Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 001-31566

 


 

PROVIDENT FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   42-1547151

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

830 Bergen Avenue, Jersey City, New Jersey   07306-4599
(Address of principal executive offices)   (Zip Code)

 

(201) 333-1000

(Registrant’s telephone number including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES   x     NO   ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    YES   x      NO   ¨

 

As of November 1, 2004 there were 79,879,017 shares issued and 74,751,320 shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, including 765,318 shares held by the First Savings Bank Directors’ Deferred Fee Plan not otherwise considered outstanding under accounting principles generally accepted in the United States of America.

 



Table of Contents

PROVIDENT FINANCIAL SERVICES, INC.

 

INDEX TO FORM 10-Q

 

Item Number


      Page Number

    PART I— FINANCIAL INFORMATION    
1.   Financial Statements:    
    Consolidated Statements of Financial Condition as of September 30, 2004 (unaudited) and December 31, 2003   3
    Consolidated Statements of Income for the three months and nine months ended September 30, 2004 and 2003 (unaudited)   4
    Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2004 and 2003 (unaudited)   5
    Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)   7
    Notes to Consolidated Financial Statements (unaudited)   9
2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
3.   Quantitative and Qualitative Disclosures About Market Risk   21
4.   Controls and Procedures   22
    PART II— OTHER INFORMATION    
1.   Legal Proceedings   23
2.   Unregistered Sales of Equity Securities and Use of Proceeds   24
3.   Defaults Upon Senior Securities   24
4.   Submission of Matters to a Vote of Security Holders   24
5.   Other Information   24
6.   Exhibits and Reports on Form 8-K   24
Signatures   26

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

 

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

September 30, 2004 (Unaudited) and December 31, 2003

(Dollars in thousands, except per share data)

 

     September 30,
2004


    December 31,
2003


 
ASSETS                 

Cash and due from banks

   $ 134,553     $ 106,228  

Federal funds sold

     4,000       —    

Short-term investments

     11,823       69,624  
    


 


Total cash and cash equivalents

     150,376       175,852  
    


 


Investment securities (market value of $465,122 (unaudited) and $524,429 at September 30, 2004 and December 31, 2003, respectively)

     458,885       517,789  

Securities available for sale, at fair value

     1,485,283       1,151,829  

Federal Home Loan Bank (“FHLB”) stock

     52,464       34,585  

Loans

     3,743,686       2,237,367  

Less allowance for loan losses

     33,630       20,631  
    


 


Net loans

     3,710,056       2,216,736  
    


 


Other real estate owned, net

     32       41  

Banking premises and equipment, net

     64,758       46,741  

Accrued interest receivable

     24,343       16,842  

Intangible assets

     429,570       23,938  

Bank-owned life insurance (“BOLI”)

     104,648       71,506  

Other assets

     59,567       29,019  
    


 


Total assets

   $ 6,539,982     $ 4,284,878  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Deposits:

                

Demand deposits

   $ 1,113,028     $ 774,988  

Savings deposits

     1,561,614       987,877  

Certificates of deposit of $100,000 or more

     250,233       148,306  

Other time deposits

     1,167,120       784,805  
    


 


Total deposits

     4,091,995       2,695,976  

Mortgage escrow deposits

     14,876       11,061  

Borrowed funds

     1,239,239       736,328  

Subordinated debentures

     27,286       —    

Other liabilities

     31,984       24,394  
    


 


Total liabilities

     5,405,380       3,467,759  
    


 


Stockholders’ Equity:

                

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued

     —         —    

Common stock, $0.01 par value, 200,000,000 shares authorized, 79,879,017 shares issued and 74,851,320 shares outstanding at September 30, 2004 and 61,538,300 shares issued and 60,600,100 outstanding at December 31, 2003, respectively.

     799       615  

Additional paid-in capital

     959,435       606,541  

Retained earnings

     345,067       324,250  

Accumulated other comprehensive income

     4,704       6,416  

Treasury stock, at cost (3,228,742 shares at September 30, 2004)

     (57,327 )     —    

Unallocated common stock held by Employee Stock Ownership Plan (“ESOP”)

     (76,477 )     (78,816 )

Common stock acquired by the Stock Award Plan (“SAP”)

     (41,599 )     (41,887 )

Common stock acquired by the Directors’ Deferred Fee Plan (“DDFP”) (765,318 shares at September 30, 2004)

     (13,379 )     —    

Deferred compensation – DDFP

     13,379       —    
    


 


Total stockholders’ equity

     1,134,602       817,119  
    


 


Total liabilities and stockholders’ equity

   $ 6,539,982     $ 4,284,878  
    


 


 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Three Months and Nine Months ended September 30, 2004 and 2003 (Unaudited)

(Dollars in thousands, except per share data)

 

    

Three months ended

September 30,


  

Nine months ended

September 30,


     2004

   2003

   2004

   2003

Interest income:

                           

Real estate secured loans

   $ 36,978    $ 20,371    $ 84,283    $ 62,563

Commercial loans

     3,953      5,608      10,979      16,666

Consumer loans

     6,552      4,470      15,948      13,859

Investment securities

     4,799      4,194      14,522      12,724

Securities available for sale

     14,423      8,738      32,603      30,854

Other short-term investments

     108      126      408      370

Federal funds

     95      347      469      1,040
    

  

  

  

Total interest income

     66,908      43,854      159,212      138,076
    

  

  

  

Interest expense:

                           

Deposits

     11,321      8,792      27,123      30,962

Borrowed funds

     8,404      4,325      18,008      11,137

Subordinated debentures

     253      —        253      —  
    

  

  

  

Total interest expense

     19,978      13,117      45,384      42,099
    

  

  

  

Net interest income

     46,930      30,737      113,828      95,977

Provision for loan losses

     1,050      160      2,700      1,060
    

  

  

  

Net interest income after provision for loan losses

     45,880      30,577      111,128      94,917
    

  

  

  

Non-interest income:

                           

Fees

     5,757      4,333      15,194      12,043

Net gain on securities transactions

     577      665      1,312      661

Commissions

     96      39      342      197

BOLI

     1,255      1,019      3,193      2,813

Other income

     515      695      2,531      1,644
    

  

  

  

Total non-interest income

     8,200      6,751      22,572      17,358
    

  

  

  

Non-interest expense:

                           

Compensation and employee benefits

     17,869      14,151      46,351      38,797

Net occupancy expense

     4,837      3,727      12,355      10,562

Federal deposit insurance

     141      105      347      339

Data processing expense

     2,156      1,666      5,820      4,939

Advertising and promotion expense

     1,853      1,062      4,897      2,554

Amortization of intangibles

     1,953      863      3,048      2,997

Other operating expenses

     5,531      4,154      14,265      13,766

Contribution to The Provident Bank Foundation

     —        —        —        24,000
    

  

  

  

Total non-interest expense

     34,340      25,728      87,083      97,954
    

  

  

  

Income before income tax expense

     19,740      11,600      46,617      14,321

Income tax expense

     6,397      3,462      14,399      3,788
    

  

  

  

Net income

   $ 13,343    $ 8,138    $ 32,218    $ 10,533
    

  

  

  

Basic earnings per share

   $ 0.19    $ 0.14    $ 0.54    $ 0.16

Average basic shares outstanding

     68,729,870      56,972,858      59,444,983      58,702,373

Diluted earnings per share

   $ 0.19    $ 0.14    $ 0.54      0.16

Average diluted shares outstanding

     69,370,675      57,174,970      59,660,492      58,774,166

 

See accompanying notes to unaudited consolidated financial statements.

 

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PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003 and 2004 (Unaudited)

(Dollars in Thousands)

 

   

COMMON

STOCK


 

ADDITIONAL

PAID-IN

CAPITAL


   

UNALLOCATED

ESOP

SHARES


   

COMMON

STOCK

AWARDS

UNDER
SAP


   

COMMON

STOCK

ACQUIRED

BY DDFP


 

DEFERRED

COMPENSATION

DDFP


 

TREASURY

STOCK


 

RETAINED

EARNINGS


   

ACCUMULATED

OTHER

COMPREHENSIVE

INCOME


   

TOTAL
STOCKHOLDERS’

EQUITY


 

Balance at December 31, 2002

  $ —     $ —       $ —       $ —       $ —     $ —     $ —     $ 314,111     $ 11,898     $ 326,009  

Comprehensive income:

                                                                       

Net income

    —       —         —         —         —       —       —       10,533       —         10,533  

Other comprehensive income:

                                                                       

Unrealized holding loss on securities arising during the period (net of tax of ($3,195))

    —       —         —         —         —       —       —       —         (4,627 )     (4,627 )

Reclassification adjustment for gains included in net income (net of tax of $270)

    —       —         —         —         —       —       —       —         391       391  
                                                                   


Total comprehensive income

                                                                  $ 6,297  
                                                                   


Sale of Common Stock

    615     604,824       —         —         —       —       —       —         —         605,439  

Cash Dividends Paid

    —       —         —         —         —       —       —       (5,531 )     —         (5,531 )

Purchase of ESOP shares

    —       —         (75,437 )     —         —       —       —       —         —         (75,437 )

Allocation of ESOP shares

    —       (23 )     1,964       —         —       —       —       —         —         1,941  

Purchase of SAP shares

    —       —         —         (26,356 )     —       —       —       —         —         (26,356 )

Allocation of SAP shares

    —       12       —         627       —       —       —       —         —         639  

Allocation of stock options

    —       768       —         —         —       —       —       —         —         768  
   

 


 


 


 

 

 

 


 


 


Balance at September 30, 2003

  $ 615   $ 605,581     $ (73,473 )   $ (25,729 )   $ —     $ —     $ —     $ 319,113     $ 7,662     $ 833,769  
   

 


 


 


 

 

 

 


 


 


 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003 and 2004 (Unaudited) (Continued)

(Dollars in Thousands)

 

   

COMMON

STOCK


 

ADDITIONAL

PAID-IN

CAPITAL


   

UNALLOCATED

ESOP

SHARES


   

COMMON

STOCK

AWARDS

UNDER SAP


   

COMMON

STOCK

ACQUIRED

BY DDFP


   

DEFERRED

COMPENSATION

DDFP


 

TREASURY

STOCK


   

RETAINED

EARNINGS


   

ACCUMULATED

OTHER

COMPREHENSIVE

INCOME


   

TOTAL
STOCKHOLDERS’

EQUITY


 

Balance at December 31, 2003

  $ 615   $ 606,541     $ (78,816 )   $ (41,887 )   $ —       $ —     $ —       $ 324,250     $ 6,416     $ 817,119  

Comprehensive income:

                                                                           

Net income

    —       —         —         —         —         —       —         32,218       —         32,218  

Other comprehensive income:

                                                                           

Unrealized holding loss on securities arising during the period (net of tax of ($1,718))

    —       —         —         —         —         —       —         —         (2,488 )     (2,488 )

Reclassification adjustment for gains included in net income (net of tax of $536)

    —       —         —         —         —         —       —         —         776       776  
                                                                       


Total comprehensive income

    —       —         —         —         —         —       —         —         —       $ 30,506  
                                                                       


Cash dividends paid

    —       —         —         —         —         —       —         (11,401 )     —         (11,401 )

Common stock issued in connection with the First Sentinel Bancorp, Inc. acquisition, net

    184     350,357       —         —         —         —       —         —         —         350,541  

DDFP acquired from First Sentinel Bancorp, Inc.

