shall mean the Board of Managers of The Provident Bank. The term "total disability" shall mean a physical or mental condition that renders an eligible employee incapable of carrying out the ordinary duties and responsibilities of his usual occupation. Whenever the context shall require, the masculine gender shall be construed to include the feminine and the singular number the plural.
12. Incompetency. If the Board of Managers determines that an eligible employee (or the designated beneficiary of an eligible employee) is unable to manage his affairs, it may, in its sole discretion, pay any amount due to such person to the individual or institution then providing for the care, maintenance and support of such person, unless prior to such payment claim shall be made therefor by a duly appointed guardian, committee or other legal representative designated to receive such payment on behalf of such person.
13. Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of New Jersey to the extent not inconsistent with applicable federal law.
IN WITNESS WHEREOF, The Provident Bank has adopted this Deferred Bonus Plan effective as of January 25, 1996.
THE PROVIDENT BANK
By: /s/ Paul M. Pantozzi
--------------------------
Its President and Chief
Executive Officer
|
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of Provident Financial Services, Inc. following the Conversion:
Name State of Incorporation ---- ---------------------- The Provident Bank New Jersey (100% Owned) |
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" and "Experts" in the prospectus.
/s/ KPMG LLP ----------------------- KPMG LLP Short Hills, New Jersey August 16, 2002 |
Exhibit 23.3
[LETTERHEAD OF RP FINANCIAL, LC.]
August 15, 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 applications for the conversion and holding company formation 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.
Sincerely,
/s/ RP Financial, LC. RP FINANCIAL, LC. |
Exhibit 99.1
[LETTERHEAD OF RP FINANCIAL, LC.]
May 14, 2002
Mr. Kevin J. Ward
Executive Vice President and Chief Operating Officer
The Provident Bank
830 Bergen Avenue
Jersey City, New Jersey 07306-4599
Dear Mr. Ward:
This letter sets forth the agreement between The Provident Bank, Jersey City, New Jersey ("Provident" or the "Bank"), and RP Financial, LC. ("RP Financial") for independent conversion appraisal services pertaining to the Bank's simultaneous holding company formation and mutual-to-stock conversion. The specific appraisal services to be rendered by RP Financial are described below. These services will be directed by the undersigned.
Description of Appraisal Services
Prior to preparing the conversion appraisal report, RP Financial will conduct a financial due diligence, including on-site interviews of senior management and reviews of financial and other documents and records, to gain insight into the Bank's operations, financial condition, profitability, market area, risks and various internal and external factors which impact the pro forma market value of the Bank.
RP Financial will prepare a detailed written valuation report of the Bank that will be fully consistent with applicable federal regulatory guidelines and standard pro forma valuation practices. The appraisal report will include an analysis of the Bank's financial condition and operating results, as well as an assessment of the Bank's interest rate risk, credit risk and liquidity risk. The appraisal report will describe the Bank's business strategies, market area, prospects for the future and the intended use of proceeds. A peer group analysis relative to comparable publicly-traded savings institutions will be conducted for the purpose of determining appropriate valuation adjustments for the Bank relative to the peer group.
We will review pertinent sections of the Bank's prospectus and hold discussions with the Bank to obtain necessary data and information for the appraisal report, including the impact of key deal elements on the pro forma market value, such as dividend policy, use of proceeds and reinvestment rate, tax rate, conversion expenses and characteristics of stock plans.
The appraisal report will establish a midpoint pro forma market value. The appraisal report may be periodically updated throughout the conversion process as appropriate. The conversion appraisal guidelines require at least one updated valuation just prior to the time of the closing of the stock offering.
Mr. Kevin J. Ward
May 14, 2002
RP Financial agrees to deliver the appraisal report and subsequent updates, in writing, to the Bank at the above address in conjunction with the filing of the regulatory application. Subsequent updates will be filed promptly as certain events occur which would warrant the preparation and filing of such valuation updates. Further, RP Financial agrees to perform such other services as are necessary or required in connection with the regulatory review of the appraisal and respond to the regulatory comments, if any, regarding the valuation appraisal and subsequent updates. RP Financial expects to formally present the appraisal report, including the appraisal methodology, peer group selection and assumptions, to the Board of Managers for review and acceptance.
Fee Structure
The Bank agrees to pay RP Financial a fixed fee of $100,000 for preparation and delivery of the original appraisal report and appraisal update at closing. The Bank agrees to pay RP Financial an additional fixed fee of $5,000 for preparation and delivery of each additional interim appraisal update required, if any. Payment of these fees shall be made according to the following schedule:
. $10,000 upon execution of the letter of agreement engaging RP Financial's appraisal services;
. $85,000 upon delivery of the completed original appraisal report;
. $5,000 upon delivery of the final appraisal update at the closing of the conversion offering; and,
. $5,000 upon delivery of each interim appraisal update, if any.
The Bank will reimburse RP Financial for out-of-pocket expenses incurred in preparation of the valuation reports. Such out-of-pocket expenses will likely include travel, printing, telephone, facsimile, shipping, computer and data services. RP Financial will agree to limit reimbursable expenses in conjunction with the business planning engagement to $10,000 subject to written authorization from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue the proposed conversion prior to delivery of the completed documents set forth above and payment of the respective progress payment fees, the Bank agrees to compensate RP Financial according to RP Financial's standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted above, after giving full credit to the initial retainer fee. RP Financial's standard billing rates range from $75 per hour for research associates to $250 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur so as to fundamentally change the nature or the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank and RP Financial. Such unforeseen events shall include, but not be limited to, major
Mr. Kevin J. Ward
May 14, 2002
changes in the conversion regulations, appraisal guidelines or processing procedures as they relate to conversion appraisals, major changes in management or procedures, operating policies or philosophies, and excessive delays or suspension of processing of conversion applications by the regulators such that completion of the conversion transaction requires the preparation by RP Financial of a new appraisal.
Representations and Warranties
The Bank and RP Financial agree to the following:
1. The Bank agrees to make available or to supply to RP Financial such information with respect to its business and financial condition as RP Financial may reasonably request in order to provide the aforesaid valuation. Such information heretofore or hereafter supplied or made available to RP Financial shall include: annual financial statements, periodic regulatory filings and material agreements, debt instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and records. All information provided by the Bank to RP Financial shall remain strictly confidential (unless such information is otherwise made available to the public), and if the conversion is not consummated or the services of RP Financial are terminated hereunder, RP Financial shall upon request promptly return to the Bank the original and any copies of such information.
2. The Bank hereby represents and warrants to RP Financial that any information provided to RP Financial does not and will not, to the best of the Bank's knowledge, at the times it is provided to RP Financial, contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.
3. (a) The Bank agrees that it will indemnify and hold harmless RP Financial, any affiliates of RP Financial, the respective directors, officers, agents and employees of RP Financial or their successors and assigns who act for or on behalf of RP Financial in connection with the services called for under this agreement (hereinafter referred to as "RP Financial"), from and against any and all losses, claims, damages and liabilities (including, but not limited to, all losses and expenses in connection with claims under the federal securities laws) attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information furnished or otherwise provided by the Bank to RP Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact from the financial statements or other information furnished or otherwise made available by the Bank to RP Financial; or (iii) any action or omission to act by the Bank, or the Bank's respective officers, board of managers, employees or agents which action or omission is willful or negligent. The Bank will be under no obligation to indemnify RP Financial hereunder if a court determines that RP Financial was negligent or acted in bad faith with respect to any actions or omissions of RP Financial related to a matter for which indemnification is sought hereunder. Any time devoted by employees of RP Financial to situations for which indemnification is provided hereunder, shall be an indemnifiable cost payable by the Bank at the normal hourly professional rate chargeable by such employee.
Mr. Kevin J. Ward
May 14, 2002
(b) RP Financial shall give written notice to the Bank of such claim or facts within thirty days of the assertion of any claim or discovery of material facts upon which the RP Financial intends to base a claim for indemnification hereunder. In the event the Bank elects, within seven days of the receipt of the original notice thereof, to contest such claim by written notice to RP Financial, RP Financial will be entitled to be paid any amounts payable by the Bank hereunder, together with interest on such costs from the date incurred at the annual rate of prime plus two percent within five days after the final determination of such contest either by written acknowledgement of the Bank or a final judgment of a court of competent jurisdiction. If the Bank does not so elect, RP Financial shall be paid promptly and in any event within thirty days after receipt by the Bank of the notice of the claim.
(c) The Bank shall pay for or reimburse the reasonable expenses, including attorneys' fees, incurred by RP Financial in advance of the final disposition of any proceeding within thirty days of the receipt of such request if RP Financial furnishes the Bank: (1) a written statement of RP Financial's good faith belief that it is entitled to indemnification hereunder; and (2) a written undertaking to repay the advance if it ultimately is determined in a final adjudication of such proceeding that it or he is not entitled to such indemnification.
(d) If an indemnification is to be sought hereunder by RP Financial, then RP Financial shall promptly notify the Bank of the commencement of any action or proceeding or investigation in respect thereof but failure to so notify the Bank shall not relieve the Bank from any liability which it may have otherwise than on account of this agreement. The Bank shall be entitled to assume the defense of any action for which indemnification is sought hereunder with counsel of its choice at its expense (in which case it shall not thereafter be responsible for the fees and expenses of any separate counsel retained by RP Financial except as set forth below); provided, however, that such counsel shall be satisfactory to RP Financial in the exercise of its reasonable judgment. Notwithstanding the Bank's election to assume the defense of such action, RP Financial shall have the right to employ separate counsel and to participate in the defense of such action and the Bank shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of such counsel chosen by the Bank to represent RP Financial would present such counsel with a conflict of interest (in which case the Bank shall not have the right to assume the defense of such action on RP Financial's behalf); (ii) the actual or potential defendant's in, or targets of, any such action include both the Bank and RP Financial, and RP Financial shall have reasonably concluded that there may be legal defenses available to RP Financial which are different from or additional to those available to the Bank (in which case the Bank shall not have the right to assume the defense of such action on RP Financial's behalf); (iii) the Bank shall not have employed counsel reasonably satisfactory to RP Financial to represent RP Financial within a reasonable time after notice of the institution of such action; or (iv) the Bank shall authorize in writing RP Financial to employ separate counsel at the Bank's expense. It is expressly understood that the Bank shall only be obligated to pay for one separate counsel (in addition to any required local counsel) in any one action or proceeding or group of related actions or proceedings for all indemnified parties collectively. The Bank will not be liable under this letter agreement for any amount paid by RP Financial to settle any claims or actions if the settlement is entered into without the Bank's consent, which shall not be reasonably withheld.
Mr. Kevin J. Ward
May 14, 2002
(e) In the event the Bank does not pay any indemnified loss or make advance reimbursements of expenses in accordance with the terms of this agreement, RP Financial shall have all remedies available at law or in equity to enforce such obligation.
It is understood that, in connection with RP Financial's above-mentioned engagement, RP Financial may also be engaged to act for the Bank in one or more additional capacities, and that the terms of the original engagement may be embodied in one or more separate agreements. The provisions of Paragraph 3 herein shall apply to the original engagement, any such additional engagement, any modification of the original engagement or such additional engagement and shall remain in full force and effect following the completion or termination of RP Financial's engagement(s). This agreement constitutes the entire understanding of the Bank and RP Financial concerning the subject matter addressed herein, and such contract shall be governed and construed in accordance with the laws of the Commonwealth of Virginia. This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.
Provident and RP Financial are not affiliated, and neither Provident nor RP Financial has an economic interest in, or is held in common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter, together with the initial retainer fee of $10,000.
Sincerely,
/s/ William E. Pommerening CEO and Managing Director |
Agreed To and Accepted By:
Mr. Kevin J. Ward
May 14, 2002
/s/ Kevin J. Ward, Executive Vice President and Chief Operating Officer
Upon Authorization by the Board of Managers For: The Provident Bank
Jersey City, New Jersey
|
Date Executed: May 21, 2002
Exhibit 99.2
PRO FORMA VALUATION REPORT
PROVIDENT FINANCIAL SERVICES, INC.
PROPOSED HOLDING COMPANY FOR
THE PROVIDENT BANK
Jersey City, New Jersey
Dated As Of:
August 2, 2002
Prepared By:
RP Financial, LC.
1700 North Moore Street
Suite 2210
Arlington, Virginia 22209
RP FINANCIAL, LC.
Financial Services Industry Consultants
August 2, 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 independent appraisal ("Appraisal") of the estimated pro forma market value of the Common Stock which is to be offered in connection with the mutual-to-stock conversion ("Reorganization") described below.
This Appraisal 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.
Description of Reorganization
We understand that 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 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.
Washington Headquarters Telephone: (703)528-1700 Rosslyn Center Fax No.: (703)528-1788 1700 North Moore Street, Suite 2210 Toll-Free No.: (866)723-0594 Arlington, VA 22209 E-Mail: mail@rpfinancial.com www.rpfinancial.com |
RP Financial, LC. Boards of Directors August 2, 2002 Page 2 |
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.
RP Financial, LC.
RP Financial, LC. ("RP Financial") is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee we will receive for our appraisal and assisting Provident and Provident Financial in the preparation of the post-conversion business plan, we are independent of the Holding Company, the Bank, and the other parties engaged by Provident or Provident Financial to assist in the stock conversion process.
Valuation Methodology
In preparing our appraisal, we have reviewed the Bank's and the Holding Company's regulatory applications, including the prospectus as filed with the Department, FDIC, FRB and the Securities and Exchange Commission ("SEC"). We have conducted a financial analysis of the Bank that has included a review of its audited financial information for fiscal years ended December 31, 1997 through 2001, and as of June 30, 2002, and due diligence related discussions with the Bank's management; KPMG Peat Marwick, the Bank's independent auditor; Luse Gorman Pomerenk & Schick, P.C., the Bank's legal counsel for the stock conversion, and Sandler O'Neill & Partners, L.P., the Bank's financial and marketing advisors in connection with Provident Financial's stock offering. All conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.
We have investigated the competitive environment within which Provident operates and have assessed the Bank's relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment and analyzed the potential impact on Provident and the industry as a whole. We have analyzed the potential effects of conversion on the Bank's operating characteristics and financial performance as they relate to the pro forma market value of Provident Financial. We have reviewed the economy in the Bank's primary market area and have compared Provident's financial performance and condition with selected publicly-traded thrift institutions with similar characteristics as the Bank, as well as all publicly-traded thrifts. We have reviewed conditions in the securities markets in general and in the market for thrift
RP Financial, LC.
Boards of Directors
August 2, 2002
stocks in particular, including the market for existing thrift issues and the market for initial public offerings by thrifts.
Our Appraisal is based on Provident's representation that the information contained in the regulatory applications and additional information furnished to us by the Bank and its independent auditors are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Bank and its independent auditors, nor did we independently value the assets or liabilities, on or off balance sheet, of the Bank. The valuation considers Provident only as a going concern and should not be considered as an indication of the liquidation value of the Bank.
Our appraised value is predicated on a continuation of the current operating environment for Provident and for all thrifts. Changes in the local, state 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 Bank's value alone. It is our understanding that Provident intends to remain an independent institution and there are no current plans for selling control of the Bank as a converted institution. To the extent that such factors can be foreseen, they have been factored into our analysis.
Pro forma market value is defined as the price at which Provident Financial's stock, immediately upon completion of the conversion offering, 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.
Valuation Conclusion
It is our opinion that, as of August 2, 2002, the aggregate pro forma market value of Provident's common stock, including the contribution to the Foundation immediately following the offering, is $425,000,000 at the midpoint, equal to 42,500,000 shares issued at a per share value of $10.00. The resulting range of value pursuant to regulatory guidelines and the corresponding number of shares based on the Board approved $10.00 per share offering price is set forth below.
Offering Foundation Total Shares Aggregate
Valuation Range Amount Contribution Issued Market Value
--------------- ---------- ------------ ------------ ------------
(Shares) (Shares) (Shares) ($)
Minimum 34,493,000 1,655,700 36,148,700 $361,487,000
Midpoint 40,580,000 1,920,000 42,500,000 425,000,000
Maximum 46,667,000 1,920,000 48,587,000 485,870,000
Supermaximum 53,667,050 1,920,000 55,587,050 555,870,500
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RP Financial, LC. Boards of Directors August 2, 2002 Page 4 |
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 valuation was determined based on the financial condition and operations of Provident as of June 30, 2002, the date of the financial data included in 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 which 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.
RP Financial, LC.
Boards of Directors
August 2, 2002
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 estimated pro forma market value thereof. The appraisal does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market and reflects only a valuation range as of this date for the pro forma market value of Provident Financial immediately upon issuance of the stock.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ William E. Pommerening
---------------------------
William E. Pommerening
Chief Executive Officer
/s/ James P. Hennessey
---------------------------
James P. Hennessey
Senior Vice President
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RP Financial, LC.
TABLE OF CONTENTS
THE PROVIDENT BANK
Jersey City, New Jersey
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
Introduction 1.1
Plan of Conversion 1.1
Establishment of a Charitable Foundation 1.3
Strategic Overview 1.3
Balance Sheet Trends 1.7
Income and Expense Trends 1.13
Interest Rate Risk Management 1.18
Lending Activities and Strategy 1.19
Asset Quality 1.24
Funding Composition and Strategy 1.25
Subsidiaries 1.26
Legal Proceedings 1.27
CHAPTER TWO MARKET AREA
Introduction 2.1
Market Area Demographics 2.2
Local Economy 2.5
Market Area Deposit Characteristics 2.6
CHAPTER THREE PEER GROUP ANALYSIS
Peer Group Selection 3.1
Financial Condition 3.7
Income and Expense Components 3.11
Loan Composition 3.13
Credit Risk 3.15
Interest Rate Risk 3.15
Summary 3.18
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TABLE OF CONTENTS
THE PROVIDENT BANK
Jersey City, New Jersey
(continued)
PAGE
DESCRIPTION NUMBER
----------- ------
CHAPTER FOUR VALUATION ANALYSIS
Introduction 4.1
Appraisal Guidelines 4.1
RP Financial Approach to the Valuation 4.1
Valuation Analysis 4.2
1. Financial Condition 4.3
2. Profitability, Growth and Viability of Earnings 4.4
3. Asset Growth 4.6
4. Primary Market Area 4.6
5. Dividends 4.7
6. Liquidity of the Shares 4.8
7. Marketing of the Issue 4.8
A. The Public Market 4.9
B. The New Issue Market 4.15
C. The Acquisition Market 4.17
8. Management 4.18
9. Effect of Government Regulation and Regulatory Reform 4.18
Summary of Adjustments 4.18
Valuation Approaches 4.19
1. Price-to-Earnings ("P/E") 4.20
2. Price-to-Book ("P/B") 4.21
3. Price-to-Assets ("P/A") 4.22
Comparison to Recent Conversions 4.22
Valuation Conclusion 4.22
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RP Financial, LC.
LIST OF TABLES
THE PROVIDENT BANK
Jersey City, New Jersey
TABLE NUMBER DESCRIPTION PAGE ------ ----------- ---- 1.1 Historical Balance Sheets 1.8 1.2 Historical Income Statements 1.14 2.1 Summary Demographic Information 2.3 2.2 Market Area Unemployment Trends 2.5 2.3 Deposit Summary 2.7 3.1 Peer Group of Publicly-Traded Thrifts 3.3 3.2 Balance Sheet Composition and Growth Rates 3.8 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads 3.12 3.4 Loan Portfolio Composition and Related Information 3.14 3.5 Credit Risk Measures and Related Information 3.16 3.6 Interest Rate Risk Measures and Net Interest Income Volatility 3.17 4.1 Pricing Characteristics and After-Market Trends 4.16 4.3 Public Market Pricing 4.24 |
RP Financial, LC.
Page 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
Introduction
The Provident Bank ("Provident" or the "Bank"), is a state-chartered mutual savings bank headquartered in Jersey City, New Jersey. Founded in 1839, Provident is the oldest independent financial institution in the State of New Jersey. Provident currently conducts operations through a total of 48 full service branches located in 10 counties throughout northern and central New Jersey (see Exhibit I-1 for the New Jersey counties where the Bank currently operates). As of June 30, 2001, Provident maintained a 1.4 percent share of all New Jersey deposits, ranked 15th in the size of deposits overall. The Bank operates in two primary markets: northern New Jersey and central New Jersey including the shore area of central New Jersey. Overall, the counties in which the Bank operates encompass 69 percent of the entire population of New Jersey, providing the Bank with access to a large base of potential customers.
Provident is a member of the Federal Home Loan Bank of New York ("FHLB") and its deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). As of June 30, 2002, the Bank maintained $3.1 billion in assets, $2.5 billion in deposits and $310.6 million in equity, equal to 10.1 percent of assets. For the 12 months ended June 30, 2002, the Bank reported net income of $27.7 million, equal to 0.97 percent of average assets. Provident's audited financial statements are included by reference as Exhibit I-2.
Plan of Conversion
On April 26, 2002, the Board of Managers adopted a plan to reorganize as a bank holding company (the "Reorganization"), whereby Provident will become a wholly-owned subsidiary of Provident Financial Services, Inc. ("Provident Financial" or the "Holding Company") and Provident Financial will conduct an offering of its common stock. Concurrent with the Reorganization, Provident Financial will retain approximately 50% of the net conversion proceeds, and the balance will be invested into the Bank. It is not currently anticipated that Provident Financial will engage in any significant business activity other than ownership of the subsidiary bank and management of the net proceeds retained at the holding company level. The
RP Financial, LC.
Page 1.2
assets and liabilities of the stock subsidiary will be substantially equivalent to those of Provident prior to the Reorganization, before incorporating the impact of the conversion transaction.
The conversion offering is expected to provide the capital necessary to facilitate continued expansion and diversification. The conversion also provides the opportunity for local stock ownership, which may enhance the financial success of the Bank if local shareholders become/remain customers and promote the Bank's products and services.
The near term deployment of the net offering proceeds is anticipated to be as follows.
. Provident Financial is expected to retain up to 50% of the net proceeds of the offering including the proceeds to fund the loan to the ESOP, with the remaining funds invested into the Bank for reinvestment in interest-earning assets. The remaining funds are expected to be initially invested in high quality investment securities with relatively short durations.
Over time, funds retained by Provident Financial will be utilized for various corporate purposes, including the possible payment of regular and/or special cash dividends, acquisitions, investing additional equity into the Bank and/or repurchases of common stock. Dividends are expected to be paid to Provident Financial from the Bank, provided the Bank remains well-capitalized.
. Provident. At least 50% of the net proceeds will be invested into the Bank in exchange for all of the Bank's stock. The net investable cash proceeds are expected to be lower based on expectations of deposit withdrawals to fund stock purchases. Cash proceeds invested into the Bank will initially become part of general funds, which are expected to be initially invested into cash and short-term investments pending reinvestment into whole loans and the Bank's regular investment activities.
On a pro forma basis, Provident is expected to have a capital ratio above regulatory requirements. The Board of Directors has determined to pursue a strategy of controlled growth in order to maintain well-capitalized status, with growth expected to be funded primarily through local retail deposit growth. Provident Financial may also consider various capital management strategies if appropriate to assist in the long-run objective of increasing return on equity.
RP Financial, LC.
Page 1.3
Establishment of a Charitable Foundation
In order to enhance the Bank's existing historically strong service and reinvestment activities in the local community, the Plan of Conversion provides for the establishment of The Provident Bank Foundation, Inc. (the "Foundation"), which will be a private charitable foundation established in connection with the conversion. The Plan provides that the Bank and the Holding Company will create the Foundation and fund it in an amount equal to 6 percent of the stock offering with a maximum contribution of $24 million, with the form of funding to be 80 percent conversion stock and 20 percent cash. Funding the majority of the Foundation with shares of common stock of Provident Financial will enable the local community served to share in the growth and the profitability of Provident Financial over the long term through dividends and price appreciation. As such, the Bank believes the Foundation will generate a high level of community goodwill toward the holding company, increase the Bank's local visibility and further enhance the Bank's strong reputation for community service, thereby strengthening Provident's community banking franchise.
The issuance of shares and the contribution of cash to the Foundation will result in dilution of pro forma book value and earnings per share.
Strategic Overview
Throughout much of its corporate history, Provident's strategic focus has been that of a community oriented financial institution with a primary focus on meeting the borrowing and savings needs of its local customers in northern and central New Jersey. In this regard, through the early 1980s, Provident pursued a residential lending strategy typical of a thrift institution, with the substantial majority of loans deployed into fixed rate residential mortgage loans. However, commencing in the early 1990s, the management of Provident began to undertake a reorientation of the Bank's operations to a community-oriented institution with a broader line of commercial and consumer products. Additionally, pursuant to this strategy, Provident has sought to emphasize a community bank operating strategy, emphasizing service, its local orientation and a relatively broad array of products and services. Accordingly, Provident has implemented a three-prong lending strategy which has focused on: (1) commercial lending, including commercial and multi-family mortgage loans as well as commercial and industrial
RP Financial, LC.
Page 1.4
loans ("C&I loans"); (2) residential mortgage lending for portfolio; and (3) selling longer term fixed rate residential mortgage loans (generally conforming loans with 20 year maturities or more) into the secondary market on a servicing retained basis.
Since Provident has historically been a residential lender and most of the remainder of its interest-earning assets have been deployed into either investment securities or mortgage-backed securities ("MBS"), Provident has been required to develop the infrastructure required to undertake more diversified lending. In this regard, management has developed extensive policies and procedures pertaining to credit standards and the administration of commercial accounts. Additionally, Provident has employed approximately14 commercial loan officers (including 6 focusing on C&I lending, 7 concentrating on commercial real estate lending and one officer at the senior vice president level to provide oversight to the overall commercial lending operation). Other steps taken to facilitate the development of commercial accounts include more intensive marketing and the institution of various incentive programs for Bank personnel. Furthermore, the Bank has upgraded its data processing system to enhance the ability to service commercial accounts. Additionally, the Bank has offered ancillary products such as cash management services in order to effectively build the level of commercial account relationships.
While the commercial loan portfolio has expanded in recent years, the loan portfolio composition continues to reflect the Bank's history of residential lending. Commercial loans, including commercial and multi-family mortgage loans as well as C&I loans comprised approximately 42.49 percent of net loans (including mortgage warehouse loans equal to 7.66 percent of net loans) while loans secured by 1-4 family mortgage loans equaled 38.43 percent of net loans and consumer loans equaled 15.32 percent of net loans. The Bank's preference is to originate adjustable rate residential loans for portfolio and sell longer term fixed rate loans on a servicing retained basis to the secondary market (primarily Freddie Mac). On a more limited basis, Provident's lending activities include diversification into construction loans.
Provident's focus on building commercial account relationships implies a greater degree of credit risk compared to loan portfolios that reflect higher concentrations of 1-4 family loans. However, the Bank has sought to limit the credit risk exposure associated with its lending strategy, through emphasizing origination of such loans in local markets and to established lending relationships with favorable credit histories. Credit risk associated with the loan
RP Financial, LC.
Page 1.5
portfolio has also been limited by the strength of the local economy, implementation of what are believed by management to be conservative underwriting guidelines and building the level of loss reserves relative to non-performing assets and loans outstanding. Economic growth has been supported by relatively favorable trends in such key industry sectors as pharmaceutical, financial services, and real estate. These industries serve as the cornerstone of the economy in the Bank's market which have, in turn, facilitated growth in most areas of the regional economy. In general, the primary market area has had low unemployment and increasing real estate values, which has increased demand for new construction of both residential and commercial properties. More recently, the local economy has slowed in conjunction with the national recession, although there has yet to be any notable impairment in local real estate values and deterioration in credit quality has yet to be experienced in the Bank's loan portfolio.
Investments serve as a supplement to Provident's lending activities. Provident's investment strategy emphasizes low risk types of investments, with the intent of providing ample liquid funds and to generate a favorable return within the context of supporting interest rate and credit risk objectives. Investment securities held by the Bank consist primarily of collateralized mortgage obligations ("CMOs"), corporate and municipal bonds as well U.S. Government and agency securities. In recent years, the Bank has emphasized purchases of CMOs with average durations of approximately 2 to 5 years for yield enhancement. The Bank's investment strategy also continues to emphasize investment in corporate bonds, muni and U.S. Government and agency obligations. Corporate obligations are generally required to be rated "A" or better at the time of acquisition. The majority of Provident's investment securities are classified as available for sale ("AFS").
Coupled with the gradual reorientation of Provident's operations into a community bank, Provident has been seeking to expand its retail franchise, both internally through growth of loans and deposits and externally through acquisitions. Provident seeks to grow internally based on service, by offering a wide array of products, through intensive marketing and the establishment of de novo branches in targeted markets. At the same time, the Bank faces significant competition from many competitors, several of which are substantially larger than Provident, which tends to limit the ability to grow profitably. As a result, management has sought to supplement internal growth through the purchase of branches (both with and without deposits);
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Page 1.6
five offices were acquired in 1998 as part of a whole bank acquisition and the Bank has recently entered into a contract to acquire two offices with a total of approximately $22.7 million of deposits from another local financial institution. Provident has continually explored other acquisition opportunities, including both whole bank acquisitions and branches, and will continue to explore such opportunities in the future. Management believes that the additional capital raised in the stock offering will enhance the Bank's ability to consummate branch or whole institution acquisitions in the future.
Retail deposits have consistently served as the primary funding liability for the Bank, while borrowings have been used to a limited degree, both in conjunction with a commercial checking account program offered by the Bank as well as for asset-liability management and liquidity purposes. The majority of Provident's depositors reside in areas proximate to Provident's offices in northern and central New Jersey.
Management expects that the future activities of the Bank will continue to focus on products and services which have facilitated asset, equity and earnings growth to date. Specifically, the largest segment of Provident's business will continue to be an orientation towards retail deposit products and retail banking services, building commercial account relationships, and continuing to invest in residential mortgage loans, including both 1-4 family and multi-family loans.
