Commitment You Can Count On 2014 Annual Report CORPORATE PROFILE Provident Financial Services, Inc. is the holding company for The Provident Bank. Established in 1839, The Provident Bank emphasizes personal service and customer convenience in attending to the financial needs of businesses, individuals and families throughout northern and central New Jersey and Bucks County and the Lehigh Valley in Pennsylvania. The Bank offers a broad array of deposit, loan and investment products, as well as trust, fiduciary and wealth management services through its wholly owned subsidiary, Beacon Trust Company. FINANCIAL HIGHLIGHTS (In thousands, except branch data, per share data and percent data) At December 31, Total assets Net loans outstanding 2014 2013 2012 $8,523,377 $7,487,328 $7,283,695 6,023,771 5,130,149 4,834,351 Investment securities held to maturity 469,528 357,500 359,464 Securities available for sale Deposits Borrowed funds Stockholders’ equity 1,074,395 1,157,594 1,264,002 5,792,523 5,202,471 5,428,271 1,509,851 1,203,879 1,144,099 1,010,753 803,264 981,246 At or for the year ended December 31, Net income Diluted earnings per share Net interest margin Average net interest rate spread Non-performing loans to total loans Allowance for loan losses to total loans Number of branches $ 73,631 $ 70,534 $ 67,267 $1.22 3.30% 3.18% 0.88% 1.01% 86 $1.23 3.31% 3.19% 1.48% 1.24% 77 $1.18 3.38% 3.25% 2.02% 1.43% 78 In spite of the challenging business environment, we achieved another year of record operating results, buttressed by successful acquisitions of a bank based in eastern Pennsylvania, and the wealth management business of a Long Island, New York-based bank. DE A R FELLOW S TOCK HOLDER S: A Noteworthy Year While it was another year of consistent progress for The Provident Bank, 2014 was not without its issues and challenges. We celebrated our 175th anniversary and our rich history of successes, yet we also witnessed global economic pressures, geopolitical unrest, increasing cyber security threats, and an improving, but still soft US economy. In spite of the challenging business environment, we achieved another year of record operating results, buttressed by successful acquisitions of a bank based in eastern Pennsylvania, and the wealth management business of a Long Island, New York-based bank. As the year concluded, we also announced the pending acquisition of an in-market wealth management firm which we expect to complete in the second quarter of 2015. Our strong financial performance in 2014 was marked by core earnings growth, record revenue, commendable returns, and an impressive efficiency ratio. Our loan originations were solid, the margin remained stable, and our core deposits represented 85.7% of total deposits at year end. We also increased returns to stockholders by again increasing our cash dividend, bringing the current dividend yield to approximately 3.50%. Further, asset quality improved significantly with non-performing loans hitting a 5-year low of 0.88% of total loans. We accomplished this without resorting to discounted bulk asset sales, and our net charge-offs remained below peers. Strategic Expansion Provident was extremely busy expanding its markets and laying the foundation for future growth opportunities. In May, we completed the acquisition of Team Capital Bank, a $900 million asset institution with 12 branches in eastern Pennsylvania and western New Jersey. In less than nine months following its announcement, the transaction was approved, closed and fully integrated as a result of the great effort put forth by the staffs of both companies. We are eager to increase our penetration in these new markets with expanded product offerings, marketing initiatives and operational support. Our deposit gathering franchise now consists of 86 branches throughout northern and central New Jersey and in the Lehigh Valley and Bucks County regions of Pennsylvania. Christopher Martin Chairman, President and Chief Executive Officer ANNUAL REPORT 2014 | 3 PROVIDENT FINANCIAL SERVICES, INC. Beacon Trust, our wealth management subsidiary, completed an acquisition of a $145 million trust business located in eastern Long Island, which nicely complements our existing client base in that area. In January of 2015, we announced an agreement to purchase The MDE Group, Inc., a $1.2 billion wealth management firm based in Morristown, New Jersey. We anticipate receiving regulatory approval and closing this transaction in the second quarter of 2015. Following this combination, Beacon Trust will have approximately $2.5 billion in assets under administration. As the yield curve flattens, we will continue to seek fee income opportunities, specifically in the wealth management space. We also added a small team of individuals to initiate our entrée into asset-based lending, along with a loan portfolio of approximately $47 million acquired from that group’s prior bank. We look forward to expanding this lending platform, team and customer base. Our capital continued to grow in 2014 by virtue of our strong earnings, and we remain well-positioned to support asset growth, take advantage of opportunistic share repurchases and consider future cash dividend increases. Financial Highlights Our financial returns were bolstered by maintaining a stable net interest margin, a particularly satisfying accomplishment given the absolute low level of interest rates. With our high concentration of core deposits and extension of liabilities duration through longer–term borrowings, we believe our interest rate risk is well-managed and we are optimistic about avoiding material margin compression regardless of the future interest rate environment. Our capital continued to grow in 2014 by virtue of our strong earnings, and we remain well-positioned to support asset growth, take advantage of opportunistic share repurchases and consider future cash dividend increases. Keep in mind, we never took part in the TARP program, did not issue a dilutive stock offering, and have ample capital to take advantage of market opportunities. The newly introduced Basel III regulatory capital requirements are not expected to have a material impact on our capital levels or flexibility. We are also preparing for the additional hurdles associated with reaching the $10 billion asset threshold. Although it is not contemplated that we will reach the $10 billion mark based on normal organic growth over a near-term horizon, we are taking steps now to address the risk measurement protocols and stress testing required by our various regulators upon achievement of that milestone. Like other banks, Provident is facing a demonstrably increased regulatory burden emanating from the Dodd- Frank Act and indirectly from the Consumer Financial Protection Bureau, an agency created to shore-up consumer protection following the Great Recession. The implications are far reaching and add up to increased costs, higher minimum capital levels than ever before, and an onerous compliance process. Customer and Community Commitment We have been rolling out new technology that gives customers enhanced access to their accounts through their mobile devices in response to the impressive adoption rates of our mobile banking platform over the last two years. While careful expense management remains a core tenet of The Provident Bank, the cost of adding additional layers of security to protect our data and customer information will likely increase as the proliferation of cyber intrusion threats continues. Our highest priority is protecting customer data, and we will spare no expense in maintaining the confidence of our customers and the security of their personal information. Fortunately, these costs are somewhat offset by the lower cost of servicing customers through electronic channels and our ongoing branch rationalization efforts. 4 | ANNUAL REPORT 2014 PROVIDENT FINANCIAL SERVICES, INC. We will continue to invest in the build-up of our data analytics and social media outreach to engage with our customers and focus on their needs, anticipate business opportunities, and be part of their conversation. We initiated a Provident-4-Women group which is designed to enhance our dialogue with our female customers and aid us in developing the services and products that appeal to this important market demographic. The work of The Provident Bank Foundation continues to change lives – with over $19 million in worthy donations granted since its inception in 2003. These efforts are extremely rewarding, as we continue to interact with those in need and make a difference in our communities. 2015 and Beyond There are numerous challenges ahead: a flattening yield curve; tighter credit spreads in commercial lending; deposit costs reaching a floor; intense competition; and an uneven recovery in the US being impacted by global economic challenges. These will be met by our ability to execute on our strategic planning pillars. Our prudent management culture and discipline have served us well in meeting the demands of our business while building upon relationships with our customers, and aiding in their success. We will continue to pursue wealth management acquisitions that increase our non-interest income while being additive to stockholder value, enhance our products and services, and expand our staff of customer-centric employees. And by no means does this rule out whole-bank acquisitions, as we look to increase stockholder value by making strategic combinations that increase our market penetration and enhance our long-term prospects for growth. Our prudent management culture and discipline have served us well in meeting the demands of our business while building upon relationships with our customers, and aiding in their success. We look to 2015 as yet another opportunity to expand our reach into Pennsylvania, increase our wealth management business, continue our core growth success, and operate in an efficient manner. Ideally, our regional economy will rebound further this year, and new business opportunities will be plentiful for our current and future customers. On behalf of our staff and the balance of our board of directors, I want to thank Geoffrey Connor and Jeffries Shein for the guidance and support they both provided during their service as directors. We wish you both all the best in retirement. I would be remiss if I did not acknowledge that our results are directly tethered to the dedication and commitment of our board of directors, management team and staff members. I cannot thank them enough for allowing me to lead our company, and provide value to you, our stockholders. Sincerely, Christopher Martin Chairman, President and Chief Executive Officer With Much Appreciation We would like to extend our heartfelt thanks and appreciation to our longest serving board member Jeffries Shein. Jeff has continuously served as a director since 1985 when he joined the board of First Savings Bank which merged with Provident in 2004. We will fondly remember the practical advice and guidance that Jeff offered to management, and we wish him many years of good health and happiness in his retirement. ANNUAL REPORT 2014 | 5 PROVIDENT FINANCIAL SERVICES, INC. BOARD OF DIRECTORS AND CORPORATE MANAGEMENT DIRECTORS Christopher Martin Chairman, President and Chief Executive Officer Geoffrey M. Connor Former Partner, Reed Smith LLP Thomas W. Berry Former Partner, Goldman Sachs & Co. Frank L. Fekete Managing Partner, Mandel, Fekete & Bloom, CPAs Matthew K. Harding President and Chief Operating Officer, Levin Management Corporation Carlos Hernandez Former President, New Jersey City University Edward O’Donnell Former President, Tradelinks Transport, Inc. John Pugliese President, Motors Management Corporation Laura L. Brooks Former Vice President–Risk Management and Chief Risk Officer, PSEG Terence Gallagher President, Battalia Winston Thomas B. Hogan Jr.* Former Partner, Deloitte & Touche Jeffries Shein Principal, JGT Management Co., LLC *Lead Director MANAGEMENT P R O V I D E N T F I N A N C I A L S E R V I C E S , I N C . Christopher Martin Chairman, President and Chief Executive Officer John F. Kuntz Executive Vice President, General Counsel and Corporate Secretary Thomas M. Lyons Executive Vice President and Chief Financial Officer Leonard G. Gleason Senior Vice President and Investor Relations Officer T H E P R O V I D E N T B A N K Christopher Martin Chairman, President and Chief Executive Officer Brian Giovinazzi Executive Vice President and Chief Credit Officer Thomas M. Lyons Executive Vice President and Chief Financial Officer Jack Novielli Executive Vice President and Chief Information Officer Donald W. Blum Executive Vice President and Chief Lending Officer Janet D. Krasowski Executive Vice President and Chief Human Resources Officer Frank S. Muzio Senior Vice President and Chief Accounting Officer Michael A. Raimonde Executive Vice President and Director of Retail Banking James A. Christy Senior Vice President and Chief Risk Officer John F. Kuntz Executive Vice President, Chief Administrative Officer and General Counsel James D. Nesci Executive Vice President and Chief Wealth Management Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2014 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 No. 1-31566 PROVIDENT FINANCIAL SERVICES, INC. (Exact Name of Registrant as Specifi ed in its Charter) DELAWARE (State or Other Jurisdiction of Incorporation or Organization) 239 Washington Street, Jersey City, New Jersey (Address of Principal Executive Offi ces) 42-1547151 (I.R.S. Employer Identifi cation Number) 07302 (Zip Code) (732) 590-9200 (Registrant’s Telephone Number) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: New York Stock Exchange (Name of Exchange on Which Registered) Common Stock, par value $0.01 per share (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark YES NO • if the Registrant is a well-known seasoned issuer, as defi ned in Rule 405 of the Securities Act. • if the Registrant is not required to fi le reports pursuant to Section 13 or Section 15(d) of the Act. • whether the Registrant: (1) has fi led all reports required to be fi led 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 fi le such reports); and (2) has been subject to such fi ling requirements for the past 90 days. • whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such fi les). • if disclosure of delinquent fi lers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in defi nitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. • whether the Registrant is a large accelerated fi ler, an accelerated fi ler, a non-accelerated fi ler, or a smaller reporting company. See the defi nitions of “large accelerated fi ler,” “accelerated fi ler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer • Indicate by check mark whether the Registrant is a shell company (as defi ned in Rule 12b-2 of the Exchange Act). Non-Accelerated Filer Accelerated Filer Smaller Reporting Company As of February 2, 2015, there were 83,209,293 issued and 65,313,288 shares of the Registrant’s Common Stock outstanding, including 405,563 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. The aggregate value of the voting and non-voting common equity held by non-affi liates of the Registrant, based on the closing price of the Common Stock as of June 29, 2014, as quoted by the NYSE, was approximately $996.2 million. (1) Proxy Statement for the 2015 Annual Meeting of Stockholders of the Registrant (Part III). DOCUMENTS INCORPORATED BY REFERENCE Table of Contents PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. PART II Business ......................................................................................................................................................................................................................................................................................................2 Risk Factors .......................................................................................................................................................................................................................................................................................28 Unresolved Staff Comments .......................................................................................................................................................................................................................................32 Properties ..............................................................................................................................................................................................................................................................................................32 Legal Proceedings ....................................................................................................................................................................................................................................................................32 Mine Safety Disclosures ....................................................................................................................................................................................................................................................32 2 33 ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. PART IV and Issuer Purchases of Equity Securities ........................................................................................................................................................................................33 Selected Financial Data .....................................................................................................................................................................................................................................................35 Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................................................................................................................................................................................................................................37 Quantitative and Qualitative Disclosures About Market Risk ........................................................................................................................................47 Financial Statements and Supplementary Data ..............................................................................................................................................................................49 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .............................................................................................................................................................................................................................................98 Controls and Procedures ................................................................................................................................................................................................................................................98 Other Information ........................................................................................................................................................................................................................................................................98 Directors, Executive Offi cers and Corporate Governance ................................................................................................................................................99 Executive Compensation .................................................................................................................................................................................................................................................99 Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters ..................................................................................................................................................................................................................99 Certain Relationships and Related Transactions, and Director Independence ................................................................................100 Principal Accountant Fees and Services ...............................................................................................................................................................................................100 99 101 Exhibits and Financial Statement Schedules ...................................................................................................................................................................................101 ITEM 15. SIGNATURES ....................................................................................................................................................................................................................................................................................................................................................................103 FORWARD LOOKING STATEMENTS Certain statements contained herein 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 identifi ed 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 Provident Financial Services, Inc. (the “Company”) operates, competitive products and pricing, fi scal and monetary policies of the U.S. Government, changes in government regulations affecting fi nancial 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 fi nancial and securities markets and the availability of and costs associated with sources of liquidity. The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company also advises readers that the factors listed above could affect the Company’s fi nancial 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 specifi cally declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to refl ect events or circumstances after the date of such statements or to refl ect the occurrence of anticipated or unanticipated events. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 1 PART I ITEM 1. Business Provident Financial Services, Inc. The Company is a Delaware corporation which became the holding company for The Provident Bank (the “Bank”) on January 15, 2003, following the completion of the conversion of the Bank to a New Jersey-chartered capital stock savings bank. On January 15, 2003, the Company issued an aggregate of 59,618,300 shares of its common stock, par value $0.01 per share in a subscription offering, and contributed $4.8 million in cash and 1,920,000 shares of its common stock to The Provident Bank Foundation, a charitable foundation established by the Bank. As a result of the conversion and related stock offering, the Company raised $567.2 million in net proceeds, of which $293.2 million was utilized to acquire all of the outstanding common stock of the Bank. The Company owns all of the outstanding common stock of the Bank, and as such, is a bank holding company subject to regulation by the Federal Reserve Board. On May 30, 2014, the Company completed its acquisition of Team Capital Bank (“Team Capital”), which, after purchase accounting adjustments, added $964.0 million to total assets, $631.2 million to loans, and $769.9 million to deposits. Total consideration paid for Team Capital was $115.1 million: $31.6 million in cash and 4.9 million shares of common stock valued at $83.5 million on the acquisition date. Team Capital was merged with and into the Company’s subsidiary, The Provident Bank as of the close of business on the date of acquisition. At December 31, 2014, the Company had total assets of $8.52 billion, loans of $6.09 billion, total deposits of $5.79 billion, and total stockholders’ equity of $1.14 billion. The Company’s mailing address is 239 Washington Street, Jersey City, New Jersey 07302, and the Company’s telephone number is (732) 590-9200. Capital Management. The Company paid cash dividends totaling $36.1 million and repurchased 264,118 shares of its common stock at a cost of $4.4 million in 2014. At December 31, 2014, 3.4 million shares were eligible for repurchase under the board approved stock repurchase program. The Company and the Bank were “well capitalized” at December 31, 2014 under current regulatory standards. Available Information. The Company is a public company, and fi les interim, quarterly and annual reports with the Securities and Exchange Commission (“SEC”). These respective reports are on fi le and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that fi le electronically with the SEC (http://www.sec.gov). All fi led SEC reports and interim fi lings can also be obtained from the Bank’s website, www.providentnj. com, on the “Investor Relations” page, without charge from the Company. The Provident Bank Established in 1839, the Bank is a New Jersey-chartered capital stock savings bank currently operating 86 full-service branch offi ces in the New Jersey counties of Hudson, Bergen, Essex, Mercer, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Union and Warren, as well as in Bucks, Lehigh and Northampton counties in Pennsylvania. As a community- and customer-oriented institution, the Bank emphasizes personal service and customer convenience in serving the fi nancial needs of the individuals, families and businesses residing in its primary market areas. The Bank attracts deposits from the general public and businesses primarily in the areas surrounding its banking offi ces and uses those funds, together with funds generated from operations and borrowings, to originate commercial real estate loans, commercial business loans, residential mortgage loans, and consumer loans. The Bank also invests in mortgage-backed securities and other permissible investments. 2 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I ITEM 1 Business The following are highlights of The Provident Bank’s operations Diversifi ed Loan Portfolio. To improve asset yields and reduce its exposure to interest rate risk, the Bank has diversifi ed its loan portfolio and has emphasized the origination of commercial real estate loans, multi-family loans and commercial business loans. These loans generally have adjustable rates or shorter fi xed terms and interest rates that are higher than the rates applicable to one- to four-family residential mortgage loans. However, these loans generally have a higher risk of loss than one- to four- family residential mortgage loans. Asset Quality. As of December 31, 2014, non-performing assets were $59.0 million or 0.69% of total assets, compared to $82.2 million or 1.10% of total assets at December 31, 2013. The Bank’s non-performing asset levels continued to decline from higher levels reported in prior years as local and nationial economic conditions have gradually improved. The Bank continues to focus on conservative underwriting criteria and on active and timely collection efforts. Emphasis on Relationship Banking and Core Deposits. The Bank emphasizes the acquisition and retention of core deposit accounts, consisting of savings and all demand deposit accounts, and expanding customer relationships. Core deposit accounts totaled $4.97 billion at December 31, 2014, representing 85.7% of total deposits, compared with $4.40 billion, or 84.5% of total deposits at December 31, 2013. The Bank also focuses on increasing the number of households and businesses served and the number of banking products per customer. Non-Interest Income. The Bank’s focus on transaction accounts and expanded products and services has enabled the Bank to generate non-interest income. Fees derived from core deposit accounts are a primary source of non-interest income. The Bank also offers investment, wealth and asset management services through its subsidiaries to generate non-interest income. Total non-interest income was $41.2 million for the year ended December 31, 2014, compared with $44.2 million for the year ended December 31, 2013, of which fee income was $31.3 million for the year ended December 31, 2014, compared with $34.0 million for the year ended December 31, 2013. Managing Interest Rate Risk. The Bank manages its exposure to interest rate risk through the origination and retention of adjustable rate and shorter-term loans. In addition, the Bank uses its investments in securities to manage interest rate risk. At December 31, 2014, 53.2% of the Bank’s loan portfolio had a term to maturity of one year or less, or had adjustable interest rates. At December 31, 2014, the Bank’s securities portfolio totaled $1.61 billion and had an expected average life of 4.22 years. Market Area The Company and the Bank are headquartered in Jersey City, which is located in Hudson County, New Jersey. At December 31, 2014, the Bank operated a network of 86 full-service banking offi ces throughout thirteen counties in northern and central New Jersey, as well as in Bucks, Lehigh and Northampton counties in Pennsylvania. The Bank also maintains its administrative offi ces in Iselin, New Jersey and satellite loan production offi ces in Convent Station, Flemington, Paramus, Princeton and West Orange, New Jersey, as well as Bethlehem and Newtown, Pennsylvania. The Bank’s lending activities, though concentrated in the communities surrounding its offi ces, extend predominantly throughout New Jersey and eastern Pennsylvania. market area has a population of 6.9 million, which was 77.6% of the state’s total population. The Bank’s Pennsylvania market area has a population of 1.3 million, which was 10.0% of that state’s total population. Because of the diversity of industries within the Bank’s market area and, to a lesser extent, its proximity to the New York City fi nancial markets, the area’s economy can be signifi cantly affected by changes in national and international economies. According to the U.S. Bureau of Labor Statistics, the unemployment rate in New Jersey remained elevated at 6.2% at December 31, 2014, although a decrease from 7.3% at December 31, 2013. The unemployment rate in Pennsylvania decreased to 4.8% at December 31, 2014, from 6.8% at December 31, 2013. The Bank’s primary market area includes a mix of urban and suburban communities, and has a diversified mix of industries including pharmaceutical and other manufacturing companies, network communications, insurance and fi nancial services, healthcare, and retail. According to the U.S. Census Bureau’s most recent population data, the Bank’s New Jersey Within its primary market areas in New Jersey and Pennsylvania, the Bank had an approximate 2.22% and 1.26% share of bank deposits as of June 30, 2014, respectively, the latest date for which statistics are available. On a statewide basis, the Bank had an approximate 1.93% deposit share of the New Jersey market and an approximate 0.11% deposit share of the Pennsylvania market. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 3 PART I ITEM 1 Business Competition The Bank faces intense competition in originating loans, retaining loans and attracting deposits. The northern and central New Jersey and eastern Pennsylvania market areas have a high concentration of fi nancial institutions, including large money center and regional banks, community banks, credit unions, investment brokerage fi rms and insurance companies. The Bank faces direct competition for loans from each of these institutions as well as from mortgage companies and other loan origination fi rms operating in its market area. The Bank’s most direct competition for deposits has come from several commercial banks and savings banks in its market area. Certain of these banks have substantially greater fi nancial resources than the Bank. In addition, the Bank faces signifi cant competition for deposits from the mutual fund and investment advisory industries and from investors’ direct purchases of short- term money market securities and other corporate and government securities. The Bank competes in this environment by maintaining a diversifi ed product line, including mutual funds, annuities and other investment services made available through its investment subsidiaries. Relationships with customers are built and maintained through the Bank’s branch network, its deployment of branch ATMs, and its mobile, telephone and web-based banking services. Lending Activities The Bank originates commercial real estate loans, commercial business loans, fi xed-rate and adjustable-rate mortgage loans collateralized by one- to four-family residential real estate and other consumer loans, for borrowers generally located within its primary market area. Residential mortgage loans are primarily underwritten to standards that allow the sale of the loans to the secondary markets, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Bank of New York (“FHLBNY”). To manage interest rate risk, the Bank generally sells fi xed-rate residential mortgages that it originates with terms greater than 15 years. The Bank commonly retains biweekly payment fi xed-rate residential mortgage loans with a maturity of 30 years or less and a majority of the originated adjustable rate mortgages for its portfolio. The Bank originates commercial real estate loans that are secured by income-producing properties such as multi-family apartment buildings, offi ce buildings, and retail and industrial properties. Generally, these loans have maturities of either 5 or 10 years. For loans greater than $5.0 million originated with maturities in excess of 7 years, the bank generally requires loan-level interest rate swaps. The Bank has historically provided construction loans for both single family and condominium projects intended for sale and commercial projects, including residential for rent projects, that will be retained as investments by the borrower. The Bank underwrites most construction loans for a term of three years or less. The majority of these loans are underwritten on a fl oating rate basis. The Bank recognizes that there is higher risk in construction lending than permanent lending. As such, the Bank takes certain precautions to mitigate this risk, including the retention of an outside engineering fi rm to perform plan and cost reviews and to review all construction advances made against work in place and a limitation on how and when loan proceeds are advanced. In most cases, for the single family and condominium projects, the Bank limits its exposure against houses or units that are not under contract. Similarly, commercial construction loans usually have commitments for signifi cant pre-leasing, or funds are held back until the leases are fi nalized. Funding requirements and loan structure for residential for-rent projects vary depending on whether such projects are vertical or horizontal construction. The Bank originates consumer loans that are secured, in most cases, by a borrower’s assets. Home equity loans and home equity lines of credit that are secured by a fi rst or second mortgage lien on the borrower’s residence comprise the largest category of the Bank’s consumer loan portfolio. Commercial loans are made to businesses of varying size and type within the Bank’s market. The Bank lends to established businesses, and the loans are generally secured by business assets such as equipment, receivables, inventory, real estate or marketable securities. On a limited basis, the Bank makes unsecured commercial loans. Most commercial lines of credit are made on a fl oating interest rate basis and most term loans are made on a fi xed interest rate basis, usually with terms of fi ve years or less. Loan Portfolio Composition. Set forth below is selected information concerning the composition of the loan portfolio by type, including Purchased Credit Impaired (“PCI”) loans, (after deductions for deferred fees and costs, unearned discounts and premiums and allowances for losses) at the dates indicated. 4 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans (Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent 2014 2013 2012 2011 2010 At December 31, PART I ITEM 1 Business $ 1,252,526 20.79% $ 1,174,043 22.89% $ 1,265,015 26.17% $ 1,308,635 28.58% $ 1,386,326 31.93% 1,695,822 28.15 1,400,624 27.30 1,349,950 27.92 1,253,542 27.37 1,180,147 27.19 Total mortgage loans 4,211,673 Commercial loans Consumer loans 1,263,618 611,596 1,042,223 221,102 17.30 3.67 69.91 20.98 10.15 928,906 183,289 3,686,862 932,199 577,602 18.11 3.57 71.87 18.17 11.26 723,958 120,133 3,459,056 866,395 579,166 14.98 2.48 71.55 17.92 11.98 564,147 114,817 3,241,141 849,009 560,970 12.32 2.51 70.78 18.54 12.25 387,189 125,192 3,078,854 755,487 569,597 8.92 2.88 70.92 17.40 13.12 Total gross loans 6,086,887 101.04 5,196,663 101.30 4,904,617 101.45 4,651,120 101.57 4,403,938 101.45 Premiums on purchased loans Unearned discounts Net deferred costs (fees) 5,307 (53) 0.09 — 4,202 (62) 0.08 — 4,964 (78) 0.10 — 5,823 (100) 0.13 — 6,771 (104) 0.16 — (6,636) (0.11) (5,990) (0.12) (4,804) (0.10) (3,334) (0.07) (792) (0.02) Total loans 6,085,505 101.02 5,194,813 101.26 4,904,699 101.45 4,653,509 101.63 4,409,813 101.58 Allowance for loan losses (61,734) (1.02) (64,664) (1.26) (70,348) (1.45) (74,351) (1.62) (68,722) (1.58) Total loans, net $ 6,023,771 100.00% $ 5,130,149 100.00% $ 4,834,351 100.00% $ 4,579,158 100.00% $ 4,341,091 100.00% Loan Maturity Schedule. The following table sets forth certain information as of December 31, 2014, regarding the maturities of loans in the loan portfolio, including PCI loans. Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due within one year. (Dollars in thousands) One Through Three Years Three Through Five Years Five Through Ten Years Ten Through Twenty Years Beyond Twenty Years Within One Year Total Residential mortgage loans $ 1,596 $ 9,354 $ 42,482 $ 108,211 $ 492,365 $ 598,518 $ 1,252,526 Commercial mortgage loans Multi-family mortgage loans Construction loans Total mortgage loans Commercial loans Consumer loans Total gross loans 98,448 22,365 81,375 203,784 282,099 26,983 200,429 65,583 114,562 389,928 186,605 422,410 207,937 701 796,182 677,905 24,464 673,530 1,606,762 219,842 361,049 147,625 65,466 — 705,456 172,070 30,728 1,695,822 2,967 1,042,223 — 221,102 632,213 4,211,673 41,953 1,263,618 9,638 28,694 90,213 374,595 81,473 611,596 $ 512,866 $ 586,171 $ 922,066 $ 2,058,024 $ 1,252,121 $ 755,639 $ 6,086,887 Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2014, the dollar amount of all fi xed-rate and adjustable-rate loans due after December 31, 2015. (Dollars in thousands) Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Total mortgage loans Commercial loans Consumer loans Total loans Due After December 31, 2015 Fixed 776,155 765,775 536,312 25,397 2,103,639 394,077 354,047 2,851,763 $ $ Adjustable 474,775 831,599 483,546 114,330 1,904,250 587,442 230,566 2,722,258 $ $ Total 1,250,930 1,597,374 1,019,858 139,727 4,007,889 981,519 584,613 5,574,021 $ $ PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 5 PART I ITEM 1 Business Residential Mortgage Loans. The Bank originates residential mortgage loans secured by fi rst mortgages on one- to four-family residences, generally located in the State of New Jersey. The Bank originates residential mortgages primarily through commissioned mortgage representatives and through the Internet. The Bank originates both fi xed-rate and adjustable-rate mortgages. As of December 31, 2014, $1.25 billion or 20.8% of the total portfolio consisted of residential real estate loans. Of the one- to four-family loans at that date, 62.1% were fi xed-rate and 37.9% were adjustable-rate loans. The Bank originates fi xed-rate fully amortizing residential mortgage loans with the principal and interest due each month, that typically have maturities ranging from 10 to 30 years. The Bank also originates fi xed-rate residential mortgage loans with maturities of 10, 15, 20 and 30 years that require the payment of principal and interest on a biweekly basis. Fixed-rate jumbo residential mortgage loans (loans over the maximum that one of the government-sponsored agencies will purchase) are originated with maturities of up to 30 years. The Bank has offered adjustable-rate mortgage loans with a fi xed-rate period of 1, 3, 5, 7 or 10 years prior to the fi rst annual interest rate adjustment. In October 2009, the Bank discontinued the origination of one- and three-year adjustable rate mortgage loans. The standard adjustment formula is the one-year constant maturity Treasury rate plus 2 3/4%, adjusting annually after its fi rst re-set period, with a 2% maximum annual adjustment and a 6% maximum adjustment over the life of the loan. Residential mortgage loans are primarily underwritten to Freddie Mac and Fannie Mae standards. The Bank’s standard maximum loan to value ratio is 80%. However, working through mortgage insurance companies, the Bank underwrites loans for sale to Freddie Mac or Fannie Mae programs that will fi nance up to 95% of the value of the residence. Generally all fi xed-rate loans with terms of 20 years or more are sold into the secondary market with servicing rights retained. Fixed-rate residential mortgage loans retained in the Bank’s portfolio generally include loans with a term of 15 years or less and biweekly payment residential mortgage loans with a term of 30 years or less. The Bank retains the majority of the originated adjustable-rate mortgages for its portfolio. Loans are sold without recourse, generally with servicing rights retained by the Bank. The percentage of loans sold into the secondary market will vary depending upon interest rates and the Bank’s strategies for reducing exposure to interest rate risk. In 2014, $12.6 million or 16.7% of residential real estate loans originated were sold into the secondary market. All of the loans sold in 2014 were long-term, fi xed-rate mortgages. The retention of adjustable-rate mortgages, as opposed to longer- term, fi xed-rate residential mortgage loans, helps reduce the Bank’s exposure to interest rate risk. However, adjustable-rate mortgages generally pose credit risks different from the credit risks inherent in fi xed-rate loans primarily because as interest rates rise, the underlying debt service payments of the borrowers rise, thereby increasing the potential for default. The Bank believes that these credit risks, which have not had a material adverse effect on the Bank to date, generally are less onerous than the interest rate risk associated with holding 20- and 30-year fi xed-rate loans in its loan portfolio. For many years, the Bank has offered discounted rates on residential mortgage loans to low- to moderate-income individuals. Loans originated in this category over the last fi ve years have totaled $31.9 million. The Bank also offers a special rate program for fi rst-time homebuyers under which originations have totaled over 6 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report $4.9 million for the past fi ve years. The Bank does not originate or purchase sub-prime or option ARM loans. Commercial Real Estate Loans. The Bank originates loans secured by mortgages on various commercial income producing properties, including multi-family apartment buildings, offi ce buildings and retail and industrial properties. Commercial real estate loans were 28.2% of the loan portfolio at December 31, 2014. A substantial majority of the Bank’s commercial real estate loans are secured by properties located in the State of New Jersey. The Bank originates commercial real estate loans with adjustable rates and with fi xed interest rates for a period that is generally fi ve to ten years or less, which may adjust after the initial period. Typically these loans are written for maturities of ten years or less and generally have an amortization schedule of 20 or 25 years. As a result, the typical amortization schedule will result in a substantial principal payment upon maturity. The Bank generally underwrites commercial real estate loans to a maximum 75% advance against either the appraised value of the property, or its purchase price (for loans to fund the acquisition of real estate), whichever is less. The Bank generally requires minimum debt service coverage of 1.20 times. There is a potential risk that the borrower may be unable to pay off or refi nance the outstanding balance at the loan maturity date. The Bank typically lends to experienced owners or developers who have knowledge and contacts in the commercial real estate market. Among the reasons for the Bank’s continued emphasis on commercial real estate lending is the desire to invest in assets bearing interest rates that are generally higher than interest rates on residential mortgage loans and more sensitive to changes in market interest rates. Commercial real estate loans, however, entail signifi cant additional credit risk as compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on commercial real estate loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be more signifi cantly impacted by adverse conditions in the real estate market or in the economy generally. The Bank performs more extensive due diligence in underwriting commercial real estate loans than loans secured by owner-occupied one- to four-family residential properties due to the larger loan amounts and the riskier nature of such loans. The Bank assesses and mitigates the risk in several ways, including inspection of all such properties and the review of the overall fi nancial condition of the borrower and guarantors, which may include, for example, the review of the rent rolls and the verifi cation of income. If applicable, a tenant analysis and market analysis are part of the underwriting. Generally, for commercial real estate secured loans in excess of $1.0 million and for all other commercial real estate loans where it is deemed appropriate, the Bank requires environmental experts to inspect the property and ascertain any potential environmental risks. The Bank requires a full independent appraisal for commercial real estate in accordance with regulatory guidelines. The appraiser must be selected from the Bank’s approved list, or otherwise approved by the Chief Credit Offi cer in instances such as out-of-state or special use property. The Bank also employs an independent review appraiser to ensure that the appraisal meets the Bank’s standards. In addition, fi nancial statements are required annually for review. The Bank’s policy also requires that a property inspection of commercial mortgages over $2.5 million be completed at least every 18 months, or more frequently when warranted. The Bank’s largest commercial mortgage loan as of December 31, 2014 was a $27.9 million loan secured by a fi rst mortgage lien on a 378 room, full service hotel and a 422 car parking garage located in Elizabeth, New Jersey. The loan has a risk rating of “4” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2014. Multi-family Loans. The Bank underwrites loans secured by apartment buildings that have fi ve or more units. The Bank considers multi-family lending a component of the commercial real estate lending portfolio. The underwriting standards and procedures that are used to underwrite commercial real estate loans are used to underwrite multi-family loans, except the loan-to-value ratio shall not exceed 80% of the appraised value of the property, the debt-service coverage should be a minimum of 1.15 times and an amortization period of up to 30 years may be used. The Bank’s largest multi-family loan as of December 31, 2014 was a $39.8 million loan secured by a fi rst mortgage lien on a newly constructed 250-unit luxury multi-family apartment project located in Woolwich Township, Gloucester County, New Jersey. The project sponsors have extensive experience and a successful track record in the development and management of multi-family projects. The loan has a risk rating of “2” (loans rated 1-4 are deemed to be “acceptable quality”—see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2014. Construction Loans. The Bank originates commercial construction loans. Commercial construction lending includes both new construction of residential and commercial real estate projects and the reconstruction of existing structures. The Bank’s commercial construction fi nancing takes two forms: projects that are constructed for investment purposes (rental property) and projects for sale (single family/condominiums). To mitigate the speculative nature of construction loans, the Bank generally requires signifi cant pre-leasing on rental properties; requires that a percentage of the for-sale single-family residences or condominiums be under contract to support construction loan advances; and requires other covenants on residential for rent projects depending on whether the project is vertical or horizontal construction. The Bank underwrites construction loans for a term of three years or less. The majority of the Bank’s construction loans are fl oating-rate loans with a maximum 75% loan-to-value ratio for the completed project. The Bank employs professional engineering fi rms to assist in the review of construction cost estimates and make site inspections to determine if the work has been completed prior to the advance of funds for the project. Construction lending generally involves a greater degree of risk than commercial real estate or multi-family lending. Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject project and the successful marketing of the sale or lease of the project. Construction delays, slower than anticipated absorption or the fi nancial impairment of the builder may negatively affect the borrower’s ability to repay the loan. PART I ITEM 1 Business For all construction loans, the Bank requires an independent appraisal, which includes information on market rents and/or comparable sales for competing projects. The Bank also obtains personal guarantees and conducts environmental due diligence as appropriate. The Bank also employs other means to mitigate the risk of the construction lending process. On commercial construction projects that the developer maintains for rental, the Bank typically holds back funds for tenant improvements until a lease is executed. For single family and condominium fi nancing, the Bank generally requires payment for the release of a unit that exceeds the amount of the loan advance attributable to such unit. The Bank’s largest construction loan at December 31, 2014 was a $55.0 million loan secured by a fi rst lien on a 244,450 square foot multi-tenanted retail shopping center project that is under construction in Clark, Union County, New Jersey. The loan had an outstanding balance of $22.1 million at December 31, 2014. Construction of the project is approximately 48% complete. The project is 100% pre-leased. The loan has a risk rating of “3” (loans rated 1-4 are deemed to be “acceptable quality”-see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section) and was performing in accordance with its terms and conditions as of December 31, 2014. The Bank sold a 50% participation interest in the construction loan to another fi nancial institution, which reduced the Bank’s committed exposure and outstanding balance to $27.5 million and $11.1 million, respectively. Commercial Loans. The Bank underwrites commercial loans to corporations, partnerships and other businesses. Commercial loans represented 21.0% of the loan portfolio at December 31, 2014. The majority of the Bank’s commercial loan customers are local businesses with revenues of less than $50.0 million. The Bank primarily offers commercial loans for equipment purchases, lines of credit for working capital purposes, letters of credit and real estate loans where the borrower is the primary occupant of the property. Most commercial loans are originated on a fl oating-rate basis and the majority of fi xed-rate commercial term loans are fully amortized over a fi ve-year period. Owner-occupied commercial real estate loans are generally underwritten to terms consistent with those utilized for commercial real estate; however, the maximum loan-to-value ratio for owner-occupied commercial real estate loans is 80%. The Bank also underwrites Small Business Administration (“SBA”) guaranteed loans and guaranteed or assisted loans through various state, county and municipal programs. These governmental guarantees are typically used in cases where the borrower requires additional credit support. The Bank has “Preferred Lender” status with the SBA, allowing a more streamlined application and approval process. The underwriting of a commercial loan is based upon a review of the fi nancial statements of the prospective borrower and guarantors. In most cases the Bank obtains a general lien on accounts receivable and inventory, along with the specifi c collateral such as real estate or equipment, as appropriate. Commercial loans generally bear higher interest rates than mortgage loans, but they also involve a higher risk of default since their repayment is generally dependent on the cash fl ow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself and the general economic environment. The PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 7 PART I ITEM 1 Business Bank’s largest commercial loan as of December 31, 2014 was a $38.0 million line of credit to a general contracting company specializing in bridge and highway construction with a risk rating of “3” (loans rated 1-4 are deemed “acceptable quality”-see discussion of the Bank’s nine-point risk rating system for loans under “Allowance for Loan Losses” in the “Asset Quality” section). The line is used primarily for bid bonding and working capital purposes. The Bank sold a participation interest of $10.0 million in the line of credit to another fi nancial institution, which reduced the Bank’s exposure to $28.0 million. As of December 31, 2014, the line of credit did not have an outstanding balance. Consumer Loans. The Bank offers a variety of consumer loans to individuals. Consumer loans represented 10.2% of the loan portfolio at December 31, 2014. Home equity loans and home equity lines of credit constituted 91.3% of the consumer loan portfolio and indirect marine loans constituted 4.4% of the consumer loan portfolio as of December 31, 2014. The remainder of the consumer loan portfolio includes personal loans and unsecured lines of credit, direct auto loans and recreational vehicle loans, which represented 4.3% of the consumer loan portfolio. The Bank no longer purchases indirect auto, marine or recreational vehicle loans. Interest rates on home equity loans are fi xed for a term not to exceed 20 years and the maximum loan amount is $500,000. A portion of the home equity loan portfolio includes “fi rst lien product loans,” under which the Bank has offered special rates to borrowers who refi nance fi rst mortgage loans on the home equity (fi rst lien) basis. As of December 31, 2014, there was $291.9 million of fi rst-lien home equity loans outstanding. The Bank’s home equity lines are made at fl oating interest rates and the Bank provides lines of credit of up to $350,000. The approved home equity lines and utilization amounts as of December 31, 2014 were $529.1 million and $225.5 million, respectively, representing utilization of 42.6%. Consumer loans generally entail greater credit risk than residential mortgage loans, particularly in the case of home equity loans and lines of credit secured by second lien positions, consumer loans that are unsecured or that are secured by assets that tend to depreciate, such as automobiles, boats and recreational vehicles. Collateral repossessed by the Bank from a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance, and the remaining defi ciency may warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent upon the borrower’s continued fi nancial stability, and which is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount the Bank can recover on such loans. Loan Originations, Purchases, and Repayments. The following table sets forth the Bank’s loan origination, purchase and repayment activities for the periods indicated. (Dollars in thousands) Originations: Residential mortgage Commercial mortgage Multi-family mortgage Construction Commercial Consumer Subtotal of loans originated Loans purchased Total loans originated and purchased Net loans acquired in acquisition Loans sold or securitized Repayments: Residential mortgage Commercial mortgage Multi-family mortgage Construction Commercial Consumer Total repayments Total reductions Other items, net(1) Net increase (1) Other items, net include charge-offs, deferred fees and expenses, discounts and premiums. 8 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report Year Ended December 31, 2014 2013 2012 $ 72,418 $ 222,516 127,060 242,898 972,866 168,747 1,806,505 130,540 1,937,045 631,209 12,609 151,004 196,002 48,758 229,695 851,682 177,406 1,654,547 1,667,156 (10,406) 890,692 $ $ 122,492 $ 254,087 294,288 182,895 711,248 205,282 1,770,292 34,766 1,805,058 — 30,977 228,195 216,068 137,576 47,835 635,764 203,256 1,468,694 1,499,671 (15,273) 290,114 $ 184,327 270,190 219,068 92,291 658,228 228,401 1,652,505 73,740 1,726,245 — 36,723 270,251 179,937 59,599 73,116 622,851 206,654 1,412,408 1,449,131 (25,924) 251,190 PART I ITEM 1 Business Loan Approval Procedures and Authority. The Bank’s Board of Directors approves the Lending Policy on an annual basis as well as on an interim basis as modifi cations are warranted. The Lending Policy sets the Bank’s lending authority for each type of loan. The Bank’s lending offi cers are assigned dollar authority limits based upon their experience and expertise. All loan approvals require joint lending authority. The largest individual lending authority is $10.0 million, which is only available to the Chief Executive Offi cer and Chief Lending Offi cer. The authority of the Chief Lending Offi cer may be increased to $15.0 million for permanent commercial real estate loans when combined with the additional approval of the Chief Credit Offi cer. Loans in excess of these limits, or which when combined with existing credits of the borrower or related borrowers exceed these limits, are presented to the management Credit Committee for approval. The Credit Committee currently consists of eight senior offi cers including the Chief Executive Offi cer, the Chief Lending Offi cer, the Chief Financial Offi cer and the Chief Credit Offi cer, and requires a majority vote for credit approval. While the Bank discourages loan policy exceptions, from time to time, based upon reasonable business considerations exceptions to the policy may be warranted. The business reason and mitigants for the exception must be noted on the loan approval document. The policy exception requires the approval of the Chief Lending Offi cer or the Department Manager of the lending department responsible for the underlying loan, if it is within his or her approval authority limit. All other policy exceptions must be approved by the Credit Committee. The Credit Administration Department reports the type and frequency of loan policy exceptions to the Credit Committee and the Risk Committee of the Board of Directors on a quarterly basis, or more frequently if necessary. The Bank has adopted a risk rating system as part of the credit risk assessment of its loan portfolio. The Bank’s commercial real estate and commercial lending offi cers are required to assign a risk rating to each loan in their portfolio at origination. When the lender learns of important fi nancial developments, the risk rating is reviewed accordingly. Risk ratings are subject to review by the Credit Administration Department. Similarly, the Credit Committee can adjust a risk rating. Quarterly, management’s Credit Risk Management Committee meets to review all loans rated a “watch” (“5”) or worse. In addition, a loan review examination is performed by an independent third party which validates the risk ratings. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk ratings. The risk ratings play an important role in the establishment of the loan loss provision and to confi rm the adequacy of the allowance for loan losses. Loans to One Borrower. The regulatory limit on total loans to any borrower or attributed to any one borrower is 15% of the Bank’s unimpaired capital and surplus. As of December 31, 2014, the regulatory lending limit was $110.4 million. The Bank’s current internal policy limit on total loans to a borrower or related borrowers that constitute a group exposure is up to $80.0 million for loans with a risk rating of “2 “ or better, up to $70.0 million for loans with a risk rating of “3” and up to $50.0 million for loans with a risk rating of “4”. Maximum group exposure limits may be lower depending on the type of loans involved. The Bank reviews these group exposures on a quarterly basis. The Bank also sets additional limits on size of loans by loan type. At December 31, 2014, the Bank’s largest group exposure with an individual borrower and its related entities was $71.3 million, consisting of two commercial permanent mortgage loans totaling $39.8 million on a 250-unit apartment project in Woolwich Township, Gloucester County, New Jersey with risk ratings of “2”, a construction mortgage loan of $22.0 million secured by a fi rst lien on a newly-constructed 204-unit apartment project in Monroe Township, Gloucester County, New Jersey with a risk rating of “3”, a line of credit of $7.5 million ($1.9 million outstanding) secured by a 108-unit apartment project in Allentown, Pennsylvania with a risk rating of “2”, and a line of credit of $2.0 million ($1.3 million outstanding) with a risk rating of “3”. The borrower, headquartered in New Jersey, is an experienced real estate owner and developer in New Jersey and eastern Pennsylvania. Management has determined that this exception to the internal group exposure policy limit is manageable and is mitigated by the borrower’s diverse revenue mix, as well as its reputation and proven successful track record. This lending relationship was approved as an exception to the internal policy limits by the management Credit Committee and reported to the Risk Committee of the Board of Directors, and conformed to the regulatory limit applicable to the Bank at the time of loan origination. As of December 31, 2014, all of the loans in this lending relationship were performing in accordance with their respective terms and conditions. As of December 31, 2014, the Bank had $1.8 billion in loans outstanding to its 50 largest borrowers and their related entities. Asset Quality General. One of the Bank’s key objectives has been and continues to be to maintain a high level of asset quality. In addition to maintaining sound credit standards for new loan originations, the Bank employs proactive collection and workout processes in dealing with delinquent or problem loans. The Bank actively markets properties that it acquires through foreclosure or otherwise in the loan collection process. Collection Procedures. In the case of residential mortgage and consumer loans, the collections personnel in the Bank’s Asset Recovery Department are responsible for collection activities from the sixteenth day of delinquency. Collection efforts include automated notices of delinquency, telephone calls, letters and other notices to delinquent borrowers. Foreclosure proceedings and other appropriate collection activities such as repossession of collateral are commenced within at least 90 to 120 days after a loan is delinquent provided a plan of repayment to cure the delinquency cannot be reached with the borrower. Periodic inspections of real estate and other collateral are conducted throughout the collection process. The Bank’s collection procedures for Federal Housing Association (“FHA”) and Veteran’s Administration (“VA”) one- to four-family mortgage loans follow the collection guidelines outlined by those agencies. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 9 PART I ITEM 1 Business Real estate and other assets acquired through foreclosure or in connection with a loan workout are held as foreclosed assets. The Bank carries other real estate owned and other foreclosed assets at the lower of their cost or their fair value less estimated selling costs. The Bank attempts to sell the property at foreclosure sale or as soon as practical after the foreclosure sale through a proactive marketing effort. The collection procedures for commercial real estate and commercial loans include sending periodic late notices and letters to a borrower once a loan is past due. The Bank attempts to make direct contact with a borrower once a loan is 16 days past due, usually by telephone. The Chief Lending Offi cer and Chief Credit Offi cer review all commercial real estate and commercial loan delinquencies on a weekly basis. Generally, delinquent commercial real estate and commercial loans are transferred to the Asset Recovery Department for further action if the delinquency is not cured within a reasonable period of time, typically 90 days. The Chief Lending Offi cer and Chief Credit Offi cer have the authority to transfer performing commercial real estate or commercial loans to the Asset Recovery Department if, in their opinion, a credit problem exists or is likely to occur. Loans deemed uncollectible are proposed for charge-off on a monthly basis. Any charge-off recommendation of $500,000 or greater is submitted to Executive Management for approval. Delinquent Loans and Non-performing Loans and Assets. The Bank’s policies require that the Chief Credit Offi cer continuously monitor the status of the loan portfolios and report to the Board of Directors on a monthly basis. These reports include information on impaired loans, delinquent loans, criticized and classifi ed assets, and foreclosed assets. An impaired loan is defi ned as a non- homogenous loan greater than $1.0 million for which it is probable, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modifi ed as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a modifi cation resulting in a concession is made by the Bank in an effort to mitigate potential loss arising from a borrower’s fi nancial diffi culty. Smaller balance homogeneous loans including residential mortgages and other consumer loans are evaluated collectively for impairment and are excluded from the defi nition of impaired loans, except for TDRs. Impaired loans are individually identifi ed and reviewed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash fl ows. As of December 31, 2014, there were 147 impaired loans totaling $85.4 million, of which 143 loans totaling $81.7 million were TDRs. Included in this total were 123 TDRs to 120 borrowers totaling $54.8 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2014. Interest income stops accruing on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectability of such interest or principal is doubtful. When the accrual of interest on a loan is stopped, the loan is designated as a non-accrual loan and the outstanding unpaid interest previously credited is reversed. A non-accrual loan is returned to accrual status when factors indicating doubtful collection no longer exist, the loan has been brought current and the borrower demonstrates some period (generally six months) of timely contractual payments. Federal and state regulations as well as the Bank’s policy require the Bank to utilize an internal risk rating system as a means of reporting problem and potential problem assets. Under this system, 10 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report the Bank classifi es problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the defi ciencies are not corrected. Assets classifi ed as “doubtful” have all of the weaknesses inherent in those classifi ed “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classifi ed as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specifi c loss reserve is not warranted. Assets which do not currently expose the Bank to suffi cient risk to warrant classifi cation in one of the aforementioned categories, but possess weaknesses, are designated “special mention.” General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specifi c allowances, have not been allocated to particular problem assets. When the Bank classifi es one or more assets, or portions thereof, as “substandard” or “doubtful,” the Bank may establish a specifi c allowance for loan losses in an amount deemed prudent by management. When the Bank classifi es one or more assets, or portions thereof, as “loss,” the Bank is required either to establish a specifi c allowance for losses equal to 100% of the amount of the asset so classifi ed or to charge-off such amount. The Bank’s determination as to the classifi cation of assets and the amount of the valuation allowances is subject to review by the FDIC and the New Jersey Department of Banking and Insurance, each of which can require the establishment of additional general or specifi c loss allowances. The FDIC, in conjunction with the other federal banking agencies, issued an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for fi nancial institutions on both the responsibilities of the board of directors and management for the maintenance of adequate allowances, and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement reaffi rms that institutions should have effective loan review systems and controls to identify, monitor and address asset quality problems; that loans deemed uncollectible are promptly charged off; and that the institution’s process for determining an adequate level for its valuation allowance is based on a comprehensive, adequately documented, and consistently applied analysis of the institution’s loan and lease portfolio. While management believes that on the basis of information currently available to it, the allowance for loans losses is adequate as of December 31, 2014, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. Loans are classifi ed in accordance with the risk rating system described previously. At December 31, 2014, $110.4 million of loans were classifi ed as “substandard,” which consisted of $53.8 million in commercial and multi-family mortgage loans, $32.8 million in commercial loans, $17.2 million in residential loans, $2.6 million in construction loans and $3.9 million in consumer loans. At that same date, loans classifi ed as “doubtful” totaled $1.1 million, consisting of $1.1 million of commercial mortgage loans and $29,000 of commercial loans. There were no loans classifi ed as “loss” at December 31, 2014. As of December 31, 2014, $71.7 million of loans were designated “special mention.” The following table sets forth delinquencies in the loan portfolio as of the dates indicated. PART I ITEM 1 Business At December 31, 2014 At December 31, 2013 At December 31, 2012 60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More Number of Loans Principal Balance of Loans Number of Loans Principal Balance of Loans Number of Loans Principal Balance of Loans Number of Loans Principal Balance of Loans Number of Loans Principal Balance of Loans Number of Loans Principal Balance of Loans 27 $ 4,331 86 $ 17,222 23 $ 5,062 116 $ 23,011 43 $ 11,986 146 $ 29,293 1 — — 28 8 28 30 — — 4,361 371 2,509 13 1 — 19,107 321 — 100 36,650 19 42 5,031 3,724 1 — — 24 3 23 64 $ 7,241 161 $ 45,405 50 $ 318 — — 5,380 77 2,194 7,651 12 2 — 403 — 130 29,603 23 49 9,722 3,819 6,189 5 12,194 — — 48 2 33 — — 24,180 70 1,808 11 2 — 159 46 65 14,932 412 — 44,637 15,682 5,666 202 $ 43,144 83 $ 26,058 270 $ 65,985 (Dollars in thousands) Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Total mortgage loans Commercial loans Consumer loans Total loans Non-Accrual Loans and Non-Performing Assets. The following table sets forth information regarding non-accrual loans and other non- performing assets. At December 31, 2014, there were 20 TDRs totaling $26.9 million that were classifi ed as non-accrual, compared to 27 non-accrual TDRs which totaled $31.2 million at December 31, 2013. Loans are generally placed on non-accrual status when they become 90 days or more past due or if they have been identifi ed as presenting uncertainty with respect to the collectability of interest or principal. (Dollars in thousands) Non-accruing loans: Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Commercial loans Consumer loans Total non-accruing loans Accruing loans delinquent 90 days or more Total non-performing loans Foreclosed assets Total non-performing assets Total non-performing assets as a percentage of total assets Total non-performing loans to total loans $ 2014 2013 2012 2011 2010 At December 31, $ 17,222 $ 23,011 $ 29,293 $ 40,386 $ 20,026 322 — 12,342 3,944 53,856 — 53,856 5,098 58,954 $ 18,662 403 8,448 22,228 3,928 76,680 — 76,680 5,486 82,166 $ 29,072 412 8,896 25,467 5,850 98,990 — 98,990 12,473 111,463 $ 29,522 997 11,018 32,093 8,533 122,549 — 122,549 12,802 135,351 $ 41,247 16,091 201 9,412 23,505 6,808 97,264 — 97,264 2,858 100,122 0.69% 0.88% 1.10% 1.48% 1.53% 2.02% 1.91% 2.63% 1.47% 2.21% Non-performing commercial loans decreased $9.9 million, to $12.3 million at December 31, 2014, from $22.2 million at December 31, 2013. Non-performing commercial loans at December 31, 2014 consisted of 24 loans. The largest non-performing commercial loan relationship consisted of fi ve loans to a power systems manufacturer with total outstanding balances of $7.1 million at December 31, 2014. Contractual payments on four of these loans, based upon modifi ed terms, were current at December 31, 2014. One loan with a balance of $1.0 million matured on January 31, 2012 and is presently in default. The Company had no non-performing construction loans at December 31, 2014, compared to $8.4 million at December 31, 2013. The decrease during the period was due to a single construction loan on a Class A offi ce building which was upgraded to performing status based upon an increase in tenant occupancy. Non-performing residential mortgage loans decreased $5.8 million to $17.2 million at December 31, 2014, from $23.0 million at December 31, 2013. Gross charge-offs of residential loans were $3.2 million for the year ended December 31, 2014. Non-performing commercial mortgage loans increased $1.4 million to $20.0 million at December 31, 2014, from $18.7 million at December 31, 2013. At December 31, 2014, the Company held 16 non-performing commercial mortgage loans. The largest non-performing commercial mortgage loan was a $12.3 million loan secured by a fi rst mortgage on a 200,000 square foot offi ce/ industrial building located in Eatontown, New Jersey, which had been negatively impacted by the loss of a major tenant that relied upon contracts with the Federal government. The loan was previously restructured and matured on June 1, 2014. The loan maturity was not extended and the loan is presently in default. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 11 PART I ITEM 1 Business There is no contractual commitment to advance additional funds to this borrower. At December 31, 2014, the Company held $5.1 million of foreclosed assets, compared with $5.5 million at December 31, 2013. Foreclosed assets at December 31, 2014 are carried at fair value based on recent appraisals and valuation estimates, less estimated selling costs. Foreclosed assets consisted of $2.7 million of commercial real estate, $2.3 million of residential properties, and $60,000 of marine vessels at December 31, 2014. Non-performing assets totaled $59.0 million, or 0.69% of total assets at December 31, 2014, compared to $82.2 million, or 1.10% of total assets at December 31, 2013. If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $1.9 million during the year ended December 31, 2014. The amount of cash basis interest income that was recognized on impaired loans during the year ended December 31, 2014 was not material. Allowance for Loan Losses. The allowance for loan losses is a valuation account that refl ects an evaluation of the probable losses in the loan portfolio. The allowance for loan losses is maintained through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where it is determined the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses. Management’s evaluation of the adequacy of the allowance for loan losses includes the review of all loans on which the collectability of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of fi nancial performance, payment history and collateral values is conducted on a quarterly basis. As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating. The factors considered in assessing the adequacy of the allowance for loan losses include the following: • results of the routine loan quality reviews performed by an independent third party; • general economic and business conditions affecting key lending areas; • credit quality trends (including trends in non-performing loans and anticipated trends based on market conditions); • collateral values; • loan volumes and concentrations; • seasoning of the loan portfolio; • specifi c industry conditions within portfolio segments; • recent loss experience in particular segments of the loan portfolio; and • duration of the current business cycle. When assigning a risk rating to a loan, management utilizes the Bank’s internal nine-point risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed 12 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifi cations (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending offi cer is responsible for risk rating loans in his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Offi cer and by the Credit Administration Department. The risk ratings for loans requiring Credit Committee approval are periodically reviewed by the Credit Committee in the credit approval or renewal process. The risk ratings are also confi rmed through periodic loan review examinations, which are currently performed by an independent third party. Reports by the independent third party are presented directly to the Audit and Risk Committees of the Board of Directors. Each quarter, the lending groups prepare individual Credit Risk Management Reports for the Credit Administration Department. These reports review all commercial loans and commercial mortgage loans that have been determined to involve above-average risk (risk rating of 5 or worse). The Credit Risk Management Reports contain the reason for the risk rating assigned to each loan, status of the loan and any current developments. These reports are submitted to a committee chaired by the Chief Credit Offi cer. Each loan offi cer reviews the loan and the corresponding Credit Risk Management Report with the committee and the risk rating is evaluated for appropriateness. Management assigns general valuation allowance (“GVA”) percentages to each risk rating category for use in allocating the allowance for loan losses, giving consideration to historical loss experience by loan type, as well as qualitative and environmental factors such as: • levels of and trends in delinquencies and impaired loans; • levels of and trends in charge-offs and recoveries; • trends in volume and terms of loans; • effects of any changes in risk selection and underwriting standards, changes in lending policies, procedures and practices; • changes in the quality of the Bank’s loan review system; • experience, ability, and depth of lending management and other relevant staff; • national and local economic trends and conditions; • industry conditions; • effects of changes in credit concentration; and • changes in collateral values. The appropriateness of these percentages is evaluated by management at least annually and monitored on a quarterly basis, with changes made when they are required. In the second quarter of 2014, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, certain GVA percentages applied to residential mortgage, commercial, multi- family and commercial mortgage loans were reduced to refl ect the decrease in the historical loss experience and improvements in qualitative factors. In addition, GVA percentages for marine loans were increased due to historical loss experience. During the fourth quarter of 2014, management made certain changes and enhancements to its process and controls over measuring the GVA portion of the allowance for loan losses. In connection with its periodic risk assessment and monitoring process, PART I ITEM 1 Business the Company re-evaluated a number of assumptions supporting the methodology including the look-back period used to evaluate the historical loss factors for its portfolios, as well as performing a study of its loss emergence period (“LEP”) data. As a result of this review, management updated a number of assumptions, including lengthening its LEP given continued improvements in market conditions. Given these changes to the quantitative methodology, management reassessed its qualitative and environmental factors to align with the revised model assumptions. The result of these changes was to allocate a greater portion of the allowance to the quantitative component of the GVA and less to the qualitative component. The changes had no impact on the overall allowance. The reserve factors applied to each loan risk rating are inherently subjective in nature. Reserve factors are assigned to each of the risk rating categories. This methodology permits adjustments to the allowance for loan losses in the event that, in management’s judgment, signifi cant conditions impacting the credit quality and collectability of the loan portfolio as of the evaluation date are not otherwise adequately refl ected in the analysis. The provision for loan losses is established after considering the allowance for loan loss analysis, the amount of the allowance for loan losses in relation to the total loan balance, loan portfolio growth, loan portfolio composition, loan delinquency trends and peer group analysis. As a result of this process, management has established an unallocated portion of the allowance for loan losses. The unallocated portion of the allowance for loan losses is warranted based on factors such as the geographic concentration of the loan portfolio, current economic conditions and imprecision related to collateral valuations. Management believes the primary risks inherent in the portfolio are a decline in the economy, generally, a decline in real estate market values, rising unemployment or a protracted period of unemployment at elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. The allowance for loan losses is maintained at a level that represents management’s best estimate of probable losses related to specifi cally identifi ed loans as well as probable losses inherent in the remaining loan portfolio. There can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that additional provisions for loan losses will not be required. Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated. (Dollars in thousands) Balance at beginning of period Charge offs: Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Commercial loans Consumer loans Total Recoveries: Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Commercial loans Consumer loans Total Net charge-offs Provision for loan losses Balance at end of period Year Ended December 31, 2014 2013 2012 2011 2010 $ 64,664 $ 70,348 $ 74,351 $ 68,722 $ 60,744 3,184 705 4 15 4,449 2,515 10,872 73 131 1 80 1,776 1,231 3,292 7,580 4,650 3,900 2,882 — 234 3,686 3,704 14,406 160 104 — 869 1,075 1,014 3,222 11,184 5,500 4,622 3,253 19 238 12,259 3,516 23,907 105 56 1 — 2,771 971 3,904 20,003 16,000 5,229 3,408 — 123 8,634 7,659 25,053 197 15 — 4 1,018 548 1,782 23,271 28,900 $ 61,734 $ 64,664 $ 70,348 $ 74,351 $ 1,996 10,452 — 1,384 11,196 4,439 29,467 359 30 — 47 727 782 1,945 27,522 35,500 68,722 Ratio of net charge-offs to average loans outstanding during the period Allowance for loan losses to total loans Allowance for loan losses to non-performing loans 0.13% 1.01% 114.63% 0.22% 1.24% 84.33% 0.43% 1.43% 71.07% 0.52% 1.60% 60.67% 0.64% 1.56% 70.66% PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 13 PART I ITEM 1 Business Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specifi c amounts or the loan categories in which future charge-offs may be taken, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. 2014 2013 At December 31, 2012 2011 2010 Amount of Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Amount of Allowance for Loan Losses Percent of Loans in Each Category to Total Loans $ 4,805 20.58% $ 5,500 22.60 % $ 6,053 25.79% $ 5,873 28.14% $ 6,628 31.48% 16,645 27.86 16,404 26.96 21,639 27.52 22,308 26.95 20,441 26.80 6,258 4,269 24,381 4,881 495 17.12 3.62 20.76 10.06 5,933 6,307 24,107 4,929 1,484 17.87 3.52 17.93 11.12 — 7,163 3,107 20,315 5,224 6,847 14.76 2.45 17.67 11.81 — 6,933 4,329 25,381 5,515 4,012 12.13 2.47 18.25 12.06 — 4,065 7,282 22,210 5,616 2,480 8.79 2.84 17.15 12.94 — $ 61,734 100.00% $ 64,664 100.00 % $ 70,348 100.00% $ 74,351 100.00% $ 68,722 100.00% (Dollars in thousands) Residential mortgage loans Commercial mortgage loans Multi-family mortgage loans Construction loans Commercial loans Consumer loans Unallocated Total Investment Activities General. The Board of Directors annually approves the Investment Policy for the Bank and the Company. The Chief Financial Offi cer and the Treasurer are authorized by the Board to implement the Investment Policy and establish investment strategies. The Chief Executive Offi cer, Chief Financial Offi cer, Treasurer and Assistant Treasurer are authorized to make investment decisions consistent with the Investment Policy. Investment transactions for the Bank are reported to the Board of Directors of the Bank on a monthly basis. The Investment Policy is designed to generate a favorable rate of return, consistent with established guidelines for liquidity, safety, duration and diversifi cation, and to complement the lending activities of the Bank. Investment decisions are made in accordance with the policy and are based on credit quality, interest rate risk, balance sheet composition, market expectations, liquidity, income and collateral needs. The Investment Policy does not currently permit the purchase of any securities that are below investment grade. The investment strategy is to maximize the return on the investment portfolio consistent with the Investment Policy. The investment strategy considers the Bank’s and the Company’s interest rate risk position as well as liquidity, loan demand and other factors. Acceptable investment securities include U.S. Treasury and Agency obligations, collateralized mortgage obligations (“CMOs”), corporate debt obligations, municipal bonds, mortgage-backed securities, commercial paper, mutual funds, bankers’ acceptances and Federal funds. Securities purchased for the investment portfolio require a minimum credit rating of “A” by Moody’s or Standard & Poor’s at the time of purchase. Securities in the investment portfolio are classifi ed as held to maturity, available for sale or held for trading. Securities that are classifi ed as held to maturity are securities that the Bank or the Company has the intent and ability to hold until their contractual maturity date and are reported at cost. Securities that are classifi ed as available for sale are reported at fair value. Available for sale securities include U.S. Treasury and Agency obligations, U.S. Agency and privately-issued CMOs, corporate debt obligations and equities. Sales of securities may occur from time to time in response to changes in market rates and liquidity needs and to facilitate balance sheet reallocation to effectively manage interest rate risk. At the present time, there are no securities that are classifi ed as held for trading. Management conducts a periodic review and evaluation of the securities portfolio to determine if any securities with a market value below book value were other-than-temporarily impaired. If such an impairment were deemed other-than-temporary, management would measure the total credit-related component of the unrealized loss, and the Company would recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is signifi cantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fi xed-rate securities decreases and as interest rates fall, the fair value of fi xed-rate securities increases. The market for non-investment grade, privately issued mortgage-backed securities remains illiquid and prices have not appreciated despite favorable movements in interest rates. The Company evaluates if it has the intent to sell these 14 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I ITEM 1 Business securities and if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. CMOs are a type of debt security issued by a special-purpose entity that aggregates pools of mortgages and mortgage-related securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as a residual interest with each class possessing different risk characteristics. In contrast to pass-through mortgage-backed securities from which cash fl ow is received (and prepayment risk is shared) pro rata by all securities holders, the cash fl ow from the mortgages or mortgage-related securities underlying CMOs is paid in accordance with predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. Accordingly, CMOs attempt to moderate risks associated with conventional mortgage-related securities resulting from unexpected prepayment activity. In declining interest rate environments, the Bank attempts to purchase CMOs with principal lock-out periods, reducing prepayment risk in the investment portfolio. During rising interest rate periods, the Bank’s strategy is to purchase CMOs that are receiving principal payments that can be reinvested at higher current yields. Investments in CMOs involve a risk that actual prepayments will differ from those estimated in pricing the security, which may result in adjustments to the net yield on such securities. Additionally, the fair value of such securities may be adversely affected by changes in the market interest rates. Management believes these securities may represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available. At December 31, 2014, the Bank held $5.7 million in privately-issued CMOs in the investment portfolio. The Bank and the Company do not invest in collateralized debt obligations, mortgage-related securities secured by sub-prime loans, or any preferred equity securities. Amortized Cost and Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and fair values of the Company’s securities as of the dates indicated. (Dollars in thousands) Held to Maturity: 2014 At December 31, 2013 2012 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Mortgage-backed securities $ 2,816 $ 2,939 $ 5,273 $ 5,520 $ 11,123 $ 11,583 FHLB obligations FHLMC obligations FNMA obligations FFCB obligations State and municipal obligations Corporate obligations 1,050 1,700 3,413 650 449,410 10,489 1,048 1,696 3,414 652 462,238 10,486 895 1,900 3,909 819 334,750 9,954 893 1,876 3,883 818 332,987 9,936 500 1,300 2,905 — 336,078 7,558 500 1,305 2,934 — 350,825 7,769 Total held-to-maturity $ 469,528 $ 482,473 $ 357,500 $ 355,913 $ 359,464 $ 374,916 Available for Sale: U.S Treasury obligations State and municipal obligations 8,016 6,855 8,016 7,002 — 8,739 — 8,758 — 9,933 — 10,316 Mortgage-backed securities 944,796 957,257 1,060,013 1,054,974 1,134,647 1,162,325 FHLMC obligations FHLB obligations FNMA obligations FFCB obligations Corporate obligations Equity securities 32,360 — 16,398 46,113 6,526 397 32,351 — 16,472 46,253 6,520 524 47,713 12,163 33,347 — — 357 47,709 12,178 33,529 — — 446 38,812 13,196 38,435 — — 307 39,026 13,234 38,757 — — 344 Total available for sale Average expected life of securities(1) 3.75 years (1) Average expected life is based on prepayment assumptions utilizing prevailing interest rates as of the reporting dates and does not include equity securities. 1,061,461 $ 1,074,395 $ 1,162,332 $ 1,157,594 $ 4.55 years 4.22 years $ 1,235,330 $ 1,264,002 The aggregate carrying values and fair values of securities by issuer, where the aggregate book value of such securities exceeds ten percent of stockholders’ equity are as follows (in thousands): At December 31, 2014: FNMA FHLMC Amortized Cost Fair Value $ 486,992 $ 446,774 492,261 452,503 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 15 PART I ITEM 1 Business The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company’s debt securities portfolio as of December 31, 2014. No tax equivalent adjustments were made to the weighted average yields. Amounts are shown at amortized cost for held to maturity securities and at fair value for available for sale securities. One Year or Less Carrying Value Weighted Average Yield(1) More Than One Year to Five Years Weighted Average Yield(1) Carrying Value At December 31, 2014 More Than Five Years to Ten Years Weighted Average Yield(1) Carrying Value After Ten Years Total Carrying Value Weighted Average Yield(1) Carrying Value Weighted Average Yield(1) $ — 500 1,006 —% $ 1.88 2.25 1,919 6,313 9,483 4.03% $ 1.31 1.95 897 — — 5.26% $ — — — — — —% $ — — 2,816 6,813 10,489 4.42 % 1.35 1.98 7,433 2.84 36,294 3.73 175,546 2.99 230,137 2.77 449,410 2.93 $ 8,939 2.72% $ 54,009 3.15% $ 176,443 3.00% $ 230,137 2.77% $ 469,528 2.90 % $ — —% $ 8,016 1.06% $ 1,531 3.93% 2,432 — 26,292 1,008 — 0.89 0.43 16,861 68,784 2,497 4.26 4.21 0.93 0.83 — — 81,761 — 3,015 —% $ — —% $ 8,016 1.06 % — 3,039 2.82 — 2.99 858,635 — — 2.78 2.52 — — 7,002 957,257 95,076 6,520 3.54 2.58 0.92 — $ 28,831 1.04% $ 98,590 1.58% $ 84,776 2.83% $ 861,674 2.52% $1,073,871 2.40 % (Dollars in thousands) Held to Maturity: Mortgage-backed securities Agency obligations Corporate obligations State and municipal obligations Total held to maturity Available for sale: U.S. Treasury obligations State and municipal obligations Mortgage-backed securities Agency obligations Corporate obligations Total available for sale(2) (1) Yields are not tax equivalent (2) Totals exclude $524,000 of available for sale equity securities Sources of Funds General. Primary sources of funds consist of principal and interest cash fl ows received from loans and mortgage-backed securities, contractual maturities on investments, deposits, Federal Home Loan Bank of New York (“FHLBNY”) advances and proceeds from sales of loans and investments. These sources of funds are used for lending, investing and general corporate purposes, including acquisitions and common stock repurchases. Deposits. The Bank offers a variety of deposits for retail and business accounts. Deposit products include savings accounts, checking accounts, interest-bearing checking accounts, money market deposit accounts and certifi cate of deposit accounts at varying interest rates and terms. The Bank also offers IRA and KEOGH accounts. Business customers are offered several checking account and savings plans, cash management services, remote deposit capture services, payroll origination services, escrow account management and business credit cards. The Bank focuses on relationship banking for retail and business customers to enhance the customer experience. Deposit activity is infl uenced by state and local economic conditions, changes in interest rates, internal pricing decisions and competition. Deposits are primarily obtained from the areas surrounding the Bank’s branch locations. To attract and retain deposits, the Bank offers competitive rates, quality customer service and a wide variety of products and services that meet customers’ needs, including online and mobile banking. Deposit pricing strategy is monitored monthly by the management Asset/Liability Committee and Pricing Committee. Deposit pricing is set weekly by the Bank’s Treasury Department. When setting deposit pricing, the Bank considers competitive market rates, FHLBNY advance rates and rates on other sources of funds. Core deposits, defi ned as savings accounts, interest and non- interest bearing checking accounts and money market deposit accounts represented 85.7% of total deposits at December 31, 2014 and 84.5% of total deposits at December 31, 2013. As of December 31, 2014 and December 31, 2013, time deposits maturing in less than one year amounted to $568.5 million and $530.0 million, respectively. 