    —       —         —         —         (13,379 )     13,379     —         —         —         —    

Purchases of treasury stock

    —       —         —         —         —         —       (57,327 )     —         —         (57,327 )

Allocation of ESOP shares

    —       (188 )     2,339       —         —         —       —         —         —         2,151  

Purchase of SAP shares

    —       —         —         (3,565 )     —         —       —         —         —         (3,565 )

Allocation of SAP shares

    —       72       —         3,853       —         —       —         —         —         3,925  

Allocation of stock options

    —       2,653       —         —         —         —       —         —         —         2,653  
   

 


 


 


 


 

 


 


 


 


Balance at September 30, 2004

  $ 799   $ 959,435     $ (76,477 )   $ (41,599 )   $ (13,379 )   $ 13,379   $ (57,327 )   $ 345,067     $ 4,704     $ 1,134,602  
   

 


 


 


 


 

 


 


 


 


 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine Months ended September 30, 2004 and 2003 (Unaudited)

(Dollars in thousands)

 

     Nine months ended September 30,

 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 32,218     $ 10,533  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Cash contributed to The Provident Bank Foundation

     —         4,800  

Depreciation and amortization of intangibles

     8,078       7,410  

Provision for loan losses

     2,700       1,060  

Deferred tax benefit

     (6,300 )     (11,729 )

Increase in cash surrender value of BOLI

     (3,193 )     (2,813 )

Net amortization of premiums and discounts on securities

     8,031       10,549  

Accretion of net deferred loan fees

     (983 )     (674 )

Amortization of premiums on purchased loans, net

     2,765       679  

Proceeds from sales of other real estate owned, net

     111       1,793  

Allocation of ESOP shares

     2,151       1,941  

Allocation of SAP shares

     3,925       639  

Allocation of stock options

     2,653       768  

Net gain on sale of loans

     (1,402 )     (877 )

Net gain on securities available for sale

     (1,312 )     (661 )

Decrease (increase) in accrued interest receivable

     1,755       (639 )

Decrease (increase) in other assets

     51,192       (7,645 )

(Decrease) increase in mortgage escrow deposits

     (8,403 )     972  

(Decrease) increase in other liabilities

     (2,613 )     7,192  
    


 


Net cash provided by operating activities

     91,373       23,298  
    


 


Cash flows from investing activities:

                

Proceeds from sale of loans

     82,742       2,992  

Proceeds from maturities, calls and paydown of investment securities

     107,742       112,274  

Purchases of investment securities

     (10,523 )     (399,208 )

Proceeds from sales of securities available for sale

     280,330       28,985  

Proceeds from maturities and paydowns of securities available for sale

     326,693       1,154,460  

Purchases of securities available for sale

     (277,690 )     (1,087,545 )

Cash consideration paid to acquire First Sentinel

     (251,863 )     —    

Cash and cash equivalents acquired from First Sentinel

     103,468       —    

Purchase of BOLI

     —         (20,000 )

Net increase in loans

     (373,989 )     (60,413 )

Purchases of premises and equipment, net

     (10,291 )     (7,009 )
    


 


Net cash used in investing activities

     (23,381 )     (275,464 )
    


 


Cash flows from financing activities:

                

Net increase (decrease) in deposits

     40,618       (553,458 )

Proceeds from sale of stock, net

     —         586,414  

Purchase of ESOP shares, net

     —         (75,437 )

Purchase of SAP shares, net

     (3,565 )     (26,356 )

Purchase of treasury stock

     (57,327 )     —    

Cash dividends paid to stockholders

     (11,401 )     (5,531 )

Proceeds from FHLB Advances

     1,348,800       334,000  

Payments on FHLB Advances

     (1,429,581 )     (40,178 )

Net increase (decrease) in Retail Repurchase Agreements

     18,988       (3,348 )
    


 


Net cash (used in) provided by financing activities

     (93,468 )     216,106  
    


 


Net decrease in cash and cash equivalents

     (25,476 )     (36,060 )

Cash and cash equivalents at beginning of period

     175,852       264,855  
    


 


Cash and cash equivalents at end of period

   $ 150,376     $ 228,795  
    


 


Cash paid during the period for:

                

Interest on deposits and borrowings

   $ 42,747     $ 42,115  
    


 


Income taxes

   $ 14,336     $ 14,199  
    


 


 

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Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Continued)

Nine Months ended September 30, 2004 and 2003 (Unaudited)

(Dollars in thousands)

 

     Nine months ended September 30,

     2004

   2003

Non cash investing activities:

             

Transfer of loans receivable to other real estate owned

   $ 121    $ 1,834
    

  

Transfer of conversion proceeds held in escrow deposits to stockholders’ equity

   $ —      $ 525,989
    

  

Common stock contributed to The Provident Bank Foundation

   $ —      $ 19,200
    

  

Fair value of assets acquired

   $ 2,150,258    $ —  
    

  

Goodwill and core deposit intangible

   $ 419,415    $ —  
    

  

Liabilities assumed

   $ 1,971,756    $ —  
    

  

Common stock issued for the First Sentinel Bancorp, Inc. acquisition, net

   $ 350,541    $ —  
    

  

 

See accompanying notes to unaudited consolidated financial statements.

 

8


Table of Contents

PROVIDENT FINANCIAL SERVICES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization

 

On January 15, 2003, Provident Financial Services, Inc. (the “Company”) became the holding company for The Provident Bank (the “Bank”) in connection with the completion of the conversion of the Bank to a stock-chartered savings bank. The Company issued 59,618,300 shares of its common stock in a subscription offering to the Bank’s eligible depositors and the Bank’s ESOP. The ESOP acquired 576,634 shares of the Company’s common stock in the conversion and purchased an additional 4,192,830 shares of the Company’s common stock at an average price of $18.02 per share between January 16, 2003 and December 31, 2003.

 

The Company acquired 100% of the stock of the Bank in exchange for 50% of the net conversion proceeds of $586.4 million and retained the remaining net proceeds ($293.2 million) at the holding company level. Concurrent with the completion of the conversion, $4.8 million in cash and 1.92 million shares of common stock were contributed by the Company to The Provident Bank Foundation. This stock and cash contribution was recorded as a one-time $24.0 million expense in the first quarter of 2003 operating results, and an increase to capital stock and paid in capital was recorded for $19.2 million. The Company recorded a tax benefit of $8.4 million related to the contribution expense and a corresponding increase to its deferred tax assets in the first quarter of 2003.

 

The contribution of cash and common stock to The Provident Bank Foundation is tax deductible, subject to a limitation based on 10% of the Company’s annual taxable income. The Company is able to carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

 

The Company increased its issued and outstanding common shares by 18,540,662 as part of the consideration paid in connection with the acquisition of First Sentinel Bancorp, Inc. (“First Sentinel”) which was effective as of the close of business on July 14, 2004. (See Note 2).

 

The Board of Directors declared a quarterly cash dividend of $0.06 per common share on October 21, 2004. The dividend is payable on November 30, 2004 to stockholders of record as of November 12, 2004.

 

On July 22, 2004, the Company’s Board of Directors authorized the expansion of the Company’s stock repurchase program through the purchase of up to an additional 927,033 shares for a total stock repurchase program of 3,966,663 shares, or approximately 5% of the Company’s outstanding shares of common stock. This additional authorization was in recognition of the issuance of additional shares in conjunction with the Company’s acquisition of First Sentinel.

 

Note 2. Acquisitions

 

The Company completed the acquisition of First Sentinel and the merger of its wholly-owned subsidiary, First Savings Bank, with and into the Bank, as of the close of business July 14, 2004. First Savings Bank operated 22 full service branch offices in Middlesex, Monmouth, Somerset and Union Counties, New Jersey. The acquisition presented the Company with the strategic opportunity to enhance stockholder value, market share and earnings growth. The opportunities include strengthening and expanding the Company’s presence in the growing Middlesex County marketplace through additional retail and commercial banking product offerings, increasing deposit share and further building the Company’s core deposit funding base, as well as enhancing the Company’s avenues for earning asset generation.

 

Pursuant to the terms of the Agreement and Plan of Merger, 60% of First Sentinel’s common stock was converted into Provident common stock at an exchange rate of 1.092 Provident shares per each First Sentinel share and 40% was converted into $22.25 in cash for each First Sentinel share. The aggregate consideration paid in the merger consisted of $251.9 million in cash and 18,540,662 shares of the Company’s common stock, which had a value of $19.09 per share based on the Company’s average closing price from December 21, 2003 to December 26, 2003. The cash portion of the merger consideration was funded through the sale of securities available for sale and cash from continuing operations. Shares of the Company’s common stock amounting to 199,945 shares issued in exchange for shares of First Sentinel common stock owned by the Company at the time of the merger were retired upon issuance.

