2018
ANNUAL
REPORT
COMMITMENT YOU CAN COUNT ONSM
2018 Annual Report_FRONTv5.indd 1
2/22/19 8:59 AM
CORPORATE PROFILE
Provident Financial Services, Inc. is the holding company for Provident Bank. Established in 1839, Provident
Bank emphasizes “Commitment You Can Count On” 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 wealth management, trust and
fiduciary 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
Held to maturity debt securities
Available for sale debt securities
Deposits
Borrowed funds
Stockholders’ equity
2018
2017
2016
$9,725,769
$9,845,274
$9,500,465
7,195,026
7,265,523
6,941,603
479,425
477,652
488,183
1,063,079
1,037,154
1,040,386
6,830,122
6,714,166
6,553,629
1,442,282
1,742,514
1,612,745
1,358,980
1,298,661
1,251,781
At or for the year ended December 31,
2018
2017
2016
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
$118,387
$93,949
$87,802
$1.82
3.39%
3.20%
0.35%
0.77%
84
$1.45
3.21%
3.07%
0.48%
0.82%
84
$1.38
3.11%
2.98%
0.61%
0.88%
86
RECORD NET INCOME OF
$118.4 million
DILUTED EARNINGS PER SHARE
$1.82
RETURN ON AVERAGE ASSETS
1.22%
RETURN ON AVERAGE EQUITY
8.93%
A LETTER FROM
CHRISTOPHER MARTIN
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER
DEAR FELLOW STOCKHOLDERS:
I am proud to report that 2018 was an extremely successful year for
Provident Financial Services, Inc.
We achieved record earnings, record net interest income, and continued to
deliver on sound credit metrics. Our net interest margin expanded in the face
of rising rates, as the Federal Reserve continued on its path of rate tightening
throughout the year, and we maintained our solid core funding base.
The national and local economies continued to hum along, despite trade
and tariff disputes, political gridlock in Washington, and increased wages
resulting from near full employment, something not experienced in over
a decade. Our industry’s efforts to support regulatory reform spurred the
passage of legislation that eased some of the burdens imposed by the
Dodd-Frank Act. We remain hopeful that the bank regulatory environment
will continue to provide relief to community banks like Provident whose
business models do not pose a risk to the financial system.
Our balance sheet has yet to surpass the $10 billion asset hurdle, which
triggers many regulatory, revenue, and expense-related challenges. During
2018 we continued our preparations to overcome these obstacles. Loan
growth was muted, as loan prepayments continued throughout the year,
with insurance companies, private equity, and other financial intermediaries
actively offering credit and interest rate structures that did not meet our risk
and return requirements. Competitors in our market have remained aggressive
in their attempts to augment loan portfolio growth by compromising credit
structures and pricing. Despite this competition, our talented lending and
supporting credit teams, in tandem with our retail branch channels, posted
strong originations, allowing us to maintain consistent loan portfolio levels
with a much improved yield.
i
A LETTER FROM CHRISTOPHER MARTIN
Total deposits increased during 2018, with our best-in-class core deposit
franchise continuing to generate a low cost funding base that sets us apart
from our competitors and supports our growth initiatives. We re-entered
the time deposit market as offering rates were significantly less costly
than wholesale funding. More importantly, we are actively engaged in the
technological shift taking place in the financial services industry with the
advancement of Fintech offerings, artificial intelligence, and robotic process
automation to improve the delivery of products and services to our clients,
and to remain relevant to the next generation of banking customers. We
recognize that this shift to electronic banking requires ongoing vigilance
to ensure the safety and security of our customers’ data and protect our
systems from cyber threats.
We are investing time and capital to create more user-friendly mobile and
online banking solutions. Our recently announced strategic alliance with
Fundation, an online lending source, will enable us to offer a new, streamlined,
end-to-end digital lending capability for small businesses seeking loans or
lines of credit. Through a simple online application process, small businesses
can be approved for funding in as little as one business day. This relationship
evidences our strategic commitment to pursuing opportunities with the
Fintech industry.
In addition, we have begun the process of replacing our consumer mobile
and online banking applications to meet customers’ changing needs and
lifestyles. Our new online banking solution will be intuitive, easy to use,
and come packed with a multitude of improved features and functionality.