A key component of Provident's business plan is to complete the planned conversion stock offering. In particular, the additional equity capital raised in the conversion will provide a larger capital cushion for asset growth, including growth through acquisitions of local thrifts, commercial banks or other financial service providers as opportunities arise. Moreover, as a stock company, it is contemplated that the ability to offer Provident Financial stock as consideration will facilitate increased opportunities to grow through acquisition. Comparatively, in the current mutual structure, growth through acquisition is substantially limited to utilizing cash as consideration, which is often viewed as a less attractive type of consideration by potential acquisition candidates.
Provident anticipates that growth opportunities will also result from on-going implementation of an aggressive retail banking strategy, in which growth will be realized
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Page 1.7
through establishing additional branches that complement the existing branch network and through placing more of an emphasis on developing and marketing products and services that address the needs of retail customers. Additionally, opportunities for retail growth will continue to be realized from large bank consolidation in the local market and the resulting fallout of customers who are attracted to Provident's community-bank orientation and emphasis on customer service.
Balance Sheet Trends
Table 1.1 shows historical summary balance sheet and other financial information for Provident from the end of fiscal 1997 to June 30, 2002. As discussed previously, over the last 5 years, Provident has implemented a strategy of controlled growth and expansion, both through internal growth at existing branches, as well as through the addition of five branches as part of a whole bank acquisition. Overall, asset growth over the period shown in Table 1.1 has been moderate, as Provident's total assets increased from $2.1 billion at the end of fiscal 1997, to $3.1 billion at June 30, 2002, which reflects a 9.24 percent compounded annual growth rate. Over this period, loan growth was modestly below the rate of growth for investments and thus, loans decreased in proportion to total assets. Loans increased from $1.4 billion as of the end of fiscal 1997 to $1.9 billion as of June 30, 2002, reflecting a 7.28 percent compounded annual growth rate while total investments (including both HTM and AFS securities) increased from $489.1 million as of December 31, 1997, to $838.6 million as of June 30, 2002, reflecting a 12.69 percent compounded annual growth rate.
The Bank's assets are funded through a combination of deposits, borrowings and retained earnings. Deposits have always comprised the majority of funding liabilities and increased at a 8.31 compounded annual rate since 1997. Borrowings have increased at a comparatively faster pace equal to 25.48 percent annually. The factors leading to the increase in borrowings are primarily twofold: (1) the Bank also utilized advances to lock in longer term funds at favorable interest rates or in match funding transactions; and (2) a portion of the growth in borrowed funds is associated with the Bank's commercial checking accounts wherein the Bank provides commercial account customers with a "sweep" product which is classified as a retail repurchase agreement. In the future, Provident may utilize FHLB advances more heavily in several ways as
RP Financial, LC.
Table 1.1
The Provident Bank
Historical Balance Sheets
(Amount and Percent of Assets)
For the Fiscal Year Ended December 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Amount Pct Amount Pct Amount Pct
---------- ------ ---------- ------ ---------- ------
($000) (%) ($000) (%) ($000) (%)
Total Amount of:
Assets $2,060,205 100.00% $2,454,586 100.00% $2,578,249 100.00%
Cash and Cash Equivalents 86,654 4.21% 106,790 4.35% 54,193 2.10%
Investment Securities - HTM 290,776 14.11% 233,099 9.50% 162,680 6.31%
Investment Securities - AFS 198,287 9.62% 317,464 12.93% 361,832 14.03%
FHLB Stock 11,089 0.54% 12,474 0.51% 12,474 0.48%
Goodwill and Core Deposit Value 8,192 0.40% 29,368 1.20% 27,979 1.09%
Loans Receivable (net) 1,399,575 67.93% 1,680,091 68.45% 1,876,433 72.78%
Deposits 1,764,080 85.63% 2,056,053 83.76% 2,096,604 81.32%
Borrowed Funds 70,192 3.41% 146,620 5.97% 216,641 8.40%
Total Equity 203,651 9.88% 224,019 9.13% 236,664 9.18%
Loans/Deposits 79.34% 81.71% 89.50%
IEA/IBL (Average) 1.13 1.14 1.13
Non-Performing Loans/Loans 0.43% 0.33% 0.43%
Non-Performing Assets/Assets 0.32% 0.23% 0.31%
Allow. for Loan Losses as a % of:
Non-Performing Loans 247.63% 316.94% 233.93%
Gross Loans Receivable 1.06% 1.02% 0.99%
Number of Full Service Offices 41 49 52
For the Fiscal Year Ended December 31, Compounded
----------------------------------------- As of Annual
2000 2001 June 30, 2002 Growth Rate
------------------- ------------------- ---------------------------------
Amount Pct Amount Pct Amount Pct Pct
---------- ------ ---------- ------ ---------- ------ -----------
($000) (%) ($000) (%) ($000) (%) (%)
Total Amount of:
Assets $2,869,717 100.00% $3,066,277 100.00% 9.24%
Cash and Cash Equivalents $2,641,579 100.00% 107,403 3.74% 146,604 4.78% 12.39%
Investment Securities - HTM 67,302 2.55% 112,951 3.94% 110,131 3.59% -19.41%
Investment Securities - AFS 124,059 4.70% 494,716 17.24% 728,509 23.76% 33.53%
FHLB Stock 335,039 12.68% 12,555 0.44% 11,514 0.38% 0.84%
Goodwill and Core Deposit Value 12,803 0.48% 23,742 0.83% 22,654 0.74% 25.36%
Loans Receivable (net) 25,594 0.97% 1,994,636 69.51% 1,919,729 62.61% 7.28%
Deposits 1,954,992 74.01% 2,341,723 81.60% 2,526,611 82.40% 8.31%
Borrowed Funds 2,168,336 82.08% 195,767 6.82% 194,925 6.36% 25.48%
Total Equity 179,903 6.81% 292,130 10.18% 310,568 10.13% 9.83%
263,072 9.96%
Loans/Deposits 85.18% 75.98%
IEA/IBL (Average) 90.16% 1.15 1.15
1.14
Non-Performing Loans/Loans 0.40% 0.24%
Non-Performing Assets/Assets 0.48% 0.28% 0.15%
Allow. for Loan Losses as a % of: 0.37%
Non-Performing Loans 271.02% 474.56%
Gross Loans Receivable 213.06% 1.09% 1.13%
1.02%
Number of Full Service Offices 48 48
49
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Source: Provident's prospectus.
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Page 1.9
follows: (1) in connection with potential leveraging and/or interest rate risk management strategies; and (2) the Bank has targeted the commercial checking (including the sweep accounts) program for growth as it seeks to continue to develop its commercial lending and depository relationships.
Equity has increased steadily since the end of fiscal 1997, reflecting the retention of Provident's earnings, and has been maintained in the range of 9.1 percent to 10.2 percent. The Bank's equity contained a small amount of goodwill and core deposit value as of June 30, 2002 ($22.7 million or 0.7 percent of assets), resulting from prior whole bank and branch acquisitions; tangible equity equaled $287.9 million, or 9.4 percent of assets as of June 30, 2002. A summary of Provident's key operating ratios for the past five years is presented in Exhibit I-3.
Loans Receivable
Provident's balance of net loans receivable increased at an 9.26 percent annual rate from the year end 1997 through year end 2001, increasing as a percent of assets from 67.9 percent at year end 1997 to 69.51 percent at December 31, 2001. Loan growth was recorded throughout the past four fiscal years, with net loan growth ranging from a low of $40.6 million in 2001 to a high of $292.0 million in 1998. Growth of the loan portfolio has been focused in commercial loans including both C&I and mortgage loans while funding mortgage warehouse lines for mortgage bankers has also become a significant niche for the Bank. The loan portfolio shrank over the first six months of fiscal 2002, primarily owing to high prepayment activity and fixed rate loan sales in the residential portfolio which have prevailed in the current low interest rate environment.
Currently, 1-4 family mortgage loans comprise the largest single segment of the loan portfolio, equal to 38.4 percent of net loans. The residential mortgage loan portfolio consists primarily of adjustable rate mortgage ("ARM") loans and generally, fixed rate loans with maturities of 15 years or less. The Bank's general philosophy is to seek to originate adjustable rate loans and/or fixed rate loans with maturities of 15 years or less for portfolio and sell longer-term fixed rate loans through various secondary market conduits (primarily Freddie Mac) on a servicing retained basis.
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Page 1.10
The reorientation of Provident's operations to a more bank-like operating strategy, is evidenced in the loan portfolio composition which shows that multi-family and commercial mortgages increased to 27 percent of net loans, while commercial non-mortgage loans increased to 8 percent of total loans as of June 30, 2002.
Investment and Mortgage Backed Securities
The intent of Provident's investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting Bank's overall credit and interest rate risk objectives. Over the past five years, Provident's balance of cash and total investment securities ranged from a low of 19.93 percent of assets at year end 2000 to a high of 32.13 percent as of June 30, 2002. In recent years, Provident's investment strategy has emphasized investment in CMOs, which has increased in proportion to other investment securities. As of June 30, 2002, CMOs accounted for $427.2 million or 50.9 percent of the investment portfolio. Other investments held by Provident at June 30, 2002, consisted of U.S. Government and agency obligations ($107.6 million), U.S. government and agency mortgage-backed securities mortgage-backed securities ($42.5 million), corporate securities ($174.4 million) and state and municipal obligations ($86.9 million). Provident also has an $11.5 million investment in FHLB stock. To support management of interest rate risk and liquidity, the Provident's current philosophy has been to classify all new investment purchases as available-for-sale, with the exception of state and municipal bond investments.
As of June 30, 2002, securities classified as available for sale and held to maturity equaled $728.5 million and $110.1 million, respectively. Provident had an unrealized gain of $12.9 million on investments held as available-for-sale, as of June 30, 2002 and $2.9 million on its held-to-maturity investments. Provident's cash and cash equivalent funds totaled $146.6 million or 4.78 percent of assets at June 30, 2002, which was at the high end of the range of cash and cash equivalents that has been maintained by the Provident over the past five years. Exhibit I-4 provides historical detail of the Provident's investment portfolio.
Bank Owned Life Insurance
As of June 30, 2002, the balance of bank owned life insurance ("BOLI") totaled $46.2 million, which reflects growth relative to the prior two fiscal year ends owing to increases in the
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Page 1.11
cash surrender value of the policies. 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 on an annual basis.
Goodwill and Core Deposit Value
Goodwill and core deposit value totaled $19.9 million and $2.7 million, respectively as of June 30, 2002, reflecting a reduction from the fiscal year end peak level of $29.4 million in 1998. The goodwill and core deposit value are the result of several acquisitions including one completed in fiscal 1998 and one completed in fiscal 1995. Pursuant to SFAS No. 141, the Bank has ceased amortizing goodwill as of the fiscal 2001 year end and is periodically evaluating the remaining unamortized goodwill balance for impairment. The Bank continues to amortize the value of core deposits and expects to record a $1.0 million core deposit amortization expense in fiscal 2002.
The Bank will be acquiring two branches and approximately $22.7 million of deposits from another financial institution with the transaction expected to be completed by the end of fiscal 2002. Preliminary management estimates are that the intangibles created in the prospective branch acquisition will approximate $0.5 million.
Funding
Over the past five years, Provident's funding needs have been substantially met through retail deposits, internal cash flows, borrowings and retained earnings. From year end 1997 through June 30, 2002, the Bank's deposits increased at an annual rate of 8.31 percent. Deposit growth has been sustained at an uneven pace throughout the past four and one-half fiscal years, with the most notable increase occurring in 1998 and 1999. The Bank reported an influx of deposit funds in the first half of fiscal 2002, which management attributes to three factors including: (1) Provident's ongoing marketing efforts; (2) competitive rates; and (3) depositors "parking" funds in insured liquid accounts at the Bank in view of uncertainty with respect to the future performance of the economy and recent bear market in stocks.
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Page 1.12
In recent years, the Bank's deposit composition has exhibited a shift towards a higher concentration of transaction and savings accounts, reflecting relatively stronger growth in those accounts compared to CD growth. Most of the recent growth in transaction and savings accounts has been comprised of growth in savings accounts. As of June 30, 2002, transaction and savings accounts equaled 57.2 percent of total deposits.
Borrowed funds are at moderate levels but have been increasing over the last five fiscal years. As of June 30, 2002, borrowed funds outstanding totaled $194.9 million and consisted of FHLB-New York advances and retail repurchase agreements (i.e., sweep accounts for commercial account customers. It is management's preference to rely on deposits to fund operations, however, the Bank utilizes borrowings under several circumstances: (1) in conjunction with its offering of sweep accounts to commercial account customers; (2) when such funds are priced attractively relative to deposits; (3) to lengthen the duration of liabilities and in match funding transactions; (4) to enhance earnings when attractive arbitrage opportunities arise (i.e., the Bank is considering employing borrowings to fund the purchase of investments at a spread on a post-offering basis); and (5) to generate additional liquid funds, if required.
The repurchase agreements on Provident's balance sheet are related to a program whereby the Bank offers its commercial customers a sweep investment product. The account is collateralized with investments which is self-trusteed by the Bank. This program has been very successful with both the Bank's commercial customers and for Provident. As of June 30, 2002, retail repurchase agreements had a balance of $42.8 million.
Capital
Earnings since December 31, 1997, have led to growth in the balance of GAAP and tangible equity to 10.13 and 9.39 percent, respectively. Since fiscal year end 1997, retained earnings, and an increase in accumulated comprehensive income have translated into an annual capital growth rate of 9.83 percent for the Bank. The Bank maintains significant capital surpluses relative to all of its regulatory capital requirements as reflected in the schedule below. The additional capital realized from the stock conversion offering will serve to further strengthen the Bank's capital position and support the growth strategies contemplated in its business plan.
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Page 1.13
At the same time, as the result of the Bank's relatively high pro forma capital position, Provident's ROE will initially be depressed from current levels following its conversion.
Capital
Over
Required Actual Required
Capital Capital Amount
-------- -------- --------
($000) ($000) ($000)
Tier I Leverage Capital Ratio $119,217 $279,979 $160,762
Risk-Based Capital: Tier I 80,914 279,979 199,065
Risk-Based Capital: Total 161,827 301,937 140,110
Source: Prospectus.
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Income and Expense Trends
Table 1.2 shows the Bank's historical income statements for the fiscal years from 1997 through 2001 and for the twelve months ended June 30, 2002. Overall, Provident's net income reflects a growth trend in dollar terms but has fluctuated in a range of 0.80 percent to 0.97 percent of average assets, reflecting the benefits of expansion of the base of interest-earning assets. Specifically, net earnings increased from $19.1 million (0.96 percent of average assets) in fiscal 1997, to $27.7 million (0.97 percent of average assets) for the twelve months ended June 30, 2002. Provident's recurring earnings have fluctuated over the last five fiscal years while comparing closely to reported earnings as non-operating items have been relatively limited. The components of profitability are explored below.
Net Interest Income
Provident's ratio of net interest income to average assets decreased modestly between fiscal 1997 and 1999, from 3.70 percent to 3.62 percent, respectively, as a result of several factors including a gradual leveraging of the Bank's capital ratio and a less favorable interest rate environment (i.e., a flattened yield curve experienced through the end of fiscal 2000). Subsequently, from the beginning of fiscal 2001 to date, the Bank's spreads and margins have improved as deposit costs declined at a faster pace than the Bank's asset yields (see Exhibit I-5 for details regarding the Bank's yields and costs). Management attributes the improving spreads
RP Financial, LC.
Table 1.2
The Provident Bank
Historical Income Statements
For the Fiscal Year Ended December 31,
---------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Amount Pct(1) Amount Pct(1) Amount Pct(1)
-------- ------ -------- ------ -------- ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $140,026 7.05% $149,983 7.00% $166,046 6.77%
Interest Expense (66,589) -3.35% (70,890) -3.31% (77,244) -3.15%
-------- ----- -------- ----- -------- -----
Net Interest Income $ 73,437 3.70% $ 79,093 3.69% $ 88,802 3.62%
Provision for Loan Losses (2,350) -0.12% (1,950) -0.09% (2,100) -0.09%
-------- ----- -------- ----- -------- -----
Net Interest Income after Provisions $ 71,087 3.58% $ 77,143 3.60% $ 86,702 3.53%
Other Operating Income 12,186 0.61% 15,005 0.70% 15,688 0.64%
Operating Expense (52,735) -2.66% (60,985) -2.85% (71,853) -2.93%
--------- ----- -------- ----- -------- -----
Net Operating Income $ 30,538 1.54% $ 31,163 1.46% $ 30,537 1.24%
Non-Operating Items
Litigation Settlement Expense $ -- 0.00% $ -- 0.00% $ -- 0.00%
Gain on Equity Securities -- 0.00% -- 0.00% -- 0.00%
Gain on the Sale of Fixed Assets -- 0.00% -- 0.00% -- 0.00%
Merger-Related Break-up Fee -- 0.00% -- 0.00% -- 0.00%
-------- ----- -------- ----- -------- -----
Total Non-Operating Income/(Expense) $ -- 0.00% $ -- 0.00% $ -- 0.00%
Net Income Before Tax $ 30,538 1.54% $ 31,163 1.46% $ 30,537 1.24%
Income Taxes (11,484) -0.58% (11,465) -0.54% (10,907) -0.44%
-------- ----- -------- ----- -------- -----
Net Income Before Change in Acct. Principle $ 19,054 0.96% $19,698 0.92% $ 19,630 0.80%
Cumulative Effect of Change in Acct. Principle -- 0.00% -- 0.00% -- 0.00%
-------- ----- -------- ----- -------- -----
Net Income $ 19,054 0.96% $ 19,698 0.92% $ 19,630 0.80%
Estimated Core Net Income
Net Income (Before Cum. Effect of Acct. Change $ 19,054 0.96% $ 19,698 0.92% $ 19,630 0.80%
Addback(Deduct): Non-Recurring (Inc)/Exp -- 0.00% -- 0.00% -- 0.00%
Tax Effect (1) -- 0.00% -- 0.00% -- 0.00%
-------- ----- -------- ----- -------- -----
Estimated Core Net Income $ 19,054 0.96% $ 19,698 0.92% $ 19,630 0.80%
Memo:
Expense Coverage Ratio (2) 139.26% 129.69% 123.59%
Efficiency Ratio (3) 61.59% 64.81% 68.77%
Efficiency Ratio (4) 61.59% 64.81% 68.77%
Effective Tax Rate 37.61% 36.79% 35.72%
For the Fiscal Year Ended December 31,
-------------------------------------- For the Twelve Months
2000 2001 Ended June 30, 2002
----------------- ----------------- ---------------------
Amount Pct(1) Amount Pct(1) Amount Pct(1)
-------- ------ -------- ------ -------- ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $179,520 6.87% $180,979 6.61% $178,524 6.26%
Interest Expense (89,690) -3.43% (84,523) -3.09% (71,299) -2.50%
-------- ----- -------- ----- -------- -----
Net Interest Income $ 89,830 3.44% $ 96,456 3.52% $107,225 3.76%
Provision for Loan Losses (2,060) -0.08% (1,900) -0.07% (1,900) -0.07%
-------- ----- -------- ----- -------- -----
Net Interest Income after Provisions $ 87,770 3.36% $ 94,556 3.46% $105,325 3.69%
Other Operating Income 17,276 0.66% 21,236 0.78% 21,640 0.76%
Operating Expense (72,190) -2.76% (80,629) -2.95% (87,139) -3.05%
-------- ----- -------- ----- -------- -----
Net Operating Income $ 32,856 1.26% $ 35,163 1.29% $ 39,826 1.40%
Non-Operating Items
Litigation Settlement Expense $ (3,675) -0.14% $ -- 0.00% $ -- 0.00%
Gain on Equity Securities -- 0.00% -- 0.00% 959 0.03%
Gain on the Sale of Fixed Assets -- 0.00% -- 0.00% 192 0.01%
Merger-Related Break-up Fee 1,000 0.04% -- 0.00% -- 0.00%
-------- ----- -------- ----- -------- -----
Total Non-Operating Income/(Expense) $ (2,675) -0.10% $ -- 0.00% $ 1,151 0.04%
Net Income Before Tax $ 30,181 1.16% $ 35,163 1.29% $ 40,977 1.44%
Income Taxes (9,283) -0.36% (11,083) -0.41% (12,742) -0.45%
-------- ----- -------- ----- -------- -----
Net Income Before Change in Acct. Principle $ 20,898 0.80% $ 24,080 0.88% $ 28,235 0.99%
Cumulative Effect of Change in Acct. Principle -- 0.00% -- 0.00% (519) -0.02%
-------- ----- -------- ----- -------- -----
Net Income $ 20,898 0.80% $ 24,080 0.88% $ 27,716 0.97%
Estimated Core Net Income
Net Income (Before Cum. Effect of Acct. Change $ 20,898 0.80% $ 24,080 0.88% $ 28,235 0.99%
Addback(Deduct): Non-Recurring (Inc)/Exp 2,675 0.10% -- 0.00% (1,151) -0.04%
Tax Effect (1) (990) -0.04% -- 0.00% 426 0.01%
-------- ----- -------- ----- -------- -----
Estimated Core Net Income $ 22,583 0.86% $ 24,080 0.88% $ 27,510 0.96%
Memo:
Expense Coverage Ratio (2) 124.44% 119.63% 123.05%
Efficiency Ratio (3) 70.18% 68.51% 67.02%
Efficiency Ratio (4) 67.40% 68.51% 67.62%
Effective Tax Rate 30.76% 31.52% 31.10%
|
(1) Reflects an estimated 37 percent effective tax rate for each period.
(2) Net interest income divided by operating expenses.
(3) Operating expenses as a percent of the sum of net interest income and other
operating income.
(4) Excludes the impact of non-operating items from the efficiency ratio
calculation.
Source: Provident's prospectus.
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Page 1.15
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.
Non Interest Income
Other income has shown an upward trend in dollar terms and as a percent of average assets since fiscal 1997, from $12.2 million (0.61 percent of average assets) to $21.6 million (0.76 percent of average assets) for the twelve months ended June 30, 2002, reflecting Provident's balance sheet growth, expansion of overall business volumes and continued growth of fee generating products such as commercial lending and transaction accounts. The bulk of Provident's fee income is comprised of fees related to its depository activities, lending, and mortgage servicing. However, the Bank has also diversified into non-traditional product lines which includes a minority ownership interest in a title agency and the sales of insurance products including annuities as well as stocks, bonds, and mutual funds. Additionally, the Bank has recently acquired a mortgage subsidiary ("Provident Mortgage") which specializes in the origination and sale of FHA/VA loans in New Jersey. Non-interest income was further enhanced by the purchase of BOLI in fiscal 2000, wherein the income from the increase in the cash surrender value of the policies is reflected as non-interest income. Provident is planning to increase the level of non-interest fee income in the future by continuing to develop fee generating commercial loan and deposit relationships and by expanding non-traditional products and services. However, any growth in the level of non-interest operating income is expected to be gradual.
Operating Expense
Operating expenses increased both in dollar terms and as a percent of average assets for the period from fiscal 1997 through the twelve months ended June 30, 2002. For the twelve months ended June 30, 2002, operating expenses totaled $87.1 million, equal to 3.05 percent of average assets. The growth in operating expenses over the last five fiscal years is due to a variety of factors including the overall growth of the Bank, the employment of additional lending
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Page 1.16
staff as well as the addition of staff at new branches and the costs associated with conversion to a new data processing system in 2001, among other factors.
Further upward pressure will be placed on the Bank's operating expense ratio in the forthcoming year due to planned expansion. The Bank is in the process of completing an acquisition of two branch offices 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 3 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.
Provident's efficiency ratio (operating expenses as a percent of the sum of net interest income and other operating income excluding non-operating items) of approximately 68 percent during the twelve months ended June 30, 2002, is relatively consistent with the level of the last three fiscal years but is above the more favorable level reported in fiscal 1997 and 1998.
Loan Loss Provisions
The Bank has historically maintained strong asset quality and loan losses have been limited. Accordingly, notwithstanding the increased emphasis on high risk-weight lending (i.e., commercial mortgage and non-mortgage loans) and overall expansion of the loan portfolio, the level of loan chargeoffs have been low and the level of loan loss provisions required to be established pursuant to the Bank's policies has diminished. In the five fiscal years through fiscal 2001, Provident established loan loss provisions at the rate of between $1.9 million and $2.4 million. For the twelve months ended June 30, 2002, loan loss provisions equaled $1.9 million, or 0.07 percent of average assets. Going forward, management of the Bank intends to continue to evaluate the adequacy of the level of allowances for loan losses ("ALLs") on a regular basis, establishing additional loan loss provisions in accordance with the Bank's asset classification and loss reserve policies.
Non-Operating Items
Non-operating income and expenses have had a limited impact on earnings over the last five fiscal years. The components of non-operating income and expense have consisted of $3.7 million of litigation settlement expenses incurred in fiscal 2000 which were partially offset
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by a $1.0 million gain realized on the payment of merger-related break-up fee paid by another financial institution in connection with the termination of an agreement to be acquired by Provident. The only other significant non-operating items consisted of gains on securities equal to $959,000 and gains on the sale of real estate equal to $192,000. Net non-operating income aggregated to $1.2 million on a pre-tax basis.
Taxes
The Bank's tax rate has ranged from approximately 35.7 to 37.6 percent from fiscal 1997 to fiscal 1999. During fiscal 2000, the Bank formed a real estate investment trust ("REIT") subsidiary ("PSB Funding") for the purpose of providing financial flexibility with the additional benefit of minimizing state tax liability. In this regard, the Bank has contributed real estate loans to the REIT in exchange for stock and income generated through the REIT structure is subject to a 100 percent exclusion from state income taxes (i.e., a dividends received deduction). As a result of the establishment of the REIT coupled with expanded investment in tax-advantaged state and municipal securities, Provident's average tax rate declined to approximately 31 percent in fiscal 2000 and 2001 and for the twelve months ended June 30, 2002.
The New Jersey State Legislature enacted legislation in July 2002, which changed the state tax code such that the Bank's marginal state tax rate will be increased from 3 percent to 9 percent, and alternative minimum state tax assessments based on gross receipts and gross profits were also established. However, management and the Bank's independent accountants believe that several provisions in the legislation will minimize the impact to the Bank's effective tax rate.
Change in Accounting Principle
In accordance with FASB Statement No. 142, the Bank 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 Provident recorded an expense of $519,000, as a cumulative effect of a change in accounting principal.
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Interest Rate Risk Management
Provident manages interest rate risk from both the asset and liability sides of the balance sheet. To control interest rate risk, Provident has implemented several strategies as follows:
. Emphasizing the origination of adjustable rate loans and selling a portion of longer term fixed rate loans originated to the secondary market;
. Diversifying into other types of short-term or adjustable rate lending, including primarily commercial, construction and consumer lending;
. Building a community bank orientation so as to facilitate an increase in non-interest fee income and the proportion of low-cost transaction deposit accounts;
. Maintaining a relatively short-term investment portfolio, comprised of high quality, liquid securities and maintaining an ample balance of securities classified as available for sale;
. Promoting longer term CDs to the extent possible;
. Taking down term FHLB advances when such funds are attractively priced relative to deposits and prevailing reinvestment opportunities.
. Maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities; and
. Limiting investment in fixed assets and emphasizing asset quality.
These strategies have generally served to increase the sensitivity of the Bank's assets to changes in interest rates and lengthen the duration of liabilities. The rate shock analysis as of June 30, 2002 (see Exhibit I-6) reflects a modest liability sensitive position with the present value of equity ("PVE") declining by a projected 213 basis points pursuant to a positive 200 basis point instantaneous and permanent rate shock, resulting in a post-shock PVE ratio equal to 13.98 percent. By way of comparison, the Office of Thrift Supervision ("OTS") estimates PVE data on a regional and national basis. Based on OTS estimates incorporating March 31, 2002 financial data and market rate information, assuming a positive 200 basis point instantaneous and permanent rate shock, the post-shock PVE ratio for all thrifts operating in the OTS Northeast Region equaled 8.96 percent, which reflects a 230 basis point decline relative to the base scenario.
The PVE analysis is an indicator to the risk of earnings in a volatile interest rate environment as it incorporates changing assumptions with respect to maturity and repricing of assets and liabilities. The PVE analysis indicates that Provident has a higher PVE ratio and a
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slightly lower interest sensitivity measure (i.e., the change in the post-shock PVE ratio is more limited than OTS regulated savings institutions) pursuant to a rising interest rate scenario, which is typically the more adverse scenario for savings institutions. In this regard, the Bank's interest rate risk exposure is moderated by the increase in shorter term and higher yielding commercial loans and Provident's practice of selling longer term conforming fixed rate loans into the secondary market.
Overall, the data suggests that the Bank's earnings would be moderately impacted by changes in market interest rate levels. On a pro forma basis, the Bank's interest rate risk position is expected to improve as the conversion proceeds are reinvested in interest earning assets.
Lending Activities and Strategy
Provident's lending strategy has been developed to take advantage of (1) the Bank's historical strengths in the areas of permanent residential mortgage and residential construction lending; (2) the relatively stable economy prevailing in the Bank's markets; and (3) perceived opportunities in commercial lending that will enable Provident to build its community bank franchise.
Provident's lending operations consists of three major segments:
residential mortgage lending, commercial and consumer lending in conjunction
with the long-standing commitment to become a full-service community bank, and
secondary market operations in which Provident originates long term fixed rate
loans for resale at origination generally on a servicing retained basis and,
through its mortgage company, originates FHA/VA loans for resale on a servicing
released basis. Those strategies are consistent with Provident's community bank
orientation, as evidenced in the Bank's loan portfolio composition (see Exhibit
I-7). Although historically a residential lender, the Bank has managed to reduce
the concentration of permanent residential mortgages to 38.4 percent of net
loans ($737.8 million). The remainder of the portfolio includes sizable
concentrations of commercial mortgage loans, commercial business loans and
second mortgage loans.