 

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As a result of the First Sentinel acquisition, the Company acquired assets having a fair value of $2.57 billion, including $1.18 billion of net loans, $744.5 million of investment securities and $103.5 million of cash and cash equivalents, and assumed $1.36 billion of deposits, $566.5 million of borrowings, $27.4 million of subordinated debentures and $22.4 million of other liabilities.

 

The acquisition was accounted for as a purchase and the excess cost over the fair value of net assets acquired (“goodwill”) in the transaction was $386.4 million. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized in connection with this transaction and the goodwill will not be deductible for income tax purposes. The Company also recorded a core deposit intangible of $33.0 million in connection with the acquisition, which is being amortized on an accelerated basis over 8.8 years. The amortization of premiums and discounts resulting from the fair value adjustments of assets and liabilities were not significant for the three and nine months ended September 30, 2004.

 

The following table presents data with respect to the fair values of assets and liabilities acquired in the First Sentinel acquisition (in thousands):

 

     At July 14, 2004

Assets:

      

Cash and due from banks

   $ 103,468

Securities

     744,453

Loans, net

     1,184,559

FHLB-NY stock

     19,521

Fixed assets

     12,755

Other assets

     85,502

Core deposit intangible

     33,013

Goodwill

     386,402
    

Total assets

     2,569,673
    

Liabilities:

      

Deposits

     1,355,401

Borrowings

     566,485

Subordinated debentures

     27,448

Other liabilities

     22,422
    

Total liabilities

     1,971,756
    

Net assets acquired

   $ 597,917
    

 

The net deferred tax liability resulting from adjustments of net assets acquired, including the creation of the core deposit intangible, amounted to $729,000. Transaction and acquisition costs have been determined in accordance with EITF 95-3. Estimated costs in connection with the acquisition and included as a component of goodwill amounted to $21.8 million, of which $20.7 million was paid as of September 30, 2004.

 

The following table presents unaudited pro forma condensed combined financial information of the Company had the acquisition taken place on January 1, for all periods presented (dollars in thousands, except per share data):

 

     Three months ended
September 30,


   Nine months ended
September 30,


     2004

   2003

   2004

   2003

Net interest income

   $ 49,004    $ 45,028    $ 143,997    $ 138,754

Net income

     12,697      11,826      38,965      23,222

Basic earnings per share

   $ 0.18    $ 0.16    $ 0.54    $ 0.30

Diluted earnings per share

   $ 0.18    $ 0.16    $ 0.53    $ 0.30

 

The unaudited pro forma combined results of operations presented in the preceding table exclude charges directly attributed to the transaction totaling $20.9 million, net of tax, for the three and nine months ended September 30, 2004.

 

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Note 3. Summary of Significant Accounting Policies

 

A. Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the accounts of Provident Financial Services, Inc. and its wholly-owned subsidiary, The Provident Bank.

 

The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results of operations that may be expected for all of 2004.

 

Certain information and note disclosures normally included in financial statements and prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission.

 

Certain prior period amounts have been reclassified to correspond with the current period presentations.

 

These unaudited consolidated financial statements should be read in conjunction with the December 31, 2003 Annual Report to Stockholders on Form 10-K.

 

B. Earnings per Share

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. The basic and diluted earnings per share for the nine months ended September 30, 2003 is calculated by dividing the results of operations of $9,553,000 by the weighted average shares outstanding from January 15, 2003, the date the Bank completed its plan of conversion, through September 30, 2003.

 

     For Three Months Ended September 30,

   For Nine Months Ended September 30,

     2004

   2003

   2004

   2003

     Income

   Shares

  

Per

Share

Amount


   Income

   Shares

  

Per

Share

Amount


   Income

   Shares

  

Per

Share

Amount


   Income

   Shares

  

Per

Share

Amount


Net income

   $ 13,343                $ 8,138                $ 32,218                $ 9,553            
    

              

              

              

           

Basic earnings per share:

                                                                           

Income available to common stockholders

   $ 13,343    68,729,870    $ 0.19    $ 8,138    56,972,858    $ 0.14    $ 32,218    59,444,983    $ 0.54    $ 9,553    58,702,373    $ 0.16

Dilutive DDFP shares

          640,538                  —                    215,071                  —         

Dilutive common stock equivalents

          267                  202,112                  438                  71,793       
           
                
                
                
      

Diluted earnings per share:

                                                                           

Income available to common stockholders

   $ 13,343    69,370,675    $ 0.19    $ 8,138    57,174,970    $ 0.14    $ 32,218    59,660,492    $ 0.54    $ 9,553    58,774,166    $ 0.16
    

  
  

  

  
  

  

  
  

  

  
  

 

For the three months ended September 30, 2004, and for the nine months ended September 30, 2004, anti-dilutive non-qualified stock options were 152,727 and 82,966 shares respectively. For the three months ended September 30, 2004, and for the nine months ended September 30, 2004 anti-dilutive incentive stock options were 58,669 shares and 29,283 shares respectively.

 

Note 4. Comprehensive Income

 

For the three month periods ended September 30, 2004 and 2003, total comprehensive income, representing net income plus or minus other items recorded directly in equity, such as the change in unrealized gains and losses on securities available for sale, amounted to $20.2 million and $7.1 million, respectively. For the nine months ended September 30, 2004 and 2003, total comprehensive income was $30.5 million and $6.3 million, respectively.

 

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Note 5. Loans and Allowance for Loan Losses

 

Loans receivable at September 30, 2004 (unaudited) and December 31, 2003 are summarized as follows (in thousands):

 

     September 30,
2004


   December 31,
2003


Mortgage loans:

             

Residential

   $ 1,898,566    $ 1,046,335

Commercial

     661,419      449,092

Multi-family

     89,297      90,552

Commercial construction

     232,329      99,072
    

  

Total mortgage loans

     2,881,611      1,685,051
    

  

Commercial loans

     343,299      250,754

Consumer loans

     507,070      299,278
    

  

Total other loans

     850,369      550,032
    

  

Premium on purchased loans

     14,172      5,411

Less: Discount on purchased loans

     1,382      1,547

Less: Net deferred fees

     1,084      1,580
    

  

     $ 3,743,686    $ 2,237,367
    

  

 

The activity in the allowance for loan losses for the three and nine months ended September 30, 2004 and 2003 (in thousands):

 

     Three months ended
September 30,


    Nine months ended
September 30,


 
     2004

    2003

    2004

    2003

 
     (unaudited)     (unaudited)  

Balance at beginning of period

   $ 20,920     $ 21,517     $ 20,631     $ 20,986  

Allowance of acquired institution (First Sentinel)

     12,925       —         12,925       —    

Provision charged to operations

     1,050       160       2,700       1,060  

Recoveries of loans previously charged off

     749       870       2,007       2,654  

Loans charged off

     (2,014 )     (1,259 )     (4,633 )     (3,412 )
    


 


 


 


Balance at end of period

   $ 33,630     $ 21,288     $ 33,630     $ 21,288  
    


 


 


 


 

Note 6. Deposits

 

Deposits at September 30, 2004 (unaudited) and December 31, 2003 are summarized as follows (in thousands):

 

     September 30,
2004


   December 31,
2003


Savings deposits

   $ 1,561,614    $ 987,877

Money market accounts

     155,603      116,176

NOW accounts

     498,467      329,997

Non-interest bearing deposits

     458,958      328,815

Certificates of deposit

     1,417,353      933,111
    

  

     $ 4,091,995    $ 2,695,976
    

  

 

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Note 7. Components of Net Periodic Benefit Cost

 

The Bank has a noncontributory defined benefit pension plan (the “Plan”) covering all of its employees who have attained age 21 with at least one year of service. The Plan was frozen on April 1, 2003. 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 Allmerica 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.

 

First Sentinel terminated its pension plan effective July 1, 2004, therefore the Company has recognized no pension expense related to First Sentinel’s pension plan. Net periodic benefit cost for other postretirement benefits includes costs for First Sentinel’s postretirement benefit plan from July 14, 2004, the date of the acquisition. Net periodic benefit costs for the three months and nine months ended September 30, 2004 and 2003 include the following components (in thousands):

 

    

Three months ended

September 30,


   

Nine months ended

September 30,


 
     Pension Benefits

    Other
Postretirement
Benefits


    Pension Benefits

    Other
Postretirement
Benefits


 
     2004

    2003

    2004

   2003

    2004

    2003

    2004

   2003

 

Service cost

   $ —       (233 )   189    122     $ —       647     471    366  

Interest cost

     314     366     447    307       1,022     1,214     1,137    921  

Expected return on plan assets

     (461 )   (397 )   —      —         (1,340 )   (1,134 )   —      —    

Amortization of Unrecognized Transitional Obligation

     —       —       96    96       —       —       288    288  

Amortization of prior service cost

     —       171     —      —         —       361     —      —    

Amortization of the net (gain) loss

     (8 )   57     71    —         8     220     87    —    
    


 

 
  

 


 

 
  

Net periodic benefit cost

     (155 )   (36 )   803    525       (310 )   1,308     1,983    1,575  

Curtailment (gain)

     —       —       —      (85 )     —       —       —      (255 )
    


 

 
  

 


 

 
  

Net (benefit) cost after curtailment

   $ (155 )   (36 )   803    440     $ (310 )   1,308     1,983    1,320  
    


 

 
  

 


 

 
  

 

The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it does not expect to contribute to its defined benefit pension plan in 2004. As of September 30, 2004, no contributions have been made.

 

The net periodic benefit cost for pension and other postretirement benefits for 2004 was calculated using the January 1, 2004 SFAS No. 87 and SFAS No. 106 valuation results.

 

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Note 8. Recent Accounting Pronouncements

 

In September 2004, the Financial Accounting Standards Board (“FASB”) approved issuing a Staff Position to delay the requirement to record impairment losses under Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other Than Temporary Impairment and its Application to Certain Investments” (“EITF 03-1”). The approved delay is applicable to all securities within the scope of EITF 03-1 and will remain in effect until new guidance is issued and comes into effect. The disclosure requirements originally prescribed by EITF 03-1 will remain in effect, and SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities, September 1985, SAB Topic 5.M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” remains in effect for public companies.