16 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I ITEM 1 Business The following table indicates the amount of certifi cates of deposit by time remaining until maturity as of December 31, 2014. (Dollars in thousands) Certifi cates of deposit of $100,000 or more Certifi cates of deposit less than $100,000 Total certifi cates of deposit Maturity 3 Months or Less Over 3 to 6 Months Over 6 to 12 Months Over 12 Months Total $ $ 129,017 $ 62,641 $ 53,244 $ 97,170 $ 342,072 126,763 104,733 92,064 160,057 483,617 255,780 $ 167,374 $ 145,308 $ 257,227 $ 825,689 Certifi cates of Deposit Maturities. The following table sets forth certain information regarding certifi cates of deposit. Less Than One Year (Dollars in thousands) Rate: Period to Maturity from December 31, 2014 One to Two Years Three to Four Years Two to Three Years Four to Five Years At December 31, Five Years or More 2014 2013 2012 0.00 to 0.99% $ 466,630 $ 57,997 $ 12,029 $ 34 $ — $ 255 $ 536,945 $ 524,311 $ 588,809 1.00 to 2.00% 2.01 to 3.00% 3.01 to 4.00% 4.01 to 5.00% 5.01 to 6.00% 6.01 to 7.00% Over 7.01% 4,003 22,718 43,672 39,340 60,706 4,571 175,010 120,750 124,088 77,669 14,934 19,895 247 11 7 — — 410 8 — — — — 124 394 — 31 — — — — — — — — — — — — — 4 — — — — 92,603 19,899 781 413 7 31 111,898 129,352 45,845 3,849 68,660 46,178 31 — 70 321 — 65 Total $ 568,462 $ 96,067 $ 56,250 $ 39,374 $ 60,706 $ 4,830 $ 825,689 $ 806,754 $ 957,473 Borrowed Funds. At December 31, 2014, the Bank had $1.51 billion of borrowed funds. Borrowed funds consist primarily of FHLBNY advances and repurchase agreements. Repurchase agreements are contracts for the sale of securities owned or borrowed by the Bank, with an agreement to repurchase those securities at an agreed-upon price and date. The Bank uses wholesale repurchase agreements, as well as retail repurchase agreements as an investment vehicle for its commercial sweep checking product. Bank policies limit the use of repurchase agreements to collateral consisting of U.S. Treasury obligations, U.S. government agency obligations or mortgage-related securities. As a member of the FHLBNY, the Bank is eligible to obtain advances upon the security of the FHLBNY common stock owned and certain residential mortgage loans, provided certain standards related to credit-worthiness have been met. FHLBNY advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. The following table sets forth the maximum month-end balance and average balance of FHLBNY advances and securities sold under agreements to repurchase for the periods indicated. (Dollars in thousands) Maximum Balance: FHLBNY advances FHLBNY line of credit Securities sold under agreements to repurchase Average Balance: FHLBNY advances FHLBNY line of credit Securities sold under agreements to repurchase Weighted Average Interest Rate: FHLBNY advances FHLBNY line of credit Securities sold under agreements to repurchase Year Ended December 31, 2014 2013 2012 $ $ 1,190,280 180,000 255,633 989,245 104,121 245,260 2.08% 0.37 1.72 $ 774,557 183,000 294,035 599,991 48,784 260,004 518,215 178,000 357,164 516,440 29,004 319,031 2.34% 0.38 1.74 2.51% 0.39 2.04 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 17 PART I ITEM 1 Business The following table sets forth certain information as to borrowings at the dates indicated. (Dollars in thousands) FHLBNY advances FHLBNY line of credit Securities sold under repurchase agreements Total borrowed funds Weighted average interest rate of FHLBNY advances Weighted average interest rate of FHLBNY line of credit Weighted average interest rate of securities sold under agreements to repurchase At December 31, 2014 1,190,280 73,000 246,571 2013 774,557 183,000 246,322 $ 1,509,851 $ 1,203,879 $ 1.88% 0.32% 1.69% 2.17% 0.40% 1.69% 2012 507,648 — 295,616 803,264 2.47% —% 1.91% Wealth Management Services As part of the Company’s strategy to increase fee related income, the Company’s wholly owned subsidiary, Beacon Trust Company (“Beacon”) is engaged in providing wealth management and asset management services. In addition to its trust and estate administrative services, Beacon is also a provider of asset management services which are often introduced to existing clients through the Bank’s extensive branch network. Beacon offers a full range of asset management services to individuals, municipalities, non-profi ts, corporations and pension funds. These services include investment management, asset allocation, trust and fi duciary services, fi nancial planning, family offi ce services, estate settlement services and custody. Beacon focuses on delivering personalized investment strategies based on the client’s risk profi le. These strategies are focused on Subsidiary Activities maximizing clients’ investment returns, while minimizing expenses. Most of the fee income generated by Beacon is based on assets under management. On October 31, 2014, Beacon acquired the fi duciary account relationships of a bank in Suffolk County, New York. On January 5, 2015, Beacon announced the signing of a defi nitive agreement to acquire the assets and liabilities of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC, both Morristown, New Jersey based registered investment advisers under common ownership. The transaction is currently awaiting regulatory approval from the New Jersey Department of Banking and Insurance and the satisfaction of customary closing conditions. PFS Insurance Services, Inc., formerly Provident Investment Services, Inc., is a wholly owned subsidiary of the Bank, and a New Jersey licensed insurance producer that sells insurance and investment products, including annuities to customers through a third-party networking arrangement. TPB Realty, LLC, is a wholly owned subsidiary of the Bank formed to invest in real estate development joint ventures principally targeted at meeting the housing needs of low- and moderate- income communities in the Bank’s market. At December 31, 2014, TPB Realty, LLC had total assets of $2.9 million. Dudley Investment Corporation is a wholly owned subsidiary of the Bank which operates as a New Jersey Investment Company. Dudley Investment Corporation owns all of the outstanding common stock of Gregory Investment Corporation. Bergen Avenue Realty, LLC, is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure. At December 31, 2014, Bergen Avenue Realty, LLC had total assets of $2.5 million. Gregory Investment Corporation is a wholly owned subsidiary of Dudley Investment Corporation. Gregory Investment Corporation operates as a Delaware Investment Company. Gregory Investment Corporation owns all of the outstanding common stock of PSB Funding Corporation. PSB Funding Corporation is a majority owned subsidiary of Gregory Investment Corporation. It was established as a New Jersey corporation to engage in the business of a real estate investment trust for the purpose of acquiring mortgage loans and other real estate related assets from the Bank. Bergen Delaware Realty, LLC, is a wholly owned subsidiary of the Bank formed to manage and sell real estate acquired through foreclosure. At December 31, 2014, Bergen Delaware Realty, LLC had total assets of $500,000. Beacon Trust Company, a New Jersey limited purpose trust company, is a wholly owned subsidiary of the Bank. Beacon Investment Advisory Services, Inc. is a wholly owned subsidiary of Beacon Trust Company, incorporated under Delaware law to acquire and conduct the business of The MDE Group, Inc. and Acertus Capital Management, LLC following consummation of the acquisition. 18 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I ITEM 1 Business Team Capital Service Co., LLC is an inactive New Jersey limited liability company which became a wholly owned subsidiary of the Company by way of the Team Capital Bank acquisition. Team Capital NJ Investment Co. is an inactive New Jersey corporation which became a wholly owned subsidiary of the Company by way of the Team Capital Bank acquisition. Personnel As of December 31, 2014, the Company had 912 full-time and 109 part-time employees. None of the Company’s employees are represented by a collective bargaining group. The Company believes its working relationship with its employees is good. Regulation and Supervision General As a bank holding company controlling the Bank, the Company is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA. The Company is also subject to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”) and the regulations of the Commissioner of the New Jersey Department of Banking and Insurance (“Commissioner”) under the New Jersey Banking Act applicable to bank holding companies. The Company and the Bank are required to fi le reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board and the Commissioner. The Federal Reserve Board and the Commissioner conduct periodic examinations to assess the Company’s compliance with various regulatory requirements. The Company fi les certain reports with, and otherwise complies with, the rules and regulations of the SEC under the federal securities laws and the listing requirements of the New York Stock Exchange. The Bank is a New Jersey chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to extensive regulation, examination and supervision by the Commissioner as the issuer of its charter, and by the FDIC as its deposit insurer. The Bank fi les reports with the Commissioner and the FDIC concerning its activities and fi nancial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offi ces. The Commissioner and the FDIC conduct periodic examinations to assess the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classifi cation of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in applicable laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on the Company and the Bank and their operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of depository institutions and their holding companies. Certain provisions of the Dodd-Frank Act are impacting the Company and the Bank. For example, the Dodd-Frank Act created the Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau has assumed responsibility for the implementation of the federal fi nancial consumer protection and fair lending laws and regulations and has the authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their principal regulator, although the Consumer Financial Protection Bureau will have back-up authority to examine and enforce consumer protection laws against all institutions, including those with less than $10 billion in assets. The material laws and regulations applicable to the Company and the Bank are summarized below and elsewhere in the Form 10-K. New Jersey Banking Regulation Activity Powers. The Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including the Bank, generally may, subject to certain limits, invest in: real estate mortgages; (1) (2) consumer and commercial loans; (3) specifi c types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; (4) certain types of corporate equity securities; and (5) certain other assets. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 19 PART I ITEM 1 Business A savings bank may also invest pursuant to a “leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act, subject to certain restrictions imposed by the FDIC. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon the approval of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefi ts or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefi t or privilege, prior approval by the Commissioner by regulation or by specifi c authorization is required. The exercise of these lending, investment and activity powers is limited by federal law and the related regulations. See “Federal Banking Regulation— Activity Restrictions on State-Chartered Bank” below. Loans-to-One-Borrower Limitations. With certain specifi ed exceptions, a New Jersey chartered savings bank may not make loans or extend credit to a single borrower and to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A New Jersey chartered savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. The Bank currently complies with applicable loans-to-one- borrower limitations. Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by the bank. Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey chartered depository institutions, including the Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. At December 31, 2014, the Bank was considered “well capitalized” under FDIC guidelines. Examination and Enforcement. The New Jersey Department of Banking and Insurance may examine the Company and the Bank whenever it deems an examination advisable. The Department examines the Bank at least every two years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, offi cer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed. Federal Banking Regulation Capital Requirements. FDIC regulations require banks to maintain minimum levels of capital. The FDIC regulations defi ne two tiers, or classes, of capital. Tier 1 capital is comprised of: • common stockholders’ equity, less net unrealized holding losses on available for sale equity securities with readily determinable fair values; • non-cumulative perpetual preferred stock, including any related surplus; and • minority interests in consolidated subsidiaries minus all intangible assets, other than qualifying servicing rights and any net unrealized loss on marketable equity securities. Tier 2 capital is comprised of: • cumulative perpetual preferred stock; • certain perpetual preferred stock for which the dividend rate may be reset periodically; • hybrid capital instruments, including mandatorily convertible securities; • term subordinated debt; • intermediate term preferred stock; • allowance for loan losses; and • up to 45% of pre-tax net unrealized holding gains on available for sale equity securities with readily determinable fair values. The allowance for loan losses may be includible in Tier 2 capital up to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be included in total capital cannot exceed 100% of Tier 1 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest fi nancial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System that are not anticipating or experiencing signifi cant growth, of not less than a ratio of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profi le of the bank. The FDIC regulations also establish a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital, which is defi ned as the sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of a bank’s risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 200%, based on the risks the FDIC believes are inherent in the type of asset or item. The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of a bank’s exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing such bank’s capital adequacy. Under 20 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I ITEM 1 Business Institutions with signifi cant interest rate risk may be required to maintain additional capital. such a risk assessment, examiners will evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. According to the agencies, applicable considerations include: • the quality of a bank’s interest rate risk management process; • the overall fi nancial condition of the bank; and • the level of other risks at the bank for which capital is needed. The following table shows the Bank’s leverage ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio, at December 31, 2014 (Dollars in thousands) Regulatory Tier 1 leverage capital Tier 1 risk-based capital As of December 31, 2014 $ Capital 674,483 674,483 Percent of Assets(1) Capital Requirements(1) 8.38% 10.97 4.00% 4.00 Total risk-based capital (1) For purposes of calculating Regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating Tier 1 risk-based capital and total risk-based 736,217 11.98 8.00 capital, assets are based on total risk-weighted assets. As of December 31, 2014, the Bank was considered “well capitalized” under FDIC guidelines. In July 2013, the FDIC and the other federal bank regulatory agencies issued a fi nal rule that revises their leverage and risk- based capital requirements and the method for calculating risk- weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopts a uniform minimum leverage capital ratio of 4%, increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that fi nance the acquisition, development or construction of real property. The fi nal rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive offi cers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The fi nal rule is effective January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective. Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifi cally exempted by law or consented to by the FDIC. Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a signifi cant risk to the FDIC insurance fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “fi nancial subsidiary” are subject to additional restrictions. Federal law permits a state-chartered savings bank to engage, through fi nancial subsidiaries, in any activity in which a national bank may engage through a fi nancial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a fi nancial subsidiary, any activity permitted for a fi nancial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such fi nancial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 billion. The bank must have policies and procedures to assess the fi nancial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the fi nancial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the fi nancial subsidiary. The Bank currently meets all conditions necessary to establish and engage in permitted activities through fi nancial subsidiaries. Federal Home Loan Bank System. The Bank is a member of the FHLB system which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to purchase and hold shares of capital stock in that FHLB in an amount as required by that FHLB’s capital plan and minimum capital requirements. The Bank is in compliance with these requirements. The Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue to be paid. For the year ended December 31, 2014, dividends paid by the FHLB to the Bank totaled $1.7 million. Deposit Insurance. As a member institution of the FDIC, deposit accounts at the Bank are generally insured up to a maximum of $250,000 for each separately insured depositor. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 21 PART I ITEM 1 Business Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specifi ed by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC fi nalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. On February 7, 2011, the FDIC issued a fi nal rule that establishes a target size for the Deposit Insurance Fund (“DIF”) at 2 percent of insured deposits as mandated by the Dodd-Frank Act. The rule also implements a lower assessment rate schedule when the DIF reaches 1.15 percent of total insured deposits. The FDIC may terminate the insurance of an institution’s deposits upon a fi nding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance. Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and offi cers. In general, these enforcement actions may be initiated in response to violations of law and to unsafe or unsound practices. Transactions with Affi liates. Transactions between an insured bank, such as the Bank, and any of its affi liates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing regulations. An affi liate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution, fi nancial subsidiary or other entity defi ned by the regulation generally is not treated as an affi liate of the bank for purposes of Sections 23A and 23B. Section 23A: • limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affi liate to an amount equal to 10% of such bank’s capital stock and retained earnings, and limits all such transactions with all affi liates to an amount equal to 20% of such capital stock and retained earnings; and • requires that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affi liates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by a bank with an affi liate and any purchase of assets or services by a bank from an affi liate must be on terms that are 22 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report substantially the same, or at least as favorable to the bank, as those that would be provided to a non-affi liate. Prohibitions Against Tying Arrangements. Banks are subject to statutory prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fi xing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affi liates or that the customer not obtain services of a competitor of the institution. Privacy Standards. FDIC regulations require the Company and the Bank to disclose their privacy policies, including identifying with whom they share “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter. The FDIC regulations also require the Company and the Bank to provide their customers with initial and annual notices that accurately refl ect their privacy policies and practices. In addition, the Company and the Bank are required to provide their customers with the ability to “opt-out” of having the Company and the Bank share their non- public personal information with unaffi liated third parties before they can disclose such information, subject to certain exceptions. Community Reinvestment Act and Fair Lending Laws. All FDIC insured institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution’s record of compliance with the Community Reinvestment Act. Among other things, the current Community Reinvestment Act regulations rate an institution based upon its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests: • a lending test, to evaluate the institution’s record of making loans in its service areas; • an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefi ting low- or moderate-income individuals and businesses; and • a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offi ces. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities, including, but not limited to, engaging in acquisitions and mergers. The Bank received an “Outstanding” Community Reinvestment Act rating in its most recently completed federal examination, which was conducted by the FDIC as of August 2011. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specifi ed in those statutes. An institution’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice. Safety and Soundness Standards. Each federal banking agency, including the FDIC, has adopted guidelines establishing general PART I ITEM 1 Business An institution will be treated as “undercapitalized” if: • its total risk-based capital is less than 8%; or • its Tier 1 risk-based-capital is less than 4%; and • its leverage ratio is less than 4% (or less than 3% if the institution receives the highest rating under the Uniform Financial Institutions Rating System). An institution will be treated as “signifi cantly undercapitalized” if: • its total risk-based capital is less than 6%; • its Tier 1 capital is less than 3%; or • its leverage ratio is less than 3%. An institution that has a tangible capital to total assets ratio equal to or less than 2% would be deemed “critically undercapitalized.” The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is critically undercapitalized. The FDIC may also appoint a conservator or receiver for an insured state bank on the basis of the institution’s fi nancial condition or upon the occurrence of certain events, including: • insolvency, or when the assets of the bank are less than its liabilities to depositors and others; • substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; • existence of an unsafe or unsound condition to transact business; • likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and • insuffi cient capital, or the incurring or likely incurring of losses that will substantially deplete all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance. The previously discussed fi nal rule that increased capital requirements effective January 1, 2015 adjusts the prompt action categories accordingly. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized”: (1) a common equity Tier 1 risk- based capital ratio of 6.5% (new standard); (2) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (3) a total risk-based capital ratio of 10% (unchanged from current rules) and (4) a Tier 1 leverage ratio of 5% (unchanged from the current rules). standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefi ts. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specifi ed in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive offi cer, employee, director, or principal stockholder. In addition, FDIC regulations require a bank that is given notice by the FDIC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the FDIC. If, after being so notifi ed, a bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC may issue an order directing corrective and other actions of the types to which a signifi cantly undercapitalized institution is subject under the “prompt corrective action” provisions discussed below. If a bank fails to comply with such an order, the FDIC may seek to enforce such an order in judicial proceedings and to impose civil monetary penalties. Prompt Corrective Action. Federal law requires the FDIC and the other federal banking regulators to promptly resolve the problems of undercapitalized institutions. Federal law also establishes fi ve categories, consisting of “well capitalized,” “adequately capitalized,” “undercapitalized,” “signifi cantly undercapitalized” and “critically undercapitalized.” The FDIC’s regulations defi ne the fi ve capital categories as follows: An institution will be treated as “well capitalized” if: • its ratio of total capital to risk-weighted assets is at least 10%; • its ratio of Tier 1 capital to risk-weighted assets is at least 6%; and • its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specifi c capital level. An institution will be treated as “adequately capitalized” if: • its ratio of total capital to risk-weighted assets is at least 8%; or • its ratio of Tier 1 capital to risk-weighted assets is at least 4%; and • its ratio of Tier 1 capital to total assets is at least 4% (3% if the bank receives the highest rating under the Uniform Financial Institutions Rating System) and it is not a well-capitalized institution. Loans to a Bank’s Insiders Federal Regulation. A bank’s loans to its executive offi cers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affi liated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to loans by the Bank. All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive offi cer, other than loans for the education of the offi cer’s children and certain loans secured by the offi cer’s residence may not exceed at any one time the higher of 2.5% of the bank’s unimpaired capital and unimpaired surplus or $25,000, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $500,000; or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 23 PART I ITEM 1 Business Generally, loans to insiders must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons, and not involve more than the normal risk of payment or present other unfavorable features. An exception may be made for extensions of credit made pursuant to a benefi t or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank. In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. The Bank does not, as a matter of policy, make loans to its directors or to their immediate family members and related interests. New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive offi cers and of corporations and partnerships controlled by such persons that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under Regulation O, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with Regulation O is deemed to be in compliance with such provisions of the New Jersey Banking Act. Federal Reserve System Under Federal Reserve Board regulations, the Bank is required to maintain non-interest earning reserves against its transaction accounts. The Federal Reserve Board regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts over $14.5 million and up to $103.6 million, and 10% against that portion of total transaction accounts in excess of up to $103.6 million. The fi rst $14.5 million of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these requirements. These requirements are adjusted annually by the Federal Reserve Board. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defi ned by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The Bank is authorized to borrow from the Federal Reserve Bank discount window. Internet Banking Technological developments continue to signifi cantly alter the ways in which fi nancial institutions conduct their business. The growth of the Internet has caused banks to adopt and refi ne alternative distribution and marketing systems. The federal bank regulatory agencies have conducted seminars and published materials targeted to various aspects of internet banking, and have indicated their intention to re-evaluate their regulations to ensure that they encourage banks’ effi ciency and competitiveness consistent with safe and sound banking practices. There can be no assurance that the bank regulatory agencies will adopt new regulations that will not materially affect the Bank’s internet operations or restrict any such further operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted. This law has signifi cantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given signifi cant discretion in drafting the implementing rules and regulations, and consequently, many of the details and the full impact of the Dodd-Frank Act may not be known for some time. A provision of the Dodd-Frank Act that became effective on July 1, 2011, repealed the federal prohibitions on paying interest on demand deposits, thus permitting depository institutions to pay interest on business transaction and other accounts. The legislation also provided for originators of certain securitized loans to retain a percentage of the risk for transferred credits, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination. The Dodd-Frank Act required publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank Act contained the so-called “Volcker Rule,” which generally prohibits banking organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with hedge or private equity funds (“covered funds”). On December 13, 2013, federal agencies issued a fi nal rule implementing the Volcker Rule which, among other things, requires banking organizations to restructure and limit certain of their investments in and relationships with covered funds. The fi nal rule 24 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report unexpectedly included within the interests subject to its restrictions collateralized debt obligations backed by trust-preferred securities (“TRUPs CDOs”). Many banking organizations had purchased such instruments because of their favorable tax, accounting and regulatory treatment and would have been subject to unexpected write-downs. In response to concerns expressed by community banking organizations, the federal agencies subsequently issued an interim fi nal rule which grandfathers TRUPS CDOs issued before May 19, 2010 if (i) acquired by a banking organization on or before December 10, 2013 and (ii) the organization reasonably believed the proceeds from the TRUPS CDOs were invested primarily in any trust preferred security or subordinated debt instrument issued by a depository institution holding company with less than $15 billion in assets or by a mutual holding company. Neither the Company nor the Bank have investments in covered funds or TRUPS CDOs. PART I ITEM 1 Business The USA PATRIOT Act The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act included measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III imposed affi rmative obligations on a broad range of fi nancial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Holding Company Regulation The bank regulatory agencies have increased the regulatory scrutiny of the Bank Secrecy Act and anti-money laundering programs maintained by fi nancial institutions. Signifi cant penalties and fi nes, as well as other supervisory orders may be imposed on a fi nancial institution for non-compliance with these requirements. In addition, the federal bank regulatory agencies must consider the effectiveness of fi nancial institutions engaging in a merger transaction in combating money laundering activities. The Bank has adopted policies and procedures which are in compliance with these requirements. Federal Regulation. The Company is regulated as a bank holding company, and as such, is subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis structured similarly, but not identically, to those of the FDIC for the Bank. As of December 31, 2014, the Company’s total capital and Tier 1 capital ratios exceed these minimum capital requirements. The following table shows the Company’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and the Total risk-based capital ratio as of December 31, 2014 As of December 31, 2014 Percent of Assets(1) Capital Requirements(1) (Dollars in thousands) Capital 740,958 740,958 802,692 Regulatory Tier 1 leverage capital Tier 1 risk-based capital Total risk-based capital (1) For purposes of calculating Regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating Tier 1 risk-based capital and Total risk-based 4.00% 4.00 8.00 12.06 13.06 9.21% $ capital, assets are based on total risk-weighted assets. As of December 31, 2014, the Company was “well capitalized” under Federal Reserve Board guidelines. themselves, the capital conservation buffer will be phased in between 2016 and 2019. The Dodd-Frank Act directs the Federal Reserve Board to issue consolidated capital requirements for depository institution holding companies that are not less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed fi nal rule regarding regulatory capital requirements implements the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks apply to bank holding companies (with greater than $500 million of assets) as of January 1, 2015. As is the case with institutions Regulations of the Federal Reserve Board provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. Federal Reserve Board policies generally provide that bank holding companies should pay dividends only out of current earnings and only if the prospective rate of earnings retention in the holding company appears consistent with the organization’s capital needs, asset quality and overall fi nancial condition. Under the prompt corrective action provisions discussed above, a bank holding company parent of an undercapitalized subsidiary bank PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 25 PART I ITEM 1 Business would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. If the undercapitalized bank fails to fi le an acceptable capital restoration plan or fails to implement an accepted plan, the Federal Reserve Board may prohibit the bank holding company parent of the undercapitalized bank from paying any dividends or making any other form of capital distribution without the prior approval of the Federal Reserve Board. As a bank holding company, the Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval will be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. A bank holding company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months will be equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the Federal Reserve Board, is well-managed, and that is not the subject of any unresolved supervisory issues. In addition, a bank holding company which does not opt to become a fi nancial holding company under applicable federal law is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be permissible are: • making or servicing loans; • performing certain data processing services; • providing discount brokerage services; or acting as fi duciary, investment or fi nancial advisor; Investment Adviser Regulation • leasing personal or real property; • making investments in corporations or projects designed primarily to promote community welfare; and • acquiring a savings and loan association. Bank holding companies that qualify and opt to become a fi nancial holding company may engage in activities that are fi nancial in nature or incident to activities which are fi nancial in nature. Financial holding companies may engage in a broader array of activities including insurance and investment banking. The Company fi led an election to qualify as a fi nancial holding company under federal regulations on January 31, 2014 which was deemed effective by the Federal Reserve Board on March 5, 2015. Bank holding companies may qualify to become a fi nancial holding company if at the time of the election and on a continuing basis: • each of its depository institution subsidiaries is “well capitalized”; • each of its depository institution subsidiaries is “well managed”; and • each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination. Under federal law, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would potentially be applicable to the Company if it ever acquired as a separate subsidiary, a depository institution in addition to the Bank. New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defi nes the terms “company” and “bank holding company” as such terms are defi ned under the BHCA. Each bank holding company controlling a New Jersey chartered bank or savings bank must fi le certain reports with the Commissioner and is subject to examination by the Commissioner. Acquisition of Control. Under federal law and under the New Jersey Banking Act, no person may acquire control of the Company or the Bank without fi rst obtaining approval of such acquisition of control from the Federal Reserve Board and the Commissioner. Federal Securities Laws. The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934. Following the acquisition of the MDE Group, Inc. and Acertus Capital Management, LLC, each of Beacon Investment Advisory Services, Inc. and Acertus Capital Management, LLC will be investment advisers registered with the Securities and Exchange Commission. As such, they will be required to make certain fi lings with and be subject to periodic examination by, the Securities and Exchange Commission. 26 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report Delaware Corporation Law The Company is incorporated under the laws of the State of Delaware. As a result, the rights of its stockholders are governed by the Delaware General Corporate Law and the Company’s Certifi cate of Incorporation and Bylaws. PART I ITEM 1 Business Taxation Federal Taxation General. The Company is subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company. Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for fi ling its consolidated federal income tax returns. Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), the Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specifi ed formula limits, be deducted in arriving at taxable income. The Bank was required to use the direct charge-off method to compute its bad debt deduction beginning with its 1996 federal income tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should the Bank fail to meet certain asset and defi nitional tests. Federal legislation has eliminated these recapture rules. Retained earnings at December 31, 2014 included approximately $51.8 million for which no provisions for income tax had been made. This amount represents an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, stock redemptions and excess distributions to shareholders. At December 31, 2014, the Bank had an unrecognized tax liability of $21.2 million with respect to this reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences (alternative minimum taxable income or AMTI). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Company has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover. Net Operating Loss Carryovers. Under the general rule, a fi nancial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2014, the Company had approximately $3,900,000 of Federal Net Operating Losses (“NOLs”). These NOLs were generated by entities the Company acquired in previous years and are subject to an annual Code Section 382 limitation. Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affi liated group of corporations. State Taxation New Jersey State Taxation. The Company and the Bank fi le New Jersey Corporation Business Tax returns. Generally, the income of fi nancial institutions in New Jersey, which is calculated based on federal taxable income subject to certain adjustments, is subject to New Jersey tax. The Company and the Bank are currently subject to the corporate business tax (“CBT”) at 9% of apportioned taxable income. New Jersey tax law does not and has not allowed for a taxpayer to fi le a tax return on a combined or consolidated basis with another member of the affi liated group where there is common ownership. However, if the taxpayer cannot demonstrate by clear and convincing evidence that the tax fi ling discloses the true earnings of the taxpayer on its business carried on in the State of New Jersey, the Director of the New Jersey Division of Taxation may, at the director’s discretion, require the taxpayer to fi le a consolidated return of the entire operations of the affi liated group or controlled group, including its own operations and income. Pennsylvania State Taxation. Due to the acquisition of Team Capital in the current year, the Bank is now subject to Pennsylvania Mutual Thrift Institutions Tax. Mutual thrift institutions tax is imposed at the rate of 11.5 percent on net taxable income of mutual thrift institutions in Pennsylvania, including savings banks without capital stock, building and loan associations, savings and loan associations, and savings institutions having capital stock. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 27 PART I ITEM 1A Risk Factors ITEM 1A. Risk Factors In the ordinary course of operating our business, we are exposed to a variety of risks inherent to the fi nancial services industry. The following discusses the signifi cant risk factors that could affect our business and operations. If any of the following conditions or events actually occur, our business, fi nancial condition or results of operations could be negatively affected, the market price of your investment in the Company’s common stock could decline, and you could lose all or a part of your investment in the Company’s common stock. Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the value of securities fl uctuates inversely with changes in interest rates. At December 31, 2014, our available for sale securities portfolio totaled $1.07 billion. Unrealized gains and losses on securities available for sale are reported as a separate component of stockholders’ equity. Decreases in the fair value of securities available for sale resulting from increases in interest rates therefore could have an adverse effect on stockholders’ equity. Historically low interest rates may adversely affect our net interest income and profi tability. The Federal Reserve Board continues to maintain interest rates at historically low levels through its targeted federal funds rate and until recently, the purchase of mortgage-backed securities. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which has resulted in increases in net interest income in the short term. Our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may continue to decrease. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which may have an adverse affect on our profi tability. In the event the Federal Reserve Board changes its current stance by increasing short-term rates and long-term rates remain low, we may experience a fl attening or inverted yield curve that would negatively impact our net interest margin and earnings. Changes in interest rates could adversely affect our results of operations and fi nancial condition. Our fi nancial condition and results of operations are signifi cantly affected by changes in market interest rates. Our results of operations substantially depend on our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we pay on our interest-bearing liabilities. Our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets. If rates increase rapidly, we may have to increase the rates we pay on our deposits and borrowed funds more quickly than any changes in interest rates earned on our loans and investments, resulting in a negative effect on interest spreads and net interest income. In addition, the effect of rising rates could be compounded if deposit customers move funds into higher yielding accounts. Conversely, should market interest rates fall below current levels, our net interest margin could also be negatively affected if competitive pressures keep us from further reducing rates on our deposits, while the yields on our assets decrease more rapidly through loan prepayments and interest rate adjustments. In the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, and assuming management took no actions to mitigate the effect of such change, we are projecting that our net interest income would decrease 4.0% or $9.8 million. We are also subject to prepayment and reinvestment risk related to interest rate movements. Changes in interest rates can affect the average life of loans and mortgage related securities. Decreases in interest rates can result in the prepayment or refi nancing of loans and loans underlying mortgage related securities, resulting in accelerated cash fl ows subject to reinvestment at reduced market interest rates and increased premium amortization. Under these circumstances, we are subject to reinvestment risk to the extent that such prepayments cannot be reinvested at a profi table spread in excess of our funding costs. Increases in interest rates can result in reduced prepayments of loans and mortgage related securities, as borrowers retain existing loans to maintain lower borrowing costs. We are subject to liquidity risk. Liquidity risk is the potential that we will be unable to meet our obligations as they become due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis at a reasonable cost within acceptable risk tolerances. Liquidity is required to fund various obligations, including loan commitments to borrowers, loan originations, withdrawals by depositors, repayments of borrowings, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; the sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Our access to funding sources in amounts adequate to fi nance our activities could be impaired by factors specifi c to us or the fi nancial services industry in general. Factors detrimental to our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specifi c to us, such as a severe disruption of the fi nancial markets or negative views and expectations about the prospects for the fi nancial services industry. If our allowance for loan losses is not suffi cient to cover actual loan losses, our earnings could decrease. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we rely on our loan 28 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report quality reviews and credit risk ratings, our experience and our evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, or if delinquencies or non-accrual and non-performing loans increase, the allowance for loan losses may not be suffi cient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to the allowance would materially decrease our net income. Our emphasis on the continued diversifi cation of our loan portfolio through the origination of commercial mortgage loans, commercial loans, and construction loans has been one of the more signifi cant factors we have taken into account in evaluating our allowance for loan losses and provision for loan losses. In the event we were to further increase the amount of such types of loans in our portfolio, we may decide to make additional or increased provisions for loans losses, which could adversely affect our earnings. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and fi nancial condition. A downturn in the housing sector and related markets and elevated unemployment levels may adversely affect our business and fi nancial results. Our lending business and investments in mortgage-backed securities are tied in large part to the housing market. Lower home prices, a heightened level of foreclosures, the protracted foreclosure process or elevated unemployment levels would adversely impact the credit performance of real estate related loans and collateral values. These conditions could potentially cause a reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses. Such negative economic conditions could adversely impact our prospects for growth, asset and goodwill valuations, and could result in a decrease in our interest income and a material increase in our provision for loan losses. Our commercial real estate, multi-family, and commercial loans expose us to increased lending risks. A signifi cant portion of our loan portfolio consists of commercial real estate, multi-family, commercial and, to a lesser extent, construction loans. These loans are generally regarded as having a higher risk of default and loss than single-family residential mortgage loans, because repayment of these loans often depends on the successful operation of a business or of the underlying property. In addition, our construction loans, commercial mortgage loans, multi-family loans and commercial loans have signifi cantly larger average loan balances compared to our single-family residential mortgage loans. Also, many of our borrowers of these types of loans have more than one loan outstanding with us. Consequently, any adverse development with respect to one loan or one credit relationship can expose us to a signifi cantly greater risk of loss compared to an adverse development with respect to one single- family residential mortgage loan. PART I ITEM 1A Risk Factors Our continuing concentration of loans in our primary market area may increase our risk. Our success is signifi cantly affected by general economic conditions in northern and central New Jersey, and with the acquisition of Team Capital Bank in 2014, eastern Pennsylvania. Unlike some larger banks that are more geographically diversifi ed, we provide banking and fi nancial services to customers mostly located in our primary markets. Consequently, a downturn in economic conditions in our local markets would have a signifi cant impact on our loan portfolios, the ability of borrowers to repay their loans and the value of the collateral securing our loans. Adverse local economic conditions caused by infl ation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect the fi nancial results of our banking operations. Additionally, because we have a signifi cant amount of real estate loans, depressed real estate values and real estate sales may also have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings and overall fi nancial condition. We target our business development and marketing strategy for loans to serve primarily the banking and fi nancial services needs of small- to medium-sized businesses in northern and central New Jersey and eastern Pennsylvania. These small- to medium-sized businesses generally have fewer fi nancial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and fi nancial condition may be adversely affected. Risks associated with cyber-security could negatively affect our earnings. The fi nancial services industry has experienced an increase in both the number and severity of reported cyber attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions. We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches. We also rely on the integrity and security of a variety of third party processers, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers’ transaction data may put us at risk for possible losses due to fraud or operational disruption. Our customers are also the target of cyber attacks and identity theft. Large scale identity theft could result in customers’ accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent fi nancial losses. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 29 PART I ITEM 1A Risk Factors The occurrence of a breach of security involving our customers’ information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible fi nancial liability. Any of these events could have a material adverse effect on our fi nancial condition and results of operations. Because the fi nancial services business involves a high volume of transactions, we face signifi cant operational risks. We operate in diverse market segments and rely on the ability of our employees, systems and third party providers to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, the occurrence of systems failures and disruptions, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational defi ciency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer fi nancial loss, face regulatory action, and suffer damage to our reputation. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the New Jersey Department of Banking and Insurance, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. As a bank holding company, we are subject to regulation and oversight by the Board of Governors of the Federal Reserve System. Such regulation and supervision govern the activities in which a bank and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the requirement for additional capital, the imposition of restrictions on our operations, the classifi cation of our assets, the adequacy of our allowance for loan losses, and our management of risks posed by our reliance on third party vendors. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on our operations. The potential exists for additional Federal or state laws and regulations regarding capital requirements, lending and funding practices and liquidity standards, and bank regulatory agencies are expected to remain active in responding to concerns and 30 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report trends identifi ed in examinations, including the potential issuance of formal enforcement orders. Actions taken to date, as well as potential actions, may not have the benefi cial effects that are intended. In addition, new laws, regulations, and other regulatory changes could increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws, regulations, and other regulatory changes, may signifi cantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profi tability. The Dodd-Frank Act, among other things, created the Consumer Financial Protection Bureau, tightened capital standards and resulted in new laws and regulations that are expected to increase our costs of operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has signifi cantly changed the bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of fi nancial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were given signifi cant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act are still not known. However, we expect the legislation and implementing regulations may materially increase our operating and compliance costs. Banks with assets in excess of $10 billion are subject to additional requirements imposed by the Dodd-Frank Act and its implementing regulations such as the imposition of higher FDIC premiums, reduced debit card interchange fees, enhanced risk management frameworks and stress testing, all of which increase operating costs and reduce earnings. As we approach $10 billion in assets, we will be required to incur additional costs to address these additional requirements. The Dodd-Frank Act also created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. The Dodd-Frank Act requires minimum leverage (Tier 1) and risk- based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, and directs the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives. The fi nal rules implementing these requirements, will increase the regulatory capital requirements applicable to the Bank. These fi nal rules became effective on January 1, 2015, with certain aspects of the fi nal rules being phased in through 2019. Our risk management program may not be effective in mitigating risk and reducing the potential for signifi cant losses. Our risk management program is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversifi ed set of risk monitoring, modeling and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened regulatory scrutiny of the fi nancial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks. We may fail to realize the anticipated benefi ts of a recently announced wealth management acquisition. On January 5, 2015, we announced the proposed acquisition of The MDE Group, Inc. and Acertus Capital Management, LLC by Beacon Trust Company, our wholly owned subsidiary. The proposed acquisition remains subject to regulatory approvals. We anticipate completing the acquisition in the second quarter of 2015. The success of the proposed acquisition will depend on, among other things, our ability to combine the businesses of MDE/ Acertus and Beacon Trust in a manner that does not materially disrupt the customer relationships of either company. If we are unable to successfully achieve this objective, the anticipated benefi ts of the proposed acquisition may not be realized fully or at all, or may take longer to realize than expected. MDE/Acertus and Beacon Trust have operated and, until completion of the acquisition, will continue to operate, independently. It is possible that the integration process related to the proposed acquisition may result in the loss of key personnel, the disruption of our existing or the acquired business or inconsistencies in standards, controls, procedures and policies that may adversely impact its ability to maintain relationships with customers and employees, or to achieve the anticipated benefi ts of the proposed acquisition. A general economic slowdown could adversely impact our wealth management fee income. A general economic slowdown could affect the value of the assets under management in our wealth management business resulting in lower fee income and the departure of clients to seeking alternative investment opportunities with other wealth managers. Strong competition within our market area may limit our growth and profi tability. Competition in the banking and fi nancial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage banking fi rms, credit unions, fi nance companies, investment advisers, wealth managers, mutual funds, insurance companies, and brokerage and investment banking fi rms operating locally and elsewhere. In particular, over the past decade, PART I ITEM 1A Risk Factors our local markets have experienced the effects of substantial banking consolidation, and large out-of-state competitors have grown signifi cantly. There are also a number of strong locally- based competitors in our market. Many of these competitors have substantially greater resources and lending limits than we do, and may offer certain deposit and loan pricing, services or credit criteria that we do not or cannot provide. Our profi tability depends upon our continued ability to successfully compete in our market area. Acts of terrorism, severe weather and other external events could impact our ability to conduct business. Our business is subject to risk from external events. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising their operating and communication systems. The metropolitan New York and Northern New Jersey areas remain central targets for potential acts of terrorism. Additionally, severe weather-related events have adversely impacted customers in our market area, especially those in areas located near coastal waters and fl ood prone areas. Events such as these may become more common in the future and could cause signifi cant damage, cause disruption of power and communication services, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing the repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and fi nancial condition. We hold certain intangible assets that could be classifi ed as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings could decline. We record all assets acquired and liabilities assumed by the Company in purchase acquisitions, including goodwill and other intangible assets, at fair value. At December 31, 2014, goodwill totaling $392.8 million was not amortized but remains subject to impairment tests at least annually, or more often if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a potential inability to realize the carrying amount. The initial recording and subsequent impairment testing of goodwill and other intangible assets requires subjective judgments about the estimates of the fair value of assets acquired. A company has the option to qualitatively determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before proceeding with a two step quantitative impairment analysis. If a company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the quantitative impairment analysis and then, if needed, Step 2 to determine whether goodwill is impaired. The fi rst step compares the fair value of the reporting unit with its carrying amount, PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 31 PART I ITEM 4 Mine Safety Disclosures including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied value. Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash fl ow analysis and other factors. Estimated cash fl ows may extend far into the future and by their nature are diffi cult to determine over an extended time frame. Factors that may signifi cantly affect the estimates include specifi c industry or market sector conditions, changes in revenue growth trends, customer behavior, competitive forces, cost structures and changes in discount rates. It is possible that our future impairment testing could result in an impairment of the value of goodwill or other identifi ed intangible assets, or both. If we determine impairment exists at a given point in time, our earnings and the book value of the related intangible asset(s) will be reduced by the amount of the impairment. In any event, the results of impairment testing on goodwill and other identifi ed intangible assets have no impact on our tangible book value or regulatory capital levels. ITEM 1B. Unresolved Staff Comments There are no unresolved comments from the staff of the SEC to report. ITEM 2. Properties Property At December 31, 2014, the Bank conducted business through 86 full-service branch offi ces located in Hudson, Bergen, Essex, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Union and Warren counties in New Jersey, and in Bucks, Lehigh and Northampton counties in Pennsylvania. The aggregate net book value of premises and equipment was $93.0 million at December 31, 2014. ITEM 3. Legal Proceedings The Company’s executive offi ces are located in a leased facility at 239 Washington Street, Jersey City, New Jersey, which is also the Bank’s Main Offi ce. The Bank’s administrative offi ces are located in a leased facility at 100 Wood Avenue South, Iselin, New Jersey. The Company is involved in various legal actions and claims arising in the normal course of its business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s fi nancial condition and results of operations. ITEM 4. Mine Safety Disclosures Not applicable. 32 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 5. Market For Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “PFS.” Trading in the Company’s common stock commenced on January 16, 2003. As of February 2, 2015, there were 83,209,285 shares of the Company’s common stock issued and 65,313,288 shares outstanding, and approximately 5,520 stockholders of record. The table below shows the high and low closing prices reported on the NYSE for the Company’s common stock, as well as the cash dividends paid per common share during the periods indicated. First Quarter Second Quarter Third Quarter Fourth Quarter $ $ High 19.11 18.65 17.50 18.27 2014 Low 16.38 16.48 16.37 16.21 $ Dividend 0.15 0.15 $ 0.15 0.15 $ High 15.10 15.57 17.83 19.75 2013 Low 14.24 14.21 15.60 16.01 $ Dividend 0.13 0.14 0.14 0.15 On January 29, 2015, the Board of Directors declared a quarterly cash dividend of $0.16 per common share, which was paid on February 27, 2015, to common stockholders of record as of the close of business on February 13, 2015. The Company’s Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly cash dividend in the future, subject to fi nancial condition, results of operations, tax considerations, industry standards, economic conditions, regulatory restrictions that affect the payment of dividends by the Bank to the Company and other relevant factors. The Company is subject to the requirements of Delaware law that generally limit dividends to an amount equal to the difference between the amount by which total assets exceed total liabilities and the amount equal to the aggregate par value of the outstanding shares of capital stock. If there is no difference between these amounts, dividends are limited to net income for the current and/ or immediately preceding year. Stock Performance Graph Set forth below is a stock performance graph comparing (a) the cumulative total return on the Company’s common stock for the period December 31, 2009 through December 31, 2014, (b) the cumulative total return on stocks included in the Russell 2000 Index over such period, and (c) the cumulative total return of the SNL Thrift Index over such period. The SNL Thrift Index, produced by SNL Financial LC, contains all thrift institutions traded on the New York and NASDAQ stock exchanges. Cumulative return assumes the reinvestment of dividends and is expressed in dollars based on an assumed investment of $100 on December 31, 2009. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 33 PART II ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PROVIDENT FINANCIAL SERVICES, INC. TOTAL RETURN PERFORMANCE l e u a V x e d n I 240 220 200 180 160 140 120 100 80 60 2009 2010 2011 2012 2013 2014 Provident Financial Services, Inc. Russell 2000 SNL Thrift Index Provident Financial Services, Inc. Russell 2000 SNL Thrift 12/31/2009 100.00 100.00 100.00 12/31/2010 147.35 126.86 104.49 12/31/2011 135.06 121.56 87.90 12/31/2012 158.07 141.43 106.91 12/31/2013 211.68 196.34 137.20 12/31/2014 204.91 205.95 147.56 The following table reports information regarding purchases of the Company’s common stock during the fourth quarter of 2014 and the stock repurchase plan approved by the Company’s Board of Directors: Period Ending ISSUER PURCHASES OF EQUITY SECURITIES Period October 1, 2014 through October 31, 2014 November 1, 2014 through November 30, 2014 December 1, 2014 through December 31, 2014 Total (1) On October 24, 2007, the Company’s Board of Directors approved the purchase of up to 3,107,077 shares of its common stock under a seventh general repurchase program which commenced upon completion of the previous repurchase program. The repurchase program has no expiration date. All shares were repurchased pursuant to the seventh general repurchase program. (a) Total Number of Shares Purchased 181 862 $ — 1,043 $ (b) Average Price Paid per Share 18.23 18.04 — 18.07 (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) 181 862 — 1,043 (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)(2) 3,450,755 3,449,893 3,449,893 (2) On December 20, 2012, the Company’s Board of Directors approved the purchase of up to 3,017,770 shares of its common stock under an eighth general repurchase program which will commence upon completion of the seventh repurchase program. The repurchase program has no expiration date. Common stock repurchases for the three months ended December 31, 2014 were made in connection with employee income tax withholding on stock-based compensation. 34 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report ITEM 6. Selected Financial Data The summary information presented below at or for each of the periods presented is derived in part from and should be read in conjunction with the consolidated fi nancial statements of the Company presented in Item 8. PART II ITEM 6 Selected Financial Data (Dollars in thousands) Selected Financial Condition Data: Total assets Loans, net(1) Investment securities held to maturity Securities available for sale Deposits Borrowed funds Stockholders’ equity (Dollars in thousands) Selected Operations Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income tax expense Income tax expense Net income 2014 2013 2012 2011 2010 At December 31, $ 8,523,377 $ 7,487,328 $ 7,283,695 $ 7,097,403 $ 6,824,528 4,341,091 5,130,149 4,834,351 4,579,158 6,023,771 469,528 1,074,395 5,792,523 1,509,851 1,144,099 357,500 1,157,594 5,202,471 1,203,879 1,010,753 359,464 1,264,002 5,428,271 803,264 981,246 348,318 1,376,119 5,156,597 920,180 952,477 346,022 1,378,927 4,877,734 969,683 921,687 For the Year Ended December 31, 2014 2013 2012 2011 2010 $ 279,361 $ 252,777 $ 262,259 $ 275,719 $ 40,472 238,889 4,650 234,239 41,168 169,991 105,416 31,785 73,631 $ 36,767 216,010 5,500 210,510 44,153 148,763 105,900 35,366 70,534 $ 44,922 217,337 16,000 201,337 43,613 148,828 96,122 28,855 67,267 $ 59,729 215,990 28,900 187,090 32,542 142,446 77,186 19,842 57,344 $ $ 286,534 77,569 208,965 35,500 173,465 31,552 138,748 66,269 16,564 49,705 Earnings per share: Basic earnings per share Diluted earnings per share (1) Loans are shown net of allowance for loan losses, deferred fees and unearned discount. $ $ 1.22 $ 1.22 $ 1.23 $ 1.23 $ 1.18 $ 1.18 $ 1.01 $ 1.01 $ 0.88 0.88 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 35 PART II ITEM 6 Selected Financial Data Selected Financial and Other Data(1) Performance Ratios: Return on average assets Return on average equity Average net interest rate spread Net interest margin(2) Average interest-earning assets to average interest-bearing liabilities Non-interest income to average total assets Non-interest expenses to average total assets Effi ciency ratio(3) Asset Quality Ratios: 2014 At or For the Year Ended December 31, 2011 2013 2012 2010 0.92% 0.97% 0.94% 0.83% 0.73% 6.75 3.18 3.30 1.22 0.51 2.11 7.08 3.19 3.31 1.22 0.61 2.05 6.88 3.25 3.38 1.19 0.61 2.08 6.09 3.33 3.49 1.16 0.47 2.07 5.46 3.27 3.45 1.14 0.47 2.05 60.70 57.18 57.03 57.31 57.69 Non-performing loans to total loans 0.88% 1.48% 2.02% 2.63% 2.21% Non-performing assets to total assets Allowance for loan losses to non-performing loans Allowance for loan losses to total loans 0.69 114.63 1.01 1.10 84.32 1.24 1.53 71.07 1.43 1.91 60.67 1.60 1.47 70.66 1.56 Capital Ratios: Leverage capital(4) Total risk based capital(4) Average equity to average assets Other Data: Number of full-service offi ces 9.21% 9.42% 8.93% 8.74% 8.57% 12.06 13.06 12.89 14.14 12.68 13.93 12.80 14.05 13.00 14.26 86 77 78 82 81 Full time equivalent employees (1) Averages presented are daily averages. (2) Net interest income divided by average interest earning assets. (3) Represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income. (4) Leverage capital ratios are presented as a percentage of quarterly average tangible assets. Risk-based capital ratios are presented as a percentage of risk-weighted assets. 967 884 886 906 899 Effi ciency Ratio Calculation: 12/31/2014 12/31/2013 12/31/2012 12/31/2011 12/31/2010 Net interest income Non-interest income Total income Non-interest expense Expense/income $ $ $ 238,889 41,168 280,057 169,991 $ $ $ 216,010 44,153 260,163 148,763 $ $ $ 217,337 43,613 260,950 148,828 $ $ $ 215,990 32,542 248,532 142,446 $ $ $ 208,965 31,552 240,517 138,748 60.70% 57.18% 57.03% 57.31% 57.69% 36 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations General On January 15, 2003, the Company became the holding company for the Bank, following the completion of the conversion of the Bank to a New Jersey-chartered capital stock savings bank. The Company issued an aggregate of 59,618,300 shares of its common stock in a subscription offering to eligible depositors. Concurrent with the conversion, the Company contributed an additional 1,920,000 shares of its common stock and $4.8 million in cash to The Provident Bank Foundation, a charitable foundation established by the Bank. The Company conducts business through its subsidiary, the Bank, a community- and customer-oriented bank currently operating 86 full-service branches throughout northern and central New Jersey, as well as Bucks, Lehigh and Northampton counties in Pennsylvania. Strategy Established in 1839, the Bank is the oldest New Jersey-chartered bank in the state. The Bank offers a full range of retail and commercial loan and deposit products, and emphasizes personal service and convenience. markets. Core deposits, consisting of all savings and demand deposit accounts, are generally a stable, relatively inexpensive source of funds. At December 31, 2014, core deposits were 85.7% of total deposits. The Bank’s strategy is to grow profi tably through a commitment to credit quality and expanding market share by acquiring, retaining and expanding customer relationships, while carefully managing interest rate risk. In recent years, the Bank has focused on commercial real estate, multi-family and commercial loans as part of its strategy to diversify the loan portfolio and reduce interest rate risk. These types of loans generally have adjustable rates that initially are higher than residential mortgage loans and generally have a higher rate of risk. The Bank’s credit policy focuses on quality underwriting standards and close monitoring of the loan portfolio. At December 31, 2014, these commercial loan types accounted for 69.4% of the loan portfolio and retail loans accounted for 30.6%. The Company intends to continue to diversify the loan portfolio and to focus on commercial real estate, multi-family and commercial lending relationships. The Company’s relationship banking strategy focuses on increasing core accounts and expanding relationships through its branch network, mobile banking, online banking and telephone banking touch points. The Company continues to evaluate opportunities to increase market share by expanding within existing and contiguous The Company’s results of operations are primarily dependent upon net interest income, the difference between interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. Changes in interest rates could have an adverse effect on net interest income to the extent the Company’s interest- bearing assets and interest-bearing liabilities reprice or mature at different times or relative interest rates. An increase in interest rates generally would result in a decrease in the Company’s average interest rate spread and net interest income, which could have a negative effect on profi tability. The Company generates non-interest income such as income from retail and business account fees, loan servicing fees, loan origination fees, appreciation in the cash surrender value of Bank-owned life insurance, income from loan or securities sales, fees from wealth management services and investment product sales and other fees. The Company’s operating expenses consist primarily of compensation and benefi ts expense, occupancy and equipment expense, data processing expense, the amortization of intangible assets, marketing and advertising expense and other general and administrative expenses. The Company’s results of operations are also affected by general economic conditions, changes in market interest rates, changes in asset quality, changes in asset values, actions of regulatory agencies and government policies. Acquisitions On October 31, 2014, Beacon acquired the fi duciary account relationships of a bank in Suffolk County, New York. On January 5, 2015, Beacon announced the signing of a defi nitive agreement to acquire the assets and liabilities of The MDE Group, Inc. and the equity interests of Acertus Capital Management, LLC, both Morristown, New Jersey based registered investment advisers under common ownership. The transaction is currently awaiting regulatory approval from the New Jersey Department of Banking and Insurance and the satisfaction of customary closing conditions. On May 30, 2014, the Company completed its acquisition of Team Capital Bank (“Team Capital”), which after purchase accounting adjustments added $964.0 million to total assets, $631.2 million to loans, and $769.9 million to deposits. Total consideration paid for Team Capital was $115.1 million: $31.6 million in cash and PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 37 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 4.9 million shares of common stock valued at $83.5 million on the acquisition date. Team Capital was merged with and into the Company’s subsidiary, The Provident Bank as of the close of business on the date of acquisition. The merger added twelve branches to The Provident Bank branch network, with fi ve branches in Pennsylvania and seven in New Jersey. Critical Accounting Policies The Company considers certain accounting policies to be critically important to the fair presentation of its fi nancial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated fi nancial statements to these critical accounting policies, and the assumptions and estimates applied, could have a signifi cant impact on its fi nancial condition and results of operations. These assumptions, estimates and judgments made by management can be infl uenced by a number of factors, including the general economic environment. The Company has identifi ed the following as critical accounting policies: • Adequacy of the allowance for loan losses • Goodwill valuation and analysis for impairment • Valuation of securities available for sale and impairment analysis • Valuation of deferred tax assets The calculation of the allowance for loan losses is a critical accounting policy of the Company. The allowance for loan losses is a valuation account that refl ects management’s evaluation of the probable losses in the loan portfolio. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses. The Company’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans, this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of fi nancial performance, payment history and collateral values is conducted on a quarterly basis. As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares an analysis that categorizes the entire loan portfolio by certain risk characteristics such as loan type (residential mortgage, commercial mortgage, construction, commercial, etc.) and loan risk rating. When assigning a risk rating to a loan, management utilizes a nine point internal risk rating system. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifi cations (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial and construction loans are rated individually and each lending offi cer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Offi cer and the Credit Administration Department. The risk ratings are also confi rmed through periodic loan review examinations, which are currently performed by an independent 38 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report third party and periodically, by the Credit Committee in the credit renewal or approval. In addition, the Bank requires an annual review be performed for commercial and commercial real estate loans above certain dollar thresholds, depending on loan type, to help determine the appropriate risk ratings. Management assigns general valuation allowance (“GVA”) percentages to each risk rating category for use in allocating the allowance for loan losses, giving consideration to historical loss experience by loan type and other qualitative or environmental factors such as trends and levels of delinquencies, impaired loans, charge-offs, recoveries, loan volume, as well as the national and local economic trends and conditions. The appropriateness of these percentages is evaluated by management at least annually and monitored on a quarterly basis, with changes made when they are required. In the second quarter of 2014, management completed its most recent evaluation of the GVA percentages. As a result of that evaluation, certain GVA percentages applied to residential mortgage, commercial, multi-family and commercial mortgage loans were reduced to refl ect the decrease in the historical loss experience and improvements in qualitative factors. In addition, GVA percentages for marine loans were increased due to historical loss experience. During the fourth quarter of 2014, management made certain changes and enhancements to its process and controls over measuring the GVA portion of the allowance for loan losses. In connection with its periodic risk assessment and monitoring process, the Company re-evaluated a number of assumptions supporting the methodology including the look-back period used to evaluate the historical loss factors for its portfolios, as well as performing a study of its loss emergence period (“LEP”) data. As a result of this review, management updated a number of assumptions, including lengthening its LEP given continued improvements in market conditions. Given these changes to the quantitative methodology, management reassessed its qualitative and environmental factors to align with the revised model assumptions. The result of these changes was to allocate a greater portion of the allowance to the quantitative component of the GVA and less to the qualitative component. The changes had no impact on the overall allowance. Management believes the primary risks inherent in the portfolio are a decline in the economy, generally, a decline in real estate market values, rising unemployment or a protracted period of unemployment at current elevated levels, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay their loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in its loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio. PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Although management believes that the Company has established and maintained the allowance for loan losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ signifi cantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be refl ected in the fi nancial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to signifi cant judgment and short-term change. Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company qualitatively determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing Step 1 of the goodwill impairment test. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would be required to perform Step 1 of the assessment and then, if needed, Step 2 to determine whether goodwill is impaired. However, if it is more likely than not that the fair value of the reporting unit is more than its carrying amount, the entity does not need to apply the two-step impairment test. For this analysis, the Reporting Unit is defi ned as the Bank, which includes all core and retail banking operations of the Company but excludes the assets, liabilities, equity, earnings and operations held exclusively at the Company level. The guidance provides certain factors an entity should consider in its qualitative assessment in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The factors include: • Macroeconomic conditions, such as deterioration in economic condition and limited access to capital. • Industry and market considerations, such as increased competition, regulatory developments and decline in market- dependent multiples. • Cost factors, such as increased labor costs, cost of materials and other operating costs. • Overall fi nancial performance, such as declining cash fl ows and decline in revenue or earnings. • Other relevant entity-specifi c events, such as changes in management, strategy or customers, litigation and contemplation of bankruptcy. • Reporting unit events, such as selling or disposing a portion of a reporting unit and a change in composition of assets. The Company completed its annual goodwill impairment test as of September 30, 2014. Based upon its qualitative assessment of goodwill, the Company concluded it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, goodwill was not impaired and no further quantitative analysis (Step 1) was warranted. The Company may, based upon its qualitative assessment, or at its option, perform the two-step process to evaluate the potential impairment of goodwill. If, based upon Step 1, the fair value of the Reporting Unit exceeds its carrying amount, goodwill of the Reporting Unit is considered not impaired. However, if the carrying amount of the Reporting Unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the Reporting Unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company’s available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in Stockholders’ Equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 5 to the audited consolidated fi nancial statements. Securities which the Company has the positive intent and ability to hold to maturity are classifi ed as held to maturity and carried at amortized cost. The Company conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In this evaluation, if such a decline were deemed other-than-temporary, the Company would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. The fair value of the securities portfolio is signifi cantly affected by changes in interest rates. In general, as interest rates rise, the fair value of fi xed-rate securities decreases and as interest rates fall, the fair value of fi xed-rate securities increases. Turmoil in the credit markets resulted in a lack of liquidity in certain sectors of the mortgage-backed securities market. Increases in delinquencies and foreclosures have resulted in limited trading activity and signifi cant price declines, regardless of favorable movements in interest rates. The Company determines if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If either exists, the decline in value is considered other-than-temporary. In this evaluation, no other-than-temporary securities impairment loss was incurred in 2014 and 2012, while in 2013, the Company recognized an other-than-temporary securities impairment loss of $434,000. The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities, utilization against carryback years and estimates of future taxable income. Such estimates are subject to management’s judgment. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 39 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. At December 31, 2014, the Company maintained a valuation allowance of $242,000, related to unused capital loss carryforwards. Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the rates of interest earned on such assets and paid on such liabilities. Average Balance Sheet. The following table sets forth certain information for the years ended December 31, 2014, 2013 and 2012. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances are daily averages. 2014 For the Years Ended December 31, 2013 2012 Average Outstanding Balance Interest Earned/ Paid Average Yield/ Cost Average Outstanding Balance Interest Earned/ Paid Average Yield/ Cost Average Outstanding Balance Interest Earned/ Paid Average Yield/ Cost (Dollars in thousands) Interest-earning assets: Deposits $ 21,548 $ Federal funds sold and short- term investments Investment securities(1) 1,398 420,161 Securities available for sale 1,131,496 Federal Home Loan Bank Stock Net loans(2) 63,697 5,599,586 Total interest-earning assets 7,237,886 Non-interest earning assets 806,296 Total assets $ 8,044,182 53 — 12,263 23,998 2,477 240,570 279,361 0.25% $ 15,240 $ 0.25% $ 32,200 $ 0.02 2.91 2.12 3.89 4.30 3.86 38 1 10,987 23,567 1,560 353,639 1,188,253 44,127 1,683 4,922,245 216,501 6,525,064 252,777 739,168 $ 7,264,232 0.04 3.11 1.98 3.81 4.40 3.87 81 1 11,808 27,327 1,439 351,981 1,348,376 39,137 1,814 4,658,422 221,228 6,431,555 262,259 739,386 $ 7,170,941 $ 2,812,451 963,807 818,753 7,733 938 6,661 1,338,463 25,140 0.27% $ 928,245 0.10 0.81 1.88 2,652,419 878,413 908,778 960 7,456 9,615 18,736 0.10% $ 901,398 0.28 1.09 2.06 2,581,802 1,041,533 864,728 1,449 10,292 13,607 19,574 5,933,474 40,472 0.68 5,367,855 36,767 0.68 5,389,461 44,922 0.83 Non-interest bearing liabilities 1,019,328 Total liabilities Stockholders’ equity 6,952,802 1,091,380 Total liabilities and equity $ 8,044,182 Net interest income Net interest rate spread Net interest earning assets $ 1,304,412 900,364 6,268,219 996,013 $ 7,264,232 803,722 6,193,183 977,758 $ 7,170,941 $ 238,889 $ 216,010 $ 217,337 3.18% 3.30% $ 1,157,209 3.19% 3.31% $ 1,042,094 3.25% 3.38% Interest-bearing liabilities: Savings deposits Demand deposits Time deposits Borrowed funds Total interest-bearing liabilities Net interest margin(3) Ratio of interest-earning assets to total interest- bearing liabilities 0.25% 0.09 3.35 2.03 4.63 4.75 4.08 0.16% 0.40 1.31 2.26 1.22x 1.22x 1.19x (1) Average outstanding balance amounts are at amortized cost. (2) Average outstanding balances are net of the allowance for loan losses, deferred loan fees and expenses, and loan premiums and discounts and include non-accrual loans. (3) Net interest income divided by average interest-earning assets. 40 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. (In thousands) Interest-earning assets: Deposits, Federal funds sold and short-term investments Investment securities Securities available for sale Federal Home Loan Bank Stock Loans Total interest-earning assets Interest-bearing liabilities: Savings deposits Demand deposits Time deposits Borrowed funds Total interest-bearing liabilities Years Ended December 31, 2014 vs. 2013 2013 vs. 2012 Increase/(Decrease) Due to Volume Rate Total Increase/ (Decrease) Increase/(Decrease) Due to Volume Rate Total Increase/ (Decrease) $ 14 $ — $ 14 $ 1,972 (1,157) 760 29,200 30,789 36 442 (618) 8,196 8,056 (696) 1,588 34 (5,131) (4,205) (58) (165) (2,336) (1,792) (4,351) 1,276 431 794 24,069 26,584 (22) 277 (2,954) 6,404 3,705 (43) $ 55 (3,186) 214 12,127 9,167 42 274 (1,962) 965 (681) — $ (876) (574) (345) (16,854) (18,649) (531) (3,110) (2,030) (1,803) (7,474) (43) (821) (3,760) (131) (4,727) (9,482) (489) (2,836) (3,992) (838) (8,155) (1,327) Net interest income $ 22,733 $ 146 $ 22,879 $ 9,848 $ (11,175) $ Comparison of Financial Condition at December 31, 2014 and December 31, 2013 Total assets increased $1.04 billion, or 13.8%, to $8.52 billion at December 31, 2014, from $7.49 billion at December 31, 2013, primarily due to the addition of $964.0 million of total assets from the Team Capital acquisition. Total loans increased $890.7 million, or 17.1%, to $6.09 billion at December 31, 2014, from $5.19 billion at December 31, 2013, which included $631.4 million of loans acquired from Team Capital. For the year ended December 31, 2014, loan originations totaling $1.79 billion and loan purchases of $130.5 million were partially offset by repayments of $1.67 billion and loan sales of $12.6 million. Commercial loans increased $331.4 million to $1.26 billion at December 31, 2014, compared to $932.2 million at December 31, 2013, commercial real estate loans increased $295.2 million to $1.70 billion at December 31, 2014, compared to $1.40 billion at December 31, 2013, multi-family loans increased $113.3 million to $1.04 billion at December 31, 2014, compared to $928.9 million at December 31, 2013, residential mortgage loans increased $78.5 million to $1.25 billion at December 31, 2014, compared to $1.17 billion at December 31, 2013, construction loans increased $37.8 million to $221.1 million at December 31, 2014, compared to $183.3 million at December 31, 2013 and consumer loans increased $34.0 million to $611.6 million at December 31, 2014, compared to $577.6 million at December 31, 2013. Commercial loans, consisting of commercial real estate, multi-family, construction and commercial loans, totaled $4.22 billion, accounting for 69.4% of the loan portfolio at December 31, 2014, compared to $3.45 billion, or 66.3% of the loan portfolio at December 31, 2013. The Company intends to continue to focus on the origination of commercially-oriented loans. Retail loans, which consist of one- to four-family residential mortgage and consumer loans, such as fi xed-rate home equity loans and lines of credit, totaled $1.86 billion and accounted for 30.6% of the loan portfolio at December 31, 2014, compared to $1.75 billion, or 33.7%, of the loan portfolio at December 31, 2013. The Company does not originate or purchase sub-prime or option ARM loans. Prior to September 30, 2008, the Company originated “Alt-A” mortgages in the form of stated income loans with a maximum loan-to-value ratio of 50% on a limited basis. The balance of these “Alt-A” loans at December 31, 2014 was $6.8 million. Of this total, 5 loans totaling $885,000 were 90 days or more delinquent. General valuation reserves of 5.5%, or $49,000, were allocated to these loans at December 31, 2014. The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNC”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $95.4 million and $46.6 million, respectively, at December 31, 2014. At December 31, 2014, no SNC relationships were classifi ed as substandard. The Company had outstanding junior lien mortgages totaling $266.8 million at December 31, 2014. Of this total, 25 loans totaling $2.0 million were 90 days or more delinquent. General valuation reserves of 10%, or $203,000, were allocated to these loans at December 31, 2014. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 41 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations At December 31, 2014, the Company had outstanding indirect marine loans totaling $26.9 million. Of this total, 2 loans totaling $419,000 were 90 days or more delinquent. General valuation reserves of 72%, or $302,000, were allocated to these loans at December 31, 2014. Marine loans are currently made only on a direct, limited accommodation basis to existing customers. The allowance for loan losses decreased $2.9 million to $61.7 million at December 31, 2014, as a result of net charge-offs of $7.6 million, partially offset by provisions for loan losses of $4.7 million during 2014. The reduction in the allowance for loan losses was a function of an improvement in the weighted average risk rating of the loan portfolio, a decline in delinquencies, non-performing loan resolutions and reduced non-performing loan formation resulting in continued net outfl ows. Total non-performing loans at December 31, 2014 were $53.9 million, or 0.88% of total loans, compared with $76.7 million, or 1.48% of total loans at December 31, 2013. At December 31, 2014, impaired loans totaled $85.4 million with related specifi c reserves of $7.1 million, compared with impaired loans totaling $106.4 million with related specifi c reserves of $10.2 million at December 31, 2013. Within total impaired loans, there were $20.9 million of loans for which the present value of expected future cash fl ows or current collateral valuations exceeded the carrying amounts of the loans and for which no specifi c reserves were required in accordance with GAAP. At December 31, 2014, the Company’s allowance for loan losses was 1.01% of total loans, compared with 1.24% of total loans at December 31, 2013. The decline in the loan coverage ratio from December 31, 2013, was largely attributable to the recording of Team Capital loans at fair value at the date of acquisition, with no corresponding allowance. Non-performing commercial loans decreased $9.9 million, to $12.3 million at December 31, 2014, from $22.2 million at December 31, 2013. Non-performing commercial loans at December 31, 2014 consisted of 24 loans. The largest non- performing commercial loan relationship consisted of fi ve loans to a power systems manufacturer with total outstanding balances of $7.1 million at December 31, 2014. Contractual payments on four of these loans, based upon modifi ed terms, were current at December 31, 2014. One loan with a balance of $1.0 million matured on January 31, 2012 and is presently in default. The Company had no non-performing construction loans at December 31, 2014, compared to $8.4 million at December 31, 2013. The decline during the year was due to a single construction loan on a Class A offi ce building which was upgraded to performing status based upon an increase in tenant occupancy. Non-performing residential mortgage loans decreased $5.8 million to $17.2 million at December 31, 2014, from $23.0 million at December 31, 2013. Gross charge-offs of residential loans were $3.2 million for the year ended December 31, 2014. Non-performing commercial mortgage loans increased $1.4 million to $20.0 million at December 31, 2014, from $18.7 million at December 31, 2013. At December 31, 2014, the Company held 16 non-performing commercial mortgage loans. The largest non-performing commercial mortgage loan was a $12.3 million loan secured by a fi rst mortgage on a 200,000 square foot offi ce/ industrial building located in Eatontown, New Jersey, which has been negatively impacted by the loss of a major tenant that relied upon contracts with the Federal government. The loan was previously restructured and matured on June 1, 2014. The loan maturity was not extended and the loan is presently in default. There is no contractual commitment to advance additional funds to this borrower. At December 31, 2014, the Company held $5.1 million of foreclosed assets, compared with $5.5 million at December 31, 2013. Foreclosed assets at December 31, 2014 are carried at fair value based on recent appraisals and valuation estimates, less estimated selling costs. Foreclosed assets consisted primarily of $2.3 million of residential properties, $2.7 million of commercial real estate and $60,000 of marine vessels at December 31, 2014. Non-performing assets totaled $59.0 million, or 0.69% of total assets at December 31, 2014, compared to $82.2 million, or 1.10% of total assets at December 31, 2013. If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $1.9 million during the year ended December 31, 2014. The amount of cash basis interest income that was recognized on impaired loans during the years ended December 31, 2014 and 2013 was not material. Total deposits increased $590.1 million, or 11.3%, during the year ended December 31, 2014 to $5.79 billion from $5.20 billion at December 31, 2013. The increase in total deposits was primarily due to $769.9 million of deposits acquired from Team Capital, partially offset by a decrease in retail time deposits. Core deposits, consisting of savings and all demand deposit accounts, increased $571.1 million, or 13.0%, to $4.97 billion at December 31, 2014. Within the core deposit category, non-interest bearing demand deposits increased $184.4 million to $1.05 billion at December 31, 2014. The Company continued to develop core deposit relationships, while strategically permitting the run-off of higher- costing retail time deposits. Core deposits represented 85.7% of total deposits at December 31, 2014, compared to 84.5% at December 31, 2013. Borrowed funds increased $306.0 million, or 25.4% during the year ended December 31, 2014, to $1.51 billion, as longer-term wholesale funding was added to mitigate interest rate risk. Borrowed funds represented 17.7% of total assets at December 31, 2014, an increase from 16.1% at December 31, 2013. Total stockholders’ equity increased $133.3 million to $1.14 billion at December 31, 2014, from $1.01 billion at December 31, 2013. This increase was a result of $83.5 million of common stock issued for the purchase of Team Capital, net income of $73.6 million, the allocation of shares to stock-based compensation plans of $10.4 million, other comprehensive income of $4.9 million and the reissuance of shares for the dividend reinvestment program of $1.3 million, partially offset by cash dividends of $36.1 million and common stock repurchases of $4.4 million. Comparison of Operating Results for the Years Ended December 31, 2014 and December 31, 2013 General. Net income for the year ended December 31, 2014 was $73.6 million, compared to $70.5 million for the year ended December 31, 2013. Basic and diluted earnings per share were $1.22 for the year ended December 31, 2014, compared to basic and diluted earnings per share of $1.23 for 2013. Operating results for year ended December 31, 2014 included non-recurring items associated with the acquisition of Team Capital Bank of $3.9 million, net of taxes. Additionally, earnings for the year ended 42 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations December 31, 2014 were impacted by a $788,000, net of tax, non-cash charge due to the recognition of a pro rata portion of unrealized losses related to lump sum distributions from the Company’s previously frozen pension plan. Net income for the year ended December 31, 2013 included the non-core write-off of a deferred tax asset related to expired non-qualifi ed stock options issued shortly after the Company’s 2003 initial public offering. The write-off in 2013 of the related $3.9 million deferred tax asset resulted in a $3.2 million charge to income tax expense and a $735,000 charge to equity in the third quarter of 2013. Net Interest Income. Net interest income increased $22.9 million to $238.9 million for 2014, from $216.0 million for 2013. The average interest rate spread declined 1 basis point to 3.18% for 2014, from 3.19% for 2013. The net interest margin decreased 1 basis point to 3.30% for 2014, compared to 3.31% for 2013. For the year ended December 31, 2014, net interest income was favorably impacted by the assets acquired from Team Capital and growth in non-interest bearing demand deposits, which was mitigated by compression in the net interest margin. Interest income increased $26.6 million, or 10.5%, to $279.4 million for 2014, compared to $252.8 million for 2013. The increase in interest income was attributable to an increase in average earning asset balances, partially offset by a decrease in the yield on average earning assets. Average interest-earning assets increased $712.8 million, or 10.9%, to $7.24 billion for 2014, compared to $6.53 billion for 2013. The average outstanding loan balances increased $677.3 million, or 13.8%, to $5.60 billion for 2014 from $4.92 billion for 2013, the average balance of securities available for sale decreased $56.8 million, or 4.8%, to $1.13 billion for 2014, compared to $1.19 billion for 2013, and the average balance of investment securities held to maturity increased $66.5 million, or 18.8%, to $420.2 million for 2014, compared to $353.6 million for 2013. The yield on interest-earning assets decreased 1 basis point to 3.86% for 2014, from 3.87% for 2013, with a reduction in the weighted average yield on total loans partially offset by an increase in the weighted average yield on total securities. Interest expense increased $3.7 million, or 10.1%, to $40.5 million for 2014, from $36.8 million for 2013. The increase in interest expense was attributable to an increase in average borrowings, which funded a portion of the growth in average interest-earning assets, partially offset by a shift in the funding composition to lower-costing core deposits from time deposits and a reduction in the average cost of borrowings. Also offsetting the increase in interest expense was a $120.5 million, or 14.4% increase in average non-interest bearing demand deposits to $959.8 million for 2014, from $839.3 million for 2013. The average rate paid on interest-bearing liabilities remained unchanged at 0.68% for 2014, compared to 2013. The average rate paid on interest-bearing deposits decreased 7 basis points to 0.33% for 2014, from 0.40% for 2013. The average rate paid on borrowings decreased 18 basis points to 1.88% for 2014, from 2.06% for 2013. The average balance of interest-bearing liabilities increased $565.6 million to $5.93 billion for 2014, compared to $5.37 billion for 2013. Average interest-bearing deposits increased $135.9 million, or 3.05%, to $4.60 billion for 2014, from $4.46 billion for 2013. Within average interest-bearing deposits, average interest-bearing core deposits increased $195.6 million, or 5.5%, for 2014, compared with 2013, while average time deposits decreased $59.7 million, or 6.79%, for 2014, compared with 2013. Average outstanding borrowings increased $429.7 million, or 47.3%, to $1.34 billion for 2014, compared with $908.8 million for 2013. Provision for Loan Losses. Provisions for loan losses are charged to operations to maintain the allowance for loan losses at a level management considers necessary to absorb probable credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay the loan and the levels of non-performing and other classifi ed loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for loan losses on a quarterly basis and makes provisions for loan losses, if necessary, in order to maintain the adequacy of the allowance. The Company’s emphasis on continued diversifi cation of the loan portfolio through the origination of commercial loans has been one of the more signifi cant factors management has considered in evaluating the allowance for loan losses and provision for loan losses for the past several years. In the event the Company further increases the amount of such types of loans in the portfolio, management may determine that additional or increased provisions for loan losses are necessary, which could adversely affect earnings. The provision for loan losses was $4.7 million in 2014, compared to $5.5 million in 2013. The decrease in the provision for loan losses was primarily attributable to a decline in non-performing loan formation and an improvement in the weighted average credit risk ratings of the loan portfolio. Net charge-offs for 2014 were $7.6 million, compared to $11.2 million for 2013. Total charge-offs for the year ended December 31, 2014 were $10.9 million, compared to $14.4 million for the year ended December 31, 2013. Recoveries for the year ended December 31, 2014, were $3.3 million, compared to $3.2 million for the year ended December 31, 2013. The allowance for loan losses at December 31, 2014 was $61.7 million, or 1.01% of total loans, compared to $64.7 million, or 1.24% of total loans at December 31, 2013. In addition to improvements in asset quality, the reduction in the ratio for allowance for loan losses to loans refl ects the acquisition of loans from Team Capital at fair value. At December 31, 2014, non-performing loans as a percentage of total loans were 0.88%, compared to 1.48% at December 31, 2013. Non-performing assets as a percentage of total assets were 0.69% at December 31, 2014, compared to 1.10% at December 31, 2013. At December 31, 2014, non-performing loans were $53.9 million, compared to $76.7 million at December 31, 2013, and non- performing assets were $59.0 million at December 31, 2014, compared to $82.2 million at December 31, 2013. Non-Interest Income. For the year ended December 31, 2014, non- interest income totaled $41.2 million, a decrease of $3.0 million, or 6.8%, compared to 2013. Fee income decreased $2.7 million, to $31.3 million for the year ended December 31, 2014, compared to 2013, largely due to a $4.0 million decrease in prepayment fees on commercial loans, partially offset by a $1.4 million increase in wealth management income. BOLI income decreased $963,000 for the year ended December 31, 2014, principally due to lower death benefi ts recognized in the year ended December 31, 2014, compared to 2013, partially offset by income recognized on BOLI assets acquired from Team Capital. Also contributing to the decline in non-interest income, net gains on securities transactions for the year ended December 31, 2014 declined $745,000 as compared to 2013. These decreases were partially offset by a $989,000 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 43 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations increase in other income for the year ended December 31, 2014, compared with 2013, primarily due to a $486,000 gain recognized on the prepayment of FHLB borrowings acquired from Team Capital, and a $787,000 gain recognized on loan level interest rate swap transactions, partially offset by a reduction in gains on loan sales. Additionally, for the year ended December 31, 2013, the Company recognized a $434,000 other-than-temporary impairment charge related to an investment in a non-Agency mortgage-backed security. Non-Interest Expense. Non-interest expense for the year ended December 31, 2014 was $170.0 million, an increase of $21.2 million from the year ended December 31, 2013. Non-interest expense for the year ended December 31, 2014 included $6.6 million of non-recurring costs related to the acquisition of Team Capital. Compensation and benefi ts expense increased $9.2 million to $92.2 million for the year ended December 31, 2014, compared to the year ended December 31, 2013, due to increased salary expense, $1.7 million of severance and retention expense associated with Team Capital, $1.3 million of pension costs associated with lump-sum pension distributions made to vested terminated employees and increased stock-based compensation. Net occupancy costs increased $3.4 million, to $24.0 million for the year ended December 31, 2014, compared to the year ended December 31, 2013, principally due to additional facilities costs related to Team Capital, increased seasonal maintenance expense in the fi rst quarter of 2014 related to the harsh winter conditions and increased depreciation expense. Other operating expenses increased $3.3 million to $27.7 million for the year ended December 31, 2014, compared to $24.5 million for the same period in 2013, primarily due to non-recurring professional services and customer communication costs related to the Team Capital acquisition. In addition, data processing expense increased $3.1 million to $13.7 million for the year ended December 31, 2014, compared to $10.6 million for the same period in 2013, principally due to $2.4 million of non-recurring core system contract termination costs related to the Team Capital acquisition and increased software maintenance and telecommunication expenses. The amortization of intangibles increased $1.1 million for the year ended December 31, 2014, compared with the same period in 2013, primarily due to increases in the core deposit intangible amortization related to the Team Capital acquisition, while advertising and promotion expense increased $1.1 million, largely due to post-merger promotional activities within the former Team Capital marketplace. Income Tax Expense. For the year ended December 31, 2014, the Company’s income tax expense was $31.8 million, compared with $35.4 million, for the same period in 2013. The Company’s effective tax rate was 30.2% for the year ended December 31, 2014, compared with 33.4% for the year ended December 31, 2013. The decreases in income tax expense and the effective tax rate were principally due to a $3.2 million charge associated with the write-off of a deferred tax asset related to expired non-qualifi ed stock options in 2013. Comparison of Operating Results for the Years Ended December 31, 2013 and December 31, 2012 General. Net income for the year ended December 31, 2013 was $70.5 million, compared to $67.3 million for the year ended December 31, 2012. Basic and diluted earnings per share were $1.23 for the year ended December 31, 2013, compared to basic and diluted earnings per share of $1.18 for 2012. Earnings for year ended December 31, 2013 was favorably impacted by the continued improvement in asset quality and related reductions in the provision for loan losses compared with the same period last year. In addition, growth in both average loans outstanding and non-interest bearing demand deposits has contributed to the improvement in earnings. Net income for the year ended December 31, 2013 was adversely impacted by the write-off of a deferred tax asset related to non-qualifi ed stock options issued shortly after the Company’s 2003 initial public offering, all of which expired unused in July 2013. The write-off of the related $3.9 million deferred tax asset resulted in a $3.2 million charge to income tax expense and a $735,000 charge to equity in the third quarter of 2013. This write-off reduced both basic and diluted earnings per share for the year ended December 31, 2013 by $0.06. Net Interest Income. Net interest income decreased $1.3 million to $216.0 million for 2013, from $217.3 million for 2012. The average interest rate spread declined 6 basis points to 3.19% for 2013, from 3.25% for 2012. The net interest margin decreased 7 basis points to 3.31% for 2013, compared to 3.38% for 2012. For the year ended December 31, 2013, net interest income was unfavorably impacted by compression in net interest margin, which was mitigated by an increase in average loans outstanding, funded in part by growth in non-interest bearing demand deposits. Interest income decreased $9.5 million, or 3.6%, to $252.8 million for 2013, compared to $262.3 million for 2012. The decrease in interest income was attributable to a decrease in the yield on average earning assets, partially offset by an increase in average earning asset balances. The yield on interest-earning assets decreased 21 basis points to 3.87% for 2013, from 4.08% for 2012, with reductions in yields experienced in nearly all earning asset classes. Average interest-earning assets increased $93.5 million, or 1.5%, to $6.53 billion for 2013, compared to $6.43 billion for 2012. The average outstanding loan balances increased $263.8 million, or 5.7%, to $4.92 billion for 2013 from $4.66 billion for 2012, the average balance of securities available for sale decreased $160.1 million, or 11.9%, to $1.19 billion for 2013, compared to $1.35 billion for 2012, and the average balance of investment securities held to maturity increased $1.7 million, or 0.5%, to $353.6 million for 2013, compared to $352.0 million for 2012. These increases were partially offset by a decrease in average interest-earning deposits, Federal funds sold and short-term investment balances of $16.8 million, to $16.8 million for 2013, from $33.6 million for 2012. Interest expense decreased $8.2 million, or 18.2%, to $36.8 million for 2013, from $44.9 million for 2012. The decrease in interest expense was attributable to lower short-term interest rates coupled with a shift in the funding composition to lower-costing core deposits from certifi cates of deposit and a reduction in the average cost of borrowings. This was partially offset by an increase in average borrowings, which replaced average deposit outfl ow and funded a portion of the growth in average interest-earning assets. The average rate paid on interest-bearing liabilities decreased 15 basis points to 0.68% for 2013, from 0.83% for 2012. The average rate paid on interest-bearing deposits decreased 16 basis points to 0.40% for 2013, from 0.56% for 2012. The average rate paid on borrowings decreased 20 basis points to 2.06% for 2013, from 2.26% for 2012. The average balance of interest-bearing liabilities decreased $8.2 million to $5.37 billion for 2013, compared to $5.39 billion for 44 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2012. Average interest-bearing deposits decreased $65.7 million, or 1.45%, to $4.46 billion for 2013, from $4.52 billion for 2012. Within average interest-bearing deposits, average interest-bearing core deposits increased $97.5 million, or 2.8%, for 2013, compared with 2012, while average time deposits decreased $163.1 million, or 15.66%, for 2013, compared with 2012. Also contributing to the decrease in interest expense, average non-interest bearing deposits increased $96.2 million, or 12.9%, to $839.3 million for 2013, from $743.1 million for 2012. Average outstanding borrowings increased $44.1 million, or 5.1%, to $908.8 million for 2013, compared with $864.7 million for 2012. Provision for Loan Losses. The provision for loan losses was $5.5 million in 2013, compared to $16.0 million in 2012. The decrease in the provision for loan losses was primarily attributable to a decline in non-performing loan formation and an improvement in credit risk ratings. Net charge-offs for 2013 were $11.2 million, compared to $20.0 million for 2012. Total charge-offs for the year ended December 31, 2013 were $14.4 million, compared to $23.9 million for the year ended December 31, 2012. Recoveries for the year ended December 31, 2013, were $3.2 million, compared to $3.9 million for the year ended December 31, 2012. The allowance for loan losses at December 31, 2013 was $64.7 million, or 1.24% of total loans, compared to $70.3 million, or 1.43% of total loans at December 31, 2012. At December 31, 2013, non-performing loans as a percentage of total loans were 1.48%, compared to 2.02% at December 31, 2012. Non-performing assets as a percentage of total assets were 1.10% at December 31, 2013, compared to 1.53% at December 31, 2012. At December 31, 2013, non-performing loans were $76.7 million, compared to $99.0 million at December 31, 2012, and non-performing assets were $82.2 million at December 31, 2013, compared to $111.5 million at December 31, 2012. Non-Interest Income. For the year ended December 31, 2013, non- interest income totaled $44.2 million, an increase of $540,000, or 1.2%, compared to the same period in 2012. Fee income increased $3.7 million, to $34.0 million for the year ended December 31, 2013, compared with the same period in 2012, largely due to increases in prepayment fees on commercial loans, wealth management income and deposit fees. BOLI income increased $1.3 million for the year ended December 31, 2013, compared to the same period in the prior year, principally due to the recognition of a policy claim. These increases were partially offset by a $3.5 million decrease in net gains on securities transactions for the year ended December 31, 2013, compared to the same period in 2012. Other income decreased $554,000 for the year ended December 31, Liquidity and Capital Resources 2013, compared with the same period in 2012, primarily due to a $491,000 decrease in gains on loan sales, a $525,000 decrease associated with the sale of a parcel of land in 2012, partially offset by a $478,000 increase in net gains on the sales of foreclosed real estate. Additionally, for the year ended December 31, 2013, the Company recognized a $434,000 net other-than-temporary impairment charge related to an investment in a previously impaired non-Agency mortgage-backed security. Non-Interest Expense. For the year ended December 31, 2013, non-interest expense was $148.8 million, a decrease of $65,000 from the year ended December 31, 2012. Other operating expenses decreased $2.0 million, primarily due to a reduction in non- performing asset related expenses and charges incurred in the prior year period, which included $545,000 related to damages sustained in Superstorm Sandy, $213,000 associated with the termination of a software contract in connection with the Beacon integration and $222,000 related to the consolidation of underperforming branches. In addition, the amortization of intangibles decreased $842,000 for the year ended December 31, 2013, compared with the same period in 2012, as a result of scheduled reductions in core deposit intangible amortization. FDIC insurance costs declined $417,000 as a result of a lower assessment rate and advertising expense decreased $249,000 to $3.9 million. Partially offsetting these reductions, compensation and benefi ts expense increased $3.2 million and data processing expense increased $232,000, respectively, for the year ended December 31, 2013, compared to the same period last year. The increase in compensation and benefi ts expense was principally due to an increase in the incentive compensation accrual, an increase in stock-based compensation resulting from an increase in the Company’s stock price and an increase in salaries and related payroll taxes, partially offset by a reduction in employee medical and retirement benefi t costs and severance expense. The increase in data processing expense was attributable to increased software maintenance and Internet- banking costs. Income Tax Expense. For the year ended December 31, 2013, the Company’s income tax expense was $35.4 million, compared with $28.9 million, for the same period in 2012. The increase in income tax expense for the year ended December 31, 2013 was primarily attributable to a $3.2 million charge associated with the write-off of a deferred tax asset related to expired non-qualifi ed stock options in the third quarter of 2013, and growth in pre-tax income from taxable sources. The Company’s effective tax rate was 33.4% for the year ended December 31, 2013, compared with 30.0% for the year ended December 31, 2012 Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet fi nancial obligations to its depositors, to fund loans and securities purchases, deposit outfl ows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash fl ows from mortgage-backed securities and the ability to borrow funds from the FHLB of New York and approved broker dealers. Cash fl ows from loan payments and maturing investment securities are a fairly predictable source of funds. Changes in interest rates, local economic conditions and the competitive marketplace can infl uence loan prepayments, prepayments on mortgage- backed securities and deposit fl ows. For each of the years ended December 31, 2014 and 2013, loan repayments totaled $1.65 billion and $1.47 billion, respectively. One- to four-family residential loans, consumer loans, commercial real estate loans, multi-family loans and commercial and small business loans are the primary investments of the Company. Purchasing securities for the investment portfolio is a secondary use of funds and the investment portfolio is structured to complement and facilitate the Company’s lending activities and ensure adequate PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 45 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations liquidity. Loan originations and purchases totaled $1.94 billion for the year ended December 31, 2014, compared to $1.81 billion for the year ended December 31, 2013. Purchases for the investment portfolio totaled $137.2 million for the year ended December 31, 2014, compared to $401.3 million for the year ended December 31, 2013. At December 31, 2014, the Bank had outstanding loan commitments to borrowers of $1.21 billion, including undisbursed home equity lines and personal credit lines of $343.1 million. Total deposits increased $590.1 million for the year ended December 31, 2014, which included deposits acquired from Team Capital. Deposit activity is affected by changes in interest rates, competitive pricing and product offerings in the marketplace, local economic conditions, customer confi dence and other factors such as stock market volatility. Certifi cate of deposit accounts that are scheduled to mature within one year totaled $568.5 million at December 31, 2014. Based on its current pricing strategy and customer retention experience, the Bank expects to retain a signifi cant share of these accounts. The Bank manages liquidity on a daily basis and expects to have suffi cient cash to meet all of its funding requirements. As of December 31, 2014, the Bank exceeded all minimum regulatory capital requirements. At December 31, 2014, the Bank’s leverage (Tier 1) capital ratio was 8.38%. FDIC regulations require banks to maintain a minimum leverage ratio of Tier 1 capital to adjusted total assets of 4.00%. At December 31, 2014, the Bank’s total risk-based capital ratio was 11.98%. Under current regulations, the minimum required ratio of total capital to risk-weighted assets is 8.00%. A bank is considered to be well-capitalized if it has a leverage (Tier 1) capital ratio of at least 5.00% and a total risk- based capital ratio of at least 10.00%. Off-Balance Sheet and Contractual Obligations Off-balance sheet and contractual obligations as of December 31, 2014, are summarized below: (In thousands) Off-Balance Sheet: Long-term commitments Letters of credit Total Off-Balance Sheet Contractual Obligations: Operating leases Certifi cate of deposits Total Contractual Obligations Total Payments Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years $ 1,180,626 $ 501,629 $ 328,173 $ 61,783 $ 289,041 27,983 1,208,609 42,267 825,689 867,956 11,563 513,192 6,521 568,462 574,983 16,170 344,343 12,415 152,317 164,732 82 168 61,865 289,209 10,444 100,080 110,524 12,887 4,830 17,717 $ 2,076,565 $ 1,088,175 $ 509,075 $ 172,389 $ 306,926 Off-balance sheet commitments consist of unused commitments to borrowers for term loans, unused lines of credit and outstanding letters of credit. Total off-balance sheet obligations were $1.21 billion at December 31, 2014, an increase of $298.5 million, or 32.8%, from $910.1 million at December 31, 2013. Contractual obligations consist of operating leases and certifi cate of deposit liabilities. There were no securities purchases that were entered into in 2014 and that settled in 2015. There was one securities purchase of $139,000 that was entered into in 2013 and that settled in 2014. Total contractual obligations at December 31, 2014 were $868.0 million, an increase of $16.9 million, or 2.0%, compared to $851.0 million at December 31, 2013. Contractual obligations under operating leases decreased $2.0 million, or 4.5%, to $42.3 million at December 31, 2014, from $44.3 million at December 31, 2013, and certifi cate of deposit accounts increased $18.9 million, or 2.3%, to $825.7 million at December 31, 2014, from $806.8 million at December 31, 2013. 46 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ITEM 7A. 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 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, the Company generally sells 20- and 30-year fi xed-rate mortgage loans at origination. Commercial real estate loans generally have interest rates that reset in fi ve 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 fi ve years or less, and mortgage-backed securities have weighted average lives initially between three and fi ve years. The Asset/Liability Committee meets on at least a monthly basis to review the impact of interest rate changes on net interest income, net interest margin, net income and economic value of equity. Members of the Asset/Liability Committee include the Chief Executive Offi cer and Chief Financial Offi cer, as well as other senior offi cers from the Bank’s fi nance, lending, credit and customer management departments. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income. 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. Certifi cate of deposit accounts as a percentage of total deposits were 14.3% at December 31, 2014, compared to 15.5% at December 31, 2013. Certifi cate of deposit accounts are generally short-term. As of December 31, 2014, 68.8% of all certifi cates of deposit had maturities of one year or less compared to 65.7% at December 31, 2013. The Company’s ability to retain maturing certifi cate of deposit accounts is reliant upon remaining competitively priced within the marketplace. The Company’s pricing strategy may vary depending upon funding needs and the Company’s ability to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLB of New York 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 fl at 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 policy limits for acceptable change. The Company periodically reviews historical deposit repricing activity and makes modifi cations to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifi cations are made to more precisely refl ect the most likely results under the various interest rate change scenarios. Since it is inherently diffi cult to predict the sensitivity of interest bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes. Specifi c assumptions used in the simulation model include: • Parallel yield curve shifts for market rates; • Current asset and liability spreads to market interest rates are fi xed; • Traditional savings and interest bearing demand accounts move at 10% of the rate ramp in either direction; • Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction, respectively; and • Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction. The following table sets forth the results of the twelve month projected net interest income model as of December 31, 2014. (Dollars in thousands) Change in Interest Rates in Basis Points (Rate Ramp) -100 Static +100 +200 +300 Net Interest Income Amount ($) Change ($) Change (%) 243,499 246,962 243,835 240,184 237,181 (3,463) — (3,127) (6,778) (9,781) (1.4) — (1.3) (2.7) (4.0) The above table indicates that as of December 31, 2014, in the event of a 300 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, the Company would experience a 4.0%, or $9.8 million decrease in net interest income. In the event of a 100 basis point decrease in interest rates, whereby rates ramp down evenly over a twelve-month period, the Company would experience a 1.4%, or $3.5 million decrease in net interest income. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 47 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 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 economic value of equity model results as of December 31, 2014. (Dollars in thousands) Change in Interest Rates (Basis Points) -100 Flat +100 +200 +300 Present Value of Equity Dollar Amount 1,365,629 1,310,791 1,274,328 1,224,772 1,164,074 Dollar Change 54,838 — (36,463) (86,019) (146,717) Present Value of Equity as Percent of Present Value of Assets Percent Change Present Value Ratio Percent Change 4.2 — (2.8) (6.6) (11.2) 15.5 15.1 14.8 14.4 13.8 3.1 — (1.9) (4.7) (8.4) The preceding table indicates that as of December 31, 2014, in the event of an immediate and sustained 300 basis point increase in interest rates, the Company would experience a 11.2%, or $146.7 million reduction in the present value of equity. If rates were to decrease 100 basis points, the Company would experience a 4.2%, or $54.8 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 refl ect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are 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 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 refl ected uniformly across the yield curve regardless of the duration to maturity or repricing of specifi c 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 net interest income and will differ from actual results. 48 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data ITEM 8. Financial Statements and Supplementary Data The following are included in this item: (A) Report of Independent Registered Public Accounting Firm (B) Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting (C) Consolidated Financial Statements: (1) Consolidated Statements of Financial Condition as of December 31, 2014 and 2013 (2) Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 (3) Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 (4) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012 (5) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 (6) Notes to Consolidated Financial Statements (D) Provident Financial Services, Inc., Condensed Financial Statements: (1) Condensed Statement of Financial Condition as of December 31, 2014 and 2013 (2) Condensed Statement of Income for the years ended December 31, 2014, 2013 and 2012 (3) Condensed Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012 The supplementary data required by this Item (selected quarterly fi nancial data) is provided in Note 19 of the Notes to Consolidated Financial Statements. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 49 PART II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Provident Financial Services, Inc.: We have audited the accompanying consolidated statements of fi nancial condition of Provident Financial Services, Inc. and subsidiary (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash fl ows for each of the years in the three-year period ended December 31, 2014. These consolidated fi nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material respects, the fi nancial position of Provident Financial Services, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash fl ows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over fi nancial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2015 expressed an unqualifi ed opinion on the effectiveness of the Company’s internal control over fi nancial reporting. /s/ KPMG LLP Short Hills, New Jersey March 2, 2015 50 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting The Board of Directors and Stockholders Provident Financial Services, Inc.: We have audited Provident Financial Services, Inc.’s and subsidiary (the “Company”) internal control over fi nancial reporting as of December 31, 2014, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (1992). The Company’s management is responsible for maintaining effective internal control over fi nancial reporting and for its assessment of the effectiveness of internal control over fi nancial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over fi nancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the fi nancial statements. Because of its inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Provident Financial Services, Inc. and subsidiary maintained, in all material respects, effective internal control over fi nancial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of fi nancial condition of Provident Financial Services, Inc. and subsidiary as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash fl ows for each of the years in the three-year period ended December 31, 2014, and our report dated March 2, 2015 expressed an unqualifi ed opinion on those consolidated fi nancial statements. /s/ KPMG LLP Short Hills, New Jersey March 2, 2015 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 51 PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statements of Financial Condition DECEMBER 31, 2014 AND 2013 (Dollars in Thousands, except share data) ASSETS Cash and due from banks Short-term investments Total cash and cash equivalents Securities available for sale, at fair value Investment securities held to maturity (fair value of $482,473 and $355,913 at December 31, 2014 and December 31, 2013, respectively) Federal Home Loan Bank Stock Loans Less allowance for loan losses Net loans Foreclosed assets, net Banking premises and equipment, net Accrued interest receivable Intangible assets Bank-owned life insurance Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Demand deposits Savings deposits Certifi cates of deposit of $100,000 or more Other time deposits Total deposits Mortgage escrow deposits Borrowed funds Other liabilities Total liabilities Stockholders’ Equity: December 31, 2014 2013 $ 102,484 $ 1,278 103,762 1,074,395 469,528 69,789 6,085,505 61,734 6,023,771 5,098 92,990 25,228 404,422 177,712 76,682 100,053 1,171 101,224 1,157,594 357,500 58,070 5,194,813 64,664 5,130,149 5,486 66,448 22,956 356,432 150,511 80,958 $ $ 8,523,377 $ 7,487,328 3,971,487 $ 3,473,724 995,347 342,072 483,617 5,792,523 21,649 1,509,851 55,255 7,379,278 921,993 270,631 536,123 5,202,471 20,376 1,203,879 49,849 6,476,575 Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued — — Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,285 shares issued and 64,905,905 shares outstanding at December 31, 2014, and 83,209,285 shares issued and 59,917,649 shares outstanding at December 31, 2013, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Unallocated common stock held by the Employee Stock Ownership Plan Common stock acquired by the Directors’ Deferred Fee Plan Deferred compensation—Directors’ Deferred Fee Plan Total stockholders’ equity Total liabilities and stockholders’ equity 832 995,053 465,276 29 (271,779) (45,312) (7,113) 7,113 1,144,099 $ 8,523,377 $ 832 1,026,144 427,763 (4,851) (390,380) (48,755) (7,205) 7,205 1,010,753 7,487,328 52 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report See accompanying notes to consolidated fi nancial statements. Provident Financial Services, Inc. and Subsidiary PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Statements of Income YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (Dollars in Thousands, except share data) Interest income: Real estate secured loans Commercial loans Consumer loans Securities available for sale and Federal Home Loan Bank stock Investment securities held to maturity Deposits, Federal funds sold and other short-term investments Total interest income Interest expense: Deposits Borrowed funds Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income: Fees Bank-owned life insurance Other-than-temporary impairment losses on securities Portion of loss recognized in other comprehensive income (before taxes) Net impairment losses on securities recognized in earnings Net gain on securities transactions Other income Total non-interest income Non-interest expense: Compensation and employee benefi ts Net occupancy expense Data processing expense FDIC Insurance Advertising and promotion expense Amortization of intangibles Other operating expenses Total non-interest expenses Income before income tax expense Income tax expense Net income Basic earnings per share Average basic shares outstanding Diluted earnings per share Average diluted shares outstanding Years ended December 31, 2014 2013 2012 $ 166,700 $ 152,429 $ 50,115 23,755 26,475 12,263 53 279,361 15,332 25,140 40,472 238,889 4,650 234,239 31,345 5,633 — — — 251 3,939 41,168 40,428 23,644 25,250 10,987 39 252,777 18,031 18,736 36,767 216,010 5,500 210,510 34,045 6,596 (434) — (434) 996 2,950 44,153 155,078 40,942 25,208 29,141 11,808 82 262,259 25,348 19,574 44,922 217,337 16,000 201,337 30,336 5,276 — — — 4,497 3,504 43,613 92,218 23,958 13,667 4,662 5,008 2,757 27,721 169,991 105,416 31,785 73,631 $ 1.22 $ 83,000 20,560 10,550 4,678 3,890 1,624 24,461 148,763 105,900 35,366 70,534 $ 1.23 $ 60,388,398 57,236,909 1.22 $ 1.23 $ 60,562,070 57,361,443 79,814 20,487 10,318 5,095 4,139 2,466 26,509 148,828 96,122 28,855 67,267 1.18 57,145,868 1.18 57,199,804 $ $ $ See accompanying notes to consolidated fi nancial statements PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 53 PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statements of Comprehensive Income YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (Dollars in Thousands) Net income Other comprehensive income (loss), net of tax: Unrealized gains and losses on securities available for sale: Net unrealized gains (losses) arising during the period Reclassifi cation adjustment for gains included in net income Total Other-than-temporary impairment on debt securities available for sale: Other-than-temporary impairment losses on securities Reclassifi cation adjustment for impairment losses included in net income Total Amortization related to post-retirement obligations Total other comprehensive income (loss) Total comprehensive income Years ended December 31, 2014 2013 $ 73,631 $ 70,534 $ 10,692 (150) 10,542 — — — (5,662) 4,880 (19,428) (589) (20,017) — 257 257 7,193 (12,567) 2012 67,267 1,810 (2,660) (850) — — — (1,005) (1,855) $ 78,511 $ 57,967 $ 65,412 See accompanying notes to consolidated fi nancial statements. 54 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report ITEM 8. Financial Statements and Supplementary Data PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statement of Changes in Stockholders’ Equity FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Unallocated ESOP Shares Common Stock Acquired by DDFP Deferred Compensation DDFP Total Stockholders’ Equity (Dollars in Thousands) Balance at December 31, 2011 $ Net income Other comprehensive income, net of tax Cash dividends paid Distributions from DDFP Purchases of treasury stock Shares issued dividend reinvestment plan Option exercises Allocation of ESOP shares Allocation of SAP shares Allocation of stock options Balance at December 31, 2012 $ Net income Other comprehensive income, net of tax Cash dividends paid Distributions from DDFP Purchases of treasury stock Shares issued dividend reinvestment plan Option exercises Allocation of ESOP shares Allocation of SAP shares Allocation of stock options Balance at December 31, 2013 $ 832 $1,019,253 $ 363,011 $ 9,571 $ (384,725) $ (55,465) $ (7,390) $ 7,390 $ 952,477 — — — — — — — — — — — — — — — (1,755) (6) (452) 4,015 452 67,267 — — (40,729) — — — — — — — (1,855) — — — — — — — — — — — — (9,424) 7,845 34 — — — — — — — — — — 3,377 — — — — — 92 — — — — — — — 67,267 — $ — (1,855) (40,729) (92) — — — — — — — (9,424) 6,090 28 2,925 4,015 452 832 $1,021,507 $ 389,549 $ 7,716 $ (386,270) $ (52,088) $ (7,298) $ 7,298 $ 981,246 — — — — — — — — — — — — — — — (57) (134) (15) 4,546 297 70,534 — — (32,320) — — — — — — — (12,567) — — — — — — — — — — — — (5,899) 1,301 488 — — — — — — — — — — 3,333 — — — — — 93 — — — — — — — — — (93) — — — — — — 70,534 (12,567) (32,320) — (5,899) 1,244 354 3,318 4,546 297 832 $1,026,144 $ 427,763 $ (4,851) $ (390,380) $ (48,755) $ (7,205) $ 7,205 $ 1,010,753 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 55 PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statement of Changes in Stockholders’ Equity (Continued) FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Unallocated ESOP Shares Common Stock Acquired by DDFP Deferred Compensation DDFP Total Stockholders’ Equity (Dollars in Thousands) Balance at December 31, 2013 $ Net income Other comprehensive income, net of tax Cash dividends paid Distributions from DDFP Purchases of treasury stock Treasury shares issued to fi nance acquisition Shares issued dividend reinvestment plan Option exercises Allocation of ESOP shares Allocation of SAP shares Reclassifi cation of Stock awards Allocation of Treasury Shares Allocation of stock options Balance at December 31, 2014 $ 832 $1,026,144 $ 427,763 $ (4,851) $ (390,380) $ (48,755) $ (7,205) $ 7,205 $ 1,010,753 — — — — — — — — — — — — — — — — — — (962) — (49) 107 6,555 (32,787) (4,253) 298 73,631 — (36,118) — — — — — — — — — — — 4,880 — — — — — — — (4,420) — 84,479 — — — — — — — 1,336 166 — — 32,787 4,253 — — — — — — — — — 3,443 — — — — — — — 92 — — — — — — — — — — — — (92) — — — — — — — — — 73,631 4,880 (36,118) — (4,420) 83,517 1,336 117 3,550 6,555 — — 298 832 $ 995,053 $ 465,276 $ 29 $ (271,779) $ (45,312) $ (7,113) $ 7,113 $ 1,144,099 See accompanying notes to consolidated fi nancial statements. 