The Bank offers a wide array of products and services and has diversified its loan portfolio with mortgages secured by multi-family and commercial properties totaling $516.7 million, equal to 26.9 percent of loans. Additional diversification has been provided by
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commercial business loans and mortgage warehouse lending, which represented growing segments of the loan portfolio, equal to $152.0 million (7.9 percent of loans) and $147.0 million (7.7 percent of loans), respectively, as of June 30, 2002. The balance of the loan portfolio consists primarily of various types of consumer credit including second mortgage loans, home equity loans, marine loans and other consumer installment loans.
Provident originates both fixed rate and adjustable rate 1-4 family loans. The Bank's general philosophy is to seek to originate adjustable rate loans and/or fixed rate loans for portfolio with maturities of 15 years or less and sell longer-term fixed rate loans through various secondary market conduits on a servicing retained basis. Adjustable rate residential mortgage loans approximated $435.3 million, equal to 22.7 percent of total loans as of June 30, 2002 and 59 percent of total residential loans.
The Bank originates one-to-four family loans up to a loan-to-value ("LTV") ratio of 100 percent, with private mortgage insurance ("PMI") being required for loans in excess of a 80 percent LTV ratio. Most 1-4 family loan originations are secured by property in the local market. As a complement to 1-4 family permanent mortgage lending activities, the Bank also offers home equity loans including fixed rate amortizing term loans as well as variable rate lines of credit.
In addition to permanent mortgage lending, Provident finances mortgage warehouse lines for approximately 25 mortgage bankers, all of whom operate within the Bank's markets in New Jersey. The warehouse credit lines are variable rate, generally indexed to the Prime Rate or the federal funds rate. The warehouse credit lines fluctuate based on the mortgage bankers' loan volumes and time of the month and typically range from $100 million to $170 million and equaled $147.0 million as of June 30, 2002.
Construction lending has been a modest part of overall lending operations over the last several years and the construction loan balance totaled $92.9 million, equal to 4.8 percent of net loans as of June 30, 2002. Provident originates construction loans as it seeks to participate in the growth occurring in the market, shorten the average duration of assets, and support asset yields. The majority of the Bank's construction lending is in the areas proximate to where Provident maintains branch offices in northern and central New Jersey. Construction loans made to the
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homeowners are generally construction/permanent loans. Additionally, Provident makes construction loans to builders for either spec or pre-sold homes. The Bank limits builders to a maximum number of spec homes and carefully controls draws to ensure that the Bank's disbursements are being applied to the construction of the collateral property. The Bank also originates commercial construction loans for the purpose of building a variety of types of multi-family and commercial structures.
In conjunction with its construction lending, the Bank has also made land development loans. Land development loans are typically tied to the construction of residential housing and are limited to local developers with whom the Bank has established relationships for the purpose of developing residential subdivisions (i.e., installing roads, sewers, water and other utilities), as well as loans to individuals to build lots. Land development loans are secured by a lien on the property and made with a variety of fixed and adjustable terms and are made with maximum loan-to-value ratios of 75 percent of the improved value of the property. The Bank may finance the acquisition, development and construction of projects and all such loans will be secured by properties in its local markets. The Bank seeks to obtain personal guarantees from the principals of its corporate borrowers.
Provident has and will continue to make loans for the purchase or financing of various types of multi-family and commercial real estate loans. Provident's commercial real estate and multi-family loan portfolios are largely comprised of loans originated in-house and secured by properties in the primary market in the Bank's New Jersey markets. At June 30, 2002, the balance of multi-family and commercial mortgage loans equaled $94.2 million (4.9 percent of net loans) and $422.6 million (22.0 percent of net loans), respectively. Multi-family and commercial real estate loans are secured by apartments and other structures such as office buildings, strip malls, retail shops and various other properties. Most income producing property loans are for the purpose of financing existing structures rather than new construction. The typical balance of a multi-family or commercial mortgage loan ranges between $3 to $5 million; the policy limit is $17.5 million per loan and $35 million per relationship. Management typically limits the maximum loan-to-value ratio to 75 percent and seeks to maintain at least a 1.2 times debt coverage ratio. Consistent with the broad product line appropriate for a community bank, Provident's lending activity is expected to continue to include multi-family and commercial real
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estate with such loans targeted for growth as the Bank continues to more fully develop its commercial account relationships.
C&I loans comprise a growing segment of the commercial loan portfolio and equaled approximately $152.0 million or 7.9 percent of net loans as of June 30, 2002. The Bank employs a group of loan officers each responsible for C&I lending or real estate-based commercial lending.
The Bank offers commercial loans to sole proprietorships, professional partnerships and various other small businesses. The types of commercial loans offered include lines of credit and business term loans. Most line of credit and business term loans are secured loans. Security can include commercial real estate or other assets such as inventory, equipment or accounts receivable. Unsecured business loans, which are made infrequently, are generally reserved for customers with very strong financial conditions and a demonstrated capacity to repay their obligations. Provident expects to continue to pursue a similar lending strategy going forward, with the portfolio becoming more heavily weighted toward commercial loans including loans secured by commercial real estate as the Bank continues to develop its community bank operating strategy.
The consumer loan portfolio consists primarily of home equity and indirect marine loans, supplemented by various other types of consumer installment credit made primarily to customers of the Bank. As of June 30, 2002, consumer loans totaled $294.2 million, equal to 15.3 percent of net loans. Consumer loans are comprised of three principal components as follows: (1) home equity and second mortgage loans; (2) marine loans; and (3) other consumer installment loans. Home equity and second mortgage loans totaled approximately $179.0 million as of June 30, 2002, or approximately 60.8 percent of consumer installment loans. Interest rates on home equity lines of credit are typically floating while second mortgage loans are typically fixed with maturities extending out to a maximum of 15 years.
Marine loans equaled $103.0 million as of June 30, 2002. Marine loans are originated through relationships with a small number of loan brokers who maintain relationships with various boat dealers on the eastern coast of the U.S. Marine loans are secured by both new and late model boats and are originated in a procedure whereby Bank personnel process and
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underwrite the loans to Bank standards using information provided by the dealers. When appropriate, borrower information is confirmed by the Bank before a marine loan is approved. Marine loans are capped at a maximum of $750,000 and Provident requires a minimum 20 percent downpayment from the borrower.
Loan Originations, Purchases and Sales
Exhibit I-10 shows the Bank's loan originations, purchases, sales and repayments over the past three fiscal years and for the first six months of fiscal 2002, highlighting Provident's three prong lending strategy. In this regard, residential mortgage loan originations have comprised the largest single component of the Bank's lending volume, increasing to $215.9 million in fiscal 2001 and $154.2 million for the first six months of 2002, comprising approximately 35 to 40 percent of total loans originated (excluding mortgage warehouse loans). The remaining loans originated are spread among various loan types including commercial, commercial and multi-family mortgage, construction and consumer loans. Additionally, while mortgage warehouse lending comprises a significant proportion of overall loan origination volumes, their balance sheet and earnings impact is comparatively limited given their modest average balances (owing to the high turnover rate) and yields.
Residential mortgage loans are primarily originated through salaried and commissioned loan personnel, as well as through selected purchases. The Bank employs both salaried and commissioned loan officers. Salaried loan personnel are located in the branches or loan department and are responsible for handling walk-in traffic and customers calling into Provident. Commissioned loan officers, currently totaling nine, solicit and originate loans for the Bank throughout the entire market area. In recent periods, the commissioned originators employed by the Bank have originated approximately 85 percent of the Bank's residential mortgage loan volume. Provident also purchases residential mortgage loans primarily from the New Jersey-based mortgage bankers with whom it maintains a warehouse line financing relationship. Loans purchased by the Bank primarily are secured by properties located in New Jersey. The purchased loans are underwritten to conform to the Bank's guidelines, and the Bank usually obtains the right to service the loans.
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The Bank has structured the commercial lending function into two groups with one handling real estate-based transactions and the other managing C&I loans. As stated previously, the employment of seasoned commercial lenders has been undertaken in conjunction with the gradual restructuring of the Bank to a more intensive commercial orientation. All the commercial loan officers are compensated on a salary basis and are responsible for originating commercial loans and the on-going servicing of their commercial accounts. The focus of this business has been in areas of New Jersey served by Provident's branches. The Bank expects to continue to increase the level of commercial loans in the future and may employ additional commercial loan officers in order to accomplish this objective.
Consumer loans are generated in two fashions. Direct loans are typically made to customers of the Bank and are made through applications taken at the call center and branch offices. Occasionally, the Bank will utilize direct marketing (primarily for home equity loans) to increase loan volumes. Marine loans are originated through several loan brokers who maintain relationships with dealers throughout the eastern coast of the United States.
Asset Quality
Provident's asset quality has remained strong over the last five fiscal years, notwithstanding the growth of the Bank's loan portfolio, including growth in higher risk-weight loans. Specifically, as reflected in Exhibit I-11, the balance of non-performing assets ("NPAs") equaled $4.8 million as of June 30, 2002, or 0.15 percent of assets. At that date, the Bank's loan loss reserves equaled $22.0 million, or 1.14 percent of the net loan portfolio (see Exhibit I-12 for details); the reserve coverage as a percent of NPAs was 462 percent. While Provident's historical delinquency rate and loss experience suggest limited credit risk exposure for the Bank, the recent growth of the loan portfolio, particularly in higher risk-weight loans, tends to increase the Bank's credit risk exposure relative to historical levels. Additionally, Provident has some significant loan concentrations as the Banks 50 largest lending relationships aggregated to $380.1 million, equal to 19.8 percent of the loan portfolio and reflecting an average balance of $7.8 million per relationship.
The Bank reviews and classifies assets on a quarterly basis and establishes loan loss provisions based on the overall quality, size and composition of the loan portfolio, as well other
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factors such as historical loss experience, industry trends and local real estate market and economic conditions. Historically, a portion of the Bank's allowance for loan losses has been categorized as unallocated rather than being allocated to specific loan categories. The unallocated part of the allowance has been maintained in recognition of the inherent risks resulting from the following concentrations in the Bank's loan portfolio: the significance of loans in the higher risk categories of commercial real estate, multi-family, and C&I loans and other commercial loans, concentrations in geographic locations of properties on which such loans have been made and the aggregate amount of loans outstanding to large borrowers. The combination of these three concentrations impacts the risk level of the Bank's loan portfolio. The unallocated portion of the allowance tends to be a greater percent of the total allowance in periods when the economy is strong and equaled $5.7 million as of June 30, 2002.
Funding Composition and Strategy
As of June 30, 2002, the Bank's assets were funded primarily with deposits, borrowings and retained earnings. Local retail deposits have consistently addressed the substantial portion of Provident's funding needs. Deposits are substantially retail in nature and certificates of deposits ("CDs") accounted for 42.8 percent of Provident's deposits at June 30, 2002. The Bank expects to continue its policy of not using brokered deposits.
The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank presently offers savings, interest bearing demand deposits, non-interest bearing demand deposits, money market accounts and time deposits. The flow of deposits is significantly influenced by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Local retail deposits have consistently addressed the substantial portion of Provident's funding needs, and the Bank relies primarily on paying competitive rates, service and long-standing relationships with customers to attract deposits. Certificates of deposit ("CDs") comprise the largest single account category (42.8 percent of total deposits) but savings and transaction accounts comprise the bulk of deposits.
CDs historically have been concentrated in short-term maturities, as the Bank has traditionally been very rate competitive on maturities up to one year. As of June 30, 2002, approximately 84.5 percent of CDs had remaining maturities of one year or less. Provident's
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transaction and savings accounts now comprise 57.2 percent of total deposits which reflects a modest increase relative to the level prevailing over the last five fiscal years, which is partially attributable to the Bank's marketing efforts designed to increase the balance of commercial and individual checking accounts.
As of June 30, 2002, borrowed funds totaled $194.9 million and consisted of FHLB advances and reverse repurchase agreements. The level of borrowings have fluctuated over time based on their cost relative to deposits, the Bank's liquidity requirements, and interest rate risk considerations. In the future, Provident may utilize FHLB advances more heavily in connection with potential leveraging and/or interest rate risk management strategies. Exhibit I-4 provides detail of the Bank's borrowings activities during the past three years and for the six months ended June 30, 2002.
Subsidiaries
Provident has three active subsidiaries: (1) PSB Funding Corporation; (2) Provident Investment Services; and (3) Provident Mortgage. PSB Funding Corporation ("PSB Funding") was formed in May 2000 as a REIT under New Jersey law in order to provide financial flexibility for the Bank with the additional benefit of minimizing the Bank's state tax liability.
Provident Investment Services, Inc. ("Provident Investment") is the vehicle through which the Bank offers alternative financial products and services such as mutual funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities. Such products are currently offered through a contractual arrangement with a third party vendor.
Provident Mortgage was acquired in July 2001 for the purpose of originating FHA/VA and other alternative loan products to customers within the Bank's geographical footprint. Provident Mortgage has recently received delegated approval authority from HUD to originate loans and is in the process of employing originators and increasing loan origination volumes. It is projected that the operations of Provident Mortgage will become a positive contributor to the Bank's earnings by the third calendar quarter of 2002.
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Additionally, Provident Title, LLC is a joint venture in which the Bank has a 49 percent interest and Investor's Title Agency, Inc. has a 51 percent interest. Provident Title, LLC is licensed to sell title insurance in the State of New Jersey and commenced operations in August 2001.
Provident will continually evaluate the merits of subsidiary activities in the future based on their profit potential.
Legal Proceedings
Other than the routine legal proceedings that occur in the Bank's ordinary course of business, the Bank is not involved in litigation which is expected to have a material impact on the Bank's financial condition or operations.
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II. MARKET AREA
Introduction
Provident currently conducts operations out of its executive offices in
Jersey City, New Jersey and 48 full service depository branches located in 10
counties throughout northern and central New Jersey. As of June 30, 2001,
Provident maintained a 1.4 percent share of all New Jersey deposits, ranked 15th
in the size of deposits overall. The Bank operates in two primary markets:
northern New Jersey and central New Jersey including the shore area of central
New Jersey. Overall, the counties in which the Bank operates encompass 69
percent of the entire population of New Jersey, providing the Bank with access
to a large base of potential customers.
The Bank's market areas provide distinct differences in demographics and economic characteristics. The northern New Jersey market (including Bergen, Essex, Hudson, Middlesex, Morris, Somerset and Union Counties) represents the greatest concentration of population, deposits and income in the state. For example, these counties combined represent 51 percent of the entire New Jersey population and a similar percentage of New Jersey households. The northern New Jersey market also represents the greatest concentration of Provident's retail operations -- both lending and deposit gathering -- and based on its high level of economic activity, the northern New Jersey markets provide the most significant opportunities for future growth. The central New Jersey market including the shore market (i.e., Monmouth and Ocean Counties) represents a strong concentration of population and income, and is an increasingly popular resort and retirement economy -- providing opportunities for deposit growth and residential lending.
Over the past decade, New Jersey has experienced the effects of substantial banking consolidation. In the early 1990s, certain out-of-state banks acquired New Jersey financial institutions and, later in the decade, such acquirors became subject to mergers themselves. In the northern New Jersey market, for example, large out-of-state competitors include Fleet Bank, Bank of New York, PNC Bank, Sovereign Bank, First Union National Bank, and Bank of New York. Additionally, there are a number of strong locally-based competitors such as Valley National Bank, Commerce Bank, Trust Company of New Jersey and Hudson City Savings Bank.
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Competition is similar in the central New Jersey areas with many of these aforementioned institutions competing in the Bank's central New Jersey market such as Mercer, Monmouth and Ocean Counties.
Future growth opportunities for Provident are influenced by growth, stability of the statewide and regional economies, other demographic population trends and the competitive environment. These factors have been examined to help determine the Bank's growth potential and the relative economic health of the market areas served, as they have a direct bearing on the pro forma market value of Provident and have been factored into our valuation analysis accordingly.
Market Area Demographics
Overall, the regional market areas served exhibit a range of historical and projected demographic trends (see Table 2.1), as would be expected given the broad coverage of the Provident branch network. Typical of a well established urban/suburban market, the northern New Jersey counties include the greatest concentration of population and number of households. Generally, the population growth in the older urbanized areas near the main office has been comparatively modest while outlying suburban areas have experienced relatively high rates of growth which are projected to continue through 2006. Specifically, the population growth rate in Hudson, Essex and Union Counties, which are proximate to the Bank's main office and where more than 60 percent of total deposits were maintained increased at a 1 percent annual rate or less over the last decade, while a majority of the Bank's markets in outlying areas increased at a comparatively higher level.
The highest income levels in the market areas served are in the suburban counties of Morris, Somerset, Bergen, Middlesex and Monmouth, with each reporting 2001 median household income and per capita income in excess of $60,000, which is well in excess of the state and national averages of $54,281 and $41,914, respectively. (see Table 2.1). Conversely, Hudson and Essex Counties where Provident operates a total of 21 offices and maintains approximately 57 percent of its deposit base reported comparatively modest median household income levels, equal to $36,386 and $41,678, respectively, as of 2001.
Table 2.1 The Provident Bank Summary Demographic Information
Year Growth Growth
------------------------------ Rate Rate
1990 2001 2006 1990-01 2001-2006
-------- -------- -------- ------- ---------
(%) (%)
Population(000)
United States 248,710 275,247 287,640 0.9% 0.9%
New Jersey 7,730 8,504 8,865 0.9% 0.8%
Bergen 825 891 919 0.7% 0.6%
Essex 778 794 815 0.2% 0.5%
Hudson 553 617 648 1.0% 1.0%
Mercer 326 354 368 0.8% 0.8%
Middlesex 672 763 813 1.2% 1.3%
Monmouth 553 624 659 1.1% 1.1%
Morris 421 475 500 1.1% 1.0%
Ocean 433 522 564 1.7% 1.6%
Somerset 240 305 340 2.2% 2.2%
Union 494 526 542 0.6% 0.6%
Households(000)
United States 91,947 103,400 108,897 1.1% 1.0%
New Jersey 2,795 3,097 3,222 0.9% 0.8%
Bergen 309 333 343 0.7% 0.6%
Essex 279 285 290 0.2% 0.3%
Hudson 209 233 245 1.0% 1.0%
Mercer 117 127 132 0.8% 0.7%
Middlesex 239 270 286 1.1% 1.2%
Monmouth 198 227 240 1.3% 1.1%
Morris 149 172 181 1.3% 1.1%
Ocean 168 205 221 1.8% 1.5%
Somerset 88 112 124 2.1% 2.1%
Union 180 187 191 0.3% 0.4%
Median Household Income($)
United States $ 29,199 $ 41,914 $ 49,127 3.3% 3.2%
New Jersey 39,066 54,281 54,454 3.0% 0.1%
Bergen 48,831 64,011 64,589 2.5% 0.2%
Essex 32,576 46,796 41,678 3.3% -2.3%
Hudson 24,920 38,523 36,386 4.0% -1.1%
Mercer 39,182 57,917 54,555 3.6% -1.2%
Middlesex 45,997 61,520 56,402 2.7% -1.7%
Monmouth 43,232 60,542 63,687 3.1% 1.0%
Morris 57,538 81,784 78,264 3.2% -0.9%
Ocean 33,049 46,970 50,202 3.2% 1.3%
Somerset 56,748 79,296 76,875 3.1% -0.6%
Union 39,872 53,242 50,395 2.7% -1.1%
|
Table 2.1 The Provident Bank Summary Demographic Information
Year Growth Growth
------------------------------ Rate Rate
1990 2001 2006 1990-01 2001-2006
-------- -------- -------- ------- ---------
(%) (%)
Per Capita Income($)
United States $ 13,179 $ 22,162 N.A. 4.8% N.M.
New Jersey 16,783 26,772 N.A. 4.3% N.M.
Bergen 21,567 32,569 N.A. 3.8% N.M.
Essex 15,133 24,744 N.A. 4.6% N.M.
Hudson 11,740 20,608 N.A. 5.2% N.M.
Mercer 16,508 29,098 N.A. 5.3% N.M.
Middlesex 17,881 27,388 N.A. 4.0% N.M.
Monmouth 18,384 30,537 N.A. 4.7% N.M.
Morris 22,737 37,433 N.A. 4.6% N.M.
Ocean 15,157 22,916 N.A. 3.8% N.M.
Somerset 23,552 37,776 N.A. 4.4% N.M.
Union 17,303 26,105 N.A. 3.8% N.M.
|
2001 Age Distribution(%) 0-14 Yrs. 15-24 Yrs. 25-44 Yrs. 45-64 Yrs. 65+ Yrs. Median Age
--------- ---------- ---------- ---------- -------- ----------
United States 21.6% 13.7% 30.3% 21.7% 12.6% 35.5
New Jersey 20.7% 12.1% 30.7% 22.9% 13.6% 37.2
Bergen 18.2% 10.8% 29.6% 25.5% 15.9% 40.1
Essex 21.5% 13.2% 30.9% 22.1% 12.3% 35.9
Hudson 19.7% 13.1% 34.7% 20.9% 11.7% 35.4
Mercer 20.2% 13.8% 30.3% 22.5% 13.1% 36.7
Middlesex 19.7% 13.1% 32.3% 22.0% 13.0% 36.6
Monmouth 21.6% 11.4% 30.3% 23.9% 12.8% 37.7
Morris 19.9% 11.0% 30.9% 26.3% 11.9% 38.4
Ocean 20.3% 10.3% 26.1% 20.6% 22.8% 40.7
Somerset 21.8% 9.4% 33.4% 24.1% 11.3% 37.4
Union 19.7% 11.7% 30.0% 23.5% 15.1% 38.4
|
Less Than $15,000 to $25,000 to $50,000 to $100,000 to
2001 HH Income Dist.(%) $15,000 24,999 $49,999 $99,999 $149,999 $150,000+
--------- ---------- ---------- ---------- ----------- ---------
United States 14.5% 12.5% 32.3% 29.8% 7.4% 3.5%
New Jersey 11.4% 9.5% 24.9% 32.6% 13.0% 8.5%
Bergen 10.5% 7.1% 22.5% 30.8% 16.3% 12.7%
Essex 15.3% 9.4% 28.3% 27.4% 11.2% 8.4%
Hudson 19.9% 12.7% 30.1% 24.4% 8.3% 4.7%
Mercer 11.7% 6.9% 22.0% 34.1% 13.6% 11.6%
Middlesex 9.7% 6.9% 22.9% 36.7% 15.3% 8.5%
Monmouth 9.2% 7.8% 23.0% 31.3% 16.8% 11.8%
Morris 6.1% 5.9% 16.2% 33.0% 21.2% 17.7%
Ocean 13.2% 13.5% 26.0% 33.8% 10.2% 3.3%
Somerset 4.5% 7.2% 16.9% 34.9% 19.9% 16.6%
Union 12.0% 10.2% 25.3% 33.8% 9.3% 9.5%
|
Source: CACI
RP Financial, LC.
Page 2.5
The highest median ages were in Ocean County (the county with the highest growth rate of retirees) and Bergen County, with both counties having concentrations of residents over 65 years old. The median age in the shore areas including Ocean County has recently been influenced by the influx of a large number of retirees, many of whom have relocated from northern New Jersey.
Local Economy
Unemployment trends in the primary market area counties have generally been consistent with state averages (see Table 2.2) which are consistent with U.S. national averages. New Jersey has experienced an increase in unemployment rates over the most recent twelve month period, consistent with but faster than the national trends. In this regard, the recessionary economic environment through the first nine months of the year, which was exacerbated in the last quarter by the events of September 11th, have led to increasing unemployment rates in Provident's markets, in a range of 1.5 percent to 2.3 percent.
Table 2.2
Provident Bank
Market Area Unemployment Trends
March 2001 March 2002 +/-
Region Unemployment Unemployment Change
---------------- ------------ ------------ ------
United States 4.3% 5.7% 1.4%
New Jersey 3.8 5.6 1.8
Bergen County 3.1 4.8 1.7
Essex County 4.7 6.9 2.2
Hudson County 5.5 7.8 2.3
Mercer County 2.9 4.6 1.7
Middlesex County 3.1 4.8 1.7
Monmouth County 3.2 4.9 1.7
Morris County 2.4 4.2 1.8
Ocean County 4.1 5.6 1.5
Somerset County 2.1 4.1 2.0
Union County 3.9 6.0 2.1
|
(1) Unemployment rates are not seasonally adjusted.
Source: CACI, U.S. Bureau of Labor Statistics.
RP Financial, LC.
Page 2.6
Market Area Deposit Characteristics
The Bank maintains an approximate 1.4 percent deposit share of the New Jersey market statewide and enjoys significant shares in the counties served (see Table 2.3). Importantly, in addition to market share in Hudson and Essex Counties in excess of 4 percent ($815 million and $485 million), the Bank was able to achieve moderate deposit growth approximating 5 percent over the two years ended June 30, 2001.
As mentioned earlier, the competition for deposit share in New Jersey is intense. The impacts of large out-of-state competitors and local consolidation have combined to intensify the competition for deposits. Against that backdrop, the Bank has positioned itself as a strictly "New Jersey based" institution and has successfully attracted business from customers unhappy with mergers at their previous institutions. Notwithstanding the success in increasing deposits in the past, the Bank recognizes the competitive landscape as becoming increasingly intense, as commercial banks and large thrift competitors combine with non-financial companies to attract deposit funds. In order to address the increasingly competitive landscape, Provident continually evaluates its competitive posture and will implement new products and services if appropriate.
Table 2.3 The Provident Bank Deposit Summary
As of June 30,
-------------------------------------------------------------------
1999 2001
-------------------------------- -------------------------------- Deposit
Market # of Market # of Growth Rate
Deposits Share Branches Deposits Share Branches 1999-2001
------------ ------ -------- ------------ ------ -------- -----------
(Dollars in Thousands) (%)
State of New Jersey $141,283,197 100.0% 2,967 $167,712,156 100.0% 3,020 9.0%
Commercial Banks 99,131,689 70.2% 2,214 123,619,364 73.7% 2,238 11.7%
Savings Institutions 42,151,508 29.8% 753 44,092,792 26.3% 782 2.3%
The Provident Bank 2,077,215 1.5% 53 2,286,137 1.4% 48 4.9%
Bergen County $ 23,616,811 100.0% 437 $ 27,680,252 100.0% 451 8.3%
Commercial Banks 13,740,073 58.2% 310 18,220,993 65.8% 326 15.2%
Savings Institutions 9,876,738 41.8% 127 9,459,259 34.2% 125 -2.1%
The Provident Bank 142,644 0.6% 4 168,069 0.6% 4 8.5%
Essex County $ 12,321,185 52.2% 236 $ 11,667,148 100.0% 247 -2.7%
Commercial Banks 8,547,139 36.2% 176 7,393,574 63.4% 172 -7.0%
Savings Institutions 3,774,046 16.0% 60 4,273,574 36.6% 75 6.4%
The Provident Bank 465,239 3.8% 5 485,365 4.2% 6 2.1%
Hudson County $ 14,246,945 60.3% 164 $ 18,307,875 100.0% 163 13.4%
Commercial Banks 10,773,453 45.6% 104 14,717,095 80.4% 105 16.9%
Savings Institutions 3,473,492 14.7% 60 3,590,780 19.6% 58 1.7%
The Provident Bank 755,191 5.3% 17 814,774 4.5% 15 3.9%
Mercer County $ 6,692,560 28.3% 125 $ 7,003,656 100.0% 127 2.3%
Commercial Banks 4,922,215 20.8% 93 5,374,109 76.7% 96 4.5%
Savings Institutions 1,770,345 7.5% 32 1,629,547 23.3% 31 -4.1%
The Provident Bank 31,456 0.5% 1 31,907 0.5% 1 0.7%
Middlesex County $ 14,275,787 60.4% 217 $ 24,873,429 100.0% 223 32.0%
Commercial Banks 10,436,100 44.2% 156 20,852,785 83.8% 157 41.4%
Savings Institutions 3,839,687 16.3% 61 4,020,644 16.2% 66 2.3%
The Provident Bank 183,923 1.3% 4 225,105 0.9% 4 10.6%
Monmouth County $ 8,784,329 37.2% 221 $ 9,906,827 100.0% 230 6.2%
Commercial Banks 5,493,252 23.3% 164 6,262,542 63.2% 171 6.8%
Savings Institutions 3,291,077 13.9% 57 3,644,285 36.8% 59 5.2%
The Provident Bank 176,883 2.0% 8 205,723 2.1% 7 7.8%
Morris County $ 8,087,330 34.2% 196 $ 8,677,499 100.0% 209 3.6%
Commercial Banks 6,175,167 26.1% 155 6,747,928 77.8% 169 4.5%
Savings Institutions 1,912,163 8.1% 41 1,929,571 22.2% 40 0.5%
The Provident Bank 20,653 0.3% 3 22,656 0.3% 2 4.7%
|
Table 2.3 The Provident Bank Deposit Summary
As of June 30,
-------------------------------------------------------------------
1999 2001
-------------------------------- -------------------------------- Deposit
Market # of Market # of Growth Rate
Deposits Share Branches Deposits Share Branches 1999-2001
------------ ------ -------- ------------ ------ -------- -----------
(Dollars in Thousands) (%)
Ocean County $ 8,263,009 35.0% 190 $ 8,952,808 100.0% 196 4.1%
Commercial Banks 4,356,115 18.4% 120 4,661,384 52.1% 122 3.4%
Savings Institutions 3,906,894 16.5% 70 4,291,424 47.9% 74 4.8%
The Provident Bank 162,531 2.0% 6 168,178 1.9% 4 1.7%
Somerset County $ 4,134,199 17.5% 100 $ 4,557,666 100.0% 104 5.0%
Commercial Banks 3,536,746 15.0% 85 3,914,065 85.9% 90 5.2%
Savings Institutions 597,453 2.5% 15 643,601 14.1% 14 3.8%
The Provident Bank 103,963 2.5% 3 120,131 2.6% 3 7.5%
Union County $ 10,230,163 43.3% 189 $ 13,246,302 100.0% 195 13.8%
Commercial Banks 6,304,043 26.7% 127 9,045,286 68.3% 127 19.8%
Savings Institutions 3,926,120 16.6% 62 4,201,016 31.7% 68 3.4%
The Provident Bank 34,732 0.3% 2 44,229 0.3% 2 12.8%
|
Source: FDIC.