 

In May 2004, the FASB issued FASB Staff Position (“FSP”) FAS106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP FAS106-2 supersedes FSP FAS106-1 and provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. At present, detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must be determined, the evidence required to demonstrate actuarial equivalency, and the documentation requirements necessary to be entitled to the subsidy. At September 30, 2004, measures of the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit cost do not reflect any amount associated with the subsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

 

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

 

Total assets at September 30, 2004 increased $2.26 billion, or 52.6%, to $6.54 billion compared to $4.28 billion at December 31, 2003, primarily as a result of the First Sentinel acquisition. Including purchase accounting adjustments, goodwill and the core deposit intangible, assets increased $2.57 billion as a result of the acquisition. Excluding assets acquired from First Sentinel, increases in net loans were more than offset by decreases in investment securities and cash and cash equivalents.

 

Total net loans at September 30, 2004 increased $1.49 billion, or 67.4%, to $3.71 billion compared to $2.22 billion at December 31, 2003. Excluding $1.18 billion in net loans added through the First Sentinel acquisition, the Company’s net loans grew $308.8 million, or 13.9%, during the nine months ended September 30, 2004. Internal loan growth highlights for the nine month period ended September 30, 2004 included an $86.2 million, or 34.4%, increase in commercial and industrial loans, an $85.8 million, or 28.7%, increase in consumer loans, and a $124.0 million, or 7.9%, increase in loans secured by real estate.

 

Including loans acquired from First Sentinel, residential mortgage loans increased $852.2 million to $1.90 billion at September 30, 2004 compared to $1.05 billion at December 31, 2003. Residential mortgage loan originations totaled $116.4 million and residential mortgage loans purchased totaled $280.9 million for the nine months ended September 30, 2004. Residential mortgage loan payoffs totaled $121.6 million, excluding scheduled amortization and residential mortgage loans sold totaled $82.7 million for the nine months ended September 30, 2004. Commercial real estate loans, including multi-family and construction loans, increased $344.3 million to $983.0 million at September 30, 2004, compared to $638.7 million at December 31, 2003. Commercial loans increased $92.5 million to $343.3 million at September 30, 2004 compared to $250.8 million at December 31, 2003. Consumer loans increased $207.8 million to $507.1 million at September 30, 2004 compared to $299.3 million at December 31, 2003. In the third quarter of 2003, the Company began purchasing auto loans for its consumer loan portfolio. At September 30, 2004, auto loans totaled $68.6 million or 13.5% of the total consumer loan portfolio.

 

Retail loans, which consist of residential mortgages loans and consumer loans, such as fixed-rate home equity loans and lines of credit, totaled $2.41 billion and accounted for 64.5% of the loan portfolio at September 30, 2004 compared to $1.35 billion, or 60.2% of the portfolio at December 31, 2003. Commercial loans, consisting of commercial real estate, multi-family, construction, and commercial and industrial loans, totaled $1.33 billion, or 35.5% of the loan portfolio at September 30, 2004, compared to $889.5 million, or 39.8% at December 31, 2003. The shift in portfolio composition was attributable to the acquisition of First Sentinel’s more heavily retail-weighted portfolio. The Company intends to continue to focus on the origination of commercial loans, with a long range target of a 50%/50% retail versus commercial loan portfolio distribution.

 

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At September 30, 2004, the allowance for loan losses totaled $33.6 million, compared with $20.6 million at December 31, 2003 and $21.3 million at September 30, 2003. The increase in the allowance was primarily attributable to the addition of First Sentinel’s loan portfolio and related $12.9 million of allowance for loan losses. Total non-performing loans were $4.9 million at September 30, 2004, compared to $6.1 million at December 31, 2003 and $5.8 million at September 30, 2003. Non-performing assets were $4.9 million and $6.2 million at September 30, 2004 and December 31, 2003, respectively, compared to $5.9 million at September 30, 2003 . Total non-performing loans as a percentage of total loans were 0.13% at September 30, 2004, compared to 0.27% at December 31, 2003 and 0.28% at September 30, 2003. The allowance for loan losses as a percentage of non-performing loans was 687.92% at September 30, 2004, compared to 336.67% at December 31, 2003 and 364.02% at September 30, 2003. The allowance for loan losses as a percentage of total loans was 0.90% at September 30, 2004, compared to 0.92% at December 31, 2003 and 1.01% at September 30, 2003.

 

The calculation of the allowance for loan losses is a critical accounting policy of the Company. Provisions for loan losses are based upon the 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 that is subject to significant judgment and short-term change. As part of the evaluation of the adequacy of the allowance for loan losses, a worksheet is prepared each month that categorizes the entire loan portfolio by certain risk characteristics including loan type and payment status. Loans with known potential losses are categorized separately. Potential loss factors are assigned to the risk rating categories based on the Company’s assessment of the potential risk inherent in each loan category. This worksheet is prepared, together with loan portfolio balances and delinquency reports, to evaluate the adequacy of the allowance for loan losses. Other key factors considered in this process are current real estate market conditions, changes in the trend of non-performing loans, the current state of the local, regional and national economy, the components of the loan portfolio and loan portfolio growth.

 

The allowance for loan losses is maintained through provisions for loan losses that are charged to income. Losses on loans are charged against the allowance for loan losses when management believes the collection of the loan principal is unlikely. The provision for loan losses is established after considering the results of the review of delinquency and charge-off trends, the allowance for loan loss worksheet, the amount of the allowance for loan losses in relation to the total loan balance, loan portfolio growth, accounting principles generally accepted in the United States of America and regulatory guidance. This process has been applied consistently, and the Company has made minimal changes in the estimation methods and assumptions that have been used.

 

Securities available for sale, at fair value increased $333.5 million, or 29.0%, to $1.49 billion at September 30, 2004, compared to $1.15 billion at December 31, 2003. Investment securities held to maturity decreased $58.9 million, or 11.4%, to $458.9 million at September 30, 2004, compared to $517.8 million at December 31, 2003. Excluding $744.5 million of investments added through the First Sentinel acquisition, total investments decreased $469.9 million, or 28.1%, during the nine months ended September 30, 2004. Proceeds from investment sales, maturities and scheduled cash flows were used to fund loan growth and the cash portion of the First Sentinel acquisition consideration.

 

Cash and cash equivalents decreased $25.5 million, or 14.5%, to $150.4 million at September 30, 2004, from $175.9 million at December 31, 2003. Excluding $103.5 million added through the First Sentinel acquisition, cash and cash equivalents decreased $128.9 million during the nine months ended September 30, 2004 in order to fund earning asset growth, common stock repurchases and the cash portion of the First Sentinel acquisition consideration.

 

FHLB stock increased $17.9 million, or 51.7%, to $52.5 million at September 30, 2004 from $34.6 million at December 31, 2003 as a result of the assumption of First Sentinel’s FHLB borrowings and related FHLB stock holdings.

 

Banking premises and equipment increased $18.0 million, or 38.5%, to $64.8 million at September 30, 2004, from $46.7 million at December 31, 2003, primarily as a result of the acquisition of First Sentinel’s corporate headquarters and 22 full-service branch locations. The Company has centralized its lending functions at the former First Sentinel corporate headquarters in Woodbridge, New Jersey, enhancing convenience for our commercial and retail loan customers. Intangible assets increased $405.6 million to $429.6 million at September 31, 2004, from $23.9 million at December 31, 2003, primarily as a result of goodwill and the core deposit intangible created through the First Sentinel acquisition. Bank owned life insurance (“BOLI”) increased $33.1 million, or 46.4%, to $104.6 million at September 30, 2004, compared to $71.5 million at December 31, 2003.

 

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This increase was due to the acquisition of $30.0 million of BOLI from First Sentinel and the increase in the cash surrender value of BOLI for the nine months ended September 30, 2004. Other assets increased $30.5 million to $59.6 million at September 30, 2004 compared to $29.0 million at December 31, 2003. The increase in other assets was largely due to an increase of $22.6 million in deferred tax assets, primarily as a result of the tax effect of the fair value adjustments related to the First Sentinel acquisition and deferred tax assets acquired from First Sentinel.

 

Total deposits increased $1.40 billion, or 51.8%, to $4.09 billion at September 30, 2004, from $2.70 billion at December 31, 2003. Excluding $1.36 billion of deposits assumed in the First Sentinel acquisition, total deposits grew $40.6 million, or 1.5%, with an increase in core deposits of $52.9 million partially offset by a $12.3 million reduction in time deposits. Core deposits, which consist of all demand and savings deposits, represented 65.4% of total deposits at September 30, 2004 and December 31, 2003.

 

Total borrowed funds increased $502.9 million, or 68.3%, to $1.24 billion at September 30, 2004, from $736.3 million at December 31, 2003, as a result of the assumption of $566.5 million in borrowings from First Sentinel. In addition, the Company assumed $27.4 million of subordinated debentures issued by First Sentinel in connection with a trust preferred securities offering. The stated maturity of the trust preferred securities is December 8, 2031, with early redemption permitted on any June 8 or December 8 on or after December 8, 2006, at par.

 

Total stockholders’ equity increased $317.5 million, or 38.9%, to $1.13 billion at September 30, 2004 compared to $817.1 million at December 31, 2003. This increase was primarily due to the net issuance of $350.5 million in common stock in connection with the First Sentinel acquisition, net income of $32.2 million for the nine months ended September 30, 2004, and net amortization of stock-based compensation plans and related tax benefit of $8.7 million, partially offset by $60.9 million of common stock repurchases and cash dividends paid totaling $11.4 million. Common stock repurchases for the three and nine months ended September 30, 2004 totaled 2.9 million shares at an average cost of $17.58 per share and 3.2 million shares at an average cost of $17.76 per share, respectively. An additional 737,921 shares remain eligible for repurchase under the current common stock repurchase authorization. At September 30, 2004, book value per share and tangible book value per share totaled $15.16 and $9.42, respectively.