Additionally, a new account opening platform will soon be deployed enabling
customers to quickly and easily open accounts from their smartphone, tablet
or personal computer. All of our digital investments are meant to augment
our branch network allowing customers to bank when they want, where
they want and how they want.
Our focus on managing credit risk remains essential as we move through a
positive credit cycle of unprecedented length. We ended the year with levels
of non-performing loans at a decade-long low, a testament to our disciplined
approach to underwriting and loan structuring and prompt problem loan
resolution.
We remain committed to our strategic goal of increasing our non-interest
income. Efforts to expand our wealth management business were rewarded
by our recent announcement of another acquisition by Beacon Trust, our
wealth subsidiary. The anticipated combination with Tirschwell & Loewy,
a registered investment advisory firm with approximately $750 million in
assets under management, will expand Beacon’s reach in the New York
City market. It is anticipated that this transaction will close in the second
quarter of 2019.
With our extremely strong capital position, we will continue to seek out
accretive whole bank and wealth company acquisition opportunities within,
or contiguous to our market.
ii
WE ACHIEVED
RECORD
EARNINGS,
RECORD NET
INTEREST
INCOME, AND
CONTINUED TO
DELIVER ON
SOUND CREDIT
METRICS.
A LETTER FROM CHRISTOPHER MARTIN
ALL OF OUR DIGITAL INVESTMENTS ARE MEANT TO AUGMENT
OUR BRANCH NETWORK ALLOWING CUSTOMERS TO BANK
WHEN THEY WANT, WHERE THEY WANT AND HOW THEY WANT.
Following the retirement of Michael Raimonde, our Director
of Retail Banking for more than 11 years, the bank added
to its experienced executive management team with the
hiring of two talented leaders - Josephine Moran, Director of
Retail Banking, and Finn Caspersen, who took on the new
role of Director of Retail Banking Operations. Both of these
executives bring diverse skill sets and a deep understanding
of financial services and delivery of best in class customer
service to these priority areas.
All of these results, records, and achievements would not
have been possible without the efforts of our employees and
management who dedicate themselves each and every day
to providing our customers and our communities with an
incomparable level of energy, enthusiasm, and commitment
that can only be found in an organization that has been a
fixture in the financial services industry for more than 180
years. I am humbled to be leading such an extraordinary
team.
As we look forward to 2019 and beyond, we remain focused
on continuing to produce steady and consistent financial
results for you, our dedicated stockholders. In that spirit,
our board of directors recently rewarded stockholders with
a 9.5% increase in our quarterly cash dividend to $0.23 per
common share, and a special cash dividend of $0.20 per
common share, both paid earlier this year. We thank you, our
stockholders, for your continued support.
Sincerely,
Chairman, President & Chief Executive Officer
Building on our commitment to our dedicated team members,
we implemented significant wage and benefit enhancements
designed to assist our employees and make Provident
more competitive in talent retention and acquisition in a
tight labor market. In response to the growing student loan
crisis, we implemented an important new employee benefit
called the Student Loan Paydown Program. Through the
program, Provident will help eligible new and existing full-
time employees pay down their student loan debt by making
direct contributions to employee student loan accounts. To
assist our employees with continuing their education, we
also expanded our current tuition reimbursement program
to include Master’s Degrees in business. Finally, to further
assist in recruitment and retention efforts, we increased our
minimum wage for eligible hourly employees to $15 an hour.
In 2018, we also marked the 15th anniversary of The Provident
Bank Foundation. To celebrate this milestone, the Foundation
awarded 12 employee-nominated grants of $15,000 each to
deserving non-profit organizations doing the most impactful
work in communities served by Provident. In addition, the
Foundation provided over $1.1 million within our communities,
assisting at-risk individuals, providing housing assistance,
health and home care, and educational initiatives as we
reinforce the commitment made by over 50% of our staff
who volunteer their time to help others.
iii
BOARD OF DIRECTORS AND CORPORATE MANAGEMENT
DIRECTORS
Christopher Martin
Chairman, President and
Chief Executive Officer
Robert Adamo
Former Partner,
Deloitte & Touche
Thomas W. Berry
Former Partner,
Goldman Sachs & Co.