RP Financial, LC.
Page 3.1
III. PEER GROUP ANALYSIS
This chapter presents an analysis of Provident's operations versus a group of comparable savings institutions (the "Peer Group") selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines. The basis of the pro forma market valuation of Provident is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments for key differences in relation to the Peer Group. Since no Peer Group can be exactly comparable to Provident, key areas examined for differences are: financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and effect of government regulations and regulatory reform.
Peer Group Selection
The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is comprised of only those publicly-traded savings institutions whose common stock is either listed on a national exchange (NYSE or AMEX) or is NASDAQ listed, since their stock trading activity is regularly reported and generally more frequent than non-publicly traded and closely-held institutions. Non-listed institutions are inappropriate since the trading activity for thinly-traded or closely-held stocks is typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value. We have also excluded from the Peer Group those companies under acquisition or subject to rumored acquisition, mutual holding companies and recent conversions, since their pricing ratios are subject to unusual distortion and/or have limited trading histories. A recent listing of the universe of all publicly-traded savings institutions is included as Exhibit III-1.
Ideally, the Peer Group, which must have at least 10 members to comply with the regulatory valuation guidelines, should be comprised of locally or regionally-based institutions with comparable resources, strategies and financial characteristics. There are approximately 240 fully-converted publicly-traded institutions nationally and, thus, it is typically the case that the Peer Group will be comprised of institutions with relatively comparable characteristics. To the
RP Financial, LC.
Page 3.2
extent that differences exist between the converting institution and the Peer Group, valuation adjustments will be applied to account for the differences. Since Provident will be a fully-converted public company upon completion of the offering, we considered only full public companies to be viable candidates for inclusion in the Peer Group. From the universe of publicly-traded thrifts, we selected eleven institutions with characteristics similar to those of Provident. In the selection process, we applied two "screens" to the universe of all public companies:
. Screen #1. All New Jersey Institutions. There were a total of five publicly-traded savings institutions in the State of New Jersey and all were somewhat comparable to the Bank in terms of asset size as well as other relevant financial and operating characteristics. Given the importance of the regional market in financial institution pricing, all of the publicly-traded savings institutions based in the State of New Jersey were included in the Peer Group. Exhibit III-2 provides financial and public market pricing characteristics of all publicly-traded New Jersey thrifts.
. Screen #2. Mid-Atlantic, Midwest and New England savings institutions with assets between $1 billion and $5 billion, equity-to-assets ratios of at least 10.0 percent and positive core return on assets ratios. Six companies met the criteria for Screen #2 and all were included in the Peer Group: American Financial Holdings of CT, Berkshire Hills Bancorp of MA, CFS Bancorp of IN, First Place Financial Corp. of OH, United Community Financial Corp. of OH and Troy Financial Corp. of NY. Exhibit III-3 provides financial and public market pricing characteristics of all publicly-traded thrifts meeting the search criteria established in Screen #2.
Table 3.1 shows the general characteristics of each of the eleven Peer Group companies and Exhibit III-4 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies. While there are expectedly some differences between the Peer Group companies and Provident, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments. The following sections present a comparison of Provident's financial condition, income and expense trends, loan composition, interest rate risk and credit risk versus the Peer Group as of the most recent publicly available date.
A summary description of the key characteristics of each of the Peer Group companies is detailed below.
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Table 3.1 Peer Group of Publicly-Traded Thrifts August 5, 2002(1)
Primary Operating Total Fiscal Conv. Stock Market
Ticker Financial Institution Exchg. Market Strat.(2) Assets Offices Year Date Price Value
------ --------------------------------- ------ -------------- --------- ------ ------- ------ ----- ----- ------
($) ($Mil)
AMFH American Fin. Holdings of CT (3) OTC Central CT Thrift 2,835 34 12-31 11/99 28.08 628
FSLA First Sentinel Bancorp of NJ OTC Eastern NJ Thrift 2,194 23 12-31 04/98 13.90 420
UCFC United Community Fin. of OH OTC Youngstown OH Thrift 1,936 29 12-31 07/98 8.38 296
PFSB PennFed Fin. Services of NJ OTC Northern NJ Thrift 1,843 21 06-30 07/94 25.69 189
OCFC OceanFirst Fin. Corp of NJ OTC Eastern NJ Thrift 1,722 16 12-31 07/96 20.52 294
FPFC First Place Fin. Corp. of OH OTC Northeast OH Thrift 1,648 24 06-30 01/99 17.90 252
CITZ CFS Bancorp, Inc of Munster IN OTC IN,IL Thrift 1,583 23 12-31 07/98 13.80 183
TRYF Troy Financial Corp of Troy NY OTC Eastcentral NY Thrift 1,117 21 09-30 03/99 27.85 277
BHL Berkshire Hills Bancorp of MA (3) AMEX Western MA Thrift 1,035 11 12-31 06/00 23.97 147
FMCO FMS Fin Corp. of Burlington NJ OTC Southern NJ Thrift 1,033 34 12-31 12/88 10.75 69
PBCI Pamrapo Bancorp, Inc. of NJ OTC Northern NJ Thrift 551 11 12-31 11/89 14.25 73
|
NOTES: (1) Or most recent date available (M=March, S=September,
D=December, J=June, E=Estimated, and P=Pro Forma)
(2) Operating strategies are: Thrift=Traditional Thrift,
M.B.=Mortgage Banker, R.E.=Real Estate Developer,
Div.=Diversified, and Ret.=Retail Banking.
(3) FDIC savings bank institution.
Source: Corporate offering circulars, data derived from information published in SNL Securities Quarterly Thrift Report, and financial reports of publicly-traded thrifts.
Date of Last Update: 08/05/02
RP Financial, LC.
Page 3.4
. American Financial Holdings of CT. American Financial is a $2.8 billion institution operating through 34 offices in Connecticut. The overall balance sheet composition is relatively comparable to the Peer Group average although the loan portfolio reflects a more limited level of diversification. Similarly, the portion of American Financial's operations funded through deposits is similar although borrowings are lower reflecting its higher capital ratio in comparison to the Peer Group average. Profitability ratios are above the Peer Group average reflecting the earnings benefit of its relatively strong capital ratio coupled with its efficient level of operating expense. Asset quality was favorable relative to the Peer Group, both in terms of the level of NPAs and reserve coverage ratio.
. First Sentinel Bancorp of NJ. First Sentinel is a $2.2 billion asset thrift operating through 23 branch offices in northern New Jersey, including many of the same markets in which Provident operates. First Sentinel maintains a comparatively higher level of investment securities and borrowings in relation to the Peer Group, reflecting implementation of a wholesale leveraging strategy. The loan portfolio composition reflects a lower level of diversification into high risk-weight loans. Profitability is above the Peer Group average facilitated by the lowest operating expense ratio of any of the Peer Group institutions. Similarly, First Sentinel's relatively strong earnings are supported by its favorable asset quality and coverage ratios in comparison to the Peer Group average.
. United Community Financial Corp. of OH. United Community, with an asset base of $1.9 billion, operates through 29 branch offices in eastern and north-central Ohio and western Pennsylvania. The asset and funding structures reflect a higher proportion of loans and deposits, respectively. The capital ratio exceeds the Peer Group average, which is reflective of the capital raised in the stock conversion offering completed in July 1998. United Community's ROA is comparable to the Peer Group average as the benefit of a strong net interest margin and favorable levels of fee income are offset by a comparatively higher operating expense ratio. Asset quality ratios are less favorable than the Peer Group average, both in terms of the ratio of NPAs and the reserve coverage ratios.
. PennFed Financial Services of NJ. PennFed is a $1.8 billion asset thrift operating through 21 branch offices in New Jersey. PennFed's balance sheet reflects a modestly higher ratio of loans and a lower ratio of deposits than the Peer Group averages. Loan portfolio diversification was more limited than the Peer Group given its higher ratio of single family mortgage loans. The ROA is below the Peer Group average primarily reflecting low spreads attributable to its higher overall funding costs.
RP Financial, LC.
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Asset quality is favorable in terms of the level of NPAs while reserve coverage is lower than the Peer Group average.
. OceanFirst Financial Corp. of NJ. OceanFirst is a $1.7 billion asset savings and loan holding company operating 16 branch offices, primarily in Ocean and Monmouth Counties in New Jersey. OceanFirst's balance sheet reflects a higher ratio of loans in comparison to the Peer Group while deposits are slightly below the Peer Group average offset by its higher utilization of borrowed funds. The loan portfolio composition reflects a lower level of diversification into high risk-weight loans. Profitability is above the Peer Group average facilitated by a relatively strong net interest margin. OceanFirst's relatively strong earnings are supported by its modest level of NPAs while the reserve coverage ratios are relatively comparable to the Peer Group average.
. First Place Financial Corp. of OH. First Place Financial, with an asset base of $1.6 billion, operates through 24 branch offices in northeastern Ohio. Interest-earning assets reflect a higher proportion of loans than the Peer Group while funding sources are relatively similar. The loan portfolio composition reflects a lower level of diversification into high risk-weight loans. Profitability is above the Peer Group average facilitated by a favorable operating expense ratio. Asset quality ratios are less favorable than the Peer Group average, both in terms of the ratio of NPAs and the reserve coverage ratios.
. CFS Bancorp, Inc. of IN. CFS Bancorp is a $1.6 billion asset thrift operating through 23 branch offices in Indiana and Illinois within the Chicago metropolitan area. CFS Bancorp maintains a high level of investment/MBS securities and borrowings, reflecting a wholesale leveraging strategy. The loan portfolio composition reflects greater emphasis on commercial, multi-family, and construction lending while non-mortgage lending is limited in relation to the Peer Group. The ROA is below the Peer Group average primarily reflecting low spreads attributable to its higher overall funding costs. Asset quality ratios are less favorable than the Peer Group average, both in terms of the ratio of NPAs and the reserve coverage ratios.
. Troy Financial Corp. of NY. Troy Financial has $1.1 billion in assets and operates out of 21 offices in upstate New York. Troy Financial's balance sheet composition compares closely to the Peer Group average in terms of the ratio of loans and investments while there is a greater retail aspect to funding operation in view of the higher ratio of borrowings and proportionately lower use of borrowed funds. The loan portfolio composition reflects a greater level of diversification into high risk-weight loans with particular emphasis on commercial and multi-family mortgage
RP Financial, LC.
Page 3.6
loans. Troy Financial's ROA was very strong and was supported by a comparatively high capital ratio and favorable cost of funds. NPAs were below the Peer Group average while reserve coverage exceeded the Peer Group averages.
. Berkshire Hills Bancorp of MA. Berkshire Hills Bancorp has $1.0 billion in assets and operates out of 11 offices in western Massachusetts. Berkshire Hills Bancorp reported a modestly higher ratio of loans and deposits in comparison to the Peer Group average, reflecting a comparatively greater retail orientation. Berkshire Hills Bancorp has diversified its loan portfolio to include commercial and consumer loans to a much greater extent than any of the other Peer Group institutions, which resulted in a very high risk assets/total assets ratio. While the net interest margin and fee income were very strong, loan loss provisions and a relatively higher operating expense ratio contributed to a lower ROA in relation to the Peer Group average. Asset quality ratios were modestly less favorable in comparison to the Peer Group, both in terms of the NPA/assets ratio and reserve coverage in relation to NPAs.
. FMS Financial Corp. of OH. FMS Financial, with an asset base of $1.0 billion, operates through 34 branch offices in southern New Jersey. Interest-earning assets reflect a lower proportion of loans than the Peer Group and a higher ratio of deposits. The loan portfolio composition reflects a lower level of diversification into high risk-weight loans. The ROA is below the Peer Group average attributable to both the highly leveraged capital ratio and the impact of FMS Financial's comparatively higher operating expense ratio. Asset quality ratios are mixed in comparison to the Peer Group as NPAs/Assets and reserve coverage in relation to total loans are favorable while reserves as a percent of NPAs are lower.
. Pamrapo Bancorp, Inc. of NJ. Pamrapo Bancorp, with an asset base of $551 million and 11 branch offices is the smallest Peer Group company but was included in the Peer Group based on its operation in many of the same markets as Provident. The asset and funding structures reflect a higher proportion of loans and deposits, respectively. Pamrapo Bancorp is primarily a mortgage lender and residential and commercial/multi-family mortgage loans both comprise a higher proportion of total loans than the Peer Group. Pamrapo Bancorp's ROA is higher than the Peer Group average benefiting from strong asset yields and a favorable cost of funds. Asset quality ratios are less favorable than the Peer Group average, both in terms of the ratio of NPAs and the reserve coverage ratios.
RP Financial, LC.
Page 3.7
In aggregate, the Peer Group companies maintain a slightly higher level of capital than the industry average (10.76 percent of assets versus 10.41 percent for all public companies), generate higher earnings as a percent of average assets (0.92 percent core ROAA versus 0.74 percent for all public companies), and generate a slightly higher core ROE (8.68 percent core ROE versus 7.51 percent for all public companies). Overall, the Peer Group's average P/B ratio and average core P/E multiple were above the respective averages for all publicly-traded thrifts.
All
Publicly-Traded Peer Group
--------------- ----------
Financial Characteristics (Averages)
Assets ($Mil) $ 1,957 $ 1,591
Market capitalization ($Mil) $ 261 $ 257
Equity/assets (%) 10.41% 10.76%
Core return on assets (%) 0.74% 0.92%
Core return on equity (%) 7.51% 8.68%
Pricing Ratios (Averages)(1)
Core price/earnings (x) 16.41x 17.86x
Price/book (%) 137.21% 158.04%
|
(1) Based on market prices as of August 2, 2002.
Ideally, the Peer Group companies would be comparable to Provident in terms of all of the selection criteria, but the universe of publicly-traded thrifts does not provide for an appropriate number of such companies. However, in general, the companies selected for the Peer Group were fairly comparable to Provident, as will be highlighted in the following comparative analysis.
Financial Condition
Table 3.2 shows comparative balance sheet measures for Provident and the Peer Group. Provident's net worth base of 10.1 percent was modestly below the Peer Group's average net worth ratio of 10.8 percent; however, with the addition of stock proceeds, the Bank's pro forma capital position (consolidated with the holding company) will exceed the Peer Group's ratio. The Bank's and the Peer Group's equity consisted of a small amount of intangible assets, equal to 0.7 percent and 1.0 percent, respectively, of assets on average. The increased equity is anticipated to
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Table 3.2 Balance Sheet Composition and Growth Rates Comparable Institution Analysis As of March 31, 2002
Balance Sheet as a Percent of Assets
---------------------------------------------------------------
Cash & MBS & Borrowed Subd. Net Goodwill Tng Net MEMO:
Equivalents Invest Loans Deposits Funds Debt Worth & Intang Worth Pref. Stock
----------- ------ ----- -------- -------- ----- ----- -------- ------- -----------
Provident Bank
June 30, 2002 4.8 27.7 62.6 82.4 6.4 0.0 10.1 0.7 9.4 0.0
All Public Companies 6.0 22.4 67.3 67.5 20.2 0.1 10.3 0.5 9.8 0.0
All Public Companies 6.0 22.4 67.3 67.5 20.2 0.1 10.3 0.5 9.8 0.0
State of NJ 3.3 35.4 58.5 66.8 22.1 0.1 9.0 0.2 8.8 0.0
Comparable Group Average 5.6 26.3 63.6 67.8 19.4 0.1 10.8 1.0 9.8 0.0
Mid-Atlantic Companies 3.5 29.1 63.5 68.2 20.4 0.2 8.9 0.6 8.3 0.0
Mid-West Companies 10.4 22.7 62.6 66.2 20.7 0.0 11.8 0.9 10.9 0.0
New England Companies 4.6 23.2 65.7 69.3 14.1 0.0 14.8 2.3 12.5 0.0
Comparable Group
Mid-Atlantic Companies
FMCO FMS Fin Corp. of Burlington NJ 11.7 50.1 34.5 71.3 19.0 1.0 5.2 0.0 5.2 0.0
FSLA First Sentinel Bancorp of NJ 1.8 38.2 57.0 61.6 26.0 0.0 10.2 0.2 10.0 0.0
OCFC OceanFirst Fin. Corp of NJ 1.1 17.5 77.0 64.7 26.1 0.0 8.3 0.1 8.2 0.0
PBCI Pamrapo Bancorp, Inc. of NJ 2.7 24.5 70.6 76.1 13.2 0.0 8.8 0.0 8.8 0.0
PFSB PennFed Fin. Services of NJ 1.8 21.1 75.0 61.6 28.5 0.0 6.3 0.3 6.0 0.0
TRYF Troy Financial Corp of Troy NY 2.0 23.4 66.8 73.9 9.8 0.0 14.6 2.8 11.8 0.0
Mid-West Companies
CITZ CFS Bancorp, Inc of Munster IN 16.0 24.4 55.7 58.7 29.2 0.0 10.6 0.0 10.6 0.0
FPFC First Place Fin. Corp. of OH 7.1 31.2 57.0 66.5 21.2 0.0 11.2 1.3 10.0 0.0
UCFC United Community Fin. of OH 8.1 12.5 75.1 73.3 11.7 0.0 13.6 1.4 12.2 0.0
New England Companies
AMFH American Fin. Holdings of CT 3.4 32.1 56.5 67.0 14.4 0.0 16.3 3.6 12.7 0.0
BHL Berkshire Hills Bancorp of MA 5.8 14.3 74.9 71.7 13.9 0.0 13.3 1.0 12.3 0.0
Balance Sheet Annual Growth Rates Regulatory Capital
--------------------------------------------------------------- -------------------------
MBS, Cash & Borrows. Net Tng Net
Assets Investments Loans Deposits &Subdebt Worth Worth Tangible Core Reg. Cap.
------ ----------- ----- -------- -------- ------ ------- -------- ----- ---------
Provident Bank
June 30, 2002 11.12 53.77 -2.21 10.52 7.83 12.68 14.85 9.39 9.39 14.93
All Public Companies 7.82 15.72 4.44 10.10 1.86 3.32 2.55 9.32 9.22 16.85
All Public Companies 7.82 15.72 4.44 10.10 1.86 3.32 2.55 9.32 9.22 16.85
State of NJ 12.54 6.11 14.49 7.87 33.67 0.91 1.49 8.49 8.83 20.86
Comparable Group Average 13.70 12.05 13.74 14.75 26.14 -2.03 -5.05 8.81 8.81 15.84
Mid-Atlantic Companies 9.90 3.35 12.78 5.76 24.37 0.71 1.21 8.46 8.46 16.61
Mid-West Companies 12.47 9.00 12.43 18.22 18.01 -6.34 -9.96 8.80 8.80 14.89
New England Companies 26.96 42.74 18.61 36.50 42.78 -3.80 -16.50 9.86 9.86 14.97
Comparable Group
Mid-Atlantic Companies
FMCO FMS Fin Corp. of Burlington NJ 21.59 21.92 22.80 14.60 45.98 10.39 10.61 6.40 6.40 17.96
FSLA First Sentinel Bancorp of NJ 11.19 17.10 5.79 8.64 18.59 -0.79 -0.43 9.17 9.17 19.46
OCFC OceanFirst Fin. Corp of NJ 3.08 -22.60 11.72 -0.53 18.25 -7.74 -7.65 7.21 7.21 12.73
PBCI Pamrapo Bancorp, Inc. of NJ 12.64 -7.61 23.52 5.17 NM 4.24 4.24 7.47 7.47 14.77
PFSB PennFed Fin. Services of NJ 6.88 -6.33 12.29 2.64 21.21 1.32 3.24 8.41 8.41 16.06
TRYF Troy Financial Corp of Troy NY 4.01 17.60 0.56 4.02 17.82 -3.15 -2.74 12.10 12.10 18.66
Mid-West Companies
CITZ CFS Bancorp, Inc of Munster IN -7.06 -4.62 -9.57 -4.14 -8.41 -16.51 -16.51 8.52 8.52 15.30
FPFC First Place Fin. Corp. of OH 1.78 23.86 -9.91 7.78 -1.26 -4.76 -4.90 8.60 8.60 14.52
UCFC United Community Fin. of OH 42.69 7.76 56.76 51.02 63.70 2.24 -8.46 9.28 9.28 14.84
New England Companies
AMFH American Fin. Holdings of CT 49.96 54.01 39.47 69.31 61.54 0.71 -21.36 9.05 9.05 14.20
BHL Berkshire Hills Bancorp of MA 3.96 31.46 -2.25 3.70 24.03 -8.31 -11.64 10.66 10.66 15.74
|
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2002 by RP Financial, LC.
RP Financial, LC.
Page 3.9
enhance Provident's earnings potential through reinvestment of proceeds and lower funding costs. However, at the same time, the Bank's increased pro forma capital position is expected to result in a significant decline in return on equity (based on core earnings) over the near term. Both the Bank's and the Peer Group's current equity ratios reflect strong surpluses over regulatory capital requirements; on a post-offering basis the Bank is anticipating a stronger cushion over capital requirements relative to the Peer Group.
The interest-earning asset compositions for the Bank and the Peer Group were somewhat similar, with loans constituting the bulk of interest-earning assets for Provident and the Peer Group. Provident maintained a slightly lower concentration of loans as a percent of assets than the Peer Group (62.6 percent versus 63.6 percent for the Peer Group), while the Bank's cash and investments-to-assets ratio was higher than the comparable ratio for the Peer Group (32.5 percent versus 31.9 percent for the Peer Group). Overall, Provident's interest-earning assets amounted to 95.1 percent of assets, which was below the comparable Peer Group ratio of 95.5 percent. The Bank's lower ratio of interest-earning assets was partially the result of the significant investment in BOLI (1.5 percent of assets), an asset which was not present on the Peer Group's balance sheets to the same degree.
Provident's funding liabilities reflected some minor differences relative to that of the Peer Group's funding composition. The Bank's deposits equaled 82.4 percent of assets, which was above the Peer Group average of 67.8 percent. Conversely, borrowings accounted for a lower portion of the Bank's interest-bearing funding composition, as reflected by borrowings-to-assets ratios of 6.4 percent and 19.4 percent for Provident and the Peer Group, respectively. Total interest-bearing liabilities maintained as a percent of assets equaled 88.8 percent and 87.2 percent for Provident and the Peer Group, respectively, with the Bank's higher ratio resulting in part, from maintenance of a lower level of capital on a pre-conversion basis.
A key measure of balance sheet strength and earnings power is the IEA/IBL ratio. Presently, the Peer Group's IEA/IBL ratio is above Provident's ratio, based on respective ratios of 109.5 percent and 107.1 percent. The shortfall is present as a result of the Bank's lower pre-conversion capital and the higher level of non-interest earning assets. The additional capital realized from stock proceeds should provide Provident with an IEA/IBL ratio that exceeds the
RP Financial, LC.
Page 3.10
level currently maintained by the Peer Group, as the interest-free capital realized in Provident's stock offering is expected to be deployed primarily into interest-earning assets.
The growth rate section of Table 3.2 shows growth rates for key balance sheet items for the most recent 12 months. Provident posted lower asset growth than the Peer Group, based on annual growth rates equal to 11.12 percent and 13.70 percent, respectively, as loan balances decreased over the most recent twelve month period, which stands in contrast to the average loan growth rate of 13.74 percent turned in by the Peer Group. Importantly, the Peer Group's balance sheet growth was supported by acquisition-related increases experienced by two companies (American Financial Holdings of CT and United Community Financial Corp. of OH) which skewed the Peer Group averages upward). Excluding these two companies, the Peer Group's average asset growth equaled 6.45 percent.
Cash flow from loan principal repayments (loans shrank by 2.21 percent) and deposit growth flowed into cash and investments for Provident (53.77 percent growth) while the growth rates for loan and investments were more balanced for the Peer Group companies (12.05 percent and 13.74 percent growth, respectively). The Bank's deposits increased at a rate of 10.52 percent in comparison to average growth of 14.75 percent turned in by the Peer Group while the growth rate of borrowings was higher for the Peer Group in comparison to the Bank (26.14 percent versus 7.83 percent).
The Bank's equity increased 12.68 percent, versus shrinkage of 2.03 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 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.
RP Financial, LC.
Page 3.11
Income and Expense Components
Provident and the Peer Group both reported net income to average assets ratios equal to 0.97 percent (see Table 3.3), based on earnings for the twelve months ended June 30, 2002, for the Bank and March 31, 2002 for the Peer Group, unless indicated otherwise. Provident's core profitability in relation to the Peer Group is 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.
The Bank's lower interest expense ratio relative to the Peer Group average more than offset the disadvantage in terms of interest income. Accordingly, the Bank's net interest income ratio, before loan loss provisions, of 3.76 percent was 58 basis points higher than the Peer Group average of 3.18 percent. The Bank's 30 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.
Loss provisions were a smaller factor impacting the Bank's earnings, amounting to 0.07 percent and 0.15 percent of average assets for Provident and the Peer Group, respectively. Although the Bank's asset quality and history of chargeoffs have been favorable, it maintains a higher risk-weighted asset ratio in comparison to the Peer Group, the impact of which will be evaluated in a section to follow.
Sources of non-interest operating income were higher for the Bank in comparison to the Peer Group, equal to 0.76 percent and 0.54 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 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 2.97 percent of average assets, is above the Peer Group average of 2.21 percent. 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
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1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
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Table 3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads Comparable Institution Analysis For the Twelve Months Ended March 31, 2002
Net Interest Income Other Income
--------------------------------- ---------------------
Loss NII Total
Net Provis. After Loan R.E. Other Other
Income Income Expense NII on IEA Provis. Fees Oper. Income Income
------ ------ ------- ---- ------- ------- ---- ----- ------ ------
Provident Bank
June 30, 2002 0.97 6.26 2.50 3.76 0.07 3.69 0.00 0.00 0.76 0.76
All Public Companies 0.85 6.73 3.63 3.10 0.18 2.92 0.07 0.01 0.48 0.56
All Public Companies 0.85 6.73 3.63 3.10 0.18 2.92 0.07 0.01 0.48 0.56
State of NJ 1.02 6.53 3.46 3.07 0.05 3.03 0.06 0.00 0.20 0.27
Comparable Group Average 0.97 6.56 3.38 3.18 0.15 3.03 0.10 0.00 0.44 0.54
Mid-Atlantic Companies 1.00 6.52 3.30 3.22 0.08 3.15 0.08 0.00 0.28 0.36
Mid-West Companies 0.86 6.61 3.79 2.82 0.13 2.69 0.18 0.00 0.58 0.75
New England Companies 1.07 6.59 3.00 3.59 0.39 3.21 0.03 -0.02 0.75 0.76
Comparable Group
Mid-Atlantic Companies
FMCO FMS Fin Corp. of Burlington NJ 0.67 5.96 2.96 3.00 0.02 2.98 0.01 -0.01 0.40 0.40
FSLA First Sentinel Bancorp of NJ 1.25 6.28 3.41 2.86 0.03 2.84 0.04 0.00 0.20 0.24
OCFC OceanFirst Fin. Corp of NJ 1.11 6.78 3.43 3.35 0.09 3.26 0.28 0.02 0.13 0.42
PBCI Pamrapo Bancorp, Inc. of NJ 1.13 7.17 3.25 3.91 0.12 3.80 0.06 0.00 0.32 0.39
PFSB PennFed Fin. Services of NJ 0.77 6.67 4.11 2.56 0.08 2.48 0.05 0.00 0.15 0.20
TRYF Troy Financial Corp of Troy NY 1.05 6.26 2.61 3.65 0.13 3.52 0.03 -0.01 0.47 0.49
Mid-West Companies
CITZ CFS Bancorp, Inc of Munster IN 0.57 6.10 4.00 2.10 0.05 2.05 0.08 0.00 0.42 0.50
FPFC First Place Fin. Corp. of OH 1.04 6.72 3.89 2.83 0.18 2.65 0.00 -0.01 0.37 0.36
UCFC United Community Fin. of OH 0.97 7.03 3.49 3.53 0.17 3.37 0.45 0.00 0.94 1.39
New England Companies
AMFH American Fin. Holdings of CT 1.32 6.04 3.02 3.03 0.01 3.02 0.00 0.01 0.53 0.54
BHL Berkshire Hills Bancorp of MA 0.83 7.14 2.98 4.16 0.76 3.40 0.07 -0.05 0.96 0.98
G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads
------------------ --------------- -------------------------------
MEMO: MEMO:
G&A Goodwill Net Extrao. Yield Cost Yld Cost Assets/ Effective
Expense Amort. Gains Items On Assets Of Funds Spread FTE Emp. Tax Rate
------- -------- ----- ------- --------- -------- -------- -------- ---------
Provident Bank
June 30, 2002 2.97 0.08 0.02 0.00 6.69 3.08 3.61 4,454 31.10
All Public Companies 2.33 0.04 0.18 -0.02 6.64 3.95 2.69 4,555 33.90
All Public Companies 2.33 0.04 0.18 -0.02 6.64 3.95 2.69 4,555 33.90
State of NJ 1.73 0.05 0.05 -0.01 6.73 3.90 2.84 6,563 34.67
Comparable Group Average 2.21 0.05 0.10 -0.01 6.86 3.91 2.95 5,030 36.22
Mid-Atlantic Companies 2.00 0.04 0.07 -0.01 6.78 3.71 3.07 5,128 34.36
Mid-West Companies 2.41 0.05 0.25 -0.02 6.97 4.42 2.54 3,784 36.89
New England Companies 2.54 0.06 -0.01 0.00 6.95 3.73 3.22 6,606 40.82
Comparable Group
Mid-Atlantic Companies
FMCO FMS Fin Corp. of Burlington NJ 2.41 0.00 0.06 0.00 6.20 3.22 2.98 2,476 35.24
FSLA First Sentinel Bancorp of NJ 1.23 0.04 0.02 0.00 6.47 3.90 2.57 7,339 31.43
OCFC OceanFirst Fin. Corp of NJ 2.17 0.01 0.28 -0.06 7.07 3.80 3.27 4,243 34.31
PBCI Pamrapo Bancorp, Inc. of NJ 2.41 0.00 0.00 0.00 7.33 3.65 3.68 5,919 36.67
PFSB PennFed Fin. Services of NJ 1.40 0.11 0.01 0.00 6.84 4.57 2.26 6,956 35.36
TRYF Troy Financial Corp of Troy NY 2.39 0.08 0.03 0.00 6.80 3.14 3.66 3,838 33.13
Mid-West Companies
CITZ CFS Bancorp, Inc of Munster IN 1.91 0.00 -0.08 0.00 6.33 4.58 1.76 4,511 41.34
FPFC First Place Fin. Corp. of OH 1.88 0.07 0.46 0.00 7.24 4.51 2.72 4,162 31.81
UCFC United Community Fin. of OH 3.42 0.08 0.37 -0.05 7.34 4.18 3.15 2,678 37.52
New England Companies
AMFH American Fin. Holdings of CT 1.78 0.03 0.18 0.00 6.41 3.95 2.46 9,449 31.77
BHL Berkshire Hills Bancorp of MA 3.30 0.09 -0.19 0.00 7.50 3.52 3.98 3,762 49.87
|
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
RP Financial, LC.