 

Liquidity and Capital Resources. The Company’s sources of funds are primarily from deposits, scheduled amortization of loans, loan repayments, scheduled maturities of investments and cash flows from mortgage-backed securities. Scheduled loan amortizations are fairly predictable sources of funds while loan and mortgage-backed securities prepayments and deposit flows are influenced by interest rates, local economic conditions and the competitive marketplace. Additional sources of liquidity that are available to the Company, should the need arise, are a $50.0 million overnight line of credit and a $50.0 million one month overnight repricing line of credit with the Federal Home Loan Bank of New York. As of September 30, 2004, the Company did not have any outstanding borrowings against the lines of credit as compared to $65.0 million in outstanding borrowings against the lines of credit at December 31, 2003.

 

Cash needs for the nine months ended September 30, 2004 were provided for primarily from principal payments on loans and mortgage-backed securities, sales of residential mortgage loans, sales of mortgage-backed securities and increases in deposits. The cash was used primarily to fund the cash portion of the First Sentinel acquisition consideration, loan originations, common stock repurchases, and the repayment of borrowings.

 

As of September 30, 2004, the Bank exceeded all regulatory capital requirements as follows:

 

     As of September 30, 2004

 
     Required

    Actual

 
     Amount

   Ratio

    Amount

   Ratio

 
     (Dollars in Thousands)  

Regulatory Tier 1 leverage capital

   $ 216,690    4.00 %   $ 579,456    10.70 %

Tier 1 risk-based capital

     153,019    4.00       579,456    15.15  

Total risk-based capital

     306,037    8.00       613,174    16.03  

 

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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

 

General. The Company reported net income of $13.3 million for the three months ended September 30, 2004 and $32.2 million for the nine months ended September 30, 2004, compared to $8.1 million and $10.5 million, respectively, for the same periods in 2003. Basic and diluted earnings per share were $0.19 for the three months ended September 30, 2004 and $0.54 for the nine months ended September 30, 2004, compared to basic and diluted earnings per share of $0.14 and $0.16 for the three months ended September 30, 2003 and for the period from January 15, 2003, the date of the Company’s stock conversion, through September 30, 2003, respectively. Annualized return on average assets improved to 0.87% and 0.88% for the three and nine months ended September 30, 2004, respectively, compared with 0.78% and 0.34% for the respective 2003 periods. Annualized return on average equity improved to 5.16% and 4.84% for the three and nine months ended September 30, 2004, respectively, compared with 3.84% and 1.74% for the respective 2003 periods. Earnings and per share data for 2004 reflected the impact of the Company’s acquisition of First Sentinel from July 14, 2004, the date the acquisition was completed. Third quarter 2004 earnings were impacted by one-time expenses related to the merger and integration of First Sentinel’s operations of approximately $870,000, net of tax. Net income for the nine months ended September 30, 2003 reflected the one-time expense associated with the $15.6 million net of tax contribution to The Provident Bank Foundation.

 

Net Interest Income. Total net interest income increased $16.2 million, or 52.7%, to $46.9 million for the quarter ended September 30, 2004, compared to $30.7 million for the quarter ended September 30, 2003. Net interest income increased $17.9 million, or 18.6%, to $113.8 million for the nine months ended September 30, 2004, compared to $96.0 million for the same period in 2003. Interest income for the third quarter of 2004 increased $23.1 million, or 52.6%, to $66.9 million compared to $43.9 million for the same period in 2003. For the nine months ended September 30, 2004, interest income increased $21.1 million, or 15.3%, to $159.2 million compared to $138.1 million for the nine month period ended September 30, 2003. Interest expense increased $6.9 million, or 52.3%, to $20.0 million for the quarter ended September 30, 2004 compared to $13.1 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, interest expense increased $3.3 million, or 7.8%, to $45.4 million compared to $42.1 million for the nine months ended September 30, 2003. The changes in net interest income for the three and nine months ended September 30, 2004 versus the comparable 2003 periods are largely attributable to increases in earning assets and interest-bearing liabilities due to internal growth and the First Sentinel acquisition, as well as reduced average funding costs attributable to growth in lower-costing core deposits and declining market interest rates on renewing time deposits.

 

Net interest margin increased 29 basis points to 3.43% for the quarter ended September 30, 2004, compared to 3.14% for the quarter ended September 30, 2003, and compared to the trailing quarter net interest margin, increased 15 basis points from 3.28%. The net accretion of purchase accounting adjustments contributed approximately 14 basis points to the net interest margin for the quarter ended September 30, 2004. The net interest margin increased six basis points to 3.41% for the nine months ended September 30, 2004, compared to 3.35% for the nine months ended September 30, 2003.

 

The average yield on interest-earning assets increased 41 basis points to 4.89% for the quarter ended September 30, 2004, compared to 4.48% for the comparable quarter in 2003, primarily due to the redeployment of federal funds sold and short-term investments into higher-yielding loans and securities. Compared to the trailing quarter, the yield on interest-earning assets increased 31 basis points to 4.89% from 4.58%. Contributing to the increase in the yield on interest-earning assets versus the trailing quarter was an increase in the yield on the available for sale securities portfolio of 65 basis points as a result of a shift out of lower yielding short-term investments, including U.S. Treasury Bills, which were held in anticipation of the payment of the cash portion of the First Sentinel acquisition consideration. For the nine months ended September 30, 2004, the earning asset yield declined five basis points to 4.77% from 4.82% for the nine months ended September 30, 2003, primarily as a result of downward repricing in the loan portfolio during a period of historically low interest rates.

 

The average cost of interest-bearing liabilities decreased five basis points to 1.70% for the quarter ended September 30, 2004 compared to 1.75% for the quarter ended September 30, 2003, and compared to the trailing quarter the average cost of interest-bearing liabilities increased one basis point from 1.69%. For the nine months ended September 30, 2004, the average cost of interest-bearing liabilities declined 26 basis points to 1.69% from 1.95% for the nine months ended September 30, 2003, reflecting growth in lower-costing core deposit balances and reductions in core deposit rates, as well as favorable repricing of renewing time deposits during a period of historically low interest rates.

 

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The average balance of net loans increased $1.39 billion, or 68.9%, to $3.41 billion for the quarter ended September 30, 2004 compared to $2.02 billion for the comparable quarter in 2003. Income on all loans secured by real estate increased $16.6 million, or 81.5%, to $37.0 million for the three months ended September 30, 2004, compared to $20.4 million for the three months ended September 30, 2003. For the nine months ended September 30, 2004, income on all loans secured by real estate increased $21.7 million, or 34.7%, to $84.3 million compared to $62.6 million for the nine months ended September 30, 2003. Interest income on commercial loans decreased $1.7 million, or 29.5%, to $4.0 million for the quarter ended September 30, 2004 compared to $5.6 million for the quarter ended September 30, 2003. Interest income on commercial loans for the nine months ended September 30, 2004 decreased $5.7 million, or 34.1%, to $11.0 million compared to $16.7 million for the nine months ended September 30, 2003. Commercial loan income for the quarter and nine months ended September 30, 2003 included $2.4 million and $7.0 million in mortgage warehouse interest income, respectively. The Company sold substantially all of its mortgage warehouse loans in the fourth quarter of 2003 and exited the business. The proceeds were reinvested in residential mortgage loans. Consumer loan interest income increased $2.1 million, or 46.6% to $6.6 million for the quarter ended September 30, 2004 compared to $4.5 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, income on consumer loans increased $2.1 million, or 15.1%, to $15.9 million compared to $14.0 million for the nine months ended September 30, 2003.

 

Interest income on investment securities held to maturity increased $605,000, or 14.4%, to $4.8 million for the quarter ended September 30, 2004, compared to $4.2 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, interest income on investment securities held to maturity increased $1.8 million, or 14.1%, to $14.5 million compared to $12.7 million for the nine months ended September 30, 2003. Interest income on securities available for sale increased $5.7 million, or 65.1%, to $14.4 million for the quarter ended September 30, 2004 compared to $8.7 million at September 30, 2003. For the nine months ended September 30, 2004, interest income on securities available for sale increased $1.7 million, or 5.7%, to $32.6 million, compared to $30.9 million for the nine months ended September 30, 2003. The increases in income on securities held to maturity and available for sale for the three and nine months ended September 30, 2004 were primarily attributable to increases in the average balances of $276.8 million, or 16.7%, and $28.8 million, or 1.7%, to $1.93 billion and $1.68 billion for the three and nine months ended September 30, 2004, respectively, compared to the same periods in 2003. In addition, the overall yield on securities held to maturity and available for sale improved to 3.79% and 3.51% for the three and nine months ended September 30, 2004, respectively, from 2.84% and 3.26% for the same periods in 2003 as a result of a reduction in lower-yielding short-term investments, reduced premium amortization as a result of slower prepayments on mortgage-backed securities and improved market yields on reinvested cash flows.

 

The average balance of core deposit accounts increased $840.8 million, or 49.5%, to $2.54 billion for the quarter ended September 30, 2004, compared to $1.70 billion for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, average core deposits increased $344.3 million, or 20.6%, to $2.02 billion compared with $1.67 billion for the same period in 2003. Average time deposit account balances increased $414.1 million or 42.5% to $1.34 billion for the quarter ended September 30, 2004, compared to $974.9 million for the same period in 2003. For the nine months ended September 30, 2004, average time deposits increased $67.7 million, or 6.7%, to $1.07 billion compared with $1.01 billion for the same period in 2003. Interest paid on deposit accounts increased $2.5 million, or 28.8%, to $11.3 million for the quarter ended September 30, 2004, compared to $8.8 million for the quarter ended September 30, 2003, as a result of the increase in average balances due primarily to the First Sentinel acquisition. For the nine months ended September 30, 2004, interest paid on deposit accounts decreased $3.8 million, or 12.4%, to $27.1 million compared to $31.0 million for the nine months ended September 30, 2003. The decrease in interest paid on deposit accounts for the nine months can be attributed to reductions in the average rates paid on core deposit accounts and favorable repricing of maturing time deposits.

 

Average borrowings, including the subordinated debentures assumed through the First Sentinel acquisition, increased $560.5 million or 91.5% to $1.17 billion for the quarter ended September 30, 2004, compared to $612.8 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, average borrowings increased $317.2 million, or 59.1%, to $854.3 million compared with $537.1 million for the same period in 2003. Interest paid on borrowed funds increased $4.3 million, or 100.2%, to $8.7 million for the quarter ended September 30, 2004, from $4.3 million for the quarter ended September 30, 2003. Interest paid on borrowed funds for the nine months ended September 30, 2004 increased $7.1 million, or 64.0%, to $18.3 million compared to $11.1 million for the same period in 2003. The increase in interest expense was primarily attributable to the increase in borrowings assumed in the First Sentinel acquisition.