* Lead director
MANAGEMENT
Laura L. Brooks
Former Vice President–Risk
Management and Chief Risk
Officer, PSEG
Terence Gallagher
President,
Battalia Winston
John Pugliese
Chief Executive Officer,
Motors Management
Corporation
James P. Dunigan
Former Executive Officer,
PNC Asset Management
Group
Matthew K. Harding
Chief Executive Officer,
Levin Management
Corporation
Frank L. Fekete
Managing Partner,
Mandel, Fekete & Bloom, CPAs
Carlos Hernandez*
Former President,
New Jersey City University
PROVIDENT FINANCIAL SERVICES, INC.
Christopher Martin
Chairman, President and
Chief Executive Officer
John Kuntz
Senior Executive
Vice President,
General Counsel and
Corporate Secretary
PROVIDENT BANK
Thomas M. Lyons
Senior Executive Vice
President and Chief
Financial Officer
Leonard G. Gleason
Senior Vice President
and Investor Relations Officer
Christopher Martin
Chairman, President
and Chief Executive Officer
James A. Christy
Executive Vice President
and Chief Risk Officer
John R. Kamin
Executive Vice President
and Chief Information Officer
Josephine Moran
Executive Vice President
and Director of Retail Banking
Donald W. Blum
Executive Vice President
and Chief Lending Officer
Joseph T. Covell
Senior Vice President
and General Auditor
Robert G. Capozzoli
Senior Vice President
and Chief Marketing Officer
Brian Giovinazzi
Executive Vice President
and Chief Credit Officer
Janet D. Krasowski
Executive Vice President
and Chief Human Resources
Officer
Valerie O. Murray
Executive Vice President and
Chief Wealth Management
Officer
John Kuntz
Senior Executive Vice
President and Chief
Administrative Officer
Frank S. Muzio
Executive Vice President
and Chief Accounting Officer
Finn M.W. Caspersen, Jr.
Executive Vice President and
Director of Retail Banking
Operations
Leonard G. Gleason
Senior Vice President
and General Counsel
Thomas M. Lyons
Senior Executive Vice
President and Chief Financial
Officer
Joseph A. Spatola
Senior Vice President
and Chief Compliance Officer
iv
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, 2018
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 Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
239 Washington Street, Jersey City, New Jersey
(Address of Principal Executive Offices)
42-1547151
(I.R.S. Employer Identification Number)
07302
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, par value $0.01 per share
(Title of Class)
New York Stock Exchange
(Name of Exchange on Which Registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark
zz if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
zz if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Act.
zz whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period
that the Registrant was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
zz whether the registrant has submitted electronically and every Interactive Data File required to be
submitted 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 files).
zz if disclosure of delinquent filers 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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
zz whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated Filer
Large Accelerated Filer
zz If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
Smaller Reporting Company
Non-Accelerated Filer
Emerging Growth Company
zz whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of February 1, 2019, there were 83,209,293 issued and 66,573,632 outstanding shares of the Registrant’s Common
Stock, including 248,069 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-affiliates of the Registrant, based on the closing price of the Common
Stock as of June 30, 2018, as quoted by the NYSE, was approximately $1.67 billion.
(1) Proxy Statement for the 2019 Annual Meeting of Stockholders of the Registrant (Part III).
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
PART I
2
Business �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������2
ITEM 1.
ITEM 1A. Risk Factors ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������32
ITEM 1B. Unresolved Staff Comments ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������38
Properties �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������38
ITEM 2.
Legal Proceedings �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������38
ITEM 3.
Mine Safety Disclosures �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������38
ITEM 4.
PART II
39
ITEM 5.
ITEM 6.
ITEM 7.
Market for Registrant’s Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities ���������������������������������������������������������������������������������������������������������������������������������������������������39
Selected Financial Data ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������40
Management’s Discussion and Analysis of Financial
Condition and Results of Operations�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������42
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ���������������������������������������������������������������������������������������������������������������������52
Financial Statements and Supplementary Data ��������������������������������������������������������������������������������������������������������������������������������������������������������������54
ITEM 8.