Page 3.13
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.
Taking non-interest operating income into account in comparing profitability, Provident's efficiency ratio (operating expenses including intangible amortization as a percent of the sum of non-interest operating income (excluding non-recurring gains) and net interest income) of 67.6 percent was modestly less favorable than the Peer Group's efficiency ratio of 60.8 percent. However, the efficiency ratio should improve with the reinvestment of the net conversion proceeds.
Non-operating expense, consisting of the gains realized on the distribution of common stock equaled 0.02 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.
The Bank's effective tax rate for the last 12 months of 31.10 percent, compares favorably to the higher tax rate of 36.22 percent for the Peer Group.
Loan Composition
The Bank's loan portfolio reflects a comparatively smaller concentration of residential mortgage loans and MBS, which aggregated to 39.38 percent and 60.20 percent for the Bank and Peer Group, respectively (see Table 3.4). This is attributable to Provident's comparatively smaller investment in whole loans secured by 1-4 family residential properties. In this regard, permanent 1-4 family mortgage loans equaled 24.06 percent of assets for the Bank versus 44.36 percent for the Peer Group on average. The level of MBS for the Bank and the Peer Group were relatively comparable, equal to 15.32 percent and 15.84 percent of assets, respectively.
The Bank's lending activities show greater diversification in most segments outside of the 1-4 family residential mortgage loan category. Specifically, construction, multi-family and commercial mortgage, commercial and consumer loans aggregated to 39.22 percent of assets for the Bank versus an average of 18.31 percent for the Peer Group. While part of the disparity results from the Bank's mortgage warehouse lines are classified as commercial loans for
RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.4 Loan Portfolio Composition and Related Information Comparable Institution Analysis As of March 31, 2002
Portfolio Composition as a Percent Assets
--------------------------------------------------------
1-4 Constr. 5+Unit Commerc. RWA/ Serviced Servicing
Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets
------------------------------------ ----- ------ ------- ------- -------- -------- ------ ---------- ---------
(%) (%) (%) (%) (%) (%) (%) ($000) ($000)
Provident Bank 15.32 24.06 3.03 16.85 9.75 9.59 65.97 399,397 3,580
All Public Companies 12.28 41.04 4.16 13.87 4.49 3.76 60.06 551,352 5,811
All Public Companies 12.28 41.04 4.16 13.87 4.49 3.76 60.06 551,352 5,811
State of NJ 27.76 48.65 1.00 5.92 0.29 1.61 46.55 125,562 1,324
Comparable Group Average 15.84 44.36 2.35 8.85 3.42 3.69 56.88 198,780 1,727
Comparable Group
AMFH American Fin. Holdings of CT 7.94 42.25 0.33 0.01 0.53 0.12 41.05 133,756 331
BHL Berkshire Hills Bancorp of MA 3.86 26.89 2.22 9.45 22.60 16.46 80.95 43,372 0
CITZ CFS Bancorp, Inc of Munster IN 19.16 36.42 6.00 12.21 0.13 1.51 58.08 19,344 0
FMCO FMS Fin Corp. of Burlington NJ 40.30 25.51 0.61 5.65 0.41 0.78 37.61 11,502 0
FPFC First Place Fin. Corp. of OH 13.52 46.11 3.76 5.37 6.57 0.73 60.90 674,675 6,640
FSLA First Sentinel Bancorp of NJ 29.29 44.38 3.26 8.71 0.30 0.58 49.20 101,077 99
OCFC OceanFirst Fin. Corp of NJ 13.54 68.20 0.47 0.65 0.09 8.90 60.41 585,541 8,477
PBCI Pamrapo Bancorp, Inc. of NJ 22.81 50.00 1.24 15.25 0.73 0.23 53.13 1,478 0
PFSB PennFed Fin. Services of NJ 10.86 65.80 0.01 6.08 0.38 0.79 54.01 179,336 691
TRYF Troy Financial Corp of Troy NY 5.39 29.54 1.60 24.35 2.64 8.83 67.01 221,497 805
UCFC United Community Fin. of OH 7.53 52.89 6.31 9.65 3.22 1.64 63.39 215,001 1,959
|
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2002 by RP Financial, LC.
RP Financial, LC.
Page 3.15
regulatory reporting (such loans equaled 4.8 percent of assets), there remains a disparity in the loan composition even compensating for this factor. The difference in high risk-weight loans for the Bank, particularly within the commercial loan segment, is attributable to the significant investment in terms of marketing, loan officers, etc., which Provident has made to more actively originate commercial loans.
Overall, the Bank maintains a higher level of risk-weighted assets as a percent of assets relative to the Peer Group, approximating 65.97 and 56.88 percent, respectively. The Bank's loan servicing portfolio was relatively comparable to the Peer Group in relation to total assets while capitalized servicing assets were modest for both the Bank and the Peer Group.
Credit Risk
The level of Provident's non-performing loans and NPAs was favorable relative to the Peer Group averages (see Table 3.5). Specifically, Provident's non-performing loans ("NPLs") and NPAs were limited, equal to 0.24 percent of loans and 0.15 percent of assets, respectively. By comparison the Peer Group reported higher NPLs and NPAs, equal to 0.61 percent and 0.45 percent respectively. Reserve coverage was favorable for the Bank, both in terms of coverage in relation to NPAs and total loans.
Overall, Provident's credit risk exposure appears to be favorable based on its highly favorable recent history with respect to losses and chargeoffs and the low level of NPAs overall. At the same time, the nature of the Bank's loan portfolio including the high proportion of higher risk commercial credits and the limited seasoning of many of the commercial loans tends to increase the Bank's risk profile in comparison to the Peer Group. Moreover, while comparable information is not available for the Peer Group, the Bank has some significant credit concentrations as the 50 largest lending relationships aggregated to $380.1 million, equal to 19.8 percent of the loan portfolio and reflecting an average balance of $7.8 million per relationship.
Interest Rate Risk
Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure. From a balance sheet perspective, Provident's similar pre-conversion capital position and lower
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Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
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Table 3.5 Credit Risk Measures and Related Information Comparable Institution Analysis As of March 31, 2002 or Most Recent Date Available
NPAs & Rsrves/
REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/
Institution Assets Assets Loans Loans NPLs 90+Del Chargoffs Loans
------------------------------------ ------ ------- ----- ------- ------- ------- --------- -----
(%) (%) (%) (%) (%) (%) ($000) (%)
Provident Bank 0.00 0.15 0.24 1.13 474.56 462.27 987 0.05
All Public Companies 0.11 0.72 0.95 0.98 203.21 156.94 382 0.17
All Public Companies 0.11 0.72 0.95 0.98 203.21 156.94 382 0.17
State of NJ 0.02 0.29 0.44 0.73 259.84 210.71 361 0.12
Comparable Group Average 0.05 0.45 0.61 1.00 269.32 231.34 523 0.19
Comparable Group
AMFH American Fin. Holdings of CT 0.00 0.16 0.27 1.19 441.13 436.06 41 0.01
BHL Berkshire Hills Bancorp of MA 0.19 0.63 0.42 1.37 329.12 166.19 1,785 0.90
CITZ CFS Bancorp, Inc of Munster IN 0.09 0.95 1.53 0.89 58.02 52.54 560 -0.01
FMCO FMS Fin Corp. of Burlington NJ 0.03 0.33 0.86 1.18 136.78 125.10 37 0.00
FPFC First Place Fin. Corp. of OH 0.06 0.80 1.32 1.02 77.04 71.43 408 0.16
FSLA First Sentinel Bancorp of NJ 0.00 0.09 0.13 1.03 775.31 658.56 25 0.00
OCFC OceanFirst Fin. Corp of NJ 0.01 0.23 0.30 0.67 224.35 214.09 2,375 0.74
PBCI Pamrapo Bancorp, Inc. of NJ 0.04 0.68 0.61 0.59 97.00 61.26 62 0.07
PFSB PennFed Fin. Services of NJ 0.01 0.15 0.19 0.39 206.14 192.23 26 0.01
TRYF Troy Financial Corp of Troy NY 0.02 0.28 0.37 1.90 507.77 468.11 277 0.15
UCFC United Community Fin. of OH 0.06 0.63 0.75 0.82 109.91 99.16 154 0.04
|
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
|
Copyright (c) 2002 by RP Financial, LC.
RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.6 Interest Rate Risk Measures and Net Interest Income Volatility Comparable Institution Analysis As of March 31, 2002 or Most Recent Date Available
Balance Sheet Measures
--------------------------
Income
Non-Earn Quarterly Change in Net Interest
Equity/ IEA/ Assets/ ---------------------------------------------------------------
Institution Assets IBL Assets 03/31/02 12/31/01 09/30/01 06/30/01 03/31/01 12/31/01
------------------------------------ ------- ----- -------- -------- -------- -------- -------- -------- --------
(%) (%) (%) (change in net interest income is annualized in basis points)
Provident Bank 9.4 107.1 4.9 2 20 15 3 3 -5
All Public Companies 9.7 108.8 4.3 3 8 1 2 -0 -1
All Public Companies 9.7 108.8 4.3 3 8 1 2 -0 -1
State of NJ 8.8 109.1 2.9 12 7 8 -4 6 -6
Comparable Group Average 9.8 109.5 4.5 7 -3 3 -6 3 -9
Comparable Group
AMFH American Fin. Holdings of CT 12.7 112.9 8.0 25 -13 3 -27 -23 0
BHL Berkshire Hills Bancorp of MA 12.3 111.1 4.9 -22 17 -4 16 -12 -3
CITZ CFS Bancorp, Inc of Munster IN 10.6 109.3 3.9 10 -29 -13 -31 3 -14
FMCO FMS Fin Corp. of Burlington NJ 5.2 105.5 3.8 25 5 -0 -6 -8 -18
FPFC First Place Fin. Corp. of OH 10.0 108.7 4.7 -13 -7 -25 -5 NA -45
FSLA First Sentinel Bancorp of NJ 10.0 110.7 3.0 -9 1 -12 4 4 -3
OCFC OceanFirst Fin. Corp of NJ 8.2 105.4 4.3 18 15 22 -3 9 7
PBCI Pamrapo Bancorp, Inc. of NJ 8.8 109.6 2.1 15 19 26 -3 -12 -14
PFSB PennFed Fin. Services of NJ 6.0 108.6 2.1 5 -6 17 3 30 -2
TRYF Troy Financial Corp of Troy NY 11.8 110.1 7.8 19 9 -11 13 36 NA
UCFC United Community Fin. of OH 12.2 112.6 4.3 2 -44 30 -23 7 3
|
NA=Change is greater than 100 basis points during the quarter.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
|
Copyright (c) 2002 by RP Financial, LC.
RP Financial, LC.
Page 3.18
IEA/IBL ratio suggest higher exposure. On a post-conversion basis, these ratios should improve relative to the Peer Group. In the absence of comparability in timely interest rate risk reporting and methodology, we reviewed quarterly changes in the net interest income ratio. In general, the quarterly fluctuations in the Bank's net interest income ratio exceed the Peer Group average. At the same time, the Bank's net interest income ratio should stabilize to some degree following the conversion, given the initial expected proceeds reinvestment strategy (primarily shorter term investment securities). Additionally, regulatory data set forth in Section One suggests that the Bank's interest rate risk exposure as measured by the change in the post-shock NPV ratio is relatively limited in relation to its industry peers (i.e., OTS regulated thrifts operating in the Northeast Region).
Summary
Based on the above analysis and the criteria employed in the selection of the companies for the Peer Group, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of Provident. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist will be addressed in the form of valuation adjustments to the extent necessary.
RP Financial, LC.
Page 4.1
IV. VALUATION ANALYSIS
Introduction
This chapter presents the valuation analysis and methodology used to determine Provident's estimated pro forma market value of the common stock to be issued in conjunction with the conversion transaction. The valuation incorporates the appraisal methodology promulgated by the Federal and state banking agencies for standard conversions and mutual holding company offerings, particularly regarding selection of the Peer Group, fundamental analysis on both the Bank and the Peer Group, and determination of the Bank's pro forma market value utilizing the market value approach.
Appraisal Guidelines
The OTS written appraisal guidelines, originally released in October 1983 and updated in late-1994, and adopted by the Department and the FDIC, specify the market value methodology for estimating the pro forma market value of an institution. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) the pro forma market value of the subject company is determined based on the market pricing of the peer group, subject to certain valuation adjustments based on key differences. In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered.
RP Financial Approach to the Valuation
The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes "fundamental analysis" techniques. Additionally, the valuation incorporates a "technical analysis" of recently completed stock conversions, including closing pricing and aftermarket trading of such offerings. It should be noted that such analyses cannot
RP Financial, LC.
Page 4.2
possibly fully account for all the market forces which impact trading activity and pricing characteristics of a stock on a given day.
The pro forma market value determined herein is a preliminary value for the Holding Company's to-be-issued stock. Throughout the conversion process, RP Financial will: (1) review changes in the Bank's operations and financial condition; (2) monitor the Bank's operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending conversion offerings (including those in the offering phase) both regionally and nationally. If material changes should occur prior to closing the offering, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.
The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent 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 major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including Provident's value, or Provident's value alone. To the extent a change in factors impacting the Bank's value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into its analysis.
Valuation Analysis
A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth,
RP Financial, LC.
Page 4.3
primary market area, dividends, liquidity of the shares, marketing of the issue, management and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of Provident coming to market at this time.
1. Financial Condition
The financial condition of an institution is an important determinant in pro forma market value, because investors typically look to such factors as liquidity, capital, asset composition and quality and funding sources in assessing investment attractiveness. The similarities and differences in the Bank's and the Peer Group's financial strength are noted as follows:
. Overall A/L Composition. Loans funded by retail deposits were the primary components of both Provident's and the Peer Group's balance sheets. Provident's interest-earning asset composition exhibited a slightly lower concentration of loans but a greater degree of diversification into higher risk and higher yielding types of loans. Provident maintains a higher risk-weighted assets to total assets ratio primarily owing to the greater proportion of loans including higher risk-weight loans. The Peer Group is currently supplementing deposits with higher borrowings utilization, while the Bank currently relies more heavily on deposits. Overall, as a percent of assets, the Bank maintained a lower IEA level and higher IBL level, which resulted in a more favorable IEA/IBL ratio for the Peer Group. However, the infusion of stock proceeds will serve to address the Bank's disadvantage.
. Credit Quality. Credit quality measures reflect limited credit risk historically for both. Provident maintained a favorable ratio of NPLs and NPAs and stronger reserve coverage ratios. Overall, Provident's credit risk exposure appears to be favorable based on its highly favorable recent history with respect to losses and chargeoffs and the low level of NPAs overall. At the same time, the nature of the Bank's loan portfolio including the high proportion of higher risk commercial credits, limited seasoning of many of the commercial loans coupled with its relatively large credit concentrations, tends to increase the Bank's risk profile in comparison to the Peer Group.
. Balance Sheet Liquidity. The Bank operated with a slightly higher level of cash and investment securities relative to the Peer Group (32.5 percent of assets versus 31.9 percent for the Peer Group). Following the infusion of stock proceeds, the Bank's cash and investments ratio is expected to increase as the proceeds retained at the Bank level are anticipated to be initially deployed into investments. Provident's future borrowing capacity was considered to be somewhat greater than Peer Group's, as the Bank's stronger pro forma capital position and lower
RP Financial, LC.
Page 4.4
level of borrowed funds on a pre-conversion basis implied a greater capacity to leverage through the utilization of borrowings.
. Funding Liabilities. Retail deposits served as the primary interest-bearing source of funds for the Bank and the Peer Group, with the Peer Group's funding composition reflecting a higher level of borrowings. The Bank's overall funding composition provided for a lower cost of funds than maintained by the Peer Group. In total, the Provident maintained a higher level of interest-bearing liabilities than the Peer Group. However, following the stock offering, the increase in the Bank's capital ratio will serve to lower the Bank's level of interest-bearing liabilities relative to the Peer Group's.
. Capital. The Bank maintains a slightly lower equity position in relation to the Peer Group, but on a pro forma basis the equity ratio is expected to exceed the Peer Group average. As a result, the Bank is expected to have a greater leverage capacity in comparison to the Peer Group. The Bank's pro forma return on equity ("ROE") is expected to compare unfavorably to the Peer Group average due to the Bank's higher pro forma equity, notwithstanding its modestly higher pro forma ROA.
On balance, Provident's financial condition was considered to be more favorable than the Peer Group's, as implied by the more favorable credit quality, capital strength and overall asset/liability composition of the Bank's pro forma balance sheet. Accordingly, we concluded that a moderate upward valuation adjustment was warranted for the Bank's financial strength.
2. Profitability, Growth and Viability of Earnings
Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institution's earnings stream and the prospects and ability to generate future earnings heavily influence the multiple the investment community will pay for earnings. The major factors considered in the valuation are described below.
. Reported Earnings. Provident reported comparable profitability relative to the Peer Group on a ROAA basis, with both reporting return on assets equal to 0.97 percent.
. Core Earnings. On a core basis, adjusting for non-operating items for both, the Bank and the Peer Group's earnings levels are still relatively comparable (0.96 percent of average assets for the Bank versus 0.92 percent of average assets for the Peer Group). The principal difference between the Bank and the Peer Group's core earnings components arise from the Bank's greater level of loan diversification (i.e., Provident generates favorable levels of net interest and non-
RP Financial, LC.
Page 4.5
interest income which were offset by higher operating expense). Reinvestment of stock proceeds into interest-earning assets will serve to increase the Bank's core earnings, with the benefit of reinvesting proceeds expected to be somewhat offset by higher operating expenses associated with operating as a stock institution, the implementation of the stock benefit plans, and the costs related to ongoing diversification and expansion.
. Interest Rate Risk. Quarterly changes in the Bank's and the Peer Group's net interest income to average assets ratios indicated a similar degree of interest rate risk exposure in their respective net interest margins. Other measures of interest rate risk, such as capital ratios, IEA/IBL ratios and the level of non-interest earning assets-to-total assets were less favorable for the Bank on a pre-conversion basis. On a pro forma basis, the Bank's capital position and IEA/IBL ratio will be enhanced by the infusion of stock proceeds and, thus, provide, the Bank with more significant comparative advantages relative to the Peer Group's balance sheet ratios.
. Credit Risk. Loss provisions had a lesser impact on Provident's earnings for the past year. Furthermore, the Bank operates with a lower ratio of NPLs and NPAs and higher reserve coverage in relation to total loans, NPAs and non-performing loans. However, the recent strong growth of the loan portfolio, particularly in high risk-weight loans and relatively large credit relationships, increases the Bank's risk exposure in relation to the Peer Group.
. Earnings Growth Potential. Several factors were considered in assessing earnings growth potential. First, the Bank's recent historical growth has been less than the Peer Group's, due largely to acquisition related growth by some of the Peer Group companies. Second, the infusion of stock proceeds will increase the Bank's earnings growth potential with respect to leverage capacity and providing the Bank with additional liquidity for purposes of funding loan growth. Lastly, the markets served by the Peer Group companies are similar to or in many cases the same markets served by the Bank and, thus, do no represent an advantage or disadvantage in terms of providing opportunities for loan and deposit growth.
. Return on Equity. Following the infusion of stock proceeds, the Bank's pro forma capital position is expected to be higher than the Peer Group, and lower pro forma core profitability will result in a significantly lower return on equity relative to the Peer Group on average.
Overall, the Bank's comparable pre-conversion reported and core earnings, lower interest rate risk exposure and earnings growth potential were negated by its expected lower return on equity. Since the market value of financial institution stocks is driven over the long term by earnings and return on equity, RP Financial concluded that a moderate downward adjustment was warranted for the Bank's profitability, growth and viability of earnings.
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Page 4.6
3. Asset Growth
Provident's asset growth was lower than Peer Group's during the period covered in our comparative analysis (positive 11.1 percent versus positive 13.7 percent for the Peer Group), largely on the basis of acquisition related growth realized by two of the Peer Group companies. On a pro forma basis, the Bank's tangible equity-to-assets ratio will be well above the Peer Group's ratio, indicating a continuance of greater leverage capacity for the Bank. The demographic characteristics of the primary market areas served by Provident and the Peer Group companies do not represent a decisive advantage for either the Bank or the Peer Group with respect to supporting retail growth opportunities. Following the conversion and operating as a stock company, the Bank will also be better positioned to pursue growth through acquisition. On balance, we believe a slight upward adjustment was warranted for this factor.
4. Primary Market Area
The general condition of an institution's market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local market served. Operating in the northern New Jersey, the Bank faces significant competition for loans and deposits from larger financial institutions, who provide a broader array of services and have significantly larger branch networks than maintained by the Bank. Provident's primary market area for deposits and loans is considered to be northern and central New Jersey, where all of the Bank's branches are located, and surrounding contiguous markets. In conjunction with the national recession, the New Jersey economy has slowed from the robust pace maintained during the late-1990s and into 2000. However, the downturn in the primary market area economy has been relatively limited compared to the previous recession and the primary market area continues to experience growth in population as well as other demographic measures. Per capita and household income measures indicate that the Bank operates in a relatively affluent market area, which is also viewed as a positive in terms of limiting credit risk exposure and supporting growth opportunities.
Overall, the markets served by the Peer Group companies were fairly comparable to the Bank's primary market. A total of five of the Peer Group companies were based in New Jersey, four of which had significant overlap of their respective branch structure with the Bank's branch
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Page 4.7
structure. Moreover, many of the remaining Peer Group operate in other similar metropolitan areas in the northeastern and midwestern U.S. The size of the markets served with respect to population were similar for the Bank and the Peer Group and growth trends for Provident's markets appear to be somewhat favorable. The median deposit market share maintained by the Peer Group companies was higher than the Bank's market share of deposits in either Essex or Hudson County, indicating a less favorable competitive position for the Bank relative to the majority of the Peer Group companies. Comparative unemployment data shows that unemployments in the Bank's principal markets are above the Peer Group average. Summary demographic and deposit market share data for the Bank and the Peer Group companies is provided in Exhibit III-4. On balance, we concluded that no adjustment was appropriate for the Bank's market area.
5. Dividends
The Bank has indicated its intention to pay an annual cash dividend. However, the amount and timing of any dividends has not yet been determined. The future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.
All eleven of the Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 1.12 percent to 5.26 percent. The average dividend yield on the stocks of the Peer Group institutions was 2.73 percent as of August 2, 2002, representing an average core earnings payout ratio of 45.79 percent. As of August 2, 2002, approximately 89 percent of all publicly-traded thrifts (non-MHC institutions) had adopted cash dividend policies (see Exhibit IV-1) exhibiting an average yield of 2.43 percent and an average earnings payout ratio of 34.36 percent. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.
The Bank's dividend capacity will be modestly greater in relation to the Peer Group's based on its higher pro forma ROA and stronger pro forma capital ratio and relatively
RP Financial, LC.
Page 4.8
comparable ROA. On balance, we concluded that a slight upward adjustment was warranted for purposes of dividends relative to the Peer Group
6. Liquidity of the Shares
The Peer Group is by definition composed of companies that are traded in the public markets. Ten of the Peer Group companies trade on the NASDAQ system and one Peer Group company trades on the AMEX. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $69.5 million to $627.9 million as of August 2, 2002, with average and median market values of $257.1 million and $251.7 million, respectively. The shares issued and outstanding to the public shareholders of the Peer Group members ranged from approximately 5.1 million to 35.4 million, with average and median shares outstanding of approximately 15.0 million and 13.3 million, respectively. The Bank's pro forma market value and shares outstanding are expected to be in the upper end of the range or above the comparable averages and medians for the Peer Group. It is anticipated that the Bank's stock will be quoted on the New York Stock Exchange. Overall, we anticipate that the Bank's stock will have a comparable trading market as the Peer Group companies on average and, therefore, concluded no adjustment was necessary for this factor.
7. Marketing of the Issue
We believe that three separate markets need to be considered for thrift stocks such as Provident's coming to market: (1) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (2) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a publicly-held company and stock trading history; and (3) the acquisition market for thrift franchises in New Jersey. All of these markets were considered in the valuation of the Bank's to-be-issued stock.
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Page 4.9
A. The Public Market
The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only.
In terms of assessing general stock market conditions, the overall stock market has continued its dismal performance over the last year providing for the prospect that the broad market indices may decline for the three consecutive years for the first time in sixty years. While the Federal Reserve has responded to the weak economy and weak stock market by cutting interest rates, the improvement in the economy overall has been lackluster and some economists remain concerned that the economy may fall back into recession.
As the result of profit warnings and growing concerns about the corporate earnings outlook, stocks moved lower in mid-June 2001. Technology stocks experienced the most significant selling pressure, as evidenced by a seven-day losing streak in the NASDAQ from June 8 through June 18, 2001. Speculation of another rate cut by the Federal Reserve at its late-June meeting provided for a relatively flat market ahead of the policy meeting. Stocks reacted mildly to the 0.25 percent rate cut implemented by the Federal Reserve in late-June and continued to trade in a narrow range to close out the second quarter. Generally weak second quarter earnings and growing uncertainty of an economic recovery in the second half of the year combined to pull stocks lower during most of July.
Weak economic data and more bad earnings news from the technology sector continued to pressure stocks lower during the first half of August 2001. The Federal Reserve's 0.25 percent rate cut at its mid-August meeting did little to lift the sagging stock market, as stocks tumbled sharply on the Federal Reserve's gloomy outlook for the economy. News that consumer confidence declined for the second month in a row in August and second quarter GDP growth of 0.2 percent was the slowest growth in eight years served to sharpen the sell-off in late
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Page 4.10
August, reflecting growing pessimism about the chances of a near term economic recovery. The stock market continued to slump in early-September, as the sharp increase in August unemployment sparked a broad-based sell-off.
On September 11, 2001, all major financial markets closed in the wake of the terrorist attack on the World Trade Center and remained closed for the balance of the week. Prior to the resumption of trading on September 17, 2001, the Federal Reserve cut short-term rates by 0.50 percent as an attempt to provide support to the stock market. However, stocks sank sharply in the first day of trading after the terrorist attack, with some of the most significant losses occurring in the airline, travel and insurance stocks. Fears over an extended war on terrorism and further erosion of the nation's weakening economy extended the sell-off through the remainder of the week, as blue chip stocks posted their biggest weekly loss since the Depression. For the week ended September 21, 2001, the DJIA dropped nearly 1,370 points or 14.3 percent. On September 24, 2001, stocks posted their first gains since the terrorist attack, as the DJIA regained approximately 25 percent of the prior week's losses with a one-day increase in the average of 368 points or 4.5 percent. Stocks continued to rebound through the end of September, regaining approximately half of the decline recorded in the first week of trading following the terrorist attack.
The positive trend in the broader stock market generally prevailed through most of October 2001, despite a continuation of bad economic news. Growing confidence about the U.S. military attack in Afghanistan and hopes for a turnaround in the economy were factors that contributed to the stock market recovery. Stocks retreated in late-October, amid uncertainties about the job market and a decline in consumer confidence. Anticipation of another rate cut by the Federal Reserve served to lift stocks in early-November and the rally strengthened following the Federal Reserve's implementation of another half point rate cut at its regularly scheduled meeting in early-November. The favorable trend in the broader stock market continued through most of November, as the DJIA achieved a technical definition of a bull market in the third week of November and closed just shy of 10000 at month's end.
In early-December 2001, technology stocks surged higher and the DJIA surpassed the 10000 mark, reflecting growing optimism about an economic recovery. However, the stock
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market rally ended on news of a larger than expected increase in the November unemployment rate. Fresh concerns about the corporate earnings outlook pushed stocks lower in mid-December, despite the Federal Reserve's eleventh interest rate cut of the year. During the second half of December, stocks generally moved higher on year end buying and favorable economic data that showed surprisingly strong new home construction. Notwithstanding the year end rally, the Dow Jones Industrial Average ("DJIA") closed seven percent lower for the year and the NASDAQ Composite Index ("NASDAQ") declined 21 percent in 2001, providing for the worst two-year performance in the stock market in 23 years.