 

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Provision for Loan Losses. The Company establishes provisions for loan losses, which are charged to income, in order to maintain the allowance for loan losses at a level management considers adequate 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 experiences, evaluation of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay the loan and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or events change. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to maintain the adequacy of the allowance.

 

The provision for loan losses for the quarter ended September 30, 2004 was $1.1 million compared to $160,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, the loan loss provision was $2.7 million compared to $1.1 million for the same period in 2003. The Company had net charge-offs for the quarter ended September 30, 2004 of $1.3 million, compared to net charge-offs of $389,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, net charge-offs were $2.6 million compared to net charge-offs of $758,000 at September 30, 2003. The allowance for loan losses was $33.6 million or 0.90% of total loans at September 30, 2004 compared to $21.3 million or 1.01% of total loans at September 30, 2003 and $20.6 million or 0.92% of total loans at December 31, 2003. At September 30, 2004, the allowance for loan losses as a percentage of non-performing loans increased to 687.9% from 364.0% at September 30, 2003 and 336.7% at December 31, 2003.

 

Non-Interest Income. Non-interest income increased $1.4 million, or 21.5%, to $8.2 million for the quarter ended September 30, 2004 compared to $6.8 million for the same period in 2003. For the nine months ended September 30, 2004, non-interest income increased $5.2 million, or 30.0%, to $22.6 million compared to $17.4 million for the same period in 2003. These increases were primarily attributable to increases in fee income and income on BOLI. Fees on retail accounts increased $1.4 million, or 32.9%, to $5.8 million for the quarter ended September 30, 2004, compared to $4.3 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, fees on retail accounts increased $3.2 million, or 26.2%, to $15.2 million compared to $12.0 million for the nine months ended September 30, 2003. These increases were primarily attributable to fee income associated with the introduction of an overdraft privilege product on retail checking accounts in late 2003. Income resulting from appreciation in the cash surrender value of BOLI increased $236,000, or 23.2%, to $1.3 million for the quarter ended September 30, 2004, compared to $1.0 million for the same period in 2003. For the nine months ended September 30, 2004, BOLI income increased $380,000, or 13.5%, to $3.2 million compared to $2.8 million for the same period in 2003. The increases in BOLI income were primarily attributable to the addition of $30.0 million of BOLI from the First Sentinel acquisition. Other items contributing to the increase in non-interest income included increased commission income on the sale of retail non-deposit investment products, increased gains on securities transactions for the nine months ended September 30, 2004, compared to the same period in 2003, and other income realized in the first half of 2004 resulting from the sale of $74.6 million of 20- and 30- year fixed-rate residential mortgage loans as part of an ongoing strategy to reduce interest rate risk. For the nine months ended September 30, 2004, the Company recorded gains of $1.4 million on the sale of residential mortgage loans compared to gains of $877,000 for the same period in 2003. Proceeds from the sale of loans and mortgage-backed securities were used to reduce short-term borrowings and reposition the balance sheet.

 

Non-Interest Expense. Non-interest expense increased $8.6 million, or 33.5%, to $34.3 million for the quarter ended September 30, 2004, compared to $25.7 million for the quarter ended September 30, 2003. For the three months ended September 30, 2004, compensation and benefits expense increased $3.7 million compared with the same period in 2003, primarily as a result of the addition of some staff from First Sentinel, increases in stock-based compensation and executive severance. Amortization of intangibles increased $1.1 million for the quarter ended September 30, 2004 compared with the same period in 2003, primarily as a result of amortization of the core deposit intangible recorded in connection with the First Sentinel acquisition. Additional increases in occupancy expense of $1.1 million, advertising expense of $791,000 and data processing expense of $490,000 for the quarter ended September 30, 2004, compared with the same period in 2003, were also due primarily to the acquisition and integration of the First Sentinel operations.

 

For the nine months ended September 30, 2004, non-interest expense decreased $10.9 million, or 11.1%, to $87.1 million compared to $98.0 million for the nine months ended September 30, 2003. A $24.0 million decrease in charitable contributions associated with the formation of The Provident Bank Foundation in early 2003 was partially offset by increases in compensation

 

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expense of $7.6 million, including stock-based compensation and executive severance. Advertising expense increased $2.3 million for the nine months ended September 30, 2004, compared with the same period in 2003, as a result of increased marketing efforts in support of the Company’s focus on core deposit and loan generation, as well as the cost of customer communications associated with the integration of the First Sentinel business. Occupancy expense increased $1.8 million for the nine months ended September 30, 2004, compared with the same period in 2003, primarily as a result of the additional 22 branch locations obtained through the First Sentinel acquisition. In addition, data processing costs increased $881,000 for the nine months ended September 30, 2004, compared with the same period in 2003, due primarily to the acquisition and integration of the First Sentinel operations.

 

Income Tax Expense . Income tax expense was $6.4 million for the quarter ended September 30, 2004, resulting in an effective tax rate of 32.4%, compared to $3.5 million for the quarter ended September 30, 2003, resulting in an effective tax rate of 29.8%. Income tax expense was $14.4 million for the nine months ended September 30, 2004, resulting in an effective tax rate of 30.9%, compared to $3.8 million for the nine months ended September 30, 2003, resulting in an effective tax rate of 26.5%. The increase in the effective tax rate for the third quarter of 2004 compared with the same period in 2003 was primarily due to the vesting of stock awards at a market price below the market value on the date of grant, resulting in the reversal of previously recognized tax benefit. The increase in the effective tax rate for the nine months ended September 30, 2004, compared with the same period in 2003, was further impacted by the income tax benefit realized in the first quarter of 2003 as a result of the contribution to The Provident Bank Foundation. The Internal Revenue Service (“IRS”) recently completed an examination of the Company’s Federal income tax returns for tax years 2000 and 2001. As a result of their examination, the IRS has issued a “no change” letter for tax years 2000 and 2001.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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. The Company’s most significant risk exposure is interest rate risk. The guidelines of the Company’s 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, 20- and 30- year fixed-rate mortgage loans may be sold at origination. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the prime rate, the federal funds rate or LIBOR. 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 the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix, various interest rate scenarios and the impact of those changes on projected net interest income and net income.

 

The Company’s 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. A consistent focus on core deposit accounts has led to a shift in the funding base to less interest rate sensitive liabilities. The Company’s ability to retain maturing certificate of deposit accounts is the result of its strategy to remain competitively priced within its marketplace, typically within the upper quartile of rates offered by its competitors. Pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLB during periods of pricing dislocation.

 

Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured 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. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to limits for acceptable change.

 

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The following sets forth the results of a twelve month net interest income projection model as of September 30, 2004 (dollars in thousands:

 

Change in Interest Rates in Basis Points (Rate Shock)


   Net Interest Income

 
  

Dollar

Amount


  

Dollar

Change


   

Percent

Change


 

-100

   $ 214,042    $ 15,388     7.75 %

Static

     198,655      —       —    

+100

     177,830      (20,825 )   (10.48 )

+200

     156,109      (42,546 )   (21.42 )

+300

     133,731      (64,924 )   (32.68 )

 

The preceding table indicates that as of September 30, 2004, in the event of an immediate and sustained 200 basis point increase in interest rates, based on a twelve month forward projection, net interest income would decrease 21.4% or $42.5 million. In the event of a 100 basis point decrease in interest rates, net interest income is projected to increase 7.8% or $15.4 million.

 

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 the economic value of equity model as of September 30, 2004 (dollars in thousands):

 

Change in Interest Rates (Basis Points)


   Present Value of Equity

    Present Value of Equity as
Percent of Present Value
of Assets


 
   Dollar
Amount


   Dollar
Change


    Percent
Change


    Present
Value Ratio


    Percent
Change


 
                                 

-100

   $ 1,461,784    $ 72,197     5.20 %   21.18 %   3.45 %

Flat

     1,389,587      —       —       20.47     —    

+100

     1,300,086      (89,501 )   (6.44 )   19.53     (4.61 )

+200

     1,210,286      (179,301 )   (12.90 )   18.54     (9.44 )

+300

     1,126,210      (263,377 )   (18.95 )   17.58     (14.13 )

 

The above table indicates that as of September 30, 2004, in the event of an immediate and sustained 200 basis point increase in interest rates, the present value of equity is projected to decrease 12.9% or $179.3 million. If rates were to decrease 100 basis points, the model forecasts a 5.2% or $72.2 million increase in the present value of equity.

 

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. 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 the Company believes 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 the Company’s 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 the Company’s 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 the Company’s net interest income and will differ from actual results.

 

Item 4. CONTROLS AND PROCEDURES.

 

Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is

 

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recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is involved in various legal actions and claims arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition and results of operations.

 

In its Annual Report on Form 10-K for the year ended December 31, 2002, the Company reported that after the completion of The Provident Bank’s (“Bank”) conversion from a mutual to stock savings bank, certain depositors of the Bank appealed the Order and Decision of the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) approving the plan of conversion. The appeal In the Matter of the Decision of the Commissioner of Banking and Insurance dated November 8, 2002, Permitting the Conversion of The Provident Bank from a Mutual to Stock Savings Bank (Superior Court of New Jersey, Appellate Division/Docket Nos. A-2107-02T2 and A-2615-02T3) challenged the aggregate purchase limits on subscription rights contained in the Bank’s plan of conversion as approved by the Commissioner claiming that the limits violated the New Jersey Law Against Discrimination and state and federal law.

 

In its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, the Company reported that the Appellate Division of the Superior Court of New Jersey dismissed the appeal as moot without reaching the merits of the depositors’ claims. On September 10, 2004 certain of the depositors filed a lawsuit ( Stephen Royce et al. v. The Provident Bank et al. , Docket No. HUD-L-4751-04) in the Superior Court of New Jersey against the Bank, the Company and certain members of the board of directors of the Company alleging facts similar to those raised in the appeal. The lawsuit, which seeks compensatory and punitive damages, asserts that purchase limitations contained in the Bank’s plan of conversion as approved by the Commissioner violated the New Jersey Law Against Discrimination and that the named directors, as well as the Bank and the Company, breached their fiduciary duty to the plaintiff depositors by approving the plan of conversion with the purchase limitations. The Company intends to defend this matter vigorously.