Changes in and Disagreements With Accountants
ITEM 9.
on Accounting and Financial Disclosure ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
ITEM 9A. Controls and Procedures �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
ITEM 9B. Other Information ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
PART III
110
ITEM 10. Directors, Executive Officers and Corporate Governance �������������������������������������������������������������������������������������������������������������������������110
Executive Compensation �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������110
ITEM 11.
Security Ownership of Certain Beneficial
ITEM 12.
Owners and Management and Related Stockholder Matters �������������������������������������������������������������������������������������������������������������110
Certain Relationships and Related Transactions,
and Director Independence ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������111
ITEM 14. Principal Accountant Fees and Services ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������111
ITEM 13.
PART IV
112
Exhibits and Financial Statement Schedules �������������������������������������������������������������������������������������������������������������������������������������������������������������������112
ITEM 15.
ITEM 16.
Form 10-K Summary ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������113
SIGNATURES ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������114
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 identified by
reference to a future period or periods, or by the use of forward-
looking terminology, such as “may,” “will,” “believe,” “expect,”
“estimate,” “project,” “intend,” “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, fiscal and monetary policies
of the U�S� Government, changes in government regulations
affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and
the integration of acquired businesses, credit risk management,
asset-liability management, the financial and securities markets
and the availability of and costs associated with sources of
liquidity�
The Company 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 financial performance
and could cause the Company’s actual results for future periods
to differ materially from any opinions or statements expressed with
respect to future periods in any current statements� The Company
does not have any obligation to update any forward-looking
statements to reflect any subsequent events or circumstances
after the date of this statement�
1
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1. Business
Provident Financial Services, Inc.
The Company is a Delaware corporation which became the
holding company for Provident Bank (the “Bank”) on January 15,
2003, following the completion of the Bank’s conversion 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�
At December 31, 2018, the Company had total assets of
$9�73 billion, total loans of $7�25 billion, total deposits of
$6�83 billion, and total stockholders’ equity of $1�36 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 $53�6 million and
repurchased 635,436 shares of its common stock at a cost of
$15�1 million in 2018� At December 31, 2018, 2�5 million shares
were eligible for repurchase under the board approved stock
repurchase program� The Company and the Bank were “well
capitalized” at December 31, 2018 under current regulatory
standards�
Available Information
The Company is a public company, and files interim, quarterly
and annual reports with the Securities and Exchange Commission
(“SEC”)� The SEC maintains an Internet site (http://www�sec�gov)
that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC,
including the Company� All SEC reports and amendments to these
reports are available on the SEC’s website and are made available
as soon as practical after they have been filed or furnished to the
SEC and are available on the Bank’s website, www�provident�
bank, at the “Investor Relations” page, without charge from the
Company� Information on our website should not be considered
a part of this Annual Report on Form 10-K�
Provident Bank
Established in 1839, the Bank is a New Jersey-chartered capital
stock savings bank operating full-service branch offices in the New
Jersey counties of Bergen, Essex, Hudson, Hunterdon, Mercer,
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 financial 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 offices 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. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
The following are highlights of Provident Bank’s operations
Diversified Loan Portfolio
Non-Interest Income
To improve asset yields and reduce its exposure to interest
rate risk, the Bank continues to emphasize the origination of
commercial real estate loans, multi-family loans and commercial
business loans� These loans generally have adjustable rates or
shorter fixed 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, 2018, non-performing assets were
$27�3 million or 0�28% of total assets, compared to $41�8 million
or 0�42% of total assets at December 31, 2017� The Bank’s
non-performing asset levels continued to decline from higher
levels reported in prior years as local and national 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 demand deposit
accounts, and expanding customer relationships� Core deposit
accounts totaled $6�08 billion at December 31, 2018, representing
89�0% of total deposits, compared with $6�08 billion, or 90�5%
of total deposits at December 31, 2017� The Bank also focuses
on increasing the number of households and businesses served
and the number of banking products per customer�
Market Area
The Company and the Bank are headquartered in Jersey City,