The stock market began 2002 with a New Year rally, as investors bet on a forthcoming economic recovery and an upturn in corporate earnings. The momentum of the advance faded in mid-January, reflecting concerns that the markets were pricing in more of a recovery than the economy was showing. The Federal Reserve's decision to leave interest rates unchanged and indications that the economic downturn may be ending provided for a brief rebound in the broader stock market at the end of January. Stock market activity was mixed throughout most of February, as fears that accounting troubles similar to those impacting Enron could affect more companies weighed against hopes for an economic recovery and improved corporate earnings. The DJIA moved back above 10000 in late-February and sustained upward momentum in early-March, as favorable economic news and the Federal Reserve's cautiously optimistic assessment of the economy served to rally the broader market. Stocks traded in a narrow range in mid-March, reflecting uncertainty over the strength of the economic recovery and the possibility of future rate increases by the Federal Reserve. The Federal Reserve's decision to leave short-term rates unchanged at its mid-March meeting, as well as a shift in its policy directive to a neutral stance from one that favored additional easing, provided for a mixed reaction in the stock market. Stocks moved lower in late-March, reflecting first quarter earnings concerns and the prospect of rising interest rates.
The general stock market declined at the beginning of the second quarter of 2002, reflecting growing concerns about the Mideast conflict. The broader stock market continued to struggle through mid-April, as the result of disappointing first quarter earnings among some of the blue chip stocks and weak earnings forecasts for the balance of 2002. Stocks continued to falter into late-April, primarily on the basis of weak first quarter earnings and growing concerns
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about the strength of the economic recovery. The extended sell-off prompted a rebound in blue-chip stocks at the end of April, but the rally sputtered on news of a sharper than expected increase in the April unemployment rate. The April 2002 unemployment rate rose to 6.0 percent, its highest level in nearly eight years.
Stocks were largely unchanged by the Federal Reserve's widely anticipated decision to leave rates unchanged at its early-May 2002 meeting, but then rallied sharply higher the day following the meeting on hints from Cisco about a possible business rebound. Favorable economic data in the form of stronger than expected retail sales in April and rising hopes of more upbeat earnings forecast by technology firms supported further advances in stocks during mid-May. The rebound was not sustained in late-May, as profit taking and more terrorism warnings dampened investor enthusiasm for stocks. Market pessimism extended the sell-off in stocks in through June and July, reflecting political turmoil abroad, concerns over corporate scandals and more disappointing earnings news from market leaders.
As an indication of the general trends in the nation's stock markets over the past year, as of August 2, 2002, the DJIA closed at 8313.13, a decrease of 20.9 percent from one year earlier and 17.1 percent from the beginning of the year. The NASDAQ Composite Index stood at 1247.92, a decrease of 36.0 percent since the beginning of the year while the Standard & Poors 500 Index closed at 864.24 on August 2, 2002, a decline of 24.72 percent from the beginning of the year.
The market for thrift stocks has been mixed during the past twelve months, but, in general, thrift stocks have outperformed the broader market. Expectations of further rate cuts by the Federal Reserve and stronger second quarter earnings translated into slightly higher thrift prices in early-June 2001. Consolidation among thrift stocks, including Washington Mutual's proposed $5.2 billion acquisition of Dime Bancorp, extended the rally in thrift issues through mid-June. The widely anticipated rate cut by the Federal Reserve at its late-June meeting had little impact on thrift prices, as thrift prices eased lower at the close of the second quarter on profit taking. Generally favorable second quarter earnings realized from strong lending volumes and expansion of the net interest margin served to boost thrift prices during July, in which the strongest gains were again posted by the large-cap issues.
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Page 4.13
The positive trend in thrift stocks continued to prevail during the first half of August 2001, reflecting a continuation of the favorable interest rate environment and little threat of inflationary pressures. Thrift stocks reacted mildly to the widely anticipated 0.25 percent rate cut by the Federal Reserve in mid-August, which was followed a decline of more than 5.0 percent in the SNL Index for all publicly-traded thrifts in late-August. The decline in the market-cap weighted SNL Index was prompted by news that some of the large publicly-traded thrift lenders were experiencing net interest margin compression. Thrift stocks followed the broader market lower in early-September, reflecting the potential negative implications that a slowdown in consumer spending would have on financial stocks.
In a sharp contrast to the broader market, thrift stocks moved higher on the first day of trading following the terrorist attack. The increase in thrift stocks was attributed to the 0.50 percent rate cut implemented by the Federal Reserve, which provided for a further steepening of the yield curve, and large buyback programs announced by a number of the large-cap thrifts following the Securities and Exchange Commission's decision to waive many of the regulations governing repurchases. However, thrift stocks experienced selling pressure at the end of the week ended September 21, 2001, as investors became wary that the worsening U.S. economy would negatively impact the housing market and related industries as well. Oversold conditions in the thrift sector provided for a positive correction in thrift stocks at the close of September.
Thrift stocks eased lower through mid-October 2001, reflecting expectations that the series of interest rate cuts implemented by the Federal Reserve would be ending soon and the slowing economy would also began to negatively impact residential lenders. The SNL Index dropped sharply in mid-October, as third quarter results for two large-cap issues (Washington Mutual and Golden West Financial) indicated an increase in problem assets. After trading in a narrow range through the balance of October, thrifts stocks rebounded during most of November. Attractive valuations on some of the large-cap issues that had become oversold and another rate cut by the Federal Reserve in early-November were factors that contributed to the recovery in thrift prices. Thrift stocks eased lower at the close of November and traded in a narrow range in early-December, which was largely attributed to profit taking in some of the large-cap issues following their strong November performance. Expectations that earnings would benefit from
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the additional interest rate cuts implemented by the Federal Reserve during the fourth quarter supported an upward trend in thrift issues during mid- and late-December. For the year ended 2001, the SNL Index for all publicly-traded thrifts posted a gain of 5.0 percent.
Further gains were registered in thrift stocks at the beginning of 2002, with the strongest performances again turned in by the larger companies. Expectations of strong fourth quarter earnings and growing sentiment of a slow economic recovery that would support a continuation of the steep yield curve were factors that contributed to the advance in thrift stocks. Thrift issues stabilized in mid-January and then moved higher in late-January, as investors were encouraged by fourth quarter earnings. In early-February, concerns about corporate accounting practices spilled over into the financial services sector, which translated into a general decline in bank and thrift stocks, particularly the large-cap issues. After stabilizing in mid-February, thrift issues advanced in late-February and early-March on strong fundamentals and acquisition speculation. Thrift stocks edged lower following the Federal Reserve meeting in March, reflecting growing sentiment that the economic recovery would lead to higher interest rates in the second half of the year.
Thrift issues moved higher in early-April 2002, as investors became more optimistic about first and second quarter earnings for the thrift sector. Growing sentiment that the Federal Reserve would not raise rates in May further contributed to the upswing in thrift prices. The upward momentum in thrift stocks was sustained through mid-April, with the advance supported by favorable first quarter earnings, low inflation data and investors dumping technology stocks in favor of lower risk bank and thrift stocks. Thrift stocks stabilized in late-April in the face of a downturn experienced in broader stock market, as traditional spread lenders benefited from generally weak economic news. News of the increase in the April unemployment rate served to boost thrift prices in early-May, as the weak employment data lessened expectations of a strong economic recovery that could lead to higher interest rates. Thrift stocks stabilized in mid- and late-May, as Citigroup's proposed $5.8 billion acquisition of Golden State Bancorp had little impact on the broader thrift market. While the broader market experienced extensive selling pressure in the months of June and July, the decline in thrift issues was relatively mild as investors continued to be attracted to the generally more stable performance characteristics of thrift stocks. On August 2, 2002, the SNL Index for all publicly-traded thrifts
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Page 4.15
closed at 1056.2, an increase of 3.6 percent from one year ago, and 15.0 percent from the beginning of the year.
B. The New Issue Market
In addition to thrift stock market conditions in general, the new
issue market for converting thrifts is also an important consideration in
determining the Bank's pro forma market value. The new issue market is separate
and distinct from the market for seasoned stock thrifts in that the pricing
ratios for converting issues are computed on a pro forma basis, specifically:
(1) the numerator and denominator are both impacted by the conversion offering
amount, unlike existing stock issues in which price change affects only the
numerator; and (2) the pro forma pricing ratio incorporates assumptions
regarding source and use of proceeds, effective tax rates, stock plan purchases,
etc. which impact pro forma financials, whereas pricing for existing issues are
based on reported financials. The distinction between pricing of converting and
existing issues is perhaps no clearer than in the case of the price/tangible
book ("P/TB") ratio in that the P/TB ratio of a converting thrift will typically
result in a discount to tangible book value whereas in the current market for
existing thrifts the P/TB ratio often reflects a premium to tangible book value.
Therefore, it is appropriate to also consider the market for new issues, both at
the time of the conversion and in the aftermarket.
The market for converting thrifts has strengthened in conjunction with the broader thrift market over the past year, although conversion activity has remained somewhat limited. As shown in Table 4.1, only two standard conversion offerings have been completed during 2002. The average pro forma price/tangible book and price/core earnings ratios of the recent standard conversion equaled 63.7 percent and 26.8 times, respectively. There have also been two second step stock offerings completed and three mutual holding company offerings completed during the 2002 calendar year. However, the standard conversions are considered to be more relevant to Provident's pricing since the Bank is undertaking the standard conversion transaction structure, although the two institutions completing such offerings (Reserve Bancorp of PA and Heritage Bancshares of TX) are substantially smaller than Provident and operate in different markets.
RP Financial, LC.
Pricing Characteristics and After-Market Trends Conversions Completed in 2002
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Pre-Conversion Data
--------------------------------
Institutional Information Financial Info. Asset Quality Offering Information
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Conversion Equity/ NPAs/ Res. Gross % % of Exp./
Institution State Date Ticker Assets Assets Assets Cov. Proc. Offered Mid. Proc.
----------- ----- --------- -------- ------ ------- ------ ---- ------- ------- ---- -----
($Mil) (%) (%) (%) ($Mil.) (%) (%) (%)
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Standard Conversions
Reserve Bancorp, Inc. PA 4/8/2002 RSVB-OTC $ 46 11.50% 0.28% 134% $ 7.4 100% 125% 5.4%
Heritage Bancshares, Inc.(1) TX 2/26/2002 HRGB-OTC $ 40 9.71% 0.81% 93% $ 4.9 100% 112% 7.6%
Averages - Standard Conversions: $ 43 10.61% 0.55% 114% $ 6.1 100% 119% 6.5%
Medians - Standard Conversions: $ 43 10.61% 0.55% 114% $ 6.1 100% 119% 6.5%
Second Step Conversions
Brookline Bancorp, Inc.* MA 7/10/2002 BRKL $1,138 26.20% 0.00% 0% $337.2 58% 132% 1.3%
Willow Grove Bancorp, Inc.* PA 4/4/2002 WGBC $ 644 9.78% 0.75% 92% $ 64.1 57% 132% 2.5%
Averages - Second Step Conversions: $ 891 17.99% 0.38% 46% $200.7 57% 132% 1.9%
Medians - Second Step Conversions: $ 891 17.99% 0.38% 46% $200.7 57% 132% 1.9%
Mutual Holding Companies(6)
Minden Bancorp, Inc.* LA 7/2/2002 MDBC-OTC $ 65 17.43% 0.20% 204% $ 6.5 45% 132% 5.5%
New England Bancshares, Inc. CT 6/4/2002 NEBS-OTC $ 132 10.84% 0.28% 234% $ 9.2 45% 132% 5.0%
Partners Trust Fin. Grp.* NY 4/4/2002 PRTR $ 983 10.17% 0.95% 87% $ 64.0 46% 132% 2.9%
Averages - Mutual Holding Companies: $ 393 12.81% 0.48% 175% $ 26.6 45% 132% 4.5%
Medians - Mutual Holding Companies: $ 132 10.84% 0.28% 204% $ 9.2 45% 132% 5.0%
Averages - All Conversions: $ 436 10.79% 0.47% 120% $ 70.5 64% 128% 4.3%
Medians - All Conversions: $ 132 10.84% 0.28% 93% $ 9.2 57% 132% 5.0%
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Contribution to
Institutional Information Charitable Found Insider Purchases
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Benefit Plans
------------- Initial
Conversion % of Recog Mgmt.& Dividend
Institution State Date Ticker Form Offering ESOP Plans Dirs. Yield
----------- ----- --------- -------- ----- -------- ---- ----- ------ --------
(%) (%) (%) (%)(2) (%)
------------------------------------------------------------------------------------------------------------------
Standard Conversions
Reserve Bancorp, Inc. PA 4/8/2002 RSVB-OTC NA NA 8.0% 4.0% 10.4% 0.00%
Heritage Bancshares, Inc.(1) TX 2/26/2002 HRGB-OTC NA NA 8.0% 4.0% 12.8% 0.00%
Averages - Standard Conversions: N.A. N.A. 8.0% 4.0% 11.6% 0.00%
Medians - Standard Conversions: N.A. N.A. 8.0% 4.0% 11.6% 0.00%
Second Step Conversions
Brookline Bancorp, Inc.* MA 7/10/2002 BRKL NA NA 0.0% 4.0% 0.6% 3.40%
Willow Grove Bancorp, Inc.* PA 4/4/2002 WGBC NA NA 8.0% 4.0% 1.8% 2.28%
Averages - Second Step Conversions: N.A. N.A. 4.0% 4.0% 1.2% 2.84%
Medians - Second Step Conversions: N.A. N.A. 4.0% 4.0% 1.2% 2.84%
Mutual Holding Companies(6)
Minden Bancorp, Inc.* LA 7/2/2002 MDBC-OTC NA NA 8.0% 4.0% 17.3% 0.00%
New England Bancshares, Inc. CT 6/4/2002 NEBS-OTC NA NA 8.0% 4.0% 0.3% 0.00%
Partners Trust Fin. Grp.* NY 4/4/2002 PRTR Stock 1.35% 8.0% 4.0% 3.2% 2.00%
Averages - Mutual Holding Companies: N.A. N.A. 8.0% 4.0% 6.9% 0.67%
Medians - Mutual Holding Companies: N.A. N.A. 8.0% 4.0% 3.2% 0.00%
Averages - All Conversions: N.A. 1.35% 6.9% 4.0% 6.6% 1.10%
Medians - All Conversions: N.A. 1.35% 8.0% 4.0% 3.2% 0.00%
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Pro Forma Data
---------------------------------------
Institutional Information Pricing Ratios(3) Financial Charac.
-----------------------------------------------------------------------------------------------------
Conversion Core Core Core IPO
Institution State Date Ticker P/TB P/E P/A ROA TE/A ROE Price
----------- ----- --------- -------- ---- ---- ---- ---- ---- ---- ------
(%) (x) (%) (%) (%) (%) ($)
--------------------------------------------------------------------------------------------------------------
Standard Conversions
Reserve Bancorp, Inc. PA 4/8/2002 RSVB-OTC 64.9% 17.4x 14.2% 0.8% 21.9% 3.7% $10.00
Heritage Bancshares, Inc.(1) TX 2/26/2002 HRGB-OTC 62.5% 36.3x 11.1% 0.3% 17.8% 1.7% $10.00
Averages - Standard Conversions: 63.7% 26.8x 12.6% 0.6% 19.8% 2.7% $10.00
Medians - Standard Conversions: 63.7% 26.8x 12.6% 0.6% 19.8% 2.7% $10.00
Second Step Conversions
Brookline Bancorp, Inc.* MA 7/10/2002 BRKL 94.9% 22.1x 40.2% 1.8% 42.4% 4.3% $10.00
Willow Grove Bancorp, Inc.* PA 4/4/2002 WGBC 96.6% 35.9x 16.1% 0.7% 16.9% 4.0% $10.00
Averages - Second Step Conversions: 95.7% 29.0x 28.2% 1.2% 29.6% 4.1% $10.00
Medians - Second Step Conversions: 95.7% 29.0x 28.2% 1.2% 29.6% 4.1% $10.00
Mutual Holding Companies(6)
Minden Bancorp, Inc.* LA 7/2/2002 MDBC-OTC 61.7% 31.3x 18.8% 0.7% 23.8% 2.8% $10.00
New England Bancshares, Inc. CT 6/4/2002 NEBS-OTC 65.5% 36.4x 13.8% 0.4% 21.0% 1.8% $10.00
Partners Trust Fin. Grp.* NY 4/4/2002 PRTR 64.5% 20.1x 12.9% 0.6% 14.9% 4.4% $10.00
Averages - Mutual Holding Companies: 63.9% 29.3x 15.2% 0.6% 19.9% 3.0% $10.00
Medians - Mutual Holding Companies: 64.5% 31.3x 13.8% 0.6% 21.0% 2.8% $10.00
Averages - All Conversions: 72.9% 28.5x 18.2% 0.8% 22.6% 3.2% $10.00
Medians - All Conversions: 64.9% 31.3x 14.2% 0.7% 21.0% 3.7% $10.00
--------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Post-IPO Pricing Trends
-------------------------------------------------------
Institutional Information Closing Price:
---------------------------------------------------------------------------------------------------------------------
First After After
Conversion Trading % First % First %
Institution State Date Ticker Day Change Week(4) Change Month(5) Change
----------- ----- --------- -------- ------- ------ ------- ------ -------- ------
($) (%) ($) (%) ($) (%)
---------------------------------------------------------------------------------------------------------------------
Standard Conversions
Reserve Bancorp, Inc. PA 4/8/2002 RSVB-OTC $12.50 25.0% $12.80 28.0% $12.85 28.5%
Heritage Bancshares, Inc.(1) TX 2/26/2002 HRGB-OTC $12.05 20.5% $11.70 17.0% $11.75 17.5%
Averages - Standard Conversions: $12.28 22.8% $12.25 22.5% $12.30 23.0%
Medians - Standard Conversions: $12.28 22.8% $12.25 22.5% $12.30 23.0%
Second Step Conversions
Brookline Bancorp, Inc.* MA 7/10/2002 BRKL $11.06 10.6% $11.37 13.7% $11.37 13.7%
Willow Grove Bancorp, Inc.* PA 4/4/2002 WGBC $11.00 10.0% $11.55 15.5% $11.62 16.2%
Averages - Second Step Conversions: $11.03 10.3% $11.46 14.6% $11.50 15.0%
Medians - Second Step Conversions: $11.03 10.3% $11.46 14.6% $11.50 15.0%
Mutual Holding Companies(6)
Minden Bancorp, Inc.* LA 7/2/2002 MDBC-OTC $11.95 19.5% $11.95 19.5% $11.90 19.0%
New England Bancshares, Inc. CT 6/4/2002 NEBS-OTC $12.30 23.0% $12.35 23.5% $12.35 23.5%
Partners Trust Fin. Grp.* NY 4/4/2002 PRTR $14.25 42.5% $14.85 48.5% $14.98 49.8%
Averages - Mutual Holding Companies: $12.83 28.3% $13.05 30.5% $13.08 30.8%
Medians - Mutual Holding Companies: $12.30 23.0% $12.35 23.5% $12.35 23.5%
Averages - All Conversions: $12.16 21.6% $12.37 23.7% $12.40 24.0%
Medians - All Conversions: $12.05 20.5% $11.95 19.5% $11.90 19.0%
---------------------------------------------------------------------------------------------------------------------
|
Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available.
(1) Non-OTS regulated thrift.
(2) As a percent of MHC offering for MHC transactions.
(3) Does not take into account the adoption of SOP 93-6.
(4) Latest price if offering is less than one week old.
(5) Latest price if offering is more than one week but less than one month old.
(6) Mutual holding company pro forma data on full conversion basis.
(7) Simultaneously converted to commercial bank charter.
(8) Converted to a commercial bank charter.
July 12, 2002
RP Financial. LC.
Page 4.17
There is currently one pending full-stock conversion transaction. First PacTrust Bancorp of Chula Vista, California, the proposed holding company for Pacific Trust Bank was substantially oversubscribed at the close of its offering in June 2002, and is being resolicited at a higher level (the midpoint valuation was increased by 20 percent in the resolicitation). First PacTrust's midpoint pricing ratios in the resolicitation phase of its offering (which is expected to close in mid-August) are equal to 68.7% of pro forma book value and 21.4 times pro forma earnings.
C. The Acquisition Market
Also considered in the valuation was the potential impact on the Bank's stock price of recently completed and pending acquisitions of other savings institutions operating in New Jersey. As shown in Exhibit IV-5, there were nine thrift acquisitions of New Jersey-based savings institutions completed or announced between the beginning of 1999 through year-to-date 2002. The recent acquisition activity involving New Jersey thrifts may imply a certain degree of acquisition speculation for the Bank's stock. To the extent that acquisition speculation may impact the Bank's offering, we have largely taken this into account in selecting companies which operate in markets that have experienced a comparable level of acquisition activity as the Bank's market and, thus, are subject to the same type of acquisition speculation that may influence the Bank's trading price.
* * * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we considered trends in the overall thrift market, the new issue market including the new issue market for newly-converted issues, the acquisition market and the general market for common stock. Of these factors, the greatest consideration was given to volatility in the markets, both the general market and thrift stocks, and the sizeable offering proposed by Provident. Notwithstanding the Bank's market area and operations, $425 million is a large amount of stock to sell in a volatile and unsteady market. We thus believe a valuation adjustment is warranted to reflect current investor expectations and sentiment. Taking these factors and trends into account, RP Financial
RP Financial. LC.
Page 4.18
concluded that a moderate downward adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.
8. Management
Provident's management team appears to have experience and expertise in all of the key areas of the Bank's operations. Exhibit IV-5 provides summary resumes of Provident's Board of Directors and senior management. The financial characteristics of the Bank suggest that it is effectively managed and there appears to be a well-defined organizational structure. The Bank currently does not have any executive management positions that are vacant.
Similarly, the returns, capital positions and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.
9. Effect of Government Regulation and Regulatory Reform
As a fully-converted institution, Provident Financial and the Bank will operate in substantially the same regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 reflects the Bank's pro forma regulatory capital ratios. On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.
Summary of Adjustments
Overall, based on the factors discussed above, we concluded that the Bank's pro forma market value should reflect the following valuation adjustments relative to the Peer Group:
RP Financial. LC. Page 4.19 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 |
Valuation Approaches
In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, i.e., the pro forma market value approach, including the fully-converted analysis described above, 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 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 IV-8 and IV-9). In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and the recent conversions.
RP Financial's valuation placed an emphasis on the following:
. P/E Approach. The P/E approach is generally the best indicator of long-term value for a stock. Given the similarities between the Bank's and the Peer Group's earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation. At the same time, since reported earnings for both the Bank and the Peer Group included certain unusual items, we also made adjustments to earnings to arrive at core earnings estimates for the Bank and the Peer Group and resulting price/core earnings ratios.
. P/B Approach. P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of a public offering, as the earnings approach involves assumptions regarding the use of proceeds. RP Financial considered the P/B approach to be a valuable indicator of pro forma
RP Financial. LC.
Page 4.20
value taking into account the pricing ratios under the P/E and P/A approaches. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or "P/TB"), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.
. P/A Approach. P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings - we have also given less weight to the assets approach. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community's willingness to pay market multiples for earnings or book value when ROE is expected to be low.
The Bank has adopted Statement of Position ("SOP") 93-6, which causes earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of SOP 93-6 in the valuation.
Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, RP Financial concluded that the pro forma market value of the Bank's conversion stock as of August 2, 2002 was $425,000,000 at the midpoint, inclusive of 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 $405,800,000, or 40,580,000 shares at $10.00 per share.
1. Price-to-Earnings ("P/E"). The application of the P/E valuation method requires calculating the Bank'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, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank's reported earnings before the cumulative effect of accounting changes equaled $28.2 million for the twelve months ended June 30, 2002. In deriving the Bank's core earnings, the adjustments
RP Financial. LC.
Page 4.21
were made to reported earnings to eliminate on a tax effected basis the gain on equity securities and the sale of fixed assets as well as goodwill impairment expense. As shown below, on a tax effected basis, assuming an effective marginal tax rate of 37.0 percent, the Bank's core earnings were determined to equal $27.5 million for the twelve months ended June 30, 2002. (Note: see Exhibit IV-7 for the adjustments applied to the Peer Group's earnings in the calculation of core earnings).
Amount
-------
($000)
Net Income (Trailing 12 Months Ended 6/30/02)(1) $28,235
Less: Gain on Equity Securities (959)
Gain on the Sale of Fixed Assets (192)
Tax Effect @37% Marginal Tax Rate 426
-------
Core Earnings Estimate $27,510
|
(1) Before the impact of the cumulative effect of accounting changes.
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 $425.0 million midpoint value equaled 14.42 and 14.52 times, respectively. These pro forma multiples for the Bank indicate a discount of 10.8 percent relative to the Peer Group's median reported earnings multiple of 16.16 times and a 15.8 percent discount relative to the Peer Group median core earnings multiple of 17.24 times (see Table 4.2).
2. Price-to-Book ("P/B"). The application of the P/B valuation method requires calculating the Bank's pro forma market value by applying a valuation P/B ratio to the Bank's pro forma book value. Based on the $425.0 million midpoint valuation, the Bank's pro forma P/B and P/TB ratios equaled 63.93 percent and 66.19 percent, respectively. In comparison to the median P/B and P/TB ratios for the Peer Group of 136.24 percent and 153.12 percent, the Bank's ratios reflected a discount of 53.1 on a P/B basis and a discount of 56.8 on a P/TB basis. RP Financial considered the discounts under the book value approach to be reasonable in light of the valuation adjustments referenced earlier and in view of the significant level of pro forma capital that, in effect, constrains the ability to increase the P/B ratio without significantly depressing
RP Financial. LC.
Page 4.22
ROE. At the supermaximum of the valuation range, the Bank's pro forma P/TB ratio equaled 73.52 percent, which is discounted from the Peer Group median by 52.0.
3. Price-to-Assets ("P/A"). The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank'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 12.43 percent of pro forma assets. Comparatively, the Peer Group companies exhibited a median P/A ratio of 15.27 percent, which implies a discount of 18.6 percent for the Bank's pro forma P/A ratio.
Comparison to Recent Conversions
As indicated at the beginning of this chapter, RP Financial's analysis of recent standard conversion offering pricing characteristics at closing and in the aftermarket has been limited to a "technical" analysis and, thus, the pricing characteristics of recent standard conversions are not the primary determinate of value herein. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). The standard conversions completed in 2002 closed at a price/tangible book ratio of 63.7 percent (see Table 4.1). The price of the recent standard conversion appreciated by 22.5 percent during the first week of trading. Relative to the midpoint P/TB of the one pending full conversion transaction, the Bank's midpoint P/TB ratio is discounted by 3.7 percent from First PacTrust's pro forma P/TB ratio equal to 68.73 percent at the midpoint of its valuation range.
Valuation Conclusion
Based on the foregoing, it is our opinion that, as of August 2, 2002, the estimated pro forma market value of Provident's common stock, including the contribution to the Foundation immediately following the offering, is $425,000,000 at the midpoint, equal to 42,500,000 shares issued at a per share value of $10.00. The resulting range of value pursuant to regulatory guidelines and the corresponding number of shares based on the Board determined $10.00 per
RP Financial. LC.
Page 4.23
share offering price is set forth below. The pro forma valuation calculations relative to the Peer Group are shown in Table 4.2 and are detailed in Exhibit IV-8 and Exhibit IV-9.
Offering Foundation Total Shares Aggregate
Valuation Range Amount Contribution Issued Market Value
--------------- ---------- ------------ ------------ ------------
(Shares) (Shares) (Shares) ($)
Minimum 34,493,000 1,655,700 36,148,700 $361,487,000
Midpoint 40,580,000 1,920,000 42,500,000 425,000,000
Maximum 46,667,000 1,920,000 48,587,000 485,870,000
Supermaximum 53,667,050 1,920,000 55,587,050 555,870,500
|
Exhibit 99.3
[LETTERHEAD OF RP FINANCIAL, LC.]
August 2, 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; and (3) 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. RP FINANCIAL, LC. |
Exhibit 99.4
[DRAFT]
The Provident Bank
PROPOSED MAILING AND INFORMATIONAL MATERIALS
INDEX
1. Dear Depositor Letter*
2. Dear Depositor Letter for Non Eligible Status
3. Dear Friend Letter - Eligible Account Holders who are no longer Depositors*
4. Dear Voting Depositor*
5. Dear Potential Investor Letter*
6. Dear Customer Letter - Used as a Cover Letter for States Requiring "Agent" Mailing*
7. Proxy and Stock Q&A (7a-7g)
8. Proxy Request Letter (immediate follow-up)
9. Proxy Request
10. Stock Order/Certification Form (page 1 of 2)*
11. Stock Order/Certification Form (page 2 of 2)*
12. Stock Order Form Guidelines*
13. Mailing Insert/Lobby Poster
14. Invitation Letter - Informational Meetings
15. Dear Subscriber/Acknowledgment Letter - Initial Response to Stock Order Received
16. Dear Charter Shareholder - Confirmation Letter
17. Dear Interested Investor - No Shares Available Letter
18. Welcome Shareholder Letter - For Initial Certificate Mailing
19. Dear Interested Subscriber Letter - Subscription Rejection
20. Letter for Sandler O'Neill Mailing to Clients*
o Accompanied by a Prospectus
[The Provident Bank]
Dear Depositor:
The Board of Managers of The Provident Bank has adopted a plan of conversion under which The Provident Bank will convert from a mutual savings bank to a stock savings bank. As part of this plan, we have formed Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank. We are converting so that The Provident Bank will be structured in the form of ownership that will best support the Bank's future growth.