 

The Company reported in its Annual Report on Form 10-K for the year ended December 31, 2002 that certain depositor plaintiffs filed a lawsuit in the United States District Court for the District of New Jersey ( Bert Fingerhut et al. v. The Provident Bank et al. , Civil Action No.02-5881) against the Bank, the Company and certain directors of the Company challenging the legality of purchase limitations contained in the Bank’s plan of conversion. The depositor plaintiffs sought injunctive relief that was denied by the Court. On October 1, 2004, the federal district court signed an order of voluntary dismissal of the Fingerhut case, without prejudice.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period


   (a) Total Number
of Shares (or Units)
Purchased


   (b) Average
Price Paid per
Share (or Unit)


   (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (1)


  

(d) Maximum Number (or

Approximate Dollar Value) of

Shares (or Units) that May Yet

Be Purchased under the

Plans or Programs (1)


July 1, 2004 through July 31, 2004

   250,000    $ 17.28    250,000    3,367,695

August 1, 2004 through August 31, 2004

   1,945,774      17.53    1,945,774    1,421,921

September 1, 2004 through September 30, 2004

   684,000      17.84    684,000    737,921

Total

   2,879,774    $ 17.58    2,879,774     

(1) On January 22, 2004, the Company’s Board of Directors approved the purchase of up to 3,039,630 shares of its common stock under a general repurchase program. The program does not have an expiration date. On July 22, 2004, the Company’s Board of Directors authorized the expansion of the Company’s stock repurchase program through the purchase of up to an additional 927,033 shares for a total stock repurchase program of 3,966,663 shares

 

Item 3. Defaults Upon Senior Securities.

 

Not Applicable

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits and Reports on Form 8-K.

 

The following exhibits are filed herewith:

 

3.1   Certificate of Incorporation of Provident Financial Services, Inc.*
3.2   Bylaws of Provident Financial Services, Inc.**
4.1   Form of Common Stock Certificate of Provident Financial Services, Inc.*
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   Amended and Restated Employee Savings Incentive Plan, as amended**

 

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Table of Contents
10.4   Amendment No. 1 to the Employee Stock Ownership Plan**
10.5   Amended and Restated Supplemental Executive Retirement Plan**
10.6   Amended and Restated Supplemental Executive Savings Plan, as amended**
10.7   Retirement Plan for the Board of Directors of The Provident Bank, as amended*
10.8   Amendment No. 1 and Amendment No. 2 to The Provident Bank Amended and Restated Board of Directors Voluntary Fee Deferral Plan**
10.9   Voluntary Bonus Deferral Plan for the Chairman, as amended*
10.10   Voluntary Bonus Deferral Plan, as amended*
10.11   Provident Financial Services, Inc. Board of Directors Voluntary Fee Deferral Plan, as amended**
10.12   First Savings Bank Directors’ Deferred Fee Plan, as amended
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed as exhibits to Provident Financial Services, Inc.’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission. (Registration No. 333-98241).
** Filed as exhibits to Provident Financial Services, Inc.’s June 30, 2004 Quarterly Report on Form 10-Q with the Securities and Exchange Commission. (File No. 001-31566).

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    PROVIDENT FINANCIAL SERVICES, INC.
Date: November 9, 2004   By:  

/s/ Paul M. Pantozzi


        Paul M. Pantozzi
        Chairman and Chief Executive Officer
Date: November 9, 2004   By:  

/s/ Linda A. Niro


        Linda A. Niro
        Senior Vice President and Chief Financial Officer

 

26

Exhibit 10.12

 

FIRST SAVINGS BANK

DEFERRED FEE PLAN

 

The First Savings Bank Deferred Fee Plan is effective as of January 1, 2001, and reflects the Board of Director’s decision to combine, amend and restate the Agreement for Deferment of Directors Fees (established by resolution of the Board of Directors on May 27, 1981) and the First Savings Bank, SLA 1992 Deferred Fee Stock Unit Plan.

 

1. Purpose . The purpose of the First Savings Bank Deferred Fee Plan (the “Plan”) is to provide an opportunity for the members of the Board of Directors of First Savings Bank (the “Savings Bank”) to defer receipt of fees earned in their capacity as a director of the Savings Bank until a future date. The ability to defer fees under the Plan applies to all fees received by directors, including retainers, regular meeting fees, special meeting fees, and committee fees.

 

2. Participants . Any active director of the Savings Bank may elect to become a participant (“Participant”) under this Plan by submitting a deferral election form to the Compensation Committee of the Board of Directors of the Savings Bank (“Compensation Committee”). Also, any director who participated in one of the prior arrangements and who is still owed a benefit pursuant to that arrangement will continue as a Participant in this Plan whether or not that director continues to defer fees under this Plan.

 

3. Deferred Retainer and Fees .

 

(a) Any active director may defer all or any portion of his fees which are earned as a director for the year commencing after the date of his election to defer fees. The director shall specify the terms of his election to defer fees under this Plan by completing and submitting a deferral election form to the Compensation Committee.

 

(b) Any Participant may change the amount of, or suspend, future deferrals with respect to fees earned for years commencing after the date of change or suspension by providing written notice to the Compensation Committee. Following any suspension a director may make a new election to again begin deferring fees under this Plan, after a period of at least 12 months has lapsed since he provided the Compensation Committee with notice of his suspension. However, no Participant may make such change to his election more often than once in any 12-month period. Any such election to re-participate in the Plan must be made during a period beginning on the third business day following the date of release of the quarterly or annual statements of earnings by First Sentinel Bancorp, Inc., and ending on the twelfth business day following such date. The election to defer shall be irrevocable as to fees deferred for the particular 12-month period.

 

4. Method of Deferral and Distribution .

 

(a) The Savings Bank will maintain a deferred money account (“Deferred Money Account”) for all Participants.

 

(b) Amounts deferred pursuant to the Agreement for Deferment of Directors Fees that have not previously been credited to a Stock Unit Account shall be credited with an amount equal to the interest that would be payable on such sums if they were deposited in a six-month savings certificate or similar type of account at the Savings Bank. Interest will be credited based on a 360-day year end and will be credited at the average savings certificate rate of the previous quarter and calculated on the account balance of the Participant’s Deferred Money Account as of the beginning of the current quarter.

 

27


(c) Each Participant’s deferred fees (other than those deferred pursuant to the Agreement for Deferment of Directors Fees that have not previously been credited to a Stock Unit Account) shall be converted into Stock Units quarterly as of March 31, June 30, September 30 and December 30 of each year by dividing the Participant’s quarter-end cash balance by the last reported sales price per share of the common stock as reported on the Nasdaq National Market on the last day the common stock was traded at the end of each quarter. The Compensation Committee shall keep records for each Participant noting the number of Stock Units for full shares of common stock credited to each Participant’s account at the end of a quarter. The aggregate value of the Stock Units at the end of each quarter shall be charged to each Participant’s Deferred Money Account. Any dollar amount remaining in a Participant’s Deferred Money Account after such charge shall be used together with future fee deferrals and converted to stock units at the next quarterly conversion date.

 

(d) Additional credits will be made to each Participant’s Deferred Money Account in dollar amounts equal to the cash dividends (or the fair market value of dividends paid in property) that each Participant would have received had he been the owner of a number of shares of common stock equal to the number of Stock Units credited to his Account on such dates. Such determinations shall be made as of the record date of any dividend paid on the common stock.

 

(e) Unless otherwise elected by a Participant, cash dividends credited to his Deferred Money Account will be converted into Stock Units in the manner and at the same time as set forth in paragraph (c) of this Section 4.

 

(f) An adjustment will be made to each Participant’s Stock Unit Account to reflect any stock dividend or stock split that a Participant would have received had he been the owner on the record dates of a number of shares of common stock equal to the Stock Units credited to the Participant.

 

5. Distribution .

 

(a) A Participant shall receive his benefits payable under this Plan commencing as of the first month next following the later of:

 

(i) the Participant’s attainment of age 65; or

 

(ii) the Participant’s last day of service as a director of the Savings Bank. Notwithstanding the foregoing, with the consent of the Compensation Committee, a Participant may also elect to receive his benefits commencing as of a specific date (regardless of whether the director has terminated service as of that date), provided that such date is at least one taxable year subsequent to the date the Participant makes his election.

 

(b) A Participant may elect prior to the benefit commencement date determined under paragraph (a) of this Section 5 to receive his benefits in a lump sum payment; provided that such election does not take place in the same taxable year as the distribution. Such payment shall be in lieu of the quarterly benefits that would otherwise be payable to a Participant and in full satisfaction of the Savings Bank’s obligation to the Participant. The Participant’s election shall be made in writing on a form designated by the Savings Bank for such purpose. In the absence of such an election, the Participant’s benefits will be paid to him or his beneficiary in substantially equal payments over 40 quarterly installments.

 

(c) Notwithstanding anything in this Section to the contrary, during any period when benefits are payable under this Plan to the Participant or his beneficiary in the form of a quarterly benefit, the Compensation Committee, may in its sole discretion, authorize the payment of a lump sum

 

28


which is the equivalent to the then remaining quarterly benefits otherwise payable under this Plan. Such lump sum payment shall be in lieu of the quarterly benefits that would otherwise be payable to a Participant or his beneficiary.

 

(d) A Participant shall also elect to have his Deferred Money Account balance distributed in the form of either:

 

(i) common stock (based on the number of Stock Units credited to a Participant’s Stock Unit Account); or

 

(ii) cash (based on the market value of the number of Stock Units credited to the Participant’s Stock Unit Account); the determination of the Participant’s account shall be made as of the last day of the month preceding the distribution date. Distributions of Deferred Money Accounts shall be paid in cash.