which is located in Hudson County, New Jersey� At December 31,
2018, the Bank operated a network of 84 full-service banking
offices throughout thirteen counties in northern and central New
Jersey, as well as three counties in Pennsylvania� The Bank
maintains its administrative offices in Iselin, New Jersey and
satellite loan production offices in Convent Station, Flemington,
Paramus and Princeton, New Jersey, as well as in Bethlehem,
Newtown and Wayne, Pennsylvania� The Bank’s lending activities,
though concentrated in the communities surrounding its offices,
extend predominantly throughout New Jersey and eastern
Pennsylvania�
The Bank’s primary market area includes a mix of urban and
suburban communities, and has a diversified mix of industries
including pharmaceutical, manufacturing companies, network
communications, insurance and financial services, healthcare,
and retail� According to the U�S� Census Bureau’s most recent
population data, the Bank’s New Jersey market area has a
population of approximately 6�9 million, which was 77�7% of the
The Bank’s focus on transaction accounts and expanded products
and services has enabled the Bank to generate increased 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 $58�7 million for the year ended December 31, 2018,
compared with $55�7 million for the year ended December 31,
2017, of which fee income was $28�1 million for the year ended
December 31, 2018, compared with $27�2 million for the year
ended December 31, 2017�
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, and its investments in securities� In addition, the Bank uses
interest rate swaps as part of its interest rate risk management
strategy� Interest rate swaps designated as cash flow hedges
involve the receipt of variable amounts from a counterparty in
exchange for the Bank making fixed-rate payments over the life
of the agreements without exchange of the underlying notional
amount� These interest rate swaps are used to hedge the variable
cash outflows associated with Federal Home Loan Bank of New
York (“FHLBNY”) borrowings� At December 31, 2018, 62�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, 2018,
the Bank’s securities portfolio totaled $1�61 billion and had an
expected average life of 4�72 years to manage its exposure to
interest rate movements�
state’s total population� The Bank’s Pennsylvania market area has
a population of approximately 1�3 million, which was 10�4% 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 financial markets, the area’s economy can
be significantly affected by changes in national and international
economies� According to the U�S� Bureau of Labor Statistics, the
unemployment rate in New Jersey was 4�0% at December 31,
2018, a decrease from 5�0% at December 31, 2017� The
unemployment rate in Pennsylvania was 4�2% for December 31,
2018, a decrease from 4�7% at December 31, 2017�
Within its primary market areas in New Jersey and Pennsylvania,
the Bank had an approximate 2�23% and 0�75% share of bank
deposits as of June 30, 2018, respectively, the latest date for
which statistics are available� On a statewide basis, the Bank had
an approximate 1�94% deposit share of the New Jersey market
and an approximate 0�06% deposit share of the Pennsylvania
market�
3
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Competition
The Bank faces significant competition in originating and retaining
loans and attracting deposits� The northern and central New
Jersey and eastern Pennsylvania market areas have a high
concentration of financial institutions, including large money
center and regional banks, community banks, credit unions,
investment brokerage firms and insurance companies� The Bank
faces direct competition for loans from each of these institutions
as well as from mortgage companies, on-line lenders and other
loan origination firms operating in its market area� The Bank’s most
direct competition for deposits comes from several commercial
banks and savings banks in its market area� Certain of these
banks have substantially greater financial resources than the
Bank� The Bank also faces significant 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
diversified 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, fixed-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 FHLBNY� To manage interest
rate risk, the Bank generally sells fixed-rate residential mortgages
that it originates with terms greater than 15 years� The Bank
commonly retains biweekly payment fixed-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, office 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 for qualified borrowers�
The Bank has historically provided construction loans for both
single family and condominium projects intended for sale and
commercial projects, including residential rental 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 floating 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 firm 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 significant pre-leasing, or funds are held
back until the leases are finalized� Funding requirements and loan
structure for residential rental projects vary depending on whether
such projects are vertical or horizontal construction�
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 floating interest rate basis and most term loans
are made on a fixed interest rate basis, usually with terms of five
years or less�
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 first or second mortgage
lien on the borrower’s residence comprise the largest category of
the Bank’s consumer loan portfolio�
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. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
(Dollars in thousands)
Amount Percent
Amount Percent