As part of the conversion and in furtherance of our long-standing commitment to our local community, we intend to establish a charitable foundation to be known as The Provident Bank Foundation. The foundation will be dedicated to charitable purposes within the communities in which the Bank operates.
To accomplish the conversion and the establishment of the foundation, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed xxxxx postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Depositors and wish to vote in person, you may do so by revoking any previously executed proxy. If you have an IRA or other Qualified Plan account for which The Provident Bank acts as trustee and we do not receive a proxy from you, The Provident Bank, as trustee for such account, intends to vote in favor of the plan of conversion on your behalf.
If the plan of conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the fullest extent permitted by law.
o Existing deposit accounts and loans will not undergo any change.
o Voting for approval will not obligate you to buy any shares of common stock.
As a qualifying account holder, you may also take advantage of your nontransferable rights to subscribe for shares of Provident Financial Services, Inc. common stock on a priority basis, before the stock is offered to the general public. The enclosed proxy statement and prospectus describes the stock offering and the operations of The Provident Bank. If you wish to purchase stock, please complete the stock order and certification form and mail it, along with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with the Bank) to the conversion center of The Provident Bank in the enclosed YELLOW postage-paid envelope marked "STOCK ORDER RETURN." Your order must be physically received by the conversion center no later than x:00 p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002. Please read the prospectus carefully before making an investment decision.
If you wish to use funds in your IRA or Qualified Plan at The Provident Bank to subscribe for common stock, please be aware that federal law requires that such funds first be transferred to a self-directed retirement account with a trustee other than the Bank. The transfer of such funds to a new trustee takes time, so please make arrangements as soon as possible.
If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
[The Provident Bank]
Dear Depositor:
The Board of Managers of The Provident Bank has adopted a plan of conversion under which The Provident Bank will convert from a mutual savings bank to a stock savings bank. As part of this plan, we have formed Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank. We are converting so that The Provident Bank will be structured in the form of ownership that will best support the Bank's future growth.
As part of the conversion and in furtherance of our long-standing commitment to our local community, we intend to establish a charitable foundation to be known as The Provident Bank Foundation. The foundation will be dedicated to charitable purposes within the communities in which the Bank operates.
To accomplish the conversion, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Depositors and wish to vote in person, you may do so by revoking any previously executed proxy. If you have an IRA or other Qualified Plan for which The Provident Bank acts as trustee and we do not receive a proxy from you, The Provident Bank, as trustee for such account, intends to vote in favor of the plan of conversion on your behalf.
If the plan of conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the fullest extent permitted by law
o Existing deposit accounts and loans will not undergo any change.
We regret that we are unable to offer you common stock in the subscription offering, because the laws of your state or jurisdiction require us to register either (1) the to-be-issued common stock of Provident Financial Services, Inc. or (2) an agent of The Provident Bank to solicit the sale of such stock, and the number of eligible subscribers in your state or jurisdiction does not justify the expense of such registration.
If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
[The Provident Bank]
Dear Friend of The Provident Bank:
The Board of Managers of The Provident Bank has adopted a plan of conversion under which The Provident Bank will convert from a mutual savings bank to a stock savings bank. As part of this plan, we have formed Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank. We are converting so that The Provident Bank will be structured in the form of ownership that will best support the Bank's future growth.
As part of the conversion and in furtherance of our long-standing commitment to our local community, we intend to establish a charitable foundation to be known as The Provident Bank Foundation. The foundation will be dedicated to charitable purposes within the communities in which the Bank operates.
As a former account holder, you may take advantage of your nontransferable rights to subscribe for shares of Provident Financial Services, Inc. common stock on a priority basis, before the stock is offered to the general public. The enclosed prospectus describes the stock offering and the operations of The Provident Bank. If you wish to purchase stock, please complete the stock order and certification form and mail it, along with full payment for the shares to the conversion center of The Provident Bank in the enclosed postage-paid envelope marked "STOCK ORDER RETURN." Your order must be physically received by the conversion center no later than x:00 p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002. Please read the prospectus carefully before making an investment decision.
If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
Name
Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
[The Provident Bank]
Dear Voting Depositor:
The Board of Managers of The Provident Bank has adopted a plan of conversion under which The Provident Bank will convert from a mutual savings bank to a stock savings bank. As part of this plan, we have formed Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank. We are converting so that The Provident Bank will be structured in the form of ownership that will best support the Bank's future growth.
As part of the conversion and in furtherance of our long-standing commitment to our local community, we intend to establish a charitable foundation to be known as The Provident Bank Foundation. The foundation will be dedicated to charitable purposes within the communities in which the Bank operates.
To accomplish the conversion and the establishment of the foundation, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed xxxxx postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Depositors and wish to vote in person, you may do so by revoking any previously executed proxy. If you have an IRA or other Qualified Plan account for which The Provident Bank acts as trustee and we do not receive a proxy from you, The Provident Bank, as trustee for such account, intends to vote in favor of the plan of conversion on your behalf.
If the plan of conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the fullest extent permitted by law.
o Existing deposit accounts and loans will not undergo any change.
o Voting for approval will not obligate you to buy any shares of common stock.
Stock is being offered to qualified account holders and members of the general
public. The enclosed proxy statement and prospectus describes the stock offering
and the operations of The Provident Bank. If you wish to purchase stock, please
complete the stock order and certification form and mail it, along with full
payment for the shares (or appropriate instructions authorizing withdrawal from
a deposit account with the Bank) to the conversion center of The Provident Bank
in the enclosed YELLOW postage-paid envelope marked "STOCK ORDER RETURN." Your
order must be physically received by the conversion center no later than x:00
p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002. Please read the prospectus
carefully before making an investment decision.
If you wish to use funds in your IRA or Qualified Plan at The Provident Bank to subscribe for common stock, please be aware that federal law requires that such funds first be transferred to a self-directed retirement account with a trustee other than the Bank. The transfer of such funds to a new trustee takes time, so please make arrangements as soon as possible.
If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
[Provident Financial Services, Inc.]
Dear Potential Investor:
We are pleased to provide you with the enclosed material regarding the conversion of The Provident Bank from a mutual savings bank to a stock savings bank. As part of this conversion, Provident Financial Services, Inc. will become the parent company of The Provident Bank.
This information packet includes the following:
PROSPECTUS: This document provides detailed information about The Provident Bank's operations and the proposed stock offering by Provident Financial Services, Inc. Please read it carefully prior to making an investment decision.
STOCK ORDER AND CERTIFICATION FORM: Use this form to subscribe for common stock and return it, together with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with the Bank), to The Provident Bank in the enclosed postage-paid envelope. Your order must be physically received by the Bank no later than x:00 p.m,. New Jersey Time, on Xxxxxx, xxxxx xx, 2002.
We are pleased to offer you this opportunity to become one of our charter shareholders. If you have any questions regarding the conversion or the prospectus, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
[Sandler O'Neill & Partners, L.P. Letterhead]
Dear Customer of The Provident Bank:
At the request of The Provident Bank we have enclosed material regarding the offering of common stock in connection with the conversion of The Provident Bank from a mutual savings bank to a stock savings bank and the establishment of a charitable foundation. As part of this conversion, The Provident Bank will form Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank. These materials include a prospectus and a stock order and certification form, which offer you the opportunity to subscribe for shares of common stock of Provident Financial Services, Inc.
Please read the Prospectus carefully before making an investment decision. If you decide to subscribe for shares, you must return the properly completed and signed stock order and certification form, along with full payment for the shares (or appropriate instructions authorizing withdrawal from a deposit account with the Bank) to the conversion center of The Provident Bank in the accompanying postage-paid envelope marked "STOCK ORDER RETURN." Your order must be physically received by the conversion center no later than x:00 p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002. If you have any questions after reading the enclosed material, please call the conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., and ask for a Sandler O'Neill representative.
We have been asked to forward these documents to you in view of certain requirements of the securities laws of your jurisdiction. We should not be understood as recommending or soliciting in any way any action by you with regard to the enclosed material.
Sincerely,
Sandler O'Neill & Partners, L.P.
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
Enclosure
Questions & Answers About the Conversion
Provident Financial Services, Inc. Logo
Proposed holding company for The Provident Bank
7a
QUESTIONS AND ANSWERS
About the Conversion
The Provident Bank has received approval from the Commissioner of the New Jersey Department of Banking and Insurance to convert from a mutual savings bank to a stock savings bank, subject to the approval of depositors of the Bank, and a notice of intent not to object to the plan of conversion from the Federal Deposit Insurance Corporation. The Provident Bank is converting so that it will be structured in the form of ownership used by the majority of savings institutions and to allow our Bank to become stronger financially. In addition, as part of the conversion, The Provident Bank intends to establish The Provident Bank Foundation, which will be dedicated to charitable purposes within the communities in which The Provident Bank operates. It is necessary for The Provident Bank to receive a majority of the outstanding votes in favor of the conversion, so YOUR VOTE IS VERY IMPORTANT. Please return your proxy in the enclosed white postage-paid envelope marked "Proxy Return." YOUR BOARD OF MANAGERS URGES YOU TO VOTE "FOR" THE CONVERSION AND RETURN YOUR PROXY TODAY.
Effect on Deposits and Loans
Q. Will the conversion affect any of my deposit accounts or
loans?
A. No. The conversion will have no affect on the balance or terms of any
deposit account or loan. Your deposits will continue to be federally
insured to the fullest extent permissible.
About Voting
Q. Who is eligible to vote on the conversion?
A. Depositors of the Bank as of the close of business on _____
xx, 2002 (the "Voting Record Date")
Q. How do I vote?
A. You may vote by mailing your signed proxy card(s) in the xxxxx
postage-paid envelope marked "PROXY RETURN." Should you choose to
attend the Special Meeting of Depositors and decide to change your
vote, you may do so by revoking any previously executed proxy.
7b
Q. Am I required to vote?
A. No. Depositors who are entitled to vote are not required to vote.
However, because the conversion will produce a fundamental change in
The Provident Bank's corporate structure, the Board of Managers
encourages all Depositors to vote.
Q. Why did I receive several proxies?
A. If you have more than one account you may have received more than one
proxy depending upon the ownership structure of your accounts. Please
vote, sign and return ALL proxy cards that you received.
Q. Does my vote for conversion mean that I must buy common stock of
Provident Financial Services, Inc.?
A. No. Voting for the plan of conversion does not obligate you to buy
shares of common stock of Provident Financial Services, Inc.
Q. I have a joint savings account. Must both parties sign the
proxy card?
A. Only one signature is required, but both parties should
sign if possible.
Q. Who must sign proxies for trust or custodian accounts?
A. The trustee or custodian must sign proxies for such accounts, not the
beneficiary.
Q. I am the executor (administrator) for a deceased depositor. Can I sign
the proxy card?
A. Yes. Please indicate on the card the capacity in which you are signing
the card.
About The Foundation
Q. What is The Provident Bank Foundation and why is it being established?
A. In keeping with The Provident Bank's long standing commitment to its
community, The Provident Bank's Plan of Conversion provides for the
establishment of a community foundation to be known as The Provident
Bank Foundation. The Foundation will be dedicated to charitable
purposes within the communities in which The Provident Bank operates.
7c
About The Stock
Investment in common stock involves certain risks. For a discussion of these risks and other factors, investors are urged to read the accompanying Prospectus
Q. What are the priorities of purchasing the common stock?
A. The common stock of Provident Financial Services, Inc. will be offered
in the Subscription Offering in the following order of priority:
[_] Eligible Account Holders (depositors with accounts totalling $50 or more as of March 31, 2001).
[_] The Provident Bank Employee Stock Ownership Plan.
[_] Directors, officers and employees of Provident Financial Services, Inc. and The Provident Bank who are not Eligible Account Holders.
Upon completion of the Subscription Offering, common stock that is not sold in the Subscription Offering will be offered first to certain members of the general public in a Community Offering and then, to the extent any shares remain, to the general public in a Syndicated Community Offering and/or a Public Offering.
Q. Will any account I hold with the Bank be converted into stock?
A. No. All accounts remain as they were prior to the conversion. Eligible
Account Holders will receive priority over the general public in
exercising their right to subscribe for shares of common stock.
Q. Will I receive a discount on the price of the stock?
A. No. Regulations require that the offering price of the stock be the
same for everyone: customers of The Provident Bank, directors, officers
and employees of The Provident Bank and Provident Financial Services,
Inc. and the general public.
Q. How many shares of stock are being offered, and at what
price?
A. Provident Financial Services, Inc. is offering for sale up to
44,667,000 shares of common stock at a subscription price of $10 per
share. Under certain circumstances, Provident Financial Services, Inc.
may sell up to 53,667,050 shares.
7d
Q. How much stock can I purchase?
A. The minimum purchase is 25 shares. As more fully discussed in the plan
of conversion outlined in the Prospectus, the maximum purchase by any
person in the Subscription or Community Offering is $500,000 (50,000
shares); no person by himself or herself, with an associate or group of
persons acting in concert, may purchase more than $700,000 of common
stock offered in the offering, except for The Provident Bank Employee
Stock Ownership Plan, which may subscribe for up to 8% of the common
stock offered in the offering.
Q. How do I order stock?
A. You may subscribe for shares of common stock by completing and
returning the stock order and certification form, together with your
payment, either in person to any branch office of The Provident Bank or
by mail in the Yellow postage-paid envelope marked "STOCK ORDER
RETURN." Stock order forms may not be delivered to a walk up or drive
through window located at any of The Provident Bank's branch offices.
Q. How can I pay for my shares of stock?
A. You can pay for the common stock by check, money order or withdrawal
from your deposit account at The Provident Bank. PLEASE DO NOT SEND
CASH IN THE MAIL.
Q. When is the deadline to subscribe for stock?
A. An executed stock order form and certification form With the required
full payment must be physically received by the Bank no later than x:00
p.m. New Jersey time on _______, _____ xx, 2002.
Q. Can I subscribe for shares using funds in my IRA/Qualified Plan at The
Provident Bank?
A. Federal regulations do not permit the purchase of common stock with
your existing IRA or Qualified Plan at the Bank. To use such funds to
subscribe for common stock, you need to establish a "self directed"
trust account with an outside trustee. Please call our conversion
center if you require additional information. TRANSFER OF SUCH FUNDS
TAKES TIME, SO PLEASE MAKE ARRANGEMENTS AS SOON AS POSSIBLE.
7e
Q. Can I subscribe for shares and add someone else who is not on my
account to my stock registration?
A. No. Federal regulations prohibit the transfer of subscription rights.
Adding the names of other persons who are not owners of your qualifying
account(s) will result in your order becoming null and void.
Q. Will payments for common stock earn interest until the conversion
closes?
A. Yes. Any payment made by cash, check or money order will earn interest
at The Provident Bank's savings account rate from the date of receipt
to the completion or termination of the conversion. Withdrawals from a
deposit account or a certificate of deposit at The Provident Bank to
buy common stock may be made without penalty. Depositors who elect to
pay for their common stock by a withdrawal authorization will receive
interest at the contractual rate on the account until the completion or
termination of the conversion.
Q. Will dividends be paid on the stock?
A. We have not yet made any decision on this, but The Provident Bank will
consider a policy of paying cash dividends after conversion (no earlier
than the completion of the first calendar quarter of 2003), although we
are not obliged to do so.
Q. Will my stock be covered by deposit insurance?
A. No. The common stock cannot be insured by the FDIC or any other
government agency nor is it insured or guaranteed by The Provident Bank
or Provident Financial Services, Inc.
Q. Where will the stock be traded?
A. Upon completion of the Conversion, Provident Financial Services, Inc.
expects the stock to be traded and listed on the New York Stock
Exchange under the symbol " xxxx ".
Q. Can I change my mind after I place an order to subscribe
for stock?
A. No. After receipt, your order may not be modified or withdrawn.
7f
Additional Information
Q. What if I have additional questions or require more information?
A. The Provident Bank's Proxy Statement and the Prospectus accompany this
brochure describe the conversion in detail. Please read the Proxy
Statement and Prospectus carefully before voting or subscribing for
stock. If you have any questions after reading the enclosed material
you may call our conversion center at (800) xxx-xxxx, Monday through
Friday, between the hours of 10:00 a.m. and 4:00 p.m. Additional
material may only be obtained from the conversion center.
To ensure that each purchaser receives a prospectus at least 48 hours prior to the Expiration Date of _______, _____ xx, 2002 at x:00 p.m., New Jersey time, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date.
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency nor is the common stock insured or guaranteed by The Provident Bank or Provident Financial Services, Inc.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the Prospectus.
7g
[The Provident Bank]
A REQUEST THAT YOU VOTE
Dear Depositor:
As a follow-up to our recent mailing, this is to remind you that your vote is very important.
The Board of Managers of The Provident Bank has adopted a plan of conversion under which The Provident Bank will convert from a mutual savings bank to a stock savings bank. We are converting so that The Provident Bank will be structured in the form of ownership used by a growing number of savings institutions and to support the Bank's future growth.
As part of the conversion and in furtherance of our long-standing commitment to our local community, we intend to establish a charitable foundation to be known as The Provident Bank Foundation. The foundation will be dedicated to charitable purposes within the communities in which the Bank operates.
To accomplish the conversion and the establishment of the foundation, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed postage-paid envelope marked "PROXY RETURN." Should you choose to attend the Special Meeting of Depositors and wish to vote in person, you may do so by revoking any previously executed proxy. Please vote by returning all proxy forms received.
If the plan of conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the same extent permitted by law.
o Existing deposit accounts and loans will not undergo any change.
o Voting for approval will not obligate you to buy any shares of common stock.
If you have any questions after reading the enclosed material, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the conversion center will be closed from 12:00 noon Friday, August 30 through 12:00 noon Tuesday, September 2, in observance of the Labor Day holiday.
Sincerely,
Name Title
PROXY REQUEST
Logo
Dear Customer of The Provident Bank:
Your vote on our plan of conversion has not yet been received. Your vote is very important to us. Please vote and mail the enclosed proxy today.
Remember: Voting does not obligate you to buy stock. Your Board of Managers has approved the plan of conversion and urges you to vote in favor of the conversion. Your deposit accounts or loans with The Provident Bank will not be affected in any way. Deposit accounts will continue to be federally insured to the legal maximum.
A postage-paid envelope is enclosed with the proxy form. If you have any questions, please call our conversion center at (xxx) xxx-xxxx.
Sincerely, The Provident Bank
LOGO: Holding Company
Subscription & Community Stock Order Form
-------------------------------------------------------------------------------
BANK The Provident Bank
USE Conversion Center
xxx xxxxxx Street
xxxxxxx, xxxxxxxx xxxxx
(xxx) xxx-xxxx
-------------------------------------------------------------------------------
IMPORTANT-PLEASE NOTE: A properly completed original Expiration Date
stock order form must be used to subscribe for for Stock Order Forms:
common stock. Copies of this form are not required Xxxxxx, xxxxx xx, 2002
to be accepted. Please read the Stock Ownership x:00 p.m., New Jersey
Guide and Stock Order Form Instructions as you Time
complete this form.
--------------------------------------------------------------------------------
|
(4) Method of Payment/Check Check Amount
Enclosed is a check, bank draft or money
order made payable to The Provident Bank ------------------------------
in the amount indicated in this box. $
------------------------------
--------------------------------------------------------------------------------
|
(5) Method of Payment/Withdrawal The undersigned authorizes withdrawal from the following account(s) at The Provident Bank. There is no early withdrawal penalty for this form of payment. Individual Retirement Accounts or Qualified Plans maintained at The Provident Bank cannot be used unless special transfer arrangements are made.
-----------------------------------------------------------------------
Amount Number(s) to Withdraw $ Withdrawal Amount(s) Bank
Use
-----------------------------------------------------------------------
-----------------------------------------------------------------------
|
List account(s) below.
---------------------
------------------------------------------------
Account Title Account Number(s) Bank
(Names on Accounts) Use
------------------------------------------------
------------------------------------------------
|
[ ] Individual [ ] Joint Tenants [ ] Tenants in Common
[ ] Fiduciary [ ] Company/Corp/ [ ] Uniform Transfers (i.e. trust estate) Partnership to Minors Act
--------------------------------------------------------------------------------
Name(s) Social Security # or Tax ID
--------------------------------------------------------------------------------
Name(s) continued Social Security # or Tax ID
--------------------------------------------------------------------------------
Street Address County of Residence
--------------------------------------------------------------------------------
City State Zip Code
--------------------------------------------------------------------------------
(9) Telephone Daytime Evening
( ) ( )
--------------------------------------------------------------------------------
|
--------
To be effective, this stock order form and accompanying BANK USE
certification form must be properly completed and physically --------
received by The Provident Bank no later than x:00 p.m., New
Jersey Time, on Xxxxxx, xxxxx xx, 2002, unless extended;
otherwise this stock order form and all subscription rights
will be void. The undersigned agrees that after receipt by --------
The Provident Bank, this stock order form may not be
modified, withdrawn or canceled without the Bank's consent
and if authorization to withdraw from deposit accounts at
The Provident Bank has been given as payment for shares; the --------
amount authorized for withdrawal shall not otherwise be
available for withdrawal by the undersigned. Under penalty
of perjury, I hereby certify that the Social Security or Tax
ID Number and the information provided on this stock order --------
form is true, correct and complete, that I am not subject to BANK USE
back-up withholding, and that I am purchasing shares solely --------
for my own account and that there is no agreement or
understanding regarding the sale or transfer of such shares,
or my right to subscribe for shares. It is understood that
this stock order form will be accepted in accordance with, --------
and subject to, the terms and conditions of the plan of
conversion of the Bank described in the accompanying
prospectus. The undersigned hereby acknowledges receipt of
the prospectus at least 48 hours prior to delivery of this
stock order form to the Bank.
Federal regulations prohibit any person from transferring,
or entering into any agreement, directly or indirectly, to
transfer the legal or beneficial ownership of subscription
rights or the underlying securities to the account of
another. The Provident Bank and Provident Financial
Services, Inc. will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them
to involve such transfer.
--------------------------------------------------------------------------------
Signature Date Signature Date
--------------------------------------------------------------------------------
THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED
--------------------------------------------------------------------------------
|
Account Title Account Number(s) Bank
(Names on Accounts) Use
---------------------------------------------------------------------------
---------------------------------------------------------------------------
|
Name(s) listed on Number of Name(s) listed on Number of other stock order Shares other stock order Shares forms Ordered forms continued Ordered -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- |
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY HOLDING COMPANY, THE PROVIDENT BANK, THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS.
If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Federal Deposit Insurance Corporation, Regional Director of the New York Regional Office at (xxx) xxx-xxxx.
I further certify that, before purchasing the common stock, par value $0.01 per share, of Holding Company (the "Company"), the proposed holding company for The Provident Bank, I received a prospectus of the Company dated xxxxxxx xx, 2002 relating to such offer of common stock.
The prospectus that I received contains disclosure concerning the nature of the common stock being offered by the Company and describes in the "Risk Factors" section beginning on page xx, the risks involved in the investment in this common stock, including but not limited to the following:
(By Executing this Certification Form the Investor is Not Waiving Any Rights Under the Federal Securities Laws, Including the Securities Act of
1933 and the Securities Exchange Act of 1934)
--------------------------------------------------------------------------------
Signature Date Signature Date
--------------------------------------------------------------------------------
Print Name Print Name
--------------------------------------------------------------------------------
THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
11
|
[Logo] Holding Company
--------------------------------------------------------------------------------
Stock Ownership Guide
--------------------------------------------------------------------------------
|
Stock Order Form Instructions
Please list all names and all account numbers on accounts you had at these dates in order to insure proper identification of your purchase rights.
You may mail your completed stock order form and certification form in the envelope that has been provided. Your stock order form and certification form, properly completed, and payment in full (or withdrawal authorization) at the subscription price must be physically received by the conversion center of The Provident Bank no later than x:00 p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002 or it will become void. If you have any remaining questions, or if you would like assistance in completing your stock order form and certification form, you may call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. The conversion center will be closed for bank holidays.
Logo
Vote Your Proxy Card Today
[Holding Company]
_______________, 2002
Dear __________:
We are pleased to announce that the Board of Managers of The Provident Bank has voted in favor of a plan to convert from a mutual savings bank into a stock savings bank. As part of this plan, we have formed Provident Financial Services, Inc., which will become the parent holding company of The Provident Bank.
We are converting so that The Provident Bank will have the flexibility and ownership structure used by a growing number of savings institutions.
To learn more about the conversion and stock offering you are cordially invited to join members of our senior management team at a community meeting to be held on___ at x:00 p.m.
A member of our staff will be calling to confirm your interest in attending the meeting.
If you would like additional information regarding the meeting or our conversion, please call our conversion center at (xxx) xxx-xxxx, Monday through Friday between the hours of 10:00 a.m. to 4:00 p.m.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
(Printed by Conversion Center)
[Holding Company]
_______________, 2002
Dear Subscriber:
We hereby acknowledge receipt of your order for shares of common stock in Provident Financial Services, Inc.
At this time, we cannot confirm the number of shares of Provident Financial Services, Inc. common stock that will be issued to you. Such allocation will be made in accordance with the plan of conversion following completion of the stock offering.
If you have any questions, please call our conversion center at (xxx) xxx-xxxx.
Sincerely,
Provident Financial Services, Inc. Conversion Center
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
(Printed by Conversion Center)
[Holding Company]
_______________, 2002
Dear Charter Shareholder:
We appreciate your interest in the stock offering of Provident Financial Services, Inc. Due to the excellent response from our Eligible Account Holders, we are unable to complete all orders in full. Consequently, in accordance with the provisions of the plan of conversion, you were allocated ______ shares at a price of $10.00 per share. If your subscription was paid for by check, a refund of any balance due you with interest will be mailed to you promptly.
The purchase date and closing of the transaction occurred on __________ XX, 2002. Trading will commence on the New York Stock Exchange under the symbol "xxxx " on __________ XX, 2002. Your stock certificate will be mailed to you shortly.
We thank you for your interest in Provident Financial Services, Inc. and welcome you as a charter shareholder.
Sincerely,
Provident Financial Services, Inc. Conversion Center
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
(Printed by Conversion Center)
[Holding Company]
_______________, 2002
Dear Interested Investor:
We recently completed our subscription and community offerings. Unfortunately, due to the excellent response from our Eligible Account Holders, stock was not available for our community friends. If your subscription was paid for by check, a refund of any balance due you with interest will be mailed to you promptly.
We appreciate your interest in Provident Financial Services, Inc. and hope you become an owner of our stock in the future. The stock trades on the New York Stock Exchange under the symbol "xxxx".
Sincerely,
Provident Financial Services, Inc. Conversion Center
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
(Printed by Conversion Center)
[Holding Company]
xxxxx, 2002
Welcome Shareholder:
We are pleased to enclose the stock certificate that represents your share of ownership in Provident Financial Services, Inc., the parent holding company of The Provident Bank.
Please examine your stock certificate to be certain that it is properly registered. If you have any questions about your certificate, you should contact the Transfer Agent immediately at the following address:
1 (xxx) xxx-xxxx email: xxxx@xxxx.com
Also, please remember that your certificate is a negotiable security that should be stored in a secure place, such as a safe deposit box or on deposit with your stockbroker.
On behalf of the Board of Directors of Provident Financial Services, Inc., The Provident Bank and our employees, I would like to thank you for supporting our offering.
Sincerely,
Name Title
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
(Printed by Conversion Center)
[Holding Company]
_______________, 2002
Dear Interested Subscriber:
We regret to inform you that The Provident Bank and Provident Financial Services, Inc., the holding company for The Provident Bank, have decided not to accept your order for shares of Provident Financial Services, Inc. common stock in our community offering. This action is in accordance with our plan of conversion, which gives The Provident Bank and Provident Financial Services, Inc. the absolute right to reject the subscription of any community member, in whole or in part, in the community offering.
Enclosed is a check representing your subscription and interest earned thereon.
Sincerely,
Provident Financial Services, Inc. Conversion Center
(Printed by Conversion Center)
[Sandler O'Neill & Partners, L. P. Letterhead]
_______________, 2002
To Our Friends:
We are enclosing the offering material for Provident Financial Services, Inc., established by The Provident Bank, which is now in the process of converting from a mutual savings bank to a stock savings bank.
Sandler O'Neill & Partners, L.P. is managing the subscription offering, which will conclude at x:00 p.m., New Jersey time, on xxxxx xx, 2002. Sandler O'Neill is also providing conversion agent and proxy solicitation services for The Provident Bank. In the event that all the stock is not sold in the subscription and community offering, Sandler O'Neill may form and manage a syndicate of broker/dealers to sell the remaining stock and/or offer the stock in a public offering.
Members of the general public, other than residents of __________, are eligible to participate. If you have any questions about this transaction, please do not hesitate to call.
Sincerely,
Sandler O'Neill & Partners, L.P.
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured or guaranteed by The Provident Bank, Provident Financial Services, Inc., the Federal Deposit Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
(Printed by Sandler O'Neill)
Exhibit 99.5
-------------------------------------------------------------------------------
LOGO: Holding Company
Subscription & Community Stock Order Form
-------------------------------------------------------------------------------
BANK The Provident Bank
USE Conversion Center
xxx xxxxxx Street
xxxxxxx, xxxxxxxx xxxxx
(xxx) xxx-xxxx
-------------------------------------------------------------------------------
IMPORTANT-PLEASE NOTE: A properly completed original Expiration Date
stock order form must be used to subscribe for for Stock Order Forms:
common stock. Copies of this form are not required Xxxxxx, xxxxx xx, 2002
to be accepted. Please read the Stock Ownership x:00 p.m., New Jersey
Guide and Stock Order Form Instructions as you Time
complete this form.