 

(e) In the event of a Participant’s death, the Participant’s account balance shall be distributed or begin to be distributed to the beneficiary(ies) designated by the Participant within 90 days of the Participant’s death in the manner designated by the Participant. If any beneficiary predeceases the Participant, such beneficiary’s interest shall be payable to the Participant’s estate upon the Participant’s death. If any beneficiary survives the Participant but dies before all benefits payable hereunder have been paid, the aggregate benefits then unpaid to such beneficiary shall be paid to the beneficiary’s estate, in a lump sum, no later than the 90th day following the date of the beneficiary’s death.

 

(f) Notwithstanding any other provision of this Section 5 to the contrary, the entire Account balance then credited to a Participant’s Accounts shall be paid immediately in a single payment if:

 

(i) the Participant is discharged for “cause” by the Savings Bank, or

 

(ii) the Compensation Committee determines that the Participant engaged in misconduct in connection with the Participant’s service with the Savings Bank.

 

The determination of whether a Participant is discharged for “cause” or whether a Participant has engaged in misconduct in connection with his service with the Savings Bank shall be made by the Board of Directors of the Savings Bank and such determination shall be binding on all concerned parties.

 

(g) Notwithstanding anything in this Plan to the contrary, if, at any time, a court or the Internal Revenue Service determines that an amount in a Participant’s Accounts is includible in the gross income of the Participant and subject to tax, the Compensation Committee may, in its sole discretion, permit a lump sum distribution of an amount equal to the amount determined to be includible in the Participant’s gross income.

 

(h) The Compensation Committee may make any provision necessary for withholding from any payment to a Participant or beneficiary amounts required for federal, state, and local income or employment tax purposes.

 

6. Participant’s Rights Unsecured . The right of any Participant to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Savings Bank. A director may not encumber or assign his deferred fees. From time to time, the Savings Bank may acquire (but shall be under no obligation to do so), through an irrevocable grantor’s trust, shares of the outstanding common stock in anticipation of distributions under the Plan. The Savings Bank may also contribute cash or other assets to such a trust in anticipation of its benefit obligations under this Plan. However, in no event shall any Participant have any rights in or against such assets. All such assets shall constitute general assets of the Savings Bank.

 

29


7. Account Statements. At least annually, the Savings Bank will furnish each Participant with a statement setting forth the amount credited to his Deferred Money Account and, if applicable, his Stock Unit Account under this Plan.

 

8. Amendments to the Plan . The Board of Directors of the Savings Bank may amend the Plan at any time, without the consent of the Participants or their beneficiaries, provided, however, that no amendment shall divest any Participant or beneficiary of rights to which he would have been entitled if the Plan had been terminated on the effective date of such amendment.

 

9. Termination of Plan . The Board of Directors of the Savings Bank may terminate the Plan at any time. Upon termination of the Plan, distributions in respect to credits to a Participant’s Accounts as of the date of termination shall be made in a lump sum.

 

10. Expenses . Costs of administration of the Plan will be paid by the Savings Bank.

 

The First Savings Bank Deferred Fee Plan was adopted by the Board of Directors of the Savings Bank on November 15, 2000.

 

    FIRST SAVINGS BANK

November 15, 2000

Date

 

/s/ Philip T. Ruegger, Jr.


  Philip T. Ruegger, Jr.
    For the Board of Directors

 

30


AMENDMENT NO. 1                        

 

BOARD APPROVAL DATE: 12/19/03                        

 

F IRST S AVINGS B ANK

D EFERRED F EE P LAN

 

AMENDMENT No. 1

 

1. Section 4(e) of the Plan shall be amended, effective as of October 1, 2003, to read in its entirety as follows:

 

(e) Unless otherwise elected by a Participant with the approval of the Compensation Committee, cash dividends credited to his Deferred Money Account will be converted into Stock Units in the manner and at the same time as set forth in paragraph (c) of this Section 4.

 

2. Section 5(d) of the Plan shall be amended, effective as of October 1, 2003, to read in its entirety as follows:

 

(d) Distributions of all or part of the balance credited to a Participant’s Stock Unit Account shall be made in whole shares of common stock equal in number to the number of whole Stock Units being distributed, with a cash payment in lieu of any fractional Stock Unit the amount of which shall be based on the fair market value of a share of common stock. Distributions of all or part of the balance credited to a Participant’s Deferred Money Account that have not, as of the distribution date, been converted to Stock Units shall be made in cash.

 

3. The Plan shall be amended, effective as of October 1, 2003, by adding a new section 11 to read in its entirety as follows:

 

  11. The Savings Bank intends to account for its obligations with respect to Stock Units under the Plan on the basis of the historical cost of common stock acquired to assist the Savings Bank in meeting its obligations under the Plan. The Plan shall be construed, administered and enforced in such manner as shall be necessary to secure the availability of such accounting treatment under generally accepted accounting principles.

 

I N W ITNESS W HEREOF , this Amendment has been executed by the undersigned officer of First Savings Bank pursuant to authority given by resolution of the Board of Directors.

 

F IRST S AVINGS B ANK
By:  

/s/ Christopher Martin


Name:   Christopher Martin
Title:   President and Chief Executive Officer

 

31


AMENDMENT NO. 2                        

 

BOARD APPROVAL DATE: 05/26/04                        

 

F IRST S AVINGS B ANK

D EFERRED F EE P LAN

 

AMENDMENT No. 2

 

1. Section 4 of the Plan shall be amended, effective as of May 27, 2004, to include a new subsection (g) which shall read in its entirety as follows:

 

# # # # # # # # # #

 

(g) At the effective time (the “Effective Time”) of the closing of the merger of First Sentinel Bancorp, Inc. (“FSBI”) with and into Provident Financial Services, Inc. (“PFS”) pursuant to the Agreement and Plan of Merger dated December 19, 2003 by and between FSBI and PFS (the “Merger Agreement”):

 

(i) Each Stock Unit outstanding hereunder shall be converted into cash, Stock Units with respect to shares of PFS Common Stock, or a combination thereof in the same amounts and portions that would be received as merger consideration pursuant to the Merger Agreement by a FSBI shareholder owning a number of shares of FSBI common stock equal to the number of Stock Units outstanding under this Plan at the effective time of the merger contemplated by the Merger Agreement.

 

(ii) To the extent that a Stock Unit is converted into cash, such cash shall, at the Effective Time, be permanently credited to the Participant’s Deferred Money Account until distributed as hereinafter provided.

 

(iii) To the extent that a Stock Unit is converted into Stock Units with respect to PFS Common Stock, such Stock Units shall be used to measure the Participant’s accumulated benefits under the Plan until distributed as hereinafter provided.

 

At all times following the Merger Effective Time each reference herein to a Stock Unit shall be deemed to be a reference to a Stock Unit with respect to PFS Common Stock. In addition, notwithstanding any other provision of the Plan to the contrary, all adjustments to Stock Units in respect of dividends paid or declared on or after May 26, 2004 shall be permanently credited to the Participant’s Deferred Money Account and distributed as hereinafter provided and shall not be deemed reinvested in additional Stock Units.

 

I N W ITNESS W HEREOF , this Amendment has been executed by the undersigned officer of First Savings Bank pursuant to authority given by resolution of the Board of Directors.

 

FIRST SAVINGS BANK
By:  

/s/ Christopher Martin


    Christopher Martin
    President and Chief Executive Officer

 

32


                        AMENDMENT NO. 3
COMMITTEE APPROVAL DATE:   6/29/04
BOARD APPROVAL DATE:   6/30/04

 

F IRST S AVINGS B ANK

D EFERRED F EE P LAN

 

AMENDMENT No. 3

 

1. Section 3 — Section 3(a) of the Plan shall be amended, effective as of June 30, 2004, to include the following sentence at the end thereof to read in its entirety as follows:

 

Notwithstanding anything in the Plan to the contrary, no deferrals shall be made of amounts earned after June 30, 2004.

 

I N W ITNESS W HEREOF , this Amendment has been executed by the undersigned officer of First Savings Bank pursuant to authority given by resolution of the Board of Directors.

 

F IRST S AVINGS B ANK
By:  

/s/ Christopher Martin


    Christopher Martin
    President and Chief Executive Officer

 

33


F IRST S AVINGS B ANK

D EFERRED F EE P LAN

 

AMENDMENT No. 4

 

2. Section 9 — Section 9 of the Plan shall be amended, effective as of July 13, 2004, to read in its entirety as follows:

 

The Board of Directors of the Savings Bank may terminate the Plan at any time; provided, however , that the Plan may not be terminated after July 14, 2004 without the unanimous consent of the Participants with unpaid benefits under the Plan. Upon termination of the Plan, distributions in respect to credits to a Participant’s Accounts as of the date of termination shall be made in a lump sum.

 

I N W ITNESS W HEREOF , this Amendment has been executed by the undersigned officer of First Savings Bank pursuant to authority given by resolution of the Board of Directors.

 

F IRST S AVINGS B ANK
By:  

/s/ Christopher Martin


Name:   Christopher Martin
Title:   President and CEO

 

34

Exhibit 31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Paul M. Pantozzi, Chairman and Chief Executive Officer certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Provident Financial Services, Inc;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  c) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004  

/s/ Paul M. Pantozzi


   

Paul M. Pantozzi,

Chairman and Chief Executive Officer

 

35

Exhibit 31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Linda A. Niro, Senior Vice President and Chief Financial Officer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Provident Financial Services, Inc;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  c) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004  

/s/ Linda A. Niro


   

Linda A. Niro,

Senior Vice President and

Chief Financial Officer

 

36

Exhibit 32

 

Certification pursuant to

18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

Paul M. Pantozzi, Chairman and Chief Executive Officer, and Linda A. Niro, Senior Vice President and Chief Financial Officer of Provident Financial Services, Inc. (the “Company”), each certify in his or her capacity as an officer of the Company that he or she has reviewed the quarterly report of the Company on Form 10-Q for the quarter ended September 30, 2004 and that to the best of his or her knowledge:

 

(1) the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations.

 

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.

 

November 9, 2004

Date

 

/s/ Paul M. Pantozzi


  Chairman and Chief Executive Officer

November 9, 2004

Date

 

/s/ Linda A. Niro


 

Senior Vice President and

Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to Provident Financial Services, Inc. and will be retained by Provident Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

37