56 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (Dollars in Thousands) Cash fl ows from operating activities: Years Ended December 31, 2014 2013 2012 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 73,631 $ 70,534 $ 67,267 Depreciation and amortization of intangibles Provision for loan losses Deferred tax expense (benefi t) Increase in cash surrender value of Bank-owned Life Insurance Net amortization of premiums and discounts on securities Accretion of net deferred loan fees Amortization of premiums on purchased loans Net increase in loans originated for sale Proceeds from sales of loans originated for sale Proceeds from sales of foreclosed assets ESOP expense Allocation of stock award shares Allocation of stock options Net gain on sale of loans Net gain on securities available for sale Impairment charge on securities Net gain on sale of premises and equipment Net (gain) loss on sale of foreclosed assets Contribution to pension plan Decrease in accrued interest receivable Increase in other assets Increase in other liabilities Net cash provided by operating activities Cash fl ows from investing activities: Proceeds from maturities, calls and paydowns of investment securities held to maturity Purchases of investment securities held to maturity Proceeds from sales of securities Proceeds from maturities calls and paydowns of securities available for sale Purchases of securities available for sale Cash received, net of cash consideration paid for acquisition Purchases of loans Net increase in loans Proceeds from sales of premises and equipment Purchases of premises and equipment, net Net cash used in investing activities 11,133 4,650 3,666 (5,633) 10,461 (3,364) 694 (12,609) 14,018 6,494 2,654 6,359 298 (1,409) (251) — (5) (516) — 787 (22,379) 7,721 96,400 41,057 (73,397) 25,033 207,531 (63,835) 68,650 (130,540) (129,240) 1,903 (16,441) (69,279) 8,776 5,500 5,531 (6,596) 12,942 (3,877) 1,286 (30,977) 32,447 13,686 2,559 4,869 297 (1,470) (996) 434 (42) (403) — 1,046 (16,325) 173 99,394 97,974 (97,964) 14,834 351,472 (303,334) — (34,766) (259,359) 35 (7,709) (238,817) 9,327 16,000 (1,134) (5,276) 16,545 (3,493) 1,694 (36,723) 38,684 16,484 2,030 3,658 452 (1,961) (4,497) — (633) 75 (4,113) 651 (9,228) 2,482 108,291 77,207 (89,281) 106,768 488,590 (495,726) — (73,740) (191,904) 638 (7,658) (185,106) PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 57 PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows (Continued) YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (Dollars in Thousands) Cash fl ows from fi nancing activities: Net (decrease) increase in deposits Increase (decrease) in mortgage escrow deposits Purchase of treasury stock Cash dividends paid to stockholders Shares issued to dividend reinvestment plan Stock options exercised Proceeds from long-term borrowings Payments on long-term borrowings Net (decrease) increase in short-term borrowings Net cash (used in) provided by fi nancing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash paid during the period for: Interest on deposits and borrowings Income taxes Non cash investing activities: Transfer of loans receivable to foreclosed assets Acquisition: Non-cash assets acquired: Investment securities available for sale Loans Bank-owned life insurance Goodwill and other intangible assets, net Other assets Total non-cash assets acquired Liabilities assumed: Deposits Borrowings Other Liabilities Total liabilities assumed Common stock issued for acquisitions Years Ended December 31, 2014 2013 2012 (179,886) 1,250 (4,420) (36,118) 1,336 117 595,063 (289,757) (112,168) (24,583) 2,538 101,224 103,762 $ (226,504) (666) (5,899) (32,320) 1,244 354 301,000 (79,090) 178,705 136,824 (2,599) 103,823 101,224 $ 271,674 283 (9,424) (40,729) 6,090 28 — (55,700) (61,216) 111,006 34,191 69,632 103,823 39,952 $ 25,776 36,727 $ 29,119 $ 45,362 25,858 5,382 6,602 $ 16,253 $ $ $ $ 157,635 631,209 22,319 50,222 33,939 $ 895,324 $ 769,936 112,835 (2,314) 880,457 $ 83,517 $ $ $ — — — — — — $ — — — — $ — $ — — — (672) 672 — — — — — — See accompanying notes to consolidated fi nancial statement 58 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Provident Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Years Ended December 31, 2014, 2013 and 2012 NOTE 1 Summary of Signifi cant Accounting Policies .................................................................................................................................................................................................... 60 NOTE 2 Stockholders’ Equity and Acquisitions ..................................................................................................................................................................................................................... 65 NOTE 3 Restrictions on Cash and Due from Banks .......................................................................................................................................................................................................... 67 NOTE 4 Investment Securities Held to Maturity ..................................................................................................................................................................................................................... 67 NOTE 5 Securities Available for Sale .................................................................................................................................................................................................................................................... 68 NOTE 6 Loans Receivable and Allowance for Loan Losses................................................................................................................................................................................... 70 NOTE 7 Banking Premises and Equipment .................................................................................................................................................................................................................................. 76 NOTE 8 Intangible Assets ................................................................................................................................................................................................................................................................................... 77 NOTE 9 Deposits ............................................................................................................................................................................................................................................................................................................ 77 NOTE 10 Borrowed Funds ..................................................................................................................................................................................................................................................................................... 78 NOTE 11 Benefi t Plans ............................................................................................................................................................................................................................................................................................... 89 NOTE 12 Income Taxes .............................................................................................................................................................................................................................................................................................. 84 NOTE 13 Lease Commitments ......................................................................................................................................................................................................................................................................... 86 NOTE 14 Commitments, Contingencies and Concentrations of Credit Risk ....................................................................................................................................... 86 NOTE 15 Regulatory Capital Requirements .................................................................................................................................................................................................................................... 86 NOTE 16 Fair Value Measurements ............................................................................................................................................................................................................................................................ 87 NOTE 17 Selected Quarterly Financial Data (Unaudited) ............................................................................................................................................................................................... 92 NOTE 18 Earnings Per Share .............................................................................................................................................................................................................................................................................. 93 NOTE 19 Parent-only Financial Information .................................................................................................................................................................................................................................... 93 NOTE 20 Other Comprehensive Income (Loss) .......................................................................................................................................................................................................................... 95 NOTE 21 Derivative and Hedging Activities .................................................................................................................................................................................................................................... 97 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 59 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 1 Summary of Signifi cant Accounting Policies Principles of Consolidation Securities The consolidated fi nancial statements include the accounts of Provident Financial Services, Inc. (the “Company”), The Provident Bank (the “Bank”) and their wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifi cations have been made in the consolidated fi nancial statements to conform with current year classifi cations. Business The Company, through the Bank, provides a full range of banking services to individual and business customers through branch offi ces in New Jersey and eastern Pennsylvania. The Bank is subject to competition from other fi nancial institutions and to the regulations of certain federal and state agencies, and undergoes periodic examinations by those regulatory authorities. Basis of Financial Statement Presentation The consolidated fi nancial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the consolidated fi nancial statements, management is required to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities as of the dates of the consolidated statements of fi nancial condition, and revenues and expenses for the periods then ended. Such estimates are used in connection with the determination of the allowance for loan losses, evaluation of goodwill for impairment, evaluation of other-than-temporary impairment on securities, evaluation of the need for valuation allowances on deferred tax assets, and determination of liabilities related to retirement and other post-retirement benefi ts, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile securities markets, and declines in the housing market and the economy generally have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ signifi cantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be refl ected in the fi nancial statements in future periods. Cash and Cash Equivalents For purposes of reporting cash fl ows, cash and cash equivalents include cash and due from banks, Federal funds sold and commercial paper with maturity dates less than 90 days. Securities include investment securities held to maturity and securities available for sale. Securities that the Company has the positive intent and ability to hold to maturity are classifi ed as “investment securities held to maturity” and reported at amortized cost. Securities to be held for indefi nite periods of time and not intended to be held to maturity are classifi ed as “securities available for sale” and are reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred taxes. The estimated fair values of the Company’s securities are affected by changes in interest rates, credit spreads, and market illiquidity. The Company conducts a periodic review and evaluation of the securities portfolio to determine if any declines in the fair values of securities are other-than-temporary. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standard Codifi cation (“ASC”) Topic 320 “Investments-Debt and Equity Securities” on April 1, 2009, to determine if a decline in value is other-than- temporary, the Company evaluates if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. If such a decline were deemed other-than- temporary, the Company would measure the total credit-related component of the unrealized loss, and recognize that portion of the loss as a charge to current period earnings. The remaining portion of the unrealized loss would be recognized as an adjustment to accumulated other comprehensive income. In general, as interest rates rise, the market value of fi xed-rate securities decreases and as interest rates fall, the market value of fi xed-rate securities increases. The market for non-investment grade, privately issued mortgage-backed securities remains illiquid and prices have not appreciated despite favorable movements in interest rates. To determine if a decline in value is other-than-temporary, the Company evaluates if it has the intent to sell these securities or if it is more likely than not that the Company would be required to sell the securities before the anticipated recovery. Premiums and discounts on securities are amortized and accreted to income using a method that approximates the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Dividend and interest income are recognized when earned. Realized gains and losses are recognized when securities are sold or called based on the specifi c identifi cation method. Fair Value of Financial Instruments GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). A fi nancial instrument’s level within the fair value hierarchy is based on the lowest level of input that is signifi cant to the fair value measurement. 60 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Federal Home Loan Bank of New York Stock Allowance for Loan Losses The Bank, as a member of the Federal Home Loan Bank of New York (“FHLB”), is required to hold shares of capital stock of the FHLB at cost based on a specifi ed formula. The Bank carries this investment at cost, which approximates fair value. Loans Loans receivable are carried at unpaid principal balances plus unamortized premiums, purchase accounting mark-to-market adjustments, certain deferred direct loan origination costs and deferred loan origination fees and discounts, less the allowance for loan losses. The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment to yield over the expected lives of the related loans using the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method. Loans are generally placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become less than 90 days past due and its future collectibility is reasonably assured. An impaired loan is defi ned as a loan for which it is probable, based on current information, that the lender will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash fl ows. Residential mortgage and consumer loans are deemed smaller balance homogeneous loans which are evaluated collectively for impairment and are therefore excluded from the population of impaired loans. Purchased Credit-Impaired (“PCI”) loans, are loans acquired at a discount primarily due to deteriorated credit quality. PCI loans are recorded at fair value at the date of acquisition, with no allowance for loan losses. The difference between the undiscounted cash fl ows expected at acquisition and the fair value of the PCI loans at acquisition represents the accretable yield and is recognized as interest income over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash fl ows expected at acquisition represent the non-accretable discount and are not recognized as a yield adjustment or a valuation allowance. Reclassifi cations of the non-accretable to accretable yield may occur subsequent to the loan acquisition dates due to an increase in expected cash fl ows of the loans and results in an increase in interest income on a prospective basis. Losses on loans are charged to the allowance for loan losses. Additions to this allowance are made by recoveries of loans previously charged off and by a provision charged to expense. The determination of the balance of the allowance for loan losses is based on an analysis of the loan portfolio, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate allowance. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Bank’s market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Foreclosed Assets Assets acquired through foreclosure or deed in lieu of foreclosure are carried at the lower of the outstanding loan balance at the time of foreclosure or fair value, less estimated costs to sell. Fair value is generally based on recent appraisals. When an asset is acquired, the excess of the loan balance over fair value, less estimated costs to sell, is charged to the allowance for loan losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred. Banking Premises and Equipment Land is carried at cost. Banking premises, furniture, fi xtures and equipment are carried at cost, less accumulated depreciation, computed using the straight-line method based on their estimated useful lives (generally 25 to 40 years for buildings and 3 to 5 years for furniture and equipment). Leasehold improvements, carried at cost, net of accumulated depreciation, are amortized over the terms of the leases or the estimated useful lives of the assets, whichever are shorter, using the straight-line method. Maintenance and repairs are charged to expense as incurred. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the fi nancial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 61 PART II ITEM 8 Financial Statements and Supplementary Data date. The determination of whether deferred tax assets will be realizable is predicated on estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation reserve is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefi ts in the provision for income taxes. Trust Assets Trust assets consisting of securities and other property (other than cash on deposit held by the Bank in fi duciary or agency capacities for customers of the Bank’s wholly owned subsidiary, Beacon Trust Company) are not included in the accompanying consolidated statements of fi nancial condition because such properties are not assets of the Bank. Intangible Assets Intangible assets of the Bank consist of goodwill, core deposit premiums, customer relationship premium and mortgage servicing rights. Goodwill represents the excess of the purchase price over the estimated fair value of identifi able net assets acquired through purchase acquisitions. In accordance with GAAP, goodwill with an indefi nite useful life is not amortized, but is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. Goodwill is analyzed for impairment each year at September 30th. As permitted by GAAP, the Company prepares a qualitative assessment in determining whether goodwill may be impaired. The factors considered in the assessment include macroeconomic conditions, industry and market conditions and overall fi nancial performance of the Company, among others. The Company completed its annual goodwill impairment test as of September 30, 2014. Based upon its qualitative assessment of goodwill, the Company concluded that goodwill was not impaired and no further quantitative analysis was warranted. Core deposit premiums represent the intangible value of depositor relationships assumed in purchase acquisitions and are amortized on an accelerated basis over 8.8 years. Customer relationship premiums represent the intangible value of customer relationships assumed in the purchase acquisition of Beacon and are amortized on an accelerated basis over 12.0 years. Mortgage servicing rights are recorded when purchased or when originated mortgage loans are sold, with servicing rights retained. Mortgage servicing rights are amortized on an accelerated method based upon the estimated lives of the related loans, adjusted for prepayments. Mortgage servicing rights are carried at the lower of amortized cost or fair value. Bank-owned Life Insurance Bank-owned life insurance is accounted for using the cash surrender value method and is recorded at its realizable value. Employee Benefi t Plans The Bank maintains a pension plan which covers full-time employees hired prior to April 1, 2003, the date on which the pension plan was frozen. The Bank’s policy is to fund at least the minimum 62 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report contribution required by the Employee Retirement Income Security Act of 1974. GAAP requires an employer to: (a) recognize in its statement of fi nancial position the over-funded or under-funded status of a defi ned benefi t postretirement plan measured as the difference between the fair value of plan assets and the benefi t obligation; (b) measure a plan’s assets and its obligations that determine its funded status at the end of the employer’s fi scal year (with limited exceptions); and (c) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period. The Bank has a 401(k) plan covering substantially all employees of the Bank. The Bank may match a percentage of the fi rst 6% contributed by participants. The Bank’s matching contribution, if any, is determined by the Board of Directors in its sole discretion. The Bank has an Employee Stock Ownership Plan (“ESOP”). The funds borrowed by the ESOP from the Company to purchase the Company’s common stock are being repaid from the Bank’s contributions and dividends paid on unallocated ESOP shares over a period of up to 30 years. The Company’s common stock not allocated to participants is recorded as a reduction of stockholders’ equity at cost. Compensation expense for the ESOP is based on the average price of the Company’s stock during each quarter and the amount of shares allocated during the quarter. The Bank has an Equity Plan designed to provide competitive compensation for demonstrated performance and to align the interests of participants directly to increases in shareholder value. The Equity Plan provides for performance-vesting grants as well as time-vesting grants. Time-vesting stock awards, stock options and performance vesting stock awards that are based on a performance condition, such as Earnings Per Share are valued on the closing stock price on the date of grant. Performance vesting stock awards and options that are based on a market condition, such as Total Shareholder Return, would be valued using a generally accepted statistical technique to simulate future stock prices for Provident and the components of the Peer Group which Provident would be measured against. Expense related to time vesting stock awards and stock options is based on the fair value of the common stock on the date of the grant and on the fair value of the stock options on the date of the grant, respectively, and is recognized ratably over the vesting period of the awards. Performance vesting stock awards and stock options are either dependent upon a market condition or a performance condition. A market condition performance metric is tied to a stock price, either on an absolute basis, or a relative basis against peers, while a performance-condition is based on internal operations, such as earnings per share. The expense related to a market condition performance-vesting stock award or stock option requires an initial Monte Carlo simulation to determine grant date fair value, which will be recognized as a compensation expense regardless of actual payout, assuming that the executive is still employed at the end of the requisite service period. If pre-vesting termination (forfeiture) occurs, then any expense recognized to date can be reversed. The grant date fair value is recognized ratably over the performance period. The expense related to a performance condition stock award or stock option is based on the fair value of the award on the date of grant, adjusted periodically based upon the number of awards or options expected to be earned, recognized over the performance period. In connection with the First Sentinel acquisition in July 2004, the Company assumed the First Savings Bank Directors’ Deferred Fee Plan (the “DDFP”). The DDFP was frozen prior to the acquisition. The Company recorded a deferred compensation equity instrument and corresponding contra-equity account for the value of the shares held by the DDFP at the July 14, 2004 acquisition date. These accounts will be liquidated as shares are distributed from the DDFP in accordance with the plan document. At December 31, 2014, there were 406,883 shares held by the DDFP. The Bank maintains a non-qualifi ed plan that provides supplemental benefi ts to certain executives who are prevented from receiving the full benefi ts contemplated by the 401(k) Plan’s and the ESOP’s benefi t formulas under tax law limits for tax-qualifi ed plans. Postretirement Benefi ts Other Than Pensions The Bank provides postretirement health care and life insurance plans to certain of its employees. The life insurance coverage is noncontributory to the participant. Participants contribute to the cost of medical coverage based on the employee’s length of service with the Bank. The costs of such benefi ts are accrued based on actuarial assumptions from the date of hire to the date the employee is fully eligible to receive the benefi ts. On December 31, 2002, the Bank eliminated postretirement healthcare benefi ts for employees with less than 10 years of service. GAAP requires an employer to: (a) recognize in its statement of fi nancial position the over-funded or under-funded status of a defi ned benefi t postretirement plan measured as the difference between the fair value of plan assets and the benefi t obligation; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fi scal year (with limited exceptions); and (c) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period. Derivatives The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfi ed the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships. The existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings. The fair value of the Company’s derivatives are determined using discounted cash fl ow analysis using observable market-based inputs. Comprehensive Income Comprehensive income is divided into net income and other comprehensive income. Other comprehensive income includes items previously recorded directly to equity, such as unrealized gains and losses on securities available for sale and amortization related to post-retirement obligations. Comprehensive income is presented in a separate Consolidated Statement of Comprehensive Income. PART II ITEM 8 Financial Statements and Supplementary Data Segment Reporting The Company’s operations are solely in the fi nancial services industry and include providing to its customers traditional banking and other fi nancial services. The Company operates primarily in the geographical regions of northern and central New Jersey and eastern Pennsylvania. Management makes operating decisions and assesses performance based on an ongoing review of the Bank’s consolidated fi nancial results. Therefore, the Company has a single operating segment for fi nancial reporting purposes. Earnings Per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share refl ects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Impact of Recent Accounting Pronouncements In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14, “Receivables - Troubled Debt Restructurings by Creditors: Classifi cation of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this update affect creditors that hold government guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration and the U.S. Department of Veterans Affairs. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met (i) the loan has a government guarantee that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fi xed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not anticipate a signifi cant impact to the consolidated fi nancial statements related to this guidance. The Company will comply with the provisions of this guidance upon its effective date and, if applicable, record a separate other receivable for foreclosed government guaranteed mortgage loans. In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 63 PART II ITEM 8 Financial Statements and Supplementary Data interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modifi ed after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modifi ed awards thereafter. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a signifi cant impact on the Company’s consolidated fi nancial statements. Also in June 2014, the FASB issued ASU No. 2014-11, “Repurchase- to-Maturity Transactions, Repurchase Financings, and Disclosures” which aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase fi nancing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. This update is effective for the fi rst interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as a sale is effective for the fi rst interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is prohibited. The Company is currently assessing the impact that the adoption of this update will have on its consolidated fi nancial statements and disclosures. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non- fi nancial assets unless those contracts are in the scope of other standards. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016. The Company does not anticipate a material impact to the consolidated fi nancial statements related to this guidance. In January 2014, the FASB issued ASU No. 2014-04, “Receivables- Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassifi cation of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” which clarifi es that an in- substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim periods beginning after December 15, 2014. The Company’s adoption of ASU No. 2014-04 is not expected to have a signifi cant impact on its consolidated fi nancial statements. 64 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 2 Stockholders’ Equity and Acquisitions Stockholders’ Equity On January 15, 2003, the Bank completed its plan of conversion, and the Bank became a wholly owned subsidiary of the Company. The Company sold 59.6 million shares of common stock (par value $0.01 per share) at $10.00 per share. The Company received net proceeds in the amount of $567.2 million. In connection with the Bank’s commitment to its community, the plan of conversion provided for the establishment of a charitable foundation. Provident donated $4.8 million in cash and 1.92 million of authorized but unissued shares of common stock to the foundation, which amounted to $24.0 million in aggregate. The Company recognized an expense, net of income tax benefi t, equal to the cash and fair value of the stock during 2003. Conversion costs were deferred and deducted from the proceeds of the shares sold in the offering. Upon completion of the plan of conversion, a “liquidation account” was established in an amount equal to the total equity of the Bank as of the latest practicable date prior to the conversion. The liquidation account was established to provide a limited priority claim to the assets of the Bank to “eligible account holders” and “supplemental eligible account holders” as defi ned in the Plan, who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such event, each eligible account holder and supplemental eligible account holder would receive a liquidation distribution, prior to any payment to the holder of the Bank’s common stock. This distribution would be based upon each eligible account holder’s and supplemental eligible account holder’s proportionate share of the then total remaining qualifying deposits. At December 31, 2014, the liquidation account, which is an off-balance sheet memorandum account, amounted to $15.7 million. Acquisitions On May 30, 2014, the Company completed its acquisition of Team Capital Bank (“Team Capital”), which after purchase accounting adjustments added $964.0 million to total assets, $631.2 million to loans, and $769.9 million to deposits. Total consideration paid for Team Capital was $115.1 million: $31.6 million in cash and 4.9 million shares of common stock valued at $83.5 million on the acquisition date. Team Capital was merged with and into the Company’s subsidiary, The Provident Bank as of the close of business on the date of acquisition. The transaction was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the fair value of the net assets acquired has been recorded as goodwill. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition from Team Capital, net of cash consideration paid (in thousands): Assets acquired: Cash and cash equivalents, net Securities available for sale Loans Bank-owned life insurance Banking premises and equipment Accrued interest receivable Goodwill Other intangibles assets Foreclosed assets, net Other assets Total assets acquired Liabilities assumed: Deposits Borrowed Funds Other liabilities Total liabilities assumed Net assets acquired At May 30, 2014 $ $ 68,650 157,635 631,209 22,319 24,778 3,060 40,354 9,868 653 5,448 963,974 769,936 112,835 (2,314) 880,457 83,517 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company fi nalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 65 PART II ITEM 8 Financial Statements and Supplementary Data Fair Value Measurement of Assets Assumed and Liabilities Assumed The methods used to determine the fair value of the assets acquired and liabilities assumed in the Team Capital acquisition were as follows: Securities Available for Sale The estimated fair values of the investment securities classifi ed as available for sale were calculated utilizing Level 1 and Level 2 inputs. Management reviewed the data and assumptions used by its third party provider in pricing the securities to ensure the highest level of signifi cant inputs is derived from observable market data. These prices were validated against other pricing sources and broker-dealer indications. Loans The acquired loan portfolio was valued based on current guidance which defi nes fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the portfolio and included the use of present value techniques employing cash fl ow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifi cally, Management utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specifi c credit fair value adjustment. To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment. The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses; and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the Company, the acquired bank and peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of familiarity with the originator’s underwriting process. To calculate the specifi c credit fair value adjustment, management reviewed the acquired loan portfolio for loans meeting the defi nition of an impaired loan with deteriorated credit quality. Loans meeting this defi nition were reviewed by comparing the contractual cash fl ows to expected collectible cash fl ows. The aggregate expected cash fl ows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans on a level yield basis as an adjustment to yield. Deposits and Core Deposit Premium Core deposit premium represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefi t, including the present value of future tax benefi ts, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost alternative funding sources and was valued utilizing Level 2 inputs. Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and was valued utilizing Level 2 inputs. Borrowed Funds The fair value for borrowed funds was obtained from actual prepayment rates from the FHLB - Pittsburgh, a Level 2 input. These borrowings were redeemed after the acquisition date and the fair value adjustment was fully amortized in the quarter ended June 30, 2014. 66 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 3 Restrictions on Cash and Due from Banks Included in cash on hand and due from banks at December 31, 2014 and 2013 was $20,502,000 and $21,052,000, respectively, representing reserves required by banking regulations. NOTE 4 Investment Securities Held to Maturity Investment securities held to maturity at December 31, 2014 and 2013 are summarized as follows (in thousands): Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Amortized cost 6,813 2,816 449,410 10,489 469,528 Amortized cost 7,523 5,273 334,750 9,954 357,500 $ $ $ $ 2014 Gross unrealized gains 17 123 13,814 29 13,983 2013 Gross unrealized gains 13 247 5,435 58 5,753 Gross unrealized losses (20) — (986) (32) (1,038) Gross unrealized losses (66) — (7,198) (76) (7,340) Fair value 6,810 2,939 462,238 10,486 482,473 Fair value 7,470 5,520 332,987 9,936 355,913 The Company generally purchases securities for long-term investment purposes, and differences between carrying and fair values may fl uctuate during the investment period. Investment securities held to maturity having a carrying value of $343,127,000 and $186,251,000 at December 31, 2014 and 2013, respectively, were pledged to secure other borrowings, securities sold under repurchase agreements and government deposits. The amortized cost and fair value of investment securities held to maturity at December 31, 2014 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer. Due in one year or less Due after one year through fi ve years Due after fi ve years through ten years Due after ten years Mortgage-backed securities totaling $2.8 million at amortized cost and $2.9 million at fair value are excluded from the table above as their expected lives are expected to be shorter than the contractual maturity date due to principal prepayments. During 2014, the Company recognized gains of $23,000 and no losses related to calls on certain securities in the held to maturity portfolio, with total proceeds from the calls totaling $15,156,000. In addition, for the year ended December 31, 2014, the Company recognized a gross loss of $3,000, and no gross gain, related to the sale of a security with proceeds of $524,000. The sales of this security was in response to the credit deterioration of the issuer. 2014 Amortized cost 8,939 52,090 175,546 230,137 466,712 $ $ Fair value 9,011 53,225 181,887 235,411 479,534 In 2013, the Company recognized gains of $90,000 and no losses related to calls on certain securities in the held to maturity portfolio, with total proceeds from the calls totaling $49,631,000. In addition, for the year ended December 31, 2013, the Company recognized gross gains of $18,000, and no gross losses, related to the sales of certain securities, with the proceeds totaling $524,000. The sales of these securities were in response to the credit deterioration of the issuers. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 67 PART II ITEM 8 Financial Statements and Supplementary Data The following table represents the Company’s disclosure on investment securities held to maturity with temporary impairment (in thousands): Agency obligations State and municipal obligations Corporate obligations Agency obligations State and municipal obligations Corporate obligations Less than 12 months December 31, 2014 Unrealized Losses 12 months or longer Total Gross unrealized losses (20) (217) (32) (269) Fair value 3,735 27,679 6,888 38,302 Gross unrealized losses — (769) — (769) Gross unrealized losses (20) (986) (32) (1,038) Fair value 3,735 74,758 6,888 85,381 Fair value — 47,079 — 47,079 Less than 12 months December 31, 2013 Unrealized Losses 12 months or longer Total Gross unrealized losses (66) (5,376) (76) (5,518) Fair value 5,766 123,988 5,387 135,141 Gross unrealized losses — (1,822) — (1,822) Gross unrealized losses (66) (7,198) (76) (7,340) Fair value 5,766 143,039 5,387 154,192 Fair value — 19,051 — 19,051 $ $ $ $ Based on its detailed review of the securities portfolio, the Company believes that as of December 31, 2014, securities with unrealized loss positions shown above do not represent impairments that are other-than-temporary. The review of the portfolio for other-than- temporary impairment considered the percentage and length of time the fair value of an investment is below book value as well as general market conditions, changes in interest rates, credit risk, whether the Company has the intent to sell the securities and whether it is not more likely than not that the Company would be required to sell the securities before the anticipated recovery. The number of securities in an unrealized loss position as of December 31, 2014 totaled 163, compared with 270 at December 31, 2013. All temporarily impaired investment securities were investment grade at December 31, 2014. NOTE 5 Securities Available for Sale Securities available for sale at December 31, 2014 and 2013 are summarized as follows (in thousands): Amortized cost 8,016 94,871 944,796 6,855 6,526 397 1,061,461 Amortized cost 93,223 1,060,013 8,739 357 1,162,332 $ $ $ $ 2014 Gross unrealized gains 3 268 15,610 147 9 127 16,164 2013 Gross unrealized gains 372 14,493 171 89 15,125 Gross unrealized losses (3) (63) (3,149) — (15) — (3,230) Gross unrealized losses (179) (19,532) (152) — (19,863) Fair value 8,016 95,076 957,257 7,002 6,520 524 1,074,395 Fair value 93,416 1,054,974 8,758 446 1,157,594 U.S. Treasury obligations Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Equity securities Agency obligations Mortgage-backed securities State and municipal obligations Equity securities 68 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Securities available for sale having a carrying value of $585,928,000 and $627,053,000 at December 31, 2014 and 2013, respectively, are pledged to secure other borrowings and securities sold under repurchase agreements. The amortized cost and fair value of securities available for sale at December 31, 2014, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer. Due in one year or less Due after one year through fi ve years Due after fi ve years through ten years Due after ten years 2014 Amortized cost 28,709 81,558 3,018 2,983 116,268 $ $ Fair value 28,831 81,729 3,015 3,039 116,614 Mortgage-backed securities totaling $944.8 million at amortized cost and $957.3 million at fair value are excluded from the table above as their expected lives are expected to be shorter than the contractual maturity date due to principal prepayments. Also excluded from the table above are equity securities of $397,000 at amortized cost and $524,000 at fair value. During 2014, proceeds from the sale of securities available for sale were $24,509,000, resulting in gross gains of $632,000 and gross losses of $404,000. Also, for the year ended December 31, 2014, proceeds from calls on securities available for sale totaled $740,000, with gross gains of $2,000 and no gross losses recognized. For the 2013 period, proceeds from the sale of securities available for sale were $14,310,000 resulting in gross gains of $888,000 and no losses. Also, for the year ended December 31, 2013, proceeds from calls on securities available for sale totaled $896,000, with no gross gains or losses recognized. The Company estimates the loss projections for each non-agency mortgage-backed security by stressing the individual loans collateralizing the security and applying a range of expected default rates, loss severities, and prepayment speeds in conjunction with the underlying credit enhancement for each security. Based on specifi c assumptions about collateral and vintage, a range of possible cash fl ows was identifi ed to determine whether other-than-temporary impairment existed during the year ended December 31, 2014. The following table presents a roll-forward of the credit loss component of other-than-temporary impairment (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as an addition in two components, based upon whether the current period is the fi rst time a debt security was credit-impaired (initial credit impairment) or is not the fi rst time a debt security was credit impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows (in thousands): Beginning credit loss amount Add: Initial OTTI credit losses Subsequent OTTI credit losses Less: Realized losses for securities sold Securities intended or required to be sold Increases in expected cash fl ows on debt securities Ending credit loss amount December 31, 2014 1,674 — — 1,674 — — — $ $ December 31, 2013 1,240 — 434 — — — 1,674 The Company did not incur a net other-than-temporary impairment charge on securities for the year ended December 31, 2014. During the 2014 period, the Company realized a $59,000 gain and a $365,000 loss on the sale of previously impaired non- Agency mortgage-backed securities, respectively. The Company previously incurred cumulative credit losses of $1.7 million on these securities. For the prior year period, the Company incurred a $434,000 subsequent net other-than-temporary impairment charge on a previously impaired non-Agency mortgage-backed security. Prior to these charges, any impairment was considered temporary and was recorded as an unrealized loss on securities available for sale and refl ected as a reduction of equity, net of tax, through accumulated other comprehensive income. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 69 PART II ITEM 8 Financial Statements and Supplementary Data The following table represents the Company’s disclosure on securities available for sale with temporary impairment (in thousands): U.S. Treasury obligations Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Agency obligations Mortgage-backed securities State and municipal obligations Less than 12 months December 31, 2014 Unrealized Losses 12 months or longer Total Gross unrealized losses (3) (40) (221) — (15) (279) Fair value 5,937 24,404 55,488 — 3,466 89,295 Gross unrealized losses — (23) (2,928) — — (2,951) Fair value — 5,010 206,669 — — 211,679 Gross unrealized losses (3) (63) (3,149) — (15) (3,230) Fair value 5,937 29,414 262,157 — 3,466 300,974 Less than 12 months December 31, 2013 Unrealized Losses 12 months or longer Total Gross unrealized losses (179) (18,850) (152) (19,181) Fair value 34,355 604,778 2,867 642,000 Gross unrealized losses — (682) — (682) Gross unrealized losses (179) (19,532) (152) (19,863) Fair value 34,355 618,299 2,867 655,521 Fair value — 13,521 — 13,521 $ $ $ $ The temporary loss position associated with debt securities is the result of changes in interest rates relative to the coupon of the individual security and changes in credit spreads. In addition, there remains a lack of liquidity in certain sectors of the mortgage-backed securities market. Increases in delinquencies and foreclosures have resulted in limited trading activity and signifi cant price declines, regardless of favorable movements in interest rates. The Company does not have the intent to sell securities in a temporary loss position at December 31, 2014, nor is it more likely than not that the Company will be required to sell the securities before the anticipated recovery. The number of securities in an unrealized loss position as of December 31, 2014 totaled 43, compared with 76 at December 31, 2013. There were two private label mortgage-backed security in an unrealized loss position at December 31, 2014, with an amortized cost of $1,800,000 and unrealized losses totaling $16,200. Both private label mortgage-backed securities were investment grade at December 31, 2014. NOTE 6 Loans Receivable and Allowance for Loan Losses Loans receivable at December 31, 2014 and 2013 are summarized as follows (in thousands): Mortgage loans: Residential Commercial Multi-family Construction Total mortgage loans Commercial loans Consumer loans Total gross loans Purchased credit-impaired (“PCI”) loans Premiums on purchased loans Unearned discounts Net deferred fees 2014 2013 $ $ 1,251,445 1,694,359 1,041,582 221,102 4,208,488 1,262,422 611,467 6,082,377 4,510 5,307 (53) (6,636) 6,085,505 1,174,043 1,400,624 928,906 183,289 3,686,862 932,199 577,602 5,196,663 — 4,202 (62) (5,990) 5,194,813 Premiums and discounts on purchased loans are amortized over the lives of the loans as an adjustment to yield. Required reductions due to loan prepayments are charged against interest income. For the years ended December 31, 2014, 2013 and 2012, $694,000, $1,286,000 and $1,694,000, respectively, decreased interest income as a result of prepayments and normal amortization. 70 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data The following table summarizes the aging of loans receivable by portfolio segment and class of loans , excluding PCI loans (in thousands): At December 31, 2014 30-59 Days 60-89 Days Non-accrual Total Past Due Current Recorded Investment > 90 days accruing Total Loans Receivable 10,121 146 — — 10,267 1,000 2,398 13,665 4,331 30 — — 4,361 371 2,509 7,241 17,222 20,026 321 — 37,569 12,342 3,944 53,855 31,674 20,202 321 — 52,197 13,713 8,851 74,761 1,219,771 1,674,157 1,041,261 221,102 4,156,291 1,248,709 602,616 6,007,616 1,251,445 1,694,359 1,041,582 221,102 4,208,488 1,262,422 611,467 6,082,377 — — — — — — — — At December 31, 2013 30-59 Days 60-89 Days Non-accrual Total Past Due Current Recorded Investment > 90 days accruing Total Loans Receivable 10,639 687 — — 11,326 305 2,474 14,105 5,062 318 — — 5,380 77 2,194 7,651 23,011 18,662 403 8,448 50,524 22,228 3,928 76,680 38,712 19,667 403 8,448 67,230 22,610 8,596 98,436 1,135,331 1,380,957 928,503 174,841 3,619,632 909,589 569,006 5,098,227 1,174,043 1,400,624 928,906 183,289 3,686,862 932,199 577,602 5,196,663 — — — — — — — — Mortgage loans: Residential Commercial Multi-family Construction Total mortgage loans Commercial loans Consumer loans Total gross loans Mortgage loans: Residential Commercial Multi-family Construction Total mortgage loans Commercial loans Consumer loans Total gross loans $ $ $ $ Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the fi nancial condition of the borrowers. The principal amount of these nonaccrual loans was $53.9 million and $76.7 million at December 31, 2014 and 2013, respectively. There were no loans ninety days or greater past due and still accruing interest at December 31, 2014, or 2013. If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $1,877,000, $1,913,000 and $3,022,000, for the years ended December 31, 2014, 2013 and 2012, respectively. The amount of cash basis interest income that was recognized on impaired loans during the years ended December 31, 2014, 2013 and 2012 was not material for the periods presented. The Company defi nes an impaired loan as a non-homogenous loan greater than $1.0 million for which it is probable, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modifi ed as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modifi cation resulting in a concession is made by the Bank in an effort to mitigate potential loss arising from a borrower’s fi nancial diffi culty. Smaller balance homogeneous loans including residential mortgages and other consumer loans are evaluated collectively for impairment and are excluded from the defi nition of impaired loans, unless modifi ed as TDRs. The Company separately calculates the reserve for loan loss on impaired loans. The Company may recognize impairment of a loan based upon: (1) the present value of expected cash fl ows discounted at the effective interest rate; or (2) if a loan is collateral dependent, the fair value of collateral; or (3) the market price of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans. The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analyses of collateral dependent impaired loans. A third party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and updated annually, or more frequently if required. A specifi c allocation of the allowance for loan losses is established for each impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specifi c allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each fi scal quarter end, if a loan is designated as a collateral dependent impaired loan and the third party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower fi nancial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specifi c reserves are adjusted to refl ect the PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 71 PART II ITEM 8 Financial Statements and Supplementary Data appraised value. The Company believes there have been no signifi cant time lapses as a result of this process. At December 31, 2014, there were 147 impaired loans totaling $85.4 million, of which 143 loans totaling $81.7 million were TDRs. Included in this total were 123 TDRs related to 120 borrowers totaling $54.8 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2014. At December 31, 2013, there were 152 impaired loans totaling $106.4 million, of which 142 loans totaling $89.4 million were TDRs. Included in this total were 115 TDRs related to 110 borrowers totaling $58.2 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2013. Loans receivable summarized by portfolio segment and impairment method, excluding PCI loans are as follows (in thousands): Individually evaluated for impairment Collectively evaluated for impairment Total gross loans Individually evaluated for impairment Collectively evaluated for impairment Total gross loans At December 31, 2014 Mortgage loans 66,548 4,141,940 4,208,488 Commercial loans 16,463 1,245,959 1,262,422 Consumer loans 2,384 609,083 611,467 At December 31, 2013 Mortgage loans 75,839 3,611,023 3,686,862 Commercial loans 28,210 903,989 932,199 Consumer loans 2,321 575,281 577,602 $ $ $ $ Total Portfolio Segments 85,395 5,996,982 6,082,377 Total Portfolio Segments 106,370 5,090,293 5,196,663 The allowance for loan losses is summarized by portfolio segment and impairment classifi cation, excluding PCI loans as follows (in thousands): Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total At December 31, 2014 Mortgage loans 4,696 27,281 31,977 $ $ Commercial loans 2,318 22,063 24,381 Consumer loans 113 4,768 4,881 Total Portfolio Segments Unallocated — 495 495 7,127 54,112 61,239 Total 7,127 54,607 61,734 At December 31, 2013 Mortgage loans 7,829 26,315 34,144 $ $ Commercial loans 2,221 21,886 24,107 Consumer loans 167 4,762 4,929 Total Portfolio Segments Unallocated — 1,484 1,484 10,217 52,963 63,180 Total 10,217 54,447 64,664 Loan modifi cations to customers experiencing fi nancial diffi culties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium refl ected in the interest rate, or a combination of these two methods. These modifi cations generally do not result in the forgiveness of principal or accrued interest. In addition, the Company attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. 72 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report The following tables present the number of loans modifi ed as TDRs during the years ended December 31, 2014 and 2013 and their balances immediately prior to the modifi cation date and post-modifi cation as of December 31, 2014 and 2013. PART II ITEM 8 Financial Statements and Supplementary Data ($ in thousands) Troubled Debt Restructurings Mortgage loans: Residential Commercial Total mortgage loans Commercial loans Consumer loans Total restructured loans ($ in thousands) Troubled Debt Restructurings Mortgage loans: Residential Commercial Total mortgage loans Commercial loans Consumer loans Total restructured loans Year Ended December 31, 2014 Pre-Modifi cation Outstanding Recorded Investment Number of Loans Post- Modifi cation Outstanding Recorded Investment 14 $ 1 15 — 2 17 $ 3,034 865 3,899 — 394 4,293 2,725 861 3,586 — 156 3,742 Year Ended December 31, 2013 Pre-Modifi cation Outstanding Recorded Investment Number of Loans Post- Modifi cation Outstanding Recorded Investment 42 $ 1 43 3 8 54 $ 9,097 330 9,427 1,846 1,119 12,392 9,149 304 9,453 1,816 1,095 12,364 All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modifi ed during the years ended December 31, 2014 and 2013 exceeded the carrying amounts of such loans. As a result, there were no charge-offs recorded on collateral dependent impaired loans presented in the preceding tables for the years ended December 31, 2014 or December 31, 2013. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $419,000 and $1.0 million at December 31, 2014 and 2013, respectively and were included in the allowance for loan losses for loans individually evaluated for impairment. The TDRs presented in the preceding tables had a weighted average modifi ed interest rate of approximately 4.58% and 4.08%, compared to a yield of 5.69% and 5.75% prior to modifi cation for the years ended December 31, 2014 and 2013, respectively. The following table presents loans modifi ed as TDRs within the previous 12 months from December 31, 2014 and 2013, and for which there was a payment default (90 days or more past due) during the years ended December 31, 2014 and 2013: ($ in thousands) Troubled Debt Restructurings Subsequently Defaulted Commercial loans Consumer loans Total restructured loans TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs. Year Ended December 31, 2014 Year Ended December 31, 2013 Number of Loans Outstanding Recorded Investment Number of Loans Outstanding Recorded Investment — — — $ — — — 3 1 4 $ 1,815 130 1,945 PCI loans are loans acquired at a discount primarily due to deteriorated credit quality. As part of the Team Capital acquisition, $5.2 million of the loans purchased at May 30, 2014 were determined to be PCI loans. PCI loans are accounted for at fair value, based upon the present value of expected future cash fl ows, with no related allowance for loan losses. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 73 PART II ITEM 8 Financial Statements and Supplementary Data The following table presents information regarding the estimates of the contractually required payments, the cash fl ows expected to be collected and the estimated fair value of the PCI loans acquired from Team Capital at May 30, 2014 (in thousands): Contractually required principal and interest Contractual cash fl ows not expected to be collected (non-accretable discount) Expected cash fl ows to be collected at acquisition Interest component of expected cash fl ows (accretable yield) Fair value of acquired loans May 30, 2014 12,505 (6,475) 6,030 (810) 5,220 $ $ PCI loans declined $710,000 to $4.5 million at December 31, 2014, from $5.2 million at acquisition from Team Capital on May 30, 2014, largely due to the full repayment and greater than projected cash fl ows on certain PCI loans. This resulted in a $348,000 increase in interest income for the year ended December 31, 2014, due to the acceleration of accretable and non-accretable discount on these loans. The following table summarizes the changes in the accretable yield for PCI loans for the ended December 31, 2014 (in thousands): Beginning balance Acquisition Accretion Reclassifi cation from non-accretable difference Ending balance Year ended December 31, 2014 — 810 (592) 477 695 $ $ The activity in the allowance for loan losses for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands): Balance at beginning of period Provision charged to operations Recoveries of loans previously charged off Loans charged off Balance at end of period Years Ended December 31, 2013 2012 2014 $ $ 64,664 4,650 3,292 (10,872) 61,734 70,348 5,500 3,222 (14,406) 64,664 74,351 16,000 3,904 (23,907) 70,348 The activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2014 and 2013 are as follows (in thousands): For the Year Ended December 31, 2014 Mortgage loans Commercial loans Consumer loans Total Portfolio Segments Unallocated Balance at beginning of period Provision charged to operations Recoveries of loans previously charged off Loans charged off Balance at end of period $ 34,144 1,455 286 (3,908) $ 31,977 24,107 2,947 1,776 (4,449) 24,381 4,929 1,237 1,230 (2,515) 4,881 63,180 5,639 3,292 (10,872) 61,239 Total 64,664 4,650 3,292 (10,872) 1,484 (989) — — 495 61,734 Balance at beginning of period Provision charged to operations Recoveries of loans previously charged off Loans charged off Balance at end of period Year ended December 31, 2013 Mortgage loans 37,962 2,065 1,133 (7,016) 34,144 $ $ Commercial loans 20,315 6,403 1,075 (3,686) 24,107 Consumer loans 5,224 2,395 1,014 (3,704) 4,929 Total Portfolio Segments Unallocated 6,847 (5,363) — — 1,484 63,501 10,863 3,222 (14,406) 63,180 Total 70,348 5,500 3,222 (14,406) 64,664 74 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data Impaired loans receivable by class, excluding PCI loans are summarized as follows (in thousands): At December 31, 2014 At December 31, 2013 Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized Loans with no related allowance Mortgage loans: Residential Commercial Multi-family Construction Total Commercial loans Consumer loans $ 14,942 4,971 — — 19,913 2,718 1,250 Total loans $ 23,881 Loans with an allow-ance recorded Mortgage loans: Residential Commercial Multi-family Construction Total Commercial loans Consumer loans Total loans Total Mortgage loans: Residential Commercial Multi-family Construction Total Commercial loans Consumer loans $ 15,523 37,555 — — 53,078 15,990 1,565 $ 70,633 $ 30,465 42,526 — — 72,991 18,708 2,815 Total loans $ 94,514 10,629 4,708 — — 15,337 2,179 830 18,346 14,906 36,306 — — 51,212 14,283 1,554 67,049 25,535 41,014 — — 66,549 16,462 2,384 85,395 — — — — — — — — 2,367 2,329 — — 4,696 2,318 113 7,127 2,367 2,329 — — 4,696 2,318 113 7,127 11,138 4,713 — — 15,851 1,823 870 18,544 15,106 36,674 — — 51,780 15,967 1,578 69,325 26,244 41,387 — — 67,631 17,790 2,448 87,869 357 $ 13,459 — — — 357 4 28 4,917 — — 18,376 8,163 754 389 $ 27,293 555 $ 914 — — 1,469 390 80 17,122 37,320 — 9,810 64,252 22,779 1,732 1,939 $ 88,763 912 $ 914 — — 1,826 394 108 30,581 42,237 — 9,810 82,628 30,942 2,486 9,999 4,667 — — 14,666 6,674 618 21,958 16,473 36,251 — 8,449 61,173 21,536 1,703 84,412 26,472 40,918 — 8,449 75,839 28,210 2,321 — — — — — — — — 2,571 2,309 — 2,949 7,829 2,221 167 10,217 2,571 2,309 — 2,949 7,829 2,221 167 10,322 4,834 — — 15,156 8,252 674 24,082 16,610 36,727 — 8,659 61,996 23,204 1,726 86,926 26,932 41,561 — 8,659 77,152 31,456 2,400 2,328 $ 116,056 106,370 10,217 111,008 299 3 — — 302 24 26 352 557 976 — — 1,533 650 63 2,246 856 979 — — 1,835 674 89 2,598 At December 31, 2014, impaired loans consisted of 147 residential, commercial and commercial mortgage loans totaling $85,395,000, of which 24 loans totaling $30,619,000 were included in nonaccrual loans. At December 31, 2013, impaired loans consisted of 152 residential, commercial and commercial mortgage loans totaling $106,370,000, of which 37 loans totaling $48,204,000 were included in nonaccrual loans. Specifi c allocations of the allowance for loan losses attributable to impaired loans totaled $7,127,000 and $10,217,000 at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, impaired loans for which there was no related allowance for loan losses totaled $18,346,000 and $21,958,000, respectively. The average balances of impaired loans during the years ended December 31, 2014, 2013 and 2012 were $87,869,000, $111,008,000 and $115,611,000, respectively. In the normal course of conducting its business, the Bank extends credit to meet the fi nancing needs of its customers through commitments. Commitments and contingent liabilities, such as commitments to extend credit (including loan commitments of $908,581,000 and $657,563,000, at December 31, 2014 and 2013, respectively, and undisbursed home equity and personal credit lines of $300,029,000 and $252,522,000, at December 31, 2014 and 2013, respectively) exist, which are not refl ected in the accompanying consolidated fi nancial statements. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated fi nancial statements. The Bank uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on- balance sheet loans. Commitments generally have fi xed expiration dates or other termination clauses and may require payment of a fee. Since the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case- by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. The Bank grants residential real estate loans on single- and multi-family dwellings to borrowers primarily in New Jersey. Its borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash fl ows generated by the underlying collateral, value of the underlying collateral, and priority of the Bank’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank’s control; the Bank is therefore subject to risk of loss. The Bank believes that its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 75 PART II ITEM 8 Financial Statements and Supplementary Data loan losses are provided for all known and inherent risks. Collateral and/or guarantees are required for virtually all loans. The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifi cations (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending offi cer is responsible for risk rating loans in his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Offi cer and by the Credit Administration Department. The risk ratings are also confi rmed through periodic loan review examinations, which are currently performed by an independent third party. Reports by the independent third party are presented directly to the Audit Committee of the Board of Directors. Loans receivable by credit quality risk rating indicator, excluding PCI loans are as follows (in thousands): At December 31, 2014 Residential 4,331 $ 17,222 — — Special mention Substandard Doubtful Loss Total classifi ed and 21,553 criticized Acceptable/watch 1,229,892 Total outstanding loans $1,251,445 Commercial mortgages 18,414 53,454 1,063 — Multi- family Construction — 2,600 — — 851 322 — — Total mortgages 23,596 73,598 1,063 — Commercial loans 45,599 32,828 29 — Consumer loans Total loans 71,704 2,509 110,364 3,938 1,092 — — — 72,931 1,621,428 1,694,359 1,173 1,040,409 1,041,582 2,600 218,502 221,102 98,257 4,110,231 4,208,488 78,456 1,183,966 1,262,422 6,447 605,020 611,467 183,160 5,899,217 6,082,377 At December 31, 2013 Residential 5,062 $ 23,011 — — Special mention Substandard Doubtful Loss Total classifi ed and 28,073 criticized Acceptable/watch 1,145,970 Total outstanding loans $1,174,043 Commercial mortgages 15,301 54,592 — — Multi- family Construction — 8,449 — — — 403 — — Total mortgages 20,363 86,455 — — Commercial loans 28,551 46,687 649 — Consumer loans Total loans 50,951 2,037 137,362 4,220 649 — — — 69,893 1,330,731 1,400,624 403 928,503 928,906 8,449 174,840 183,289 106,818 3,580,044 3,686,862 75,887 856,312 932,199 6,257 571,345 577,602 188,962 5,007,701 5,196,663 NOTE 7 Banking Premises and Equipment A summary of banking premises and equipment at December 31, 2014 and 2013 is as follows (in thousands): Land Banking premises Furniture, fi xtures and equipment Leasehold improvements Construction in progress Less accumulated depreciation and amortization 2014 15,767 80,526 42,836 33,819 4,053 177,001 84,011 92,990 $ $ 2013 13,955 64,129 31,565 27,503 3,687 140,839 74,391 66,448 Depreciation expense for the years ended December 31, 2014, 2013 and 2012 amounted to $8,264,000, $7,152,000 and $6,929,000, respectively. 76 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 8 Intangible Assets Intangible assets at December 31, 2014 and 2013 are summarized as follows (in thousands): Goodwill Core deposit premiums Customer relationship and other intangibles Mortgage servicing rights 2014 392,757 7,603 2,987 1,075 404,422 $ $ 2013 352,609 1,096 1,563 1,164 356,432 Amortization expense of intangible assets for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands): Core deposit premiums Customer relationship and other intangibles Mortgage servicing rights $ $ 2014 1,472 1,106 179 2,757 2013 965 335 324 1,624 2012 1,698 367 401 2,466 Scheduled amortization of core deposit and customer relationship intangibles for each of the next fi ve years is as follows (in thousands): Year ended December 31, 2015 2016 2017 2018 2019 NOTE 9 Deposits $ Scheduled Amortization 2,973 2,071 1,530 1,102 925 Deposits at December 31, 2014 and 2013 are summarized as follows (in thousands): Savings deposits Money market accounts NOW accounts Non-interest bearing deposits Certifi cates of deposit 2014 995,347 1,496,466 1,425,424 1,049,597 825,689 5,792,523 $ $ Weighted average interest rate 0.10% $ 0.27 0.27 — 0.89 $ 2013 921,993 1,281,596 1,326,941 865,187 806,754 5,202,471 Weighted average interest rate 0.09% 0.25 0.29 — 0.97 Scheduled maturities of certifi cates of deposit accounts at December 31, 2014 and 2013 are as follows (in thousands): Within one year One to three years Three to fi ve years Five years and thereafter 2014 568,462 152,317 100,080 4,830 825,689 $ $ 2013 529,896 193,457 82,344 1,057 806,754 Interest expense on deposits for the years ended December 31, 2014, 2013 and 2012 is summarized as follows (in thousands): Savings deposits NOW and money market accounts Certifi cates of deposits Years ended December 31, 2014 938 7,733 6,661 15,332 $ $ 2013 960 7,456 9,615 18,031 2012 1,449 10,292 13,607 25,348 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 77 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 10 Borrowed Funds Borrowed funds at December 31, 2014 and 2013 are summarized as follows (in thousands): Securities sold under repurchase agreements FHLB line of credit FHLB advances 2014 246,571 73,000 1,190,280 1,509,851 $ $ 2013 246,322 183,000 774,557 1,203,879 FHLB advances are at fi xed rates and mature between January 2015 and August 2021. These advances are secured by loans receivable and investment securities under a blanket collateral agreement. Scheduled maturities of FHLB advances at December 31, 2014 are as follows (in thousands): Due in one year or less Due after one year through two years Due after two years through three years Due after three years through four years Due after four years through fi ve years Thereafter 2014 269,668 150,398 262,534 211,220 203,991 92,469 1,190,280 $ $ Scheduled maturities of securities sold under repurchase agreements at December 31, 2014 are as follows (in thousands): Due in one year or less Due after one year through two years Due after two years through three years Due after three years through four years Due after four years through fi ve years Thereafter 2014 91,571 75,000 25,000 20,000 35,000 — 246,571 $ $ The following tables set forth certain information as to Borrowed Funds for the years ended December 31, 2014 and 2013 (in thousands): 2014: Securities sold under repurchase agreements FHLB line of credit FHLB advances Federal funds purchased 2013: Securities sold under repurchase agreements FHLB line of credit FHLB advances Federal funds purchased Maximum balance Average balance $ $ 255,633 180,000 1,190,280 — 294,034 183,000 774,557 — 245,260 104,121 989,245 — 260,004 48,784 599,991 253 Weighted average interest rate 1.72% 0.37 2.08 — 1.74% 0.38 2.34 1.00 Securities sold under repurchase agreements include wholesale borrowing arrangements, as well as arrangements with deposit customers of the Bank to sweep funds into short-term borrowings. The Bank uses securities available for sale to pledge as collateral for the repurchase agreements. 78 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 11 Benefi t Plans Pension and Post-retirement Benefi ts The Bank has a noncontributory defi ned benefi t pension plan covering its full-time employees who had attained age 21 with at least one year of service as of April 1, 2003. The pension plan was frozen on April 1, 2003. All participants in the pension plan are 100% vested. The pension plan’s assets are invested in investment funds and group annuity contracts currently managed by the Principal Financial Group and Allmerica Financial. Based on the measurement date of December 31, 2014, management believes that no contributions will be made to the pension plan in 2015. In an effort to lower and reduce the volatility of its future pension costs, the Company offered a lump sum pension distribution option to its vested terminated employees in the quarter ended June 30, 2014. For the year ended December 31, 2014, the Plan paid $4.3 million to those employees that elected to receive lump sum pension distributions and the Company realized an associated charge of $1.3 million. This charge was a pro rata share of the unrecognized losses recorded in other comprehensive income. In addition to pension benefi ts, certain healthcare and life insurance benefi ts are currently made available to certain of the Bank’s retired employees. The costs of such benefi ts are accrued based on actuarial assumptions from the date of hire to the date the employee is fully eligible to receive the benefi ts. Effective January 1, 2003, eligibility for retiree health care benefi ts was frozen as to new entrants and benefi ts were eliminated for employees with less than ten years of service as of December 31, 2002. Effective January 1, 2007, eligibility for retiree life insurance benefi ts was frozen to new entrants and retiree life insurance benefi ts were eliminated for employees with less than ten years of service as of December 31, 2006. The following table sets forth information regarding the pension plan and post-retirement healthcare and life insurance plans (in thousands): Change in benefi t obligation: Benefi t obligation at beginning of year Service cost Interest cost Actuarial loss (gain) Benefi ts paid Change in actuarial assumptions Benefi t obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefi ts paid Fair value of plan assets at end of year Funded status at end of year Pension Post-retirement 2014 2013 2012 2014 2013 2012 $ $ $ $ $ 28,605 — 1,271 51 (5,326) 4,320 28,921 45,202 2,868 — (5,326) 42,744 13,823 32,189 — 1,273 114 (969) (4,002) 28,605 40,072 6,099 — (969) 45,202 16,597 28,277 — 1,287 779 (891) 2,737 32,189 32,666 4,184 4,113 (891) 40,072 7,883 22,086 169 1,087 51 (670) 5,610 28,333 — — 670 (670) — (28,333) 25,116 240 981 (210) (624) (3,417) 22,086 — — 624 (624) — (22,086) 23,327 252 1,043 231 (634) 897 25,116 — — 634 (634) — (25,116) For the year ended December 31, 2014, the Company in the measurement of its pension plan and post-retirement obligations updated its mortality assumptions based upon data (RP 2014 and MP 2104) issued by The Society of Actuaries (“SOA”) in November 2014. The change in mortality data resulted in an actuarial loss of $1.5 million and $3.0 million for the pension and post-retirement plans, respectively, and was refl ected in other comprehensive income for the year ended December 31, 2014. The prepaid pension benefi ts of $13.8 million and the unfunded post-retirement healthcare and life insurance benefi ts of $28.3 million at December 31, 2014 are included in other assets and other liabilities, respectively, in the consolidated statement of fi nancial condition. The components of accumulated other comprehensive loss (gain) related to the pension plan and other post-retirement benefi ts, on a pre-tax basis, at December 31, 2014 and 2013 are summarized in the following table (in thousands): Unrecognized prior service cost Unrecognized net actuarial loss (gain) Total accumulated other comprehensive loss (gain) Pension Post-retirement 2014 — 10,887 10,887 $ $ 2013 — 7,699 7,699 2014 (1) 1,788 1,787 2013 (5) (4,076) (4,081) PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 79 PART II ITEM 8 Financial Statements and Supplementary Data Net periodic benefi t cost (increase) for the years ending December 31, 2014, 2013 and 2012, included the following components (in thousands): Service cost Interest cost Return on plan assets Amortization of: Net gain (loss) Lump sum pension distribution Unrecognized prior service cost Net periodic benefi t (increase) cost Pension Post-retirement 2014 — 1,271 (3,463) 441 1,336 — (415) $ $ 2013 — 1,273 (3,167) 1,352 — — (542) 2012 — 1,287 (2,578) 1,428 — — 137 2014 169 1,087 — (204) — (4) 1,048 2013 240 981 — 15 — (4) 1,232 2012 252 1,043 — 12 — (4) 1,303 The weighted average actuarial assumptions used in the plan determinations at December 31, 2014, 2013 and 2012 were as follows: Discount rate Rate of compensation increase Expected return on plan assets Medical and life insurance benefi ts cost rate of increase 2014 4.00% — 8.00 — Pension 2013 5.00% — 8.00 — 2012 4.00% — 8.00 — Post-retirement 2014 4.00% — — 6.00 2013 5.00% — — 6.00 2012 4.00% — — 6.50 The Company provides its actuary with certain rate assumptions used in measuring the benefi t obligation. The most signifi cant of these is the discount rate used to calculate the period-end present value of the benefi t obligations, and the expense to be included in the following year’s fi nancial statements. A lower discount rate will result in a higher benefi t obligation and expense, while a higher discount rate will result in a lower benefi t obligation and expense. The discount rate assumption was determined based on a cash fl ow-yield curve model specifi c to the Company’s pension and post-retirement plans. The Company compares this rate to certain market indices, such as long-term treasury bonds, or the Citigroup pension liability indices, for reasonableness. A discount rate of 4.00% was selected for the December 31, 2014 measurement date and the 2013 expense calculation. Assumed health care cost trend rates have a signifi cant effect on the amounts reported for health care plans. A 1% change in the assumed health care cost trend rate would have had the following effects on post-retirement benefi ts at December 31, 2014 (in thousands): Effect on total service cost and interest cost Effect on post-retirement benefi ts obligation 1% increase 220 5,260 $ $ 1% decrease (180) (4,160) Estimated future benefi t payments, which refl ect expected future service, as appropriate for the next fi ve years, are as follows (in thousands): 2015 2016 2017 2018 2019 $ Pension Post-retirement 816,000 849,000 882,000 920,000 967,000 1,080,000 $ 1,141,000 1,188,000 1,225,000 1,269,000 The weighted-average asset allocation of pension plan assets at December 31, 2014 and 2013 were as follows: Asset Category Domestic equities Foreign equities Fixed income Real estate Cash Total 2014 41% 12% 45% 2% 0% 100% 2013 44% 14% 40% 2% 0% 100% The Company’s expected return on pension plan assets assumption is based on historical investment return experience and evaluation of input from the Investment Consultant and Committee managing the pension plan’s assets. The expected return on pension plan assets is also impacted by the target allocation of assets, which is based on the Company’s goal of earning the highest rate of return while maintaining risk at acceptable levels. 80 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report Management strives to have pension plan assets suffi ciently diversifi ed so that adverse or unexpected results from one security class will not have a signifi cant detrimental impact on the entire portfolio. The target allocation of assets and acceptable ranges around the targets are as follows: PART II ITEM 8 Financial Statements and Supplementary Data Asset Category Domestic equities Foreign equities Fixed income Real estate Cash Total Target Allowable Range 44% 14% 40% 2% 0% 100% 35-55% 5-25% 30-50% 0-10% 0-35% The following tables present the assets that are measured at fair value on a recurring basis by level within the U.S. GAAP fair value hierarchy as reported on the statements of net assets available for Plan benefi ts at December 31, 2014 and 2013, respectively. Financial assets and liabilities are classifi ed in their entirety based on the lowest level of input that is signifi cant to the fair value measurement. (in thousands) Group annuity contracts Mutual funds: International equity Large U.S. equity Small/Mid U.S. equity Total mutual funds Pooled separate accounts: Fixed income Large U.S. equity Small/Mid U.S. equity Total pooled separate accounts Total investments (in thousands) Group annuity contracts Mutual funds: Fixed income International equity Large U.S. equity Small/Mid U.S. equity Total mutual funds Pooled separate accounts: Fixed income Large U.S. equity Small/Mid U.S. equity Total pooled separate accounts Total investments $ $ $ $ Fair value measurements at December 31, 2014 Total 152 (Level 2) 152 (Level 1) — 5,370 1,689 1,309 8,368 19,789 11,857 2,578 34,224 42,744 5,370 1,689 1,309 8,368 — — — — 8,368 — — — — 19,789 11,857 2,578 34,224 34,376 Fair value measurements at December 31, 2013 Total 180 (Level 1) — (Level 2) 180 9,210 6,316 1,809 1,844 19,179 8,624 14,509 2,710 25,843 45,202 9,210 6,316 1,809 1,844 19,179 — — — — 19,179 — — — — — 8,624 14,509 2,710 25,843 26,023 (Level 3) — — — — — — — — — — (Level 3) — — — — — — — — — — — The Company anticipates that the long-term asset allocation on average will approximate the targeted allocation. Actual asset allocations are the result of investment decisions by a third-party investment manager. 401(k) Plan Supplemental Executive Retirement Plan The Bank has a 401(k) plan covering substantially all employees of the Bank. For 2014, 2013 and 2012, the Bank matched 25% of the fi rst 6% contributed by the participants. The contribution percentage is determined by the Board of Directors in its sole discretion. The Bank’s aggregate contributions to the 401(k) Plan for 2014, 2013 and 2012 were $674,000, $587,000 and $601,000, respectively. The Bank maintains a non-qualifi ed supplemental retirement plan for certain senior offi cers of the Bank. This plan was frozen as of April 1, 2003. The Supplemental Executive Retirement Plan, which is unfunded, provides benefi ts in excess of the benefi ts permitted to be paid by the pension plan under provisions of the tax law. Amounts expensed under this supplemental retirement plan amounted to $102,000, $162,000 and $169,000 for the years PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 81 PART II ITEM 8 Financial Statements and Supplementary Data 2014, 2013 and 2012, respectively. At December 31, 2014, and 2013, $2,166,000 and $2,207,000, respectively, were recorded in other liabilities on the consolidated statements of condition for this supplemental retirement plan. A decrease of $198,000, an increase of $56,000, and a decrease of $49,000, net of tax, were recorded in other comprehensive income for 2014, 2013 and 2012, respectively, in connection with this supplemental retirement plan. Retirement Plan for the Board of Directors of The Provident Bank The Bank maintains a Retirement Plan for the Board of Directors of the Bank, a non-qualifi ed plan that provides cash payments for up to 10 years to eligible retired board members based on age and length of service requirements. The maximum payment under this plan to a board member, who terminates service on or after the age of 72 with at least ten years of service on the board, is forty quarterly payments of $1,250. The Bank may suspend payments under this plan if it does not meet Federal Deposit Insurance Corporation or New Jersey Department of Banking and Insurance minimum capital requirements. The Bank may terminate this plan at any time although such termination may not reduce or eliminate any benefi t previously accrued to a board member without his or her consent. The plan further provides that, in the event of a change in control (as defi ned in the plan), the undistributed balance of a director’s accrued benefi t will be distributed to him or her within 60 days of the change in control. The Bank paid $15,000 to former board members under this plan for each of the years ended December 31, 2014, 2013 and 2012. At December 31, 2014 and 2013, $169,000 and $181,000, respectively, were recorded in other liabilities on the consolidated statements of fi nancial condition for this retirement plan. A decrease of $7,400, an increase of $6,000, and an increase of $3,000, net of tax, were recorded in other comprehensive income for 2014, 2013 and 2012, respectively, in connection with this plan. The plan was amended in December 2005 to terminate benefi ts under this plan for any directors who had less than ten years of service on the board of directors of the Bank as of December 31, 2006. Employee Stock Ownership Plan The ESOP is a tax-qualifi ed plan designed to invest primarily in the Company’s common stock that provides employees with the opportunity to receive a funded retirement benefi t from the Bank, based primarily on the value of the Company’s common stock. The ESOP purchased 4,769,464 shares of the Company’s common stock at an average price of $17.09 per share with the proceeds of a loan from the Company to the ESOP. The outstanding loan principal at December 31, 2014, was $53.4 million. Shares of the Company’s common stock pledged as collateral for the loan are released from the pledge for allocation to participants as loan payments are made. For the ESOP years ending December 31, 2014 and 2013, 201,512 shares and 195,065 shares were released, respectively. Unallocated ESOP shares held in suspense totaled 2,652,045 at December 31, 2014, and had a fair value of $47.9 million. ESOP compensation expense for the years ended December 31, 2014, 82 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 2013 and 2012 was $2,654,000, $2,559,000 and $2,030,000, respectively. The Supplemental Executive Savings Plan The Supplemental Executive Savings Plan is a non-qualifi ed plan that provides supplemental benefi ts to certain executives who are prevented from receiving the full benefi ts contemplated by the 401(k) Plan’s and the ESOP’s benefi t formulas under tax law limits for tax-qualifi ed plans. The Supplemental Executive Savings Plan was frozen effective December 31, 2003, and all benefi t distributions have been made. Non-Qualifi ed Supplemental Defi ned Contribution Plan (“the Supplemental Employee Stock Ownership Plan”) Effective January 1, 2004, the Bank established a deferred compensation plan for executive management and key employees of the Bank, known as The Provident Bank Non-Qualifi ed Supplemental Employee Stock Ownership Plan (the “Supplemental ESOP”). The Supplemental ESOP was amended and restated as the Non- Qualifi ed Supplemental Defi ned Contribution Plan (the “Supplemental DC Plan”), effective January 1, 2010. The Supplemental DC Plan is a non-qualifi ed plan that provides additional benefi ts to certain executives whose benefi ts under the 401(k) Plan and ESOP are limited by tax law limitations applicable to tax-qualifi ed plans. The Supplemental DC Plan requires a contribution by the Bank for each participant who also participates in the 401(k) Plan and ESOP equal to the amount that would have been contributed under the terms of the of the 401(k) Plan and ESOP but for the tax law limitations, less the amount actually contributed under the 401(k) Plan and ESOP. The Supplemental DC Plan provides for a phantom stock allocation for qualifi ed contributions that may not be accrued in the qualifi ed ESOP and for matching contributions that may not be accrued in the qualifi ed 401(k) Plan due to tax law limitations. Under the Supplemental 401(k) provision, the estimated expense for the year ending December 31, 2014, 2013 and 2012 was $10,500, $7,000 and $7,500, respectively, and included the matching contributions plus interest credited at an annual rate equal to the ten-year bond-equivalent yield on U.S. Treasury securities. Under the Supplemental ESOP provision, the estimated expense for the year ending December 31, 2014, 2013 and 2012 was $48,000, $45,000 and $28,000, respectively. The phantom equity is treated as equity awards (expensed at the time of allocation) and not liability awards which would require periodic adjustment to market, as participants do not have an option to take their distribution in cash. The Amended and Restated Long-Term Incentive Plan Upon stockholders’ approval of the Amended and Restated Long- Term Incentive Plan on April 4, 2014, shares available for stock awards and stock options under the 2008 Long-Term Equity Incentive Plan were reserved for issuance under the new Amended and Restated Long-Term Incentive Plan. No additional grants of stock awards and stock options will be made under the 2008 Long-Term Equity Incentive Plan. The new plan authorized the issuance of up to 3,686,510 shares of Company common stock with no more than PART II ITEM 8 Financial Statements and Supplementary Data 2,100,000 shares permitted to be issued as stock awards. Shares previously awarded under the 2008 plans that are subsequently forfeited or expire may also be issued under the new plan. Stock Awards As a general rule, restricted stock grants are held in escrow for the benefi t of the award recipient until vested. Awards outstanding generally vest in three or fi ve annual installments, commencing one year from the date of the award. Additionally, certain awards are two and three-year performance vesting awards, which may or may not vest depending upon the attainment of certain corporate fi nancial targets. Expense attributable to stock awards amounted to $6,359,000, $4,869,000 and $3,658,000 for the years ended December 31, 2014, 2013 and 2012, respectively. A summary status of the granted but unvested stock awards as of December 31, and changes during the year, is presented below: Outstanding at beginning of year Granted Forfeited Vested Outstanding at the end of year Restricted Stock Awards 2014 782,213 426,726 (126,743) (235,734) 846,462 2013 846,883 386,669 (68,954) (382,385) 782,213 2012 904,411 373,510 (220,590) (210,448) 846,883 As of December 31, 2014, unrecognized compensation cost relating to unvested restricted stock totaled $1.1 million. This amount will be recognized over a remaining weighted average period of 1.1 years. Stock Options Each stock option granted entitles the holder to purchase one share of the Company’s common stock at an exercise price not less than the fair value of a share of the Company’s common stock at the date of grant. Options generally vest over a fi ve-year period from the date of grant and expire no later than 10 years following the grant date. Additionally, certain options are three-year performance vesting options, which may or may not vest depending upon the attainment of certain corporate fi nancial targets. A summary of the status of the granted but unexercised stock options as of December 31, and changes during the year is presented below: Outstanding at beginning of year Granted Exercised Forfeited Expired Outstanding at the end of year 2014 Number of stock options 1,233,742 $ 171,935 (9,678) (4,178) (107,500) 1,284,321 $ Weighted average exercise price 15.24 16.44 12.11 14.50 16.54 15.32 2013 Number of stock options 4,152,016 $ 85,250 (28,464) (53,444) (2,921,616) 1,233,742 $ Weighted average exercise price 17.50 15.23 12.41 10.34 18.57 15.24 2012 Number of stock options 4,248,898 $ 80,081 (2,000) (109,655) (65,308) 4,152,016 $ Weighted average exercise price 17.37 14.86 12.54 10.41 18.32 17.50 The total fair value of options vesting during 2014, 2013 and 2012 was $438,000, $696,000 and $551,000, respectively. Compensation expense of approximately $179,000, $70,000 and $41,000 is projected for 2015, 2016 and 2017, respectively, on stock options outstanding at December 31, 2014. The following table summarizes information about stock options outstanding at December 31, 2014: Range of exercise prices $10.27-15.23 $16.38-18.87 Options Outstanding Number of options outstanding 638,382 645,939 Average remaining contractual life 5.3 years $ 3.6 years $ Weighted average exercise price 12.57 17.67 Options Exercisable Number of options exercisable 476,716 $ 478,504 $ Weighted average exercise price 11.75 18.12 The stock options outstanding and stock options exercisable at December 31, 2014 have an aggregate intrinsic value of $3,840,117 and $3,064,000, respectively. Compensation expense related to the Company’s stock option plan totaled $298,000, $297,000 and $452,000 for 2014, 2013 and 2012, respectively. The expense related to stock options is based on the fair value of the options at the date of the grant and is recognized ratably over the vesting period of the options. The estimated fair values were determined on the dates of grant using the Black-Scholes Option pricing model. The fair value of the Company’ stock option awards are expensed on a straight- line basis over the vesting period of the stock option. The risk-free PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 83 PART II ITEM 8 Financial Statements and Supplementary Data rate is based on the implied yield on a U.S. Treasury bond with a term approximating the expected term of the option. The expected volatility computation is based on historical volatility over a period approximating the expected term of the option. The dividend yield is based on the annual dividend payment per share, divided by the grant date stock price. The expected option term is a function of the option life and the vesting period. The fair value of the option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Expected dividend yield Expected volatility Risk-free interest rate Expected option life For the year ended December 31, 2014 3.66% 20.04% 0.96% 2013 3.41% 33.38% 0.88% 2012 3.26% 32.51% 0.86% 6.5 years 8 years 8 years The weighted average fair value of options granted during 2014, 2013 and 2012 was $1.64, $3.49 and $3.37 per option, respectively. NOTE 12 Income Taxes The current and deferred amounts of income tax expense (benefi t) for the years ended December 31, 2014, 2013 and 2012 are as follows (in thousands): Current: Federal State Total current Deferred: Federal State Total deferred Years ended December 31, 2014 2013 2012 $ $ 27,577 542 28,119 1,678 1,988 3,666 31,785 27,667 2,168 29,835 4,210 1,321 5,531 35,366 29,813 176 29,989 (3,208) 2,074 (1,134) 28,855 The Bank recorded, in accumulated other comprehensive income, deferred tax expense (benefi t) of $7,075,000, ($13,824,000) and $587,000 during 2014, 2013 and 2012, respectively, to refl ect the tax effect of the unrealized gain on securities available for sale. The Bank recorded, in accumulated other comprehensive income, a deferred tax expense (benefi t) of $(3,800,000), $4,968,000 and ($694,000) in 2014, 2013 and 2012, respectively, related to the amortization of post-retirement obligations. A reconciliation between the amount of reported total income tax expense and the amount computed by multiplying the applicable statutory income tax rate is as follows (in thousands): Tax expense at statutory rate of 35% Increase (decrease) in taxes resulting from: State tax, net of federal income tax benefi t Tax-exempt interest income Bank-owned life insurance Non-qualifi ed stock option expiration Other, net Years ended December 31, 2014 36,896 1,621 (4,916) (1,972) — 156 31,785 $ $ 2013 37,065 2,268 (4,084) (2,309) 2,746 (320) 35,366 2012 33,643 1,462 (3,937) (1,847) — (466) 28,855 84 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data The net deferred tax asset is included in other assets in the consolidated statements of fi nancial condition. The tax effects of temporary differences that give rise to signifi cant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows (in thousands): 2014 2013 Deferred tax assets: Allowance for loan losses Post-retirement benefi t Deferred compensation Intangibles Purchase accounting adjustments Depreciation SERP ESOP Stock-based compensation Non-accrual interest Unrealized loss on securities State NOL Federal NOL Pension liability adjustments Other Total gross deferred tax assets Valuation Reserve Deferred tax liabilities: Pension expense Deferred loan costs Investment securities, principally due to accretion of discounts Originated mortgage servicing rights Unrealized gain on securities Total gross deferred tax liabilities Net deferred tax asset The 2014 deferred tax expense does not equal the change in net deferred tax assets as a result of deferred taxes recorded in connection with the Team Capital acquisition in the amount of $486,000. Retained earnings at December 31, 2014 includes approximately $51,800,000 for which no provision for income tax has been made. This amount represented an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include the failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, stock redemptions and excess distributions to stockholders. At December 31, 2014, the Company had an unrecognized tax liability of $21,160,000 with respect to this reserve. At December 31, 2014 and 2013, the Company had a valuation allowance of $242,000 related to approximately $648,000 of capital loss carryforwards. As a result of the Beacon acquisition in 2011, the Company acquired federal net operating loss carryforwards. There are approximately $3,900,000 available to offset future taxable income as of December 31, 2014. If not utilized, these carryforwards will expire in 2030. Also, the Company New Jersey NOL carryforwards in the amount of $3,300,000 which are scheduled to expire in 2033 and Pennsylvania NOL $ $ 24,160 10,658 3,009 499 387 3,963 949 3,264 5,734 5,202 — 430 1,376 5,178 1,073 65,882 (242) 9,925 4,089 311 395 5,191 19,911 45,729 25,848 10,690 3,037 511 426 3,396 958 3,253 5,558 6,756 1,939 237 1,692 1,438 1,345 67,084 (242) 9,925 3,936 235 447 — 14,543 52,299 carryforwards in the amount of $3,000,000, which are set to expire in 2016. The federal NOLs are subject to a combined annual Code Section 382 limitation in the amount of approximately $900,000. Management has determined that it is more likely than not that it will realize the net deferred tax asset based upon the nature and timing of the items listed above. In order to fully realize the net deferred tax asset, the Company will need to generate future taxable income. Management has projected that the Company will generate suffi cient taxable income to utilize the net deferred tax asset; however, there can be no assurance that such levels of taxable income will be generated. The Company’s policy is to report interest and penalties, if any, related to unrecognized tax benefi ts in income tax expense. The Company did not have any liabilities for uncertain tax positions or any known unrecognized tax benefi ts at December 31, 2014 and 2013. The Company and its subsidiaries fi le a consolidated U.S. Federal income tax return and each entity fi les a separate state income tax return. The Company and its subsidiaries are no longer subject to income tax examinations by taxing authorities for years prior to 2011. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 85 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 13 Lease Commitments The approximate future minimum rental commitments, exclusive of taxes and other related charges, for all signifi cant non-cancellable operating leases at December 31, 2014, are summarized as follows (in thousands): Year ending December 31, 2015 2016 2017 2018 2019 Thereafter $ $ 6,521 6,455 5,960 5,351 5,093 12,887 42,267 Rental expense was $8,056,000, $6,850,000 and $7,115,000 for the years ended December 31, 2014, 2013 and 2012, respectively. NOTE 14 Commitments, Contingencies and Concentrations of Credit Risk In the normal course of business, various commitments and contingent liabilities are outstanding which are not refl ected in the accompanying consolidated fi nancial statements. In the opinion of management, the consolidated fi nancial position of the Company will not be materially affected by the outcome of such commitments or contingent liabilities. A substantial portion of the Bank’s loans are one- to four-family residential fi rst mortgage loans secured by real estate located in New Jersey. Accordingly, the collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in local real estate market conditions. NOTE 15 Regulatory Capital Requirements FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2014 and 2013, the Bank is required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution’s fi nancial statements. The regulations establish a framework for the classifi cation of savings institutions into fi ve categories: well capitalized, adequately capitalized, undercapitalized, signifi cantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier 1) capital ratio of at least 5.00%; a Tier 1 risk-based capital ratio of at least 6.00%; and a total risk-based capital ratio of at least 10.00%. The foregoing capital ratios are based in part on specifi c quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifi cations are also subject to qualitative judgments by the FDIC about capital components, risk weightings and other factors. As of December 31, 2014 and 2013, the Bank exceeded all minimum capital adequacy requirements to which it is subject. Further, the most recent FDIC notifi cation categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notifi cation that management believes have changed the Bank’s capital classifi cation. The Company is regulated as a bank holding company, and as such, is subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board (“FRB”). The FRB has adopted capital adequacy guidelines for bank holding companies on a consolidated basis substantially similar to those of the FDIC for the Bank. As of December 31, 2014 and 2013, the Company was “well capitalized” under FRB guidelines. Regulations of the FRB provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. Under the prompt corrective action provisions discussed above, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. If the undercapitalized bank fails to fi le an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the FRB. 86 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report The following is a summary of the Company’s actual capital amounts and ratios as of December 31, 2014 and 2013, compared to the FRB minimum capital adequacy requirements and the FRB requirements for classifi cation as a well-capitalized institution (dollars in thousands). PART II ITEM 8 Financial Statements and Supplementary Data As of December 31, 2014: Leverage (Tier 1) Risk-based capital: Tier 1 Total As of December 31, 2013: Leverage (Tier 1) Risk-based capital: Tier 1 Total Actual FRB minimum capital adequacy requirements Amount Ratio Amount Ratio To be well-capitalized under prompt corrective action provisions Amount Ratio $ 740,958 9.21% $ 321,809 4.00% $ 402,262 5.00% 740,958 802,692 12.06 13.06 245,859 491,717 4.00 8.00 368,788 614,646 6.00 10.00 Actual Amount Ratio FRB minimum capital adequacy requirements Ratio Amount To be well-capitalized under prompt corrective action provisions Amount Ratio $ 660,549 9.42% $ 280,572 4.00% $ 350,715 5.00% 660,549 724,609 12.89 14.14 204,967 409,934 4.00 8.00 307,451 512,418 6.00 10.00 The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2014 and 2013, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classifi cation as a well-capitalized institution (dollars in thousands). As of December 31, 2014: Leverage (Tier 1) Risk-based capital: Tier 1 Total As of December 31, 2013: Leverage (Tier 1) Risk-based capital: Tier 1 Total Actual Amount Ratio FDIC minimum capital adequacy requirements Ratio Amount To be well-capitalized under prompt corrective action provisions Amount Ratio $ 674,483 8.38% $ 321,805 4.00% $ 402,257 5.00% 674,483 736,217 10.97 11.98 245,853 491,705 4.00 8.00 368,779 614,631 6.00 10.00 Actual Amount Ratio FDIC minimum capital adequacy requirements Ratio Amount To be well-capitalized under prompt corrective action provisions Amount Ratio $ 585,313 8.34% $ 280,578 4.00% $ 350,723 5.00% 585,313 649,373 11.42 12.67 204,967 409,933 4.00 8.00 307,450 512,417 6.00 10.00 NOTE 16 Fair Value Measurements The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of fi nancial instruments often requires the use of estimates. Where quoted market values in an active market are not readily available, the Company utilizes various valuation techniques to estimate fair value. Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, in many instances fair value estimates may not be substantiated by comparison to independent markets and may not be realized in an immediate sale of the fi nancial instrument. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 87 PART II ITEM 8 Financial Statements and Supplementary Data GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows: Level 1: Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both signifi cant to the fair value measurement and unobservable (i.e., supported by little or no market activity). A fi nancial instrument’s level within the fair value hierarchy is based on the lowest level of input that is signifi cant to the fair value measurement. The valuation techniques are based upon the unpaid principal balance only, and exclude any accrued interest or dividends at the measurement date. Interest income and expense and dividend income are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium. Assets Measured at Fair Value on a Recurring Basis The valuation techniques described below were used to measure fair value of fi nancial instruments in the table below on a recurring basis as of December 31, 2014 and December 31, 2013. Securities Available for Sale For securities available for sale, fair value was estimated using a market approach. The majority of the Company’s securities are fi xed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or to comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash fl ows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifi cally, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verifi cation procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also may hold equity securities and debt instruments 88 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report issued by the U.S. government and U.S. government-sponsored agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 inputs. Derivatives The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfi ed the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships. The existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings. The fair value of the Company’s derivatives are determined using discounted cash fl ow analysis using observable market-based inputs, which are considered Level 2 inputs. Assets Measured at Fair Value on a Non-Recurring Basis The valuation techniques described below were used to estimate fair value of fi nancial instruments measured on a non-recurring basis as of December 31, 2014 and 2013. Collateral Dependent Impaired Loans For loans measured for impairment based on the fair value of the underlying collateral, fair value was estimated using a market approach. The Company measures the fair value of collateral underlying impaired loans primarily through obtaining independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case-by-case basis, to comparable assets based on the appraisers’ market knowledge and experience, as well as adjustments for estimated costs to sell of up to 6%. The Company classifi es these loans as Level 3 within the fair value hierarchy. Foreclosed Assets Assets acquired through foreclosure or deed in lieu of foreclosure are carried at fair value, less estimated costs to sell of up to 6%. Fair value is generally based on independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments, on an individual case basis, to comparable assets based on the appraisers’ market knowledge and experience, and are classifi ed as Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated costs to sell, is charged to the allowance for loan losses. A reserve for foreclosed assets may be established to provide for possible write-downs and selling costs that occur subsequent to foreclosure. Foreclosed assets are carried net of the related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned, are recorded as incurred. There were no changes to the valuation techniques for fair value measurements during the years ended December 31, 2014 and 2013. The following tables present the assets and liabilities reported on the consolidated statements of fi nancial condition at their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy (in thousands). PART II ITEM 8 Financial Statements and Supplementary Data Measured on a recurring basis: U.S. Treasury obligations Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Equities Asset derivatives Liability derivatives Measured on a non-recurring basis: Loans measured for impairment based on the fair value of the underlying collateral Foreclosed assets Measured on a recurring basis: Agency obligations Mortgage-backed securities State and municipal obligations Equities Measured on a non-recurring basis: Loans measured for impairment based on the fair value of the underlying collateral Foreclosed assets Fair Value Measurements at Reporting Date Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Signifi cant Other Observable Inputs (Level 2) Signifi cant Unobservable Inputs (Level 3) December 31, 2014 8,016 95,076 957,257 7,002 6,520 524 1,074,395 2,046 1,076,441 2,052 23,086 5,098 28,184 8,016 95,076 — — — 524 103,616 — 103,616 — — — — — — 957,257 7,002 6,520 — 970,779 2,046 972,825 2,052 — — — — — — — — — — — — — 23,086 5,098 28,184 Fair Value Measurements at Reporting Date Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Signifi cant Other Observable Inputs (Level 2) Signifi cant Unobservable Inputs (Level 3) December 31, 2013 93,416 1,054,974 8,758 446 1,157,594 29,782 5,486 35,268 93,416 — — 446 93,862 — — — — 1,054,974 8,758 — 1,063,732 — — — — — — — — 29,782 5,486 35,268 $ $ $ $ $ $ $ $ $ $ $ There were no transfers between Level 1 and Level 2 during the years ended December 31, 2014 and 2013. Other Fair Value Disclosures The Company is required to disclose estimated fair value of fi nancial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities. Cash and Cash Equivalents For cash and due from banks, federal funds sold and short-term investments, the carrying amount approximates fair value. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 89 PART II ITEM 8 Financial Statements and Supplementary Data Investment Securities Held to Maturity For investment securities held to maturity, fair value was estimated using a market approach. The majority of the Company’s securities are fi xed income instruments that are not quoted on an exchange, but are traded in active markets. Prices for these instruments are obtained through third party data service providers or dealer market participants with which the Company has historically transacted both purchases and sales of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing, a Level 2 input, is a mathematical technique used principally to value certain securities to benchmark or comparable securities. The Company evaluates the quality of Level 2 matrix pricing through comparison to similar assets with greater liquidity and evaluation of projected cash fl ows. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifi cally, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verifi cation procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service. The Company also holds debt instruments issued by the U.S. government and U.S. government agencies that are traded in active markets with readily accessible quoted market prices that are considered Level 1 within the fair value hierarchy. FHLBNY Stock The carrying value of FHLBNY stock was its cost. The fair value of FHLBNY stock is based on redemption at par value. The Company classifi es the estimated fair value as Level 1 within the fair value hierarchy. Loans Fair values are estimated for portfolios of loans with similar fi nancial characteristics. Loans are segregated by type such as commercial mortgage, residential mortgage, commercial, construction and consumer. Each loan category is further segmented into fi xed and adjustable rate interest terms and into performing and non- performing categories. The fair value of performing loans was estimated using a combination of techniques, including a discounted cash fl ow model that utilizes a discount rate that refl ects the Company’s current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Company classifi es the estimated fair value of its loan portfolio as Level 3. The fair value for signifi cant non-performing loans was based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash fl ows. The Company classifi es the estimated fair value of its non-performing loan portfolio as Level 3. Deposits The fair value of deposits with no stated maturity, such as non- interest bearing demand deposits and savings deposits, was equal to the amount payable on demand and classifi ed as Level 1. The estimated fair value of certifi cates of deposit was based on the discounted value of contractual cash fl ows. The discount rate was estimated using the Company’s current rates offered for deposits with similar remaining maturities. The Company classifi es the estimated fair value of its certifi cates of deposit portfolio as Level 2. Borrowed Funds The fair value of borrowed funds was estimated by discounting future cash fl ows using rates available for debt with similar terms and maturities and is classifi ed by the Company as Level 2 within the fair value hierarchy. Commitments to Extend Credit and Letters of Credit The fair value of commitments to extend credit and letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fi xed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value estimates of commitments to extend credit and letters of credit are deemed immaterial. 90 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report Limitations Fair value estimates are made at a specifi c point in time, based on relevant market information and information about the fi nancial instrument. These estimates do not refl ect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular fi nancial instrument. Because no market exists for a signifi cant portion of the Company’s fi nancial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various fi nancial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of signifi cant judgment and, therefore, cannot be determined with precision. Changes in assumptions could signifi cantly affect the estimates. PART II ITEM 8 Financial Statements and Supplementary Data Fair value estimates are based on existing on- and off-balance sheet fi nancial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered fi nancial instruments. Signifi cant assets and liabilities that are not considered fi nancial assets or liabilities include goodwill and other intangibles, deferred tax assets and premises and equipment. In addition, the tax ramifi cations related to the realization of the unrealized gains and losses can have a signifi cant effect on fair value estimates and have not been considered in the estimates. The following tables present the Company’s fi nancial instruments at their carrying and fair values as of December 31, 2014 and December 31, 2013. Fair values are presented by level within the fair value hierarchy. (Dollars in thousands) Financial assets: Cash and cash equivalents Securities available for sale: U.S. Treasury obligations Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Equity securities Total securities available for sale Investment securities held to maturity: Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Total securities held to maturity FHLBNY stock Loans, net of allowance for loan losses Asset derivative Financial liabilities: Deposits other than certifi cates of deposits Certifi cates of deposit Borrowings Liability derivative Fair Value Measurements at December 31, 2014 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Signifi cant Other Observable Inputs (Level 2) Signifi cant Unobservable Inputs (Level 3) Fair value Carrying value $ 103,762 103,762 103,762 — 8,016 95,076 957,257 7,002 6,520 524 1,074,395 6,813 2,816 449,410 10,489 469,528 69,789 6,023,771 2,046 4,966,834 825,689 5,792,523 1,509,851 2,052 $ $ $ $ $ 8,016 95,076 957,257 7,002 6,520 524 1,074,395 6,810 2,939 462,238 10,486 482,473 69,789 6,104,558 2,046 4,966,834 830,233 5,797,067 1,516,966 2,052 8,016 95,076 — — — 524 103,616 6,810 — — — 6,810 69,789 — — 4,966,834 — 4,966,834 — — — — 957,257 7,002 6,520 — 970,779 — 2,939 462,238 10,486 475,663 — — 2,046 — 830,233 830,233 1,516,966 2,052 — — — — — — — — — — — — — — 6,104,558 — — — — — — PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 91 PART II ITEM 8 Financial Statements and Supplementary Data (Dollars in thousands) Financial assets: Cash and cash equivalents Securities available for sale: Agency obligations Mortgage-backed securities State and municipal obligations Equity securities Total securities available for sale Investment securities held to maturity: Agency obligations Mortgage-backed securities State and municipal obligations Corporate obligations Total securities held to maturity FHLBNY stock Loans, net of allowance for loan losses Financial liabilities: Deposits other than certifi cates of deposits Certifi cates of deposit Total deposits Borrowings $ $ $ $ $ $ Fair Value Measurements at December 31, 2013 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Signifi cant Other Observable Inputs (Level 2) Signifi cant Unobservable Inputs (Level 3) Fair value Carrying value $ 101,224 101,224 101,224 — 93,416 1,054,974 8,758 446 1,157,594 7,523 5,273 334,750 9,954 357,500 58,070 5,130,149 4,395,717 806,754 5,202,471 1,203,879 93,416 1,054,974 8,758 446 1,157,594 7,470 5,520 332,987 9,936 355,913 58,070 5,221,228 4,395,717 813,337 5,209,054 1,218,136 93,416 — — 446 93,862 7,470 — — — 7,470 58,070 — 4,395,717 — 4,395,717 — — 1,054,974 8,758 — 1,063,732 — 5,520 332,987 9,936 348,443 — — — 813,337 813,337 1,218,136 — — — — — — — — — — — — 5,221,228 — — — — NOTE 17 Selected Quarterly Financial Data (Unaudited) The following tables are a summary of certain quarterly fi nancial data for the years ended December 31, 2014 and 2013. (In thousands, except per share data) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Basic earnings per share Diluted earnings per share 2014 Quarters Ended March 31 $ 64,523 $ June 30 67,386 $ 9,322 55,201 400 54,801 8,116 38,190 24,727 7,698 9,985 57,401 1,500 55,901 10,327 43,671 22,557 6,206 $ $ $ 17,029 $ 0.30 $ 0.30 $ 16,351 $ 0.28 $ 0.28 $ September 30 73,652 $ 10,683 62,969 1,500 61,469 11,309 45,833 26,945 7,913 19,032 $ 0.30 $ 0.30 $ December 31 73,800 10,482 63,318 1,250 62,068 11,416 42,297 31,187 9,968 21,219 0.34 0.34 92 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data March 31 63,304 9,409 53,895 1,500 52,395 9,945 36,946 25,394 7,566 17,828 0.31 0.31 $ $ $ $ 2013 Quarter Ended June 30 62,413 9,002 53,411 1,000 52,411 12,637 37,813 27,235 8,007 19,228 0.34 0.34 September 30 62,984 8,987 53,997 1,200 52,797 11,730 36,464 28,063 11,987 16,076 0.28 0.28 December 31 64,076 9,369 54,707 1,800 52,907 9,841 37,540 25,208 7,806 17,402 0.30 0.30 (In thousands, except per share data) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Basic earnings per share Diluted earnings per share NOTE 18 Earnings Per Share The following is a reconciliation of the outstanding shares used in the basic and diluted earnings per share calculations. (Dollars in thousands, except per share data) Net income Basic weighted average common shares outstanding Plus: Dilutive shares Diluted weighted average common shares outstanding Earnings per share: Basic Diluted For the Year Ended December 31, 2014 73,631 60,388,398 2013 70,534 57,236,909 2012 67,267 57,145,868 173,672 60,562,070 124,534 57,361,443 53,936 57,199,804 1.22 1.22 1.23 1.23 1.18 1.18 $ $ $ Anti-dilutive stock options and awards totaling 988,931, 659,531 and 3,891,443 shares at December 31, 2014, 2013 and 2012, respectively, were excluded from the earnings per share calculations. NOTE 19 Parent-only Financial Information The condensed fi nancial statements of Provident Financial Services, Inc. (parent company only) are presented below: PROVIDENT FINANCIAL SERVICES, INC. Condensed Statements of Financial Condition (Dollars in Thousands) Assets Cash and due from banks Securities available for sale, at fair value Investment in subsidiary Due from subsidiary—SAP ESOP loan Other assets Total assets Liabilities and Stockholders’ Equity Other liabilities Total stockholders’ equity Total liabilities and stockholders’ equity December 31, 2014 December 31, 2013 $ 10,475 $ 524 1,077,624 2,794 53,438 34 $ 1,144,889 $ 790 1,144,099 1,144,889 $ $ 12,796 446 935,517 6,269 56,716 59 1,011,803 1,050 1,010,753 1,011,803 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 93 PART II ITEM 8 Financial Statements and Supplementary Data PROVIDENT FINANCIAL SERVICES, INC. Condensed Statements of Operations (Dollars in Thousands) Dividends from subsidiary Interest income Investment gain Total income Non-interest expense Total expense Income before income tax expense Income tax expense Income before undistributed net income of subsidiary Equity in undistributed net income of subsidiary (dividends in excess of earnings) Net income PROVIDENT FINANCIAL SERVICES, INC. Condensed Statements of Cash Flows (Dollars in Thousands) Cash fl ows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities Dividends in excess of earnings (equity in undistributed net income) of subsidiary ESOP allocation SAP allocation Stock option allocation Decrease in due from subsidiary—SAP Increase (decrease) in other assets (Decrease) increase in other liabilities Net cash provided by operating activities Cash fl ows from investing activities: Cash consideration paid for business acquisition Net decrease in ESOP loan Net cash (used in) provided by investing activities Cash fl ows from fi nancing activities: Purchases of treasury stock Cash dividends paid Shares issued dividend reinvestment plan Stock options exercised Net cash used in fi nancing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period For the Years Ended December 31, 2014 36,118 2,276 11 38,405 814 814 37,591 551 37,040 36,591 73,631 $ $ 2013 32,320 2,390 9 34,719 891 891 33,828 563 33,265 37,269 70,534 2012 40,729 2,696 9 43,434 882 882 42,552 688 41,864 25,403 67,267 For the Years Ended December 31, 2014 2013 2012 $ 73,631 70,534 67,267 (36,591) 2,654 6,359 298 3,475 15,454 (259) 65,021 (31,562) 3,278 (28,284) (4,420) (36,118) 1,336 144 (39,058) (2,321) 12,796 10,475 $ (37,269) 2,559 4,869 297 5,814 (6,912) (172) 39,720 — 3,034 3,034 (5,899) (32,320) 1,186 412 (36,621) 6,133 6,663 12,796 (25,403) 2,030 3,658 452 4,177 (13,960) 68 38,289 — 3,035 3,035 (9,424) (40,729) 6,090 28 (44,035) (2,711) 9,374 6,663 94 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 20 Other Comprehensive Income (Loss) The following table presents the components of other comprehensive income (loss) both gross and net of tax, for the years ended December 31, 2014, 2013 and 2012 (in thousands): Before Tax 2014 Tax Effect For the Years Ended December 31, 2013 After Tax Before Tax Tax Effect After Tax Before Tax 2012 Tax Effect After Tax Components of Other Comprehensive Income(Loss): Unrealized gains and losses on securities available for sale: Net gains (losses) arising during the period Reclassifi cation adjustment for gains included in net income Total Other-than-temporary impairment on debt securities available for sale: Other-than-temporary impairment losses on securities Reclassifi cation adjustment for impairment losses included in net income Total Amortization related to post retirement obligations Total other comprehensive income (loss) $ 17,868 (7,176) 10,692 (32,845) 13,417 (19,428) 3,060 (1,250) 1,810 (251) 17,617 101 (7,075) (150) 10,542 (996) (33,841) 407 13,824 (589) (20,017) (4,497) (1,437) 1,837 587 (2,660) (850) — — — — — — — — — — — — 434 434 (177) (177) 257 257 — — — — — — — — — (9,462) 3,800 (5,662) 12,161 (4,968) 7,193 (1,699) 694 (1,005) $ 8,155 (3,275) 4,880 (21,246) 8,679 (12,567) (3,136) 1,281 (1,855) The following table presents the changes in the components of accumulated other comprehensive income, net of tax, for the years ended December 31, 2014 and 2013 (in thousands): Changes in Accumulated Other Comprehensive Income by Component, net of tax For the Years Ended December 31, Unrealized Gains on Securities Available for Sale (2,799) Balance at the beginning of the period, $ 2014 2013 Post Retirement Obligations (2,052) Accumulated Other Comprehensive Income (4,851) Unrealized Gains on Securities Available for Sale 16,961 Post Retirement Obligations (9,245) Accumulated Other Comprehensive Income 7,716 Current period change in other comprehensive income (loss) Balance at the end of the period 10,542 7,743 $ (5,662) (7,714) 4,880 29 (19,760) (2,799) 7,193 (2,052) (12,567) (4,851) PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 95 PART II ITEM 8 Financial Statements and Supplementary Data The following table summarizes the reclassifi cations out of accumulated other comprehensive income for the years ended December 31, 2014 and 2013 (in thousands): Reclassifi cations Out of Accumulated Other Comprehensive Income Amount reclassifi ed from AOCI for the years ended December 31, 2014 2013 Affected line item in the Consolidated Statement of Income Details of AOCI: Securities available for sale: Realized net gains on the sale of securities available for sale $ Realized other-than-temporary impairment losses securities available for sale Post retirement obligations: Amortization of actuarial losses Realized loss related to lump sum pension settlement 251 (101) 150 — — — 237 (95) 142 (1,336) 546 (790) (498) 996 Net gain on securities transactions (407) 589 Net of tax Income tax expense Net impairment losses on securities recognized in earnings (434) 177 Income tax expense (257) Net of tax 1,367 Compensation and employee benefi ts(1) Income tax expense (558) 809 Net of tax — Compensation and employee benefi ts(1) — Income tax expense — Net of tax 1,141 Net of tax Total reclassifi cations (1) This item is included in the computation of net periodic benefit cost. See Note 11. Benefit Plans $ 96 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART II ITEM 8 Financial Statements and Supplementary Data NOTE 21 Derivative and Hedging Activities The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. The Company’s existing interest rate derivatives result from a service provided to certain qualifying borrowers in a loan related transaction and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. The table below presents the fair value of the Company’s derivative fi nancial instruments as well as their classifi cation on the Consolidated Statements of Financial Condition as of December 31, 2014 (in thousands): As of December 31, 2014 Asset Derivatives Liability Derivatives Consolidated Statements of Financial Condition Other assets Other assets $ $ Consolidated Statements of Financial Condition Fair Value 2,040 Other liabilities 6 2,046 $ $ Fair Value 2,052 — 2,052 swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of December 31, 2014, the Company had nine interest rate swaps with an aggregate notional amount of $94.9 million related to this program. The tables below present the effect of the Company’s derivative fi nancial instruments on the Consolidated Statements of Income for the year ended December 31, 2014 (in thousands). Consolidated Statements of Income Other income Other income Gain (loss) recognized in Income on derivatives Year ended December 31, 2014 $ $ (3) 6 3 As of December 31, 2014, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2,084,000. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $1,250,000 against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2014, it could have been required to settle its obligations under the agreements at the termination value. Derivatives not designated as a hedging instruments: Interest rate products Credit contracts Total derivatives not designated as hedging instruments None of the Company’s derivatives are designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers, which the Company implemented during 2014. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate Derivatives not designated as a hedging instruments: Interest rate products Credit contracts Total The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision that if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 97 PART II ITEM 9B Other Information ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Christopher Martin, the Company’s Principal Executive Offi cer, and Thomas M. Lyons, the Company’s Principal Accounting Offi cer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defi ned in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2014. Based upon their evaluation, they each found that the Company’s disclosure controls and procedures were effective. Management’s Report on Internal Control Over Financial Reporting The management of Provident Financial Services, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over fi nancial reporting. The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published fi nancial statements. The Company’s internal control over fi nancial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its fi nancial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to fi nancial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. During the fourth quarter management identifi ed a material weakness in internal control relating to the determination of the qualitative factors considered by management in the allowance for loan loss estimation process. No restatement of prior period fi nancial statements and no change in previously released fi nancial results were required as a result of this fi nding. Management remediated this weakness by enhancing the documentation and controls over the process supporting the qualitative factors considered in the estimation of the allowance for loan losses. Except for the foregoing, there was no change in the Company’s internal control over fi nancial reporting in the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over fi nancial reporting. Management assessed the effectiveness of the Company’s internal control over fi nancial reporting as of December 31, 2014 In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (“COSO”) (1992). Based on the assessment management believes that, as of December 31, 2014, the Company’s internal control over fi nancial reporting is effective based on those criteria. The Company’s independent registered public accounting fi rm that audited the consolidated fi nancial statements has issued an audit report on the effectiveness of the Company’s internal control over fi nancial reporting as of December 31, 2014. This report appears on page 57. ITEM 9B. Other Information None. 98 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART III ITEM 10. Directors, Executive Offi cers and Corporate Governance Information regarding director nominees, incumbent directors, executive offi cers, the Audit Committee of the board of directors, Audit Committee fi nancial experts and procedures by which stockholders may recommend director nominees required by this item is set forth under “Proposal 1 Election of Directors” under the captions “Board of Directors”, “Executive Offi cers”, “Audit Committee Matters—Audit Committee”, and “Corporate Governance Matters—Procedures for the Recommendation of Directors by Stockholders” in the Proxy Statement fi led for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under “General Information” under the caption “Section 16(a) Benefi cial Ownership Reporting Compliance” in the Proxy Statement fi led for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. Provident has adopted a Code of Business Conduct and Ethics that is applicable to all directors, offi cers and employees of Provident and The Provident Bank, including the principal executive offi cer, principal fi nancial offi cer, principal accounting offi cer, and all persons performing similar functions. The Code of Business Conduct and Ethics is posted on the “Governance Documents” section of the “Investor Relations” page on The Provident Bank’s website at www.providentnj.com. Amendments to and waivers from the Code of Business Conduct and Ethics will also be disclosed on The Provident Bank’s website. ITEM 11. Executive Compensation The information required by this item is set forth under “Proposal 1 Election of Provident Directors” under the captions “Compensation Committee Matters”, “Executive Compensation” and “Director Compensation” in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters The information required by this item regarding security ownership of certain benefi cial owners and management is set forth under “General Information” under the caption “Security Ownership of Certain Benefi cial Owners and Management” in the Proxy Statement fi led for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 99 PART III ITEM 14 Principal Accountant Fees and Services Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2014 regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders. Plan Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights(1) Weighted Average Exercise Price(2) Number of Securities Remaining Available For Issuance Under Plan Equity compensation plans approved by stockholders Total 1,284,321 $ 1,284,321 $ 15.32 15.32 3,723,147(3) 3,723,147 (1) Consists of outstanding stock options to purchase 1,284,321 shares of common stock granted under the Company’s stock-based compensation plans. (2) The weighted average exercise price reflects an exercise price of $18.03 for 38,500 stock options granted in 2005; an exercise price of $18.55 for 85,500 stock options, $18.48 for 60,000 stock options, $17.86 for 10,000 stock options and $18.87 for 20,000 stock options granted in 2006; an exercise price of $17.94 for 219,504 stock options, $17.45 for 45,000 stock options and $15.14 for 10,000 stock options granted in 2007; an exercise price of $12.54 for 120,970 stock options granted in 2008; an exercise price of $10.27 for 15,000 stock options and an exercise price of $10.40 for 87,499 stock options granted in 2009; an exercise price of $10.34 for 160,338 stock options granted in 2010; an exercise price of $14.50 for 80,081 stock options granted in 2011; an exercise price of $14.86 for 93,802 stock options granted in 2012; an exercise price of $15.23 for 85,250 stock options granted in 2013; and an exercise price of $16.38 for 167,436 stock options granted in 2014 under the Company’s stock-based compensation plans. (3) Represents the number of available shares that may be granted as stock options and other stock awards under the Company’s stock-based compensation plans. ITEM 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is set forth under “Proposal 1 Election of Directors” under the captions “Corporate Governance Matters—Director Independence” and “—Transactions With Certain Related Persons” in the Proxy Statement fi led for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. ITEM 14. Principal Accountant Fees and Services The information required by this item is set forth under “Proposal 4 Ratifi cation of the Appointment of our Independent Registered Public Accounting Firm” in the Proxy Statement fi led for the Annual Meeting of Stockholders to be held on April 23, 2015 and is incorporated herein by reference. 100 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART I V ITEM 15. Exhibits and Financial Statement Schedules The exhibits and fi nancial statement schedules fi led as a part of this Form 10-K are as follows: (a) (1) Financial Statements Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Consolidated Statements of Financial Condition, December 31, 2014 and 2013 Consolidated Statements of Income, Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Comprehensive Income, Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Cash Flows, Years Ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements. 50 51 52 53 54 55 57 59 (a) (2) Financial Statement Schedules No fi nancial statement schedules are fi led because the required information is not applicable or is included in the consolidated fi nancial statements or related notes. (a) (3) Exhibits 3.1 3.2 4.1 10.1 10.2 10.3 10.4 10.5 10.6 10.7 Certifi cate of Incorporation of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.) Amended and Restated Bylaws of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.) Form of Common Stock Certifi cate of Provident Financial Services, Inc. (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241.) Employment Agreement by and between Provident Financial Services, Inc and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission on November 9, 2009/ File No. 001-31566.) Form of Amended and Restated Two-Year Change in Control Agreement between Provident Financial Services, Inc. and certain executive offi cers. (Filed as an exhibit to the Company’s December 31, 2009 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 1, 2010 /File No. 001-31566.) Amended and Restated Employee Savings Incentive Plan, as amended. (Filed as an exhibit to the Company’s June 30, 2004 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission /File No. 001-31566.) Employee Stock Ownership Plan (Filed as an exhibit to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission/Registration No. 333-98241) and Amendment No. 1 to the Employee Stock Ownership Plan (Filed as an exhibit to the Company’s June 30, 2004 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission /File No. 001-31566). Supplemental Executive Retirement Plan of The Provident Bank. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.) Amended and Restated Supplemental Executive Savings Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.) Retirement Plan for the Board of Managers of The Provident Bank. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 2, 2009 /File No. 001-31566.) PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 101 PART IV ITEM 15 Exhibits and Financial Statement Schedules 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 21 23 31.1 31.2 32 101 The Provident Bank Amended and Restated Voluntary Bonus Deferral Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 2, 2009/ File No. 001-31566.) Provident Financial Services, Inc. Board of Directors Voluntary Fee Deferral Plan. (Filed as an exhibit to the Company’s December 31, 2008 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 2, 2009/File No. 001-31566.) First Savings Bank Directors’ Deferred Fee Plan, as amended. (Filed as an exhibit to the Company’s September 30, 2004 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission /File No. 001-31566.) The Provident Bank Non-Qualifi ed Supplemental Defi ned Contribution Plan. (Filed as an exhibit to the Company’s May 27, 2010 Current Report on Form 8-K fi led with the Securities and Exchange Commission on June 3, 2010/File No. 001-31566.) Provident Financial Services, Inc. 2003 Stock Option Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders fi led with the Securities and Exchange Commission on June 4, 2003/File No. 001-31566.) Provident Financial Services, Inc. 2003 Stock Award Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders fi led with the Securities and Exchange Commission on June 4, 2003/File No. 001-31566.) Provident Financial Services, Inc. 2008 Long-Term Equity Incentive Plan. (Filed as an exhibit to the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders fi led with the Securities and Exchange Commission on March 14, 2008/File No. 001-31566). Consulting Services Agreement by and between The Provident Bank and Paul M. Pantozzi made as of September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission on November 9, 2009/File No. 001-31566.) Change in Control Agreement by and between Provident Financial Services, Inc. and Christopher Martin dated September 23, 2009. (Filed as an exhibit to the Company’s September 30, 2009 Quarterly Report on Form 10-Q fi led with the Securities and Exchange Commission on November 9, 2009/File No. 001-31566.) Written Description of Provident Financial Services, Inc.’s 2011 Cash Incentive Plan. (Filed as an exhibit to the Company’s Form 10-K/A fi led with the Securities and Exchange Commission on December 27, 2011/File No. 001-31566.) Written Description of Provident Financial Services, Inc.’s 2012 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2011 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.) Omnibus Incentive Compensation Plan. (Filed as an exhibit to the Company’s December 31,2011 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.) Written Description of Provident Financial Services, Inc.’s 2013 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2012 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 1, 2013/File No. 001-31566.) Form of Three-Year Change in Control Agreement between Provident Financial Services, Inc. and each of Messrs. Blum, Kuntz, Lyons and Raimonde dated as of February 21, 2013. (Filed as an exhibit to the Company’s December 31, 2012 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 1, 2013/File No. 001-31566.) Written Description of Provident Financial Services, Inc.’s 2014 Cash Incentive Plan. (Filed as an exhibit to the Company’s December 31, 2013 Annual Report to Stockholders on Form 10-K fi led with the Securities and Exchange Commission on March 3, 2014/File No. 001-31566) Agreement and Plan of Merger by and among Provident Financial Services, Inc., The Provident Bank and Team Capital Bank, dated December 19, 2013. (Filed as an exhibit to the Company’s December 19, 2013 Current Report on Form 8-K fi led with the Securities and Exchange Commission on December 20, 2013/File No. 001-31566) Written Description of Provident Financial Services, Inc.’s 2015 Cash Incentive Plan. Subsidiaries of the Registrant. Consent of KPMG LLP. Certifi cation of Chief Executive Offi cer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifi cation of Chief Financial Offi cer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifi cation of Chief Executive Offi cer and Chief Financial Offi cer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The following materials from the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements. XBRL Instance Document 101.INS 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL 101.DEF 101.LAB XBRL Taxonomy Extension Labels Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Defi nition Linkbase Document (b) The exhibits listed under (a) (3) above are fi led herewith. 102 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report PART IV ITEM 15 Exhibits and Financial Statement Schedules Signatures Pursuant to the requirements of Section 13 or 15(d) 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: March 2, 2015 By: /s/ CHRISTOPHER MARTIN Christopher Martin Chairman, President and Chief Executive Offi cer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ CHRISTOPHER MARTIN Christopher Martin, President, Chairman of the Board and Chief Executive Offi cer (Principal Executive Offi cer) Date: March 2, 2015 By: /s/ THOMAS W. BERRY Thomas W. Berry, Director By: Date: By: Date: By: /s/ THOMAS M. LYONS Thomas M. Lyons, Executive Vice President and Chief Financial Offi cer (Principal Financial Offi cer) March 2, 2015 /s/ FRANK S. MUZIO Frank S. Muzio, Senior Vice President and Chief Accounting Offi cer (Principal Accounting Offi cer) March 2, 2015 Date: March 2, 2015 Date: March 2, 2015 By: /s/ GEOFFREY M. CONNOR Geoffrey M. Connor, Director By: Date: March 2, 2015 Date: March 2, 2015 /s/ LAURA L. BROOKS Laura L. Brooks, Director /s/ FRANK L. FEKETE Frank L. Fekete, Director By: /s/ TERENCE GALLAGHER Terence Gallagher, Director By: /s/ MATTHEW K. HARDING Matthew K. Harding, Director Date: March 2, 2015 Date: March 2, 2015 By: /s/ CARLOS HERNANDEZ Carlos Hernandez, Director By: /s/ THOMAS B. HOGAN JR. Thomas B. Hogan Jr., Director Date: March 2, 2015 Date: March 2, 2015 By: /s/ EDWARD O’DONNELL Edward O’Donnell, Director By: /s/ JOHN PUGLIESE John Pugliese, Director Date: March 2, 2015 Date: March 2, 2015 Date: /s/ JEFFRIES SHEIN Jeffries Shein, Director March 2, 2015 PROVIDENT FINANCIAL SERVICES, INC. - 2015 Annual Report 103 COR P OR AT E INF OR M AT ION ANNUAL MEETING CONTACT INFORMATION The annual meeting of stockholders will be held on April 23, 2015 at 10:00 a.m. at the DoubleTree by Hilton Newark Airport Hotel, 128 Frontage Road, Newark, New Jersey. Information regarding Provident Financial Services, Inc. and The Provident Bank is available on our web site: www.providentnj.com For additional information contact: STOCK LISTING The common stock of Provident Financial Services, Inc. is listed on the New York Stock Exchange and trades under the ticker symbol PFS. Investor Relations 100 Wood Avenue South Iselin, NJ 08830 1 (732) 590-9300 investorrelations@providentnj.com TRANSFER AGENT INDEPENDENT PUBLIC ACCOUNTANTS Stockholders wishing to update their address, transfer ownership of stock certificates, report lost certificates or inquire regarding other stock registration matters should contact: KPMG LLP 51 JFK Parkway Short Hills, NJ 07078 Broadridge Corporate Issuer Solutions, Inc. P.O. Box 1342 Brentwood, NY 11717 1-888-235-9148 shareholder@broadridge.com 239 Washington Street Jersey City, NJ 07302 ProvidentNJ.com