--------------------------------------------------------------------------------
|
(4) Method of Payment/Check Check Amount
Enclosed is a check, bank draft or money
order made payable to The Provident Bank ------------------------------
in the amount indicated in this box. $
------------------------------
--------------------------------------------------------------------------------
|
(5) Method of Payment/Withdrawal The undersigned authorizes withdrawal from the following account(s) at The Provident Bank. There is no early withdrawal penalty for this form of payment. Individual Retirement Accounts or Qualified Plans maintained at The Provident Bank cannot be used unless special transfer arrangements are made.
-----------------------------------------------------------------------
Amount Number(s) to Withdraw $ Withdrawal Amount(s) Bank
Use
-----------------------------------------------------------------------
-----------------------------------------------------------------------
|
List account(s) below.
---------------------
------------------------------------------------
Account Title Account Number(s) Bank
(Names on Accounts) Use
------------------------------------------------
------------------------------------------------
|
[ ] Individual [ ] Joint Tenants [ ] Tenants in Common
[ ] Fiduciary [ ] Company/Corp/ [ ] Uniform Transfers (i.e. trust estate) Partnership to Minors Act
--------------------------------------------------------------------------------
Name(s) Social Security # or Tax ID
--------------------------------------------------------------------------------
Name(s) continued Social Security # or Tax ID
--------------------------------------------------------------------------------
Street Address County of Residence
--------------------------------------------------------------------------------
City State Zip Code
--------------------------------------------------------------------------------
(9) Telephone Daytime Evening
( ) ( )
--------------------------------------------------------------------------------
|
--------
To be effective, this stock order form and accompanying BANK USE
certification form must be properly completed and physically --------
received by The Provident Bank no later than x:00 p.m., New
Jersey Time, on Xxxxxx, xxxxx xx, 2002, unless extended;
otherwise this stock order form and all subscription rights
will be void. The undersigned agrees that after receipt by --------
The Provident Bank, this stock order form may not be
modified, withdrawn or canceled without the Bank's consent
and if authorization to withdraw from deposit accounts at
The Provident Bank has been given as payment for shares; the --------
amount authorized for withdrawal shall not otherwise be
available for withdrawal by the undersigned. Under penalty
of perjury, I hereby certify that the Social Security or Tax
ID Number and the information provided on this stock order --------
form is true, correct and complete, that I am not subject to BANK USE
back-up withholding, and that I am purchasing shares solely --------
for my own account and that there is no agreement or
understanding regarding the sale or transfer of such shares,
or my right to subscribe for shares. It is understood that
this stock order form will be accepted in accordance with, --------
and subject to, the terms and conditions of the plan of
conversion of the Bank described in the accompanying
prospectus. The undersigned hereby acknowledges receipt of
the prospectus at least 48 hours prior to delivery of this
stock order form to the Bank.
Federal regulations prohibit any person from transferring,
or entering into any agreement, directly or indirectly, to
transfer the legal or beneficial ownership of subscription
rights or the underlying securities to the account of
another. The Provident Bank and Provident Financial
Services, Inc. will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them
to involve such transfer.
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Signature Date Signature Date
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THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED
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Account Title Account Number(s) Bank
(Names on Accounts) Use
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Name(s) listed on Number of Name(s) listed on Number of other stock order Shares other stock order Shares forms Ordered forms continued Ordered -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- |
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY HOLDING COMPANY, THE PROVIDENT BANK, THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS.
If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Federal Deposit Insurance Corporation, Regional Director of the New York Regional Office at (xxx) xxx-xxxx.
I further certify that, before purchasing the common stock, par value $0.01 per share, of Holding Company (the "Company"), the proposed holding company for The Provident Bank, I received a prospectus of the Company dated xxxxxxx xx, 2002 relating to such offer of common stock.
The prospectus that I received contains disclosure concerning the nature of the common stock being offered by the Company and describes in the "Risk Factors" section beginning on page xx, the risks involved in the investment in this common stock, including but not limited to the following:
(By Executing this Certification Form the Investor is Not Waiving Any Rights Under the Federal Securities Laws, Including the Securities Act of
1933 and the Securities Exchange Act of 1934)
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Signature Date Signature Date
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Print Name Print Name
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THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
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[Logo] Holding Company
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Stock Ownership Guide
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Stock Order Form Instructions
Please list all names and all account numbers on accounts you had at these dates in order to insure proper identification of your purchase rights.
You may mail your completed stock order form and certification form in the envelope that has been provided. Your stock order form and certification form, properly completed, and payment in full (or withdrawal authorization) at the subscription price must be physically received by the conversion center of The Provident Bank no later than x:00 p.m., New Jersey Time, on Xxxxxx, xxxxx xx, 2002 or it will become void. If you have any remaining questions, or if you would like assistance in completing your stock order form and certification form, you may call our conversion center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m. The conversion center will be closed for bank holidays.
Exhibit 99.6
[LETTERHEAD OF RP FINANCIAL, LC.]
May 14, 2002
Mr. Kevin J. Ward
Executive Vice President and Chief Operating Officer
The Provident Bank
830 Bergen Avenue
Jersey City, New Jersey 07306-4599
Dear Mr. Ward:
This letter sets forth the agreement between The Provident Bank, Jersey City, New Jersey ("Provident" or the "Bank"), and RP Financial, LC. ("RP Financial"), whereby the Bank has engaged RP Financial to prepare the regulatory business plan and financial projections to be adopted by the Bank's Board of Managers in conjunction with the stock conversion transaction, whereby the Bank will become a wholly-owned subsidiary of a stock holding company. These services are described in greater detail below.
Description of Proposed Services
RP Financial's business planning services will include the following areas: (1) evaluating Provident's current financial and operating condition, business strategies and anticipated strategies in the future; (2) analyzing and quantifying the impact of business strategies, incorporating the use of net conversion proceeds both in the short and long term; (3) preparing detailed financial projections on a quarterly basis for a period of at least three fiscal years to reflect the impact of Board approved business strategies and use of proceeds; (4) preparing the written business plan document which conforms with applicable regulatory guidelines including a description of the use of proceeds and how the convenience and needs of the community will be addressed; and (5) preparing the detailed schedules of the capitalization of the Bank and holding company and related cash flows.
Contents of the business plan will include: Philosophy/Goals; Economic Environment and Background; Lending, Leasing and Investment Activities; Deposit, Savings and Borrowing Activity; Asset and Liability Management; Operations; Records, Systems and Controls; Growth, Profitability and Capital; Responsibility for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying financial projections in writing such that the business plan can be filed with the appropriate regulatory agencies prior to filing the appropriate applications.
Mr. Kevin J. Ward
May 14, 2002
Fee Structure and Payment Schedule
The Bank agrees to compensate RP Financial for preparation of the business plan on a fixed fee basis of $20,000. Payment of the professional fees shall be made upon delivery of the completed business plan.
The Bank also agrees to reimburse RP Financial for those direct out-of-pocket expenses necessary and incidental to providing the business planning services. Reimbursable expenses will likely include shipping, telephone/facsimile printing, computer and data services, and shall be paid to RP Financial as incurred and billed. RP Financial will agree to limit reimbursable expenses in conjunction with the appraisal engagement to $10,000 subject to written authorization from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue this planning engagement prior to delivery of the completed business plan and payment of the progress payment fee, the Bank agrees to compensate RP Financial according to RP Financial's standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the fixed fee described above, plus reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so as to materially change the nature or the work content of the business planning services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank and RP Financial. Such unforeseen events may include changes in regulatory requirements as it specifically relates to Provident or potential transactions that will dramatically impact the Bank such as a pending acquisition or branch transaction.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ William E. Pommerening
CEO and Managing Director
Agreed To and Accepted By: /s/ Kevin J. Ward
Executive Vice President and Chief
Operating Officer
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Upon Authorization by the Board of Managers For: The Provident Bank Jersey City, New Jersey
Date Executed: May 21, 2002
EXIHIBIT 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.
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 ................................................ iii
Nature of a Participant's Interest in the Common Stock ............................ iv
Voting Rights of Common Stock ..................................................... iv
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
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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 per share, the Plan may acquire up to
1,471,384 shares of Provident Financial Services,
Inc. common stock in the offering for the
Provident Financial Services, Inc. Stock Fund.
Only employees of The Provident Bank and
affiliated corporations that have adopted this
plan as their own may become participants in the
Plan. The common stock of Provident Financial
Services, Inc. to be issued hereby is conditioned
on the consummation of the conversion. Your
investment in the common stock of Provident
Financial Services, Inc. through the Plan in the
offering is subject to the purchase priorities
contained in the plan of conversion of Provident
Financial Services, Inc.
Information with regard to the Plan is contained
in this prospectus supplement and information with
regard to the financial condition, results of
operations and business of The Provident Bank is
contained in the attached prospectus. The address
of the principal executive office of The Provident
Bank is 830 Bergen Avenue, Jersey City, NJ
07306-4599.
ELECTION TO PURCHASE In connection with the conversion and stock
COMMON STOCK IN THE offering, The Provident Bank is establishing the
OFFERING: PRIORITIES 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, and (3) officers, employees and directors of
The Provident Bank who are not 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. If you
fall into subscription offering categories (1) or
(3) above, you have subscription rights to
purchase shares of Provident Financial Services,
Inc. common stock in the subscription offering and
you may use funds in the Plan account to pay for
the shares of Provident Financial Services, Inc.
common stock, which you are eligible to purchase.
The trustee of
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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 (in
proportion to your investment direction allocation
percentages for new contributions).
If you fail to direct the investment of your
account balances towards the purchase of any
shares in connection with the offering, your
account balances will remain in the investment
funds of the Plan as previously directed by you.
VALUE OF THE PLAN As of June 30, 2002, the market value of the
assets of the Plan was approximately $14,713,847.
The plan administrator informed each participant
of the value of his or her account balance under
the Plan by regular mail as of July 29, 2002.
ELECTION TO PURCHASE In connection with the conversion of The Provident
COMMON STOCK IN THE Bank, the Plan will permit you to direct the
CONVERSION OF THE trustee to transfer all or part of the funds which
PROVIDENT BANK represent your current beneficial interest in the
assets of the Plan (in increments of $10) to the
Provident Financial Services, Inc. Stock Fund. 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.
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If you elect to transfer a dollar amount from a
particular fund and, at the time that the transfer
is made, you do not have a sufficient dollar
amount in that fund to process your entire
election due to market fluctuation, the trustee
will withdraw up to 100% of your balance in that
fund (rounded down to the nearest $10 increment)
and apply only the amount withdrawn to the
purchase of stock for your account.
METHOD OF DIRECTING You will receive a Change of Investment Election
TRANSFER 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. 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 Joan Parzel, 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 Joan
Parzel 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
DIRECTION transfer amounts credited to your account in the
Plan to the Provident Financial Services, Inc.
Stock Fund for the purchase of stock in the
offering. You will, however, continue to have the
ability to transfer amounts not directed towards
the purchase of stock in the offering amongst all
of the other investment funds on a daily basis.
Once the offering is concluded, you will be able
to transfer amounts to and from the Provident
Financial Services, Inc. Stock Fund on a daily
basis.
DIRECTION TO PURCHASE You will be able to purchase stock after the
COMMON 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. 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
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Securities Exchange Act of 1934, as amended,
relating to the purchase and sale of securities by
officers, directors and principal shareholders of
Provident Financial Services, Inc.
NATURE OF A PARTICIPANT'S The trustee will hold Provident Financial
INTEREST IN THE COMMON Services, Inc. common stock in the name of the
STOCK 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. Therefore, earnings on your
account will not be affected by the investment
designations of other participants in the Plan.
VOTING RIGHTS OF COMMON The Plan provides that you may direct the trustee
STOCK 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.
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DESCRIPTION OF THE PLAN
INTRODUCTION
The Provident Bank (formerly "Provident Savings Bank") originally adopted the Provident Savings Bank Employee Savings Incentive Plan (the "Plan") effective January 1, 1975. The Plan was last amended and restated effective January 1, 1997. The Provident Bank intends that the Plan, in operation, will comply with the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act ("ERISA"). As a plan subject to ERISA, Federal law provides you with various rights and protections as a plan participant. However, your benefits under the Plan are not guaranteed and are not required to be guaranteed by the Pension Benefit Guaranty Corporation.
The Provident Bank may amend the Plan from time to time in the future to ensure continued compliance with all applicable laws.
Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the Plan. The Provident Bank qualifies these summaries in their entirety by the full text of the Plan, which shall have priority. You may obtain copies of the Plan document by sending a request to: Employee Savings Incentive Plan Administrator, The Provident Bank, 830 Bergen Avenue, Jersey City, NJ 07306-4599. You should carefully read the full text of the Plan document and your summary plan description to understand your rights and obligations under the Plan.
ELIGIBILITY AND PARTICIPATION
You are eligible to become a participant in the Plan upon completion of one year of service in which you have completed at least 1,000 hours of service.
As of June 30, 2002, approximately 512 out of 587 then eligible employees had elected to participate in the Plan.
CONTRIBUTIONS UNDER THE PLAN
Voluntary After-Tax Employee Contributions. You are permitted, as a participant in the Plan, to defer from 1% to 5% of your compensation (as defined in the Plan) and to have that amount contributed to the Plan on your behalf.
You may elect to modify the amount contributed to the Plan by filing a new compensation reduction agreement with the Plan administrator in accordance with the procedures established under the Plan.
Employer Matching Contributions. The Provident Bank may make matching contributions on behalf of each participant. This contribution may change from time to time. The Provident Bank is currently contributing 115% of the total contributions you are presently making to your account.
LIMITATIONS ON CONTRIBUTIONS
Limitations on Voluntary After-Tax Employee Contributions. For the calendar year beginning January 1, 2002, the amount of your voluntary after-tax employee contributions may not exceed $11,000. For each year thereafter through 2006, this limit will be increased by $1,000 per year (in 2006, the limit will be $15,000). Thereafter, the Internal Revenue Service will periodically increase this annual limitation. Contributions in excess of this limit are known as excess deferrals.
If you also participate in the ESOP and annual additions to your accounts in both plans exceed the maximum permissible amount, the plan administrator will reduce the contributions allocated to you under the Plan first, so that the total annual additions do not exceed the maximum permissible amount. If employer contributions and voluntary after-tax employee contributions are both made to the Plan in the year that the excess occurs, voluntary after-tax employee contributions will be reduced before employer contributions.
Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the Internal Revenue Code limit the amount of voluntary after-tax employee contributions and employer matching contributions that may be made to the Plan in any year on behalf of highly compensated employees, in relation to the amount of voluntary after-tax employee contributions and employer matching contributions made by or on behalf of all other employees eligible to participate in the Plan. A highly compensated employee includes any employee who (1) was a 5% owner of Provident Financial Services, Inc. at any time during the current or preceding year, or (2) had compensation for the preceding year of more than $85,000 and, if The Provident Bank so elects, was in the top 20% of employees by compensation for the preceding year. The dollar amounts in the foregoing sentence may be adjusted annually to reflect increases in the cost of living. If these limitations are exceeded, the level of voluntary after-tax employee contributions by highly compensated employees may have to be adjusted.
Vesting. At all times, you have a fully vested, nonforfeitable interest in your after-tax contribution account. You are also vested in your employer matching contribution account in accordance with the following schedule:
Vesting Date Vesting Percentage ------------ ------------------ End of the first calendar year following the end of the first year of Plan participation 33% End of the second calendar year following the end of the first year of Plan participation 66% End of the third calendar year following the end of the first year of Plan participation 100% |
You also become 100% vested in employer matching contributions, if any, made to your account upon your normal retirement age (as defined by the Plan) or termination of employment by reason of death, disability, or termination in accordance with the retirement provision under section 1.18(b) of The Provident Bank Pension Plan. If you terminate employment for reasons other than these, you will forfeit the non-vested portion of your account. Any non-vested
employer contributions which are forfeited shall be applied to subsequent employer matching contribution accounts.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to your accounts under the Plan are held in trust. PW Trust Company has been appointed by The Provident Bank to administer the trust.
As of June 30, 2002, the Plan offers the following investment choices for your accounts under the Plan:
Money Market Portfolio. This portfolio seeks to provide current income, liquidity and preservation of capital. The portfolio invests in a variety of money market instruments that have a maturity of one year or less, including U.S. Government securities, certificates of deposit and bankers' acceptances. Commercial paper issued by United States corporations rated A-1 by S&P or P-1 by Moody's at the time of purchase may also be included in the portfolio. Investments may be made in other United States corporate obligations which are rated "A" or better by Moody's or if not rated have comparable quality. To allow for liquidity, investment maturities must not exceed 91 days from the date of purchase; however 20% of the portfolio may be invested in longer term obligations. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
GIC Portfolio. This portfolio seeks to offer stability while maximizing current income and provide book value liquidity for individual plan participant withdrawals. The portfolio invests in fixed income securities, primarily insurance and bank investment contracts (together, Guaranteed Investment Contracts - GICs). UBS Global Asset Management manages the fund. UBS Global Asset Management's investment process is a systematic, disciplined approach involving continuous analysis of economic conditions, yield-curve positioning and risk/reward relationships among permissible investment alternatives to create and maintain an optimal portfolio structure. To address the unique aspects of investing in GICs, UBS Global Asset Management conducts a rigorous credit review focusing on five broad areas of analysis: asset quality, asset liquidity, capital adequacy, profitability and management quality. At the time of the purchase, each issuer must have an AA- or equivalent rating from S&P, Moody's or Duff & Phelps. No more than 10% of the portfolio's assets may be invested with any one issuer at the time of purchase. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Balanced Portfolio. This portfolio seeks to exceed the return of the benchmark (i.e., 60% S&P 500 and 40% Lehman Brothers Aggregate Bond Index) over market cycles. Atlanta Capital Management (ACM) believes in investing in a diversified group of quality stocks and bonds at reasonable valuations in light of their expected return and risk. ACM believes the best way to identify these securities is through a combination
of economic and company specific research. ACM uses a balanced fund approach that seeks to enhance returns through moderate shifts in asset allocation between stocks and bonds. ACM pursues an active but disciplined process of rebalancing the asset allocation based on its assessment of the risk and return potential for stocks and bonds. Typically, ACM's asset allocation varies no more than 15% plus or minus the benchmark weighting. ACM expects the portfolio to be fully invested, with cash reserves normally less than 10% of the portfolio. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Conservative Equity Portfolio. This portfolio seeks capital appreciation through investment in equity securities of companies believed to be undervalued in the marketplace in relation to factors such as the companies' assets, earnings, growth potential and cash flows. The investment advisor for this portfolio is Oppenheimer Capital. The portfolio uses value-oriented, fundamental bottom-up research analysis in seeking the selection of high-quality businesses which are currently undervalued. These dominant companies are characterized by competitive advantages with significant barriers to entry, sustainable profitability and strong cash flows, capable managements dedicated to shareholders' interests and selling at attractive valuations. Initial stock purchase ideas are generated from meetings with company management, industry experts, competitors, annual reports and 10-K's. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Capital Growth Portfolio. This portfolio seeks to achieve long-term capital growth though investment in stocks with positive earnings momentum. The portfolio invests in large capitalization securities that Montag & Caldwell (M&C) believes have the ability to produce strong earnings growth over the next twelve to eighteen months, and are reasonably priced in the market. M&C's process emphasizes fundamental valuation techniques, which focus on a company's estimated future earnings and dividend growth rates. M&C closely follows 500 companies, which have market capitalizations greater than $3 billion. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Strategic Bond Portfolio. This portfolio seeks to outperform the market as measured by the Lehman Brothers Aggregate Bond Index on an annualized basis over the medium term of three to seven years. The portfolio invests in a diversified range of fixed income securities and their futures or option derivatives while actively seeking the segments of the bond market offering the best total return prospects. Western Asset Management Company's strategy is to focus on four key areas: sector allocation, issue selection, duration exposure and yield curve analysis. This focus on multiple investment strategies attempts to minimize risk while seeking to add value in all areas of the fixed income markets. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Mid-Cap Growth Portfolio. This portfolio seeks to generate a total return in excess of the benchmark (i.e. the Russell Midcap Growth) over a full market cycle or a rolling five-year average. Seneca Capital Management LLC (SCM)'s mid-cap earnings-driven growth strategy employs a disciplined investment process. First a proprietary quantitative screen is used to identify stocks that have the following attributes: positive earnings surprises; earnings acceleration; earnings sustainability; earnings quality; and reasonable valuations. Candidates then undergo fundamental analysis and management assessment. This includes a careful review of a company's financials as well as intense examination of management to determine the quality and motivation of those who run the company. Portfolios generally hold 30-50 stocks. A rigorous sell discipline dictates the sale of any company when earnings disappoint, valuations become extended, loss of confidence in management occurs or a more attractive opportunity manifests itself. An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
Overseas Equity Portfolio. This portfolio seeks to invest in equity securities of non-U.S. companies in both mature and emerging economies around the globe. The portfolio invests in a diversified range of stocks outside of the U.S. Investments will be made in stocks of companies which have determinable value, but which are unpopular at the moment - "undervalued" stocks. Brandes selects stocks it believes are selling at a discount to their estimated business value and possess significant potential for superior performance with below-average risk. Brandes focuses on stocks that meet strict value criteria: a large enough price-to-value discrepancy to provide a significant opportunity for appreciation. In addition, the companies generally must have a strong balance sheet and strong cash flow. Weightings to countries are a by-product of the bottom-up stock selection process, not a top-down "allocation," based on an economic outlook or strategy. The portfolio is diversified among many different countries and industries and no one stock investment may exceed 5% of the total value of the portfolio (at cost). An investment in the fund is not insured or guaranteed by the FDIC or any other Government agency. It is possible to lose money by investing in the fund.
You may elect to have both past contributions and earnings, as well as future contributions to your account invested among the funds listed above. Transfers of past contributions and the earnings thereon do not affect the investment mix of future contributions. You may change your investment directions at any time. This may be done either by telephone or other electronic medium. You may also redirect the investment of your investment accounts such that a percentage of any one or more investment accounts may be transferred to any one or more other investment accounts either by telephone or other electronic medium.
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%
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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, the Plan now offers the Provident Financial Services, Inc. Stock Fund as an additional choice to these investments options. The Provident Financial Services, Inc. Stock Fund invests primarily in the common stock of Provident Financial Services, Inc. In connection with the conversion, you may direct the trustee to invest up to 100% of your Plan account in the Provident Financial Services, Inc. Stock Fund as a one-time special election. Subsequent to the conversion, you may elect to invest up to 50% of your payroll deductions in the Provident Financial Services, Inc. Stock Fund. Subsequent to the conversion, you may also elect to transfer into the Financial Services, Inc. Stock Fund all or a portion of your accounts currently invested in other funds under the Plan.
The Provident Financial Services, Inc. Stock Fund consists 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 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 30th. Each class of contributions matures at the end of the third class year following the year in which it begins. For example, contributions made in the class from December 31, 2000 to December 30, 2001, will mature by December 30, 2004. In order to withdraw your voluntary after-tax employee contributions and matching contributions which mature on any December 30th, you must file an election with the plan administrator no later than November 30th of that year.
You may also elect an in-service withdrawal once in any 12 month period upon 30 days written notice prior to the commencement of any calendar quarter by:
(i) Electing a withdrawal of your voluntary contribution account. If you make such an election, you may make no further voluntary after-tax employee
contributions until at least 6 months after the effective date of this withdrawal; or
(ii) Electing a withdrawal of your voluntary after-tax employee contributions and matching employer contributions for which you previously elected deferred distribution or which are 100% vested. If you make such a withdrawal, you may make no further voluntary after-tax employee contributions until an entry date commencing at least 12 months after the effective date of your withdrawal. If you have been a participant for less than 5 years at the time of this election, your withdrawal will be limited to the excess of the sum of your voluntary after-tax employee contributions and matching contributions over the matching contributions made to you in the two years immediately preceding the date of withdrawal.
You may also withdraw your vested account (including both employer and voluntary after-tax employee contributions) prior to termination of employment in the event of financial hardship, subject to the hardship distribution rules under the Plan. These requirements insure that you have a true financial need before you make a withdrawal.
Distributions. Payment of your benefits upon your normal or deferred retirement (as defined under the Plan), or your termination due to your disability, death, or for other reasons, shall be made in a single lump-sum payment or in annual installments over a period which may not exceed 10 years (or your estimated life expectancy, if longer). Alternatively, your benefit may be transferred to another qualified employee benefit plan or individual retirement account if it is an eligible rollover distribution.
Distribution Upon Death. If you die before receiving the entire value of your Plan account, your benefits will be paid to your surviving spouse or properly designated beneficiary in a lump sum. If you die while receiving distributions from the Plan before your entire interest is distributed, the remaining distributions will be made to your beneficiary at least as rapidly as under the method selected by you prior to your death.
Commencement of Benefits. The payment of your benefits will generally commence no later than 60 days after the close of the plan year following the later of your attainment of normal retirement age or the year in which you terminate employment.
Nonalienation of benefits. Except for Federal income tax withholding or a qualified domestic relations order, your benefits payable under the Plan cannot be alienated. Examples of alienation include transferring your benefits voluntarily and a creditor placing a lien on your benefits. Any attempt to alienate your benefits, whether voluntary or involuntary, shall be void.
ADMINISTRATION OF THE PLAN
THE TRUSTEE
The trustee of the Plan is PW Trust Company. The trustee receives, holds and invests the contributions to the Plan in trust and distributes them to you and your beneficiaries in accordance with the terms of the Plan and the directions of the Plan administrator. The trustee is responsible for investment of the assets of the trust.
PLAN ADMINISTRATOR
The Provident Bank is the Plan administrator. The Plan administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed and for all disclosures required to be made to participants, beneficiaries and others.
REPORTS TO PLAN PARTICIPANTS
The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses.
AMENDMENT AND TERMINATION
The Provident Bank may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. The Provident Bank reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that The Provident Bank may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with the Employee Retirement Income Security Act.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust assets to another plan, the Plan requires that you would, if either the Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then terminated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the material Federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material Federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the Federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.
As a "tax-qualified retirement plan," the Internal Revenue Code affords the Plan special tax treatment, including the following:
(1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year; and
(2) participants pay no current income tax on amounts contributed by the employer on their behalf (except in the case of voluntary after-tax employee contributions); and
(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.
The Provident Bank will administer the Plan to comply with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law.
Lump-Sum Distribution. A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant's death, disability or separation from service, or after the participant attains age 59 1/2; and consists of the balance credited to the participant under the Plan and all other profit sharing plans, if any, maintained by The Provident Bank. The portion of any lump-sum distribution required to be included in your taxable income for Federal income tax purposes consists of the entire amount of the lump-sum distribution, less the amount of voluntary after-tax employee contributions you have made to this Plan and any other profit sharing plans maintained by The Provident Bank, which is included in the distribution.
Provident Financial Services, Inc. Common Stock Included in Lump-Sum Distribution. If a lump-sum distribution includes Provident Financial Services, Inc. common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to Provident Financial Services, Inc. common stock; that is, the excess of the value of Provident Financial Services, Inc. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Provident Financial Services, Inc. common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of Provident Financial Services, Inc. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Provident Financial Services, Inc. common stock, to the extent of the amount of net unrealized appreciation
at the time of distribution, will constitute long-term capital gain, regardless of the holding period of Provident Financial Services, Inc. common stock. Any gain on a subsequent sale or other taxable disposition of Provident Financial Services, Inc. common stock, in excess of the amount of net unrealized appreciation at the time of distribution, also will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. You may roll over any eligible roll-over distribution from the Plan, including beginning in 2002, voluntary after-tax employee contributions, to another qualified plan or to an individual retirement account in accordance with the terms of the other plan or account. Distributions that would not be considered eligible roll-over distributions would include (i) required minimum distributions made to comply with tax law requirements, (ii) hardship distributions, or (iii) one of a series of distributions made over your life expectancy or over a period of ten years or more.
ADDITIONAL EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") CONSIDERATIONS
As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plan's assets by participants and beneficiaries. The Plan's feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a "fiduciary" because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as The Provident Bank, the Plan administrator, or the Plan's trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account balance in the Plan in Provident Financial Services, Inc. common stock, the regulations under section 404(c) of the ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with Federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
SECURITIES AND EXCHANGE COMMISSION REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as Provident Financial Services, Inc.
Section 16(a) of the Securities Exchange Act of 1934 requires the filing of
reports of beneficial ownership. Within 10 days of becoming an officer, director
or person beneficially owning more than 10% of the shares of Provident Financial
Services, Inc., a Form 3 reporting initial beneficial ownership must be filed
with the Securities and Exchange Commission. Changes in beneficial ownership,
such as purchases,
sales and gifts generally must be reported periodically, either on a Form 4 within 2 business days after the date in which a change occurs, or annually on a Form 5 within 45 days after the close of Provident Financial Services, Inc.'s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Provident Financial Services, Inc. Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock of Provident Financial Services, Inc. generally must be reported to the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, section 16(b) of the Securities Exchange Act of 1934 provides for the recovery by Provident Financial Services, Inc. of profits realized by an officer, director or any person beneficially owning more than 10% of Provident Financial Services, Inc.'s common stock resulting from non-exempt purchases and sales of Provident Financial Services, Inc. common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of section 16(b) persons.
Except for distributions of common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases of units within the Provident Financial Services, Inc. stock fund for six months after receiving such a distribution.
FINANCIAL INFORMATION REGARDING PLAN ASSETS
Financial information representing the net assets available for Plan benefits at December 30, 2001, is attached to this prospectus supplement.
LEGAL OPINION
The validity of the issuance of the common stock will be passed upon by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., which firm acted as special counsel to The Provident Bank in connection with Provident Financial Services, Inc.'s stock offering.
THE PROVIDENT BANK
Employee Savings Incentive Plan
Statement of Net Assets Available for Benefits as of December 30, 2001
Assets Dec. 30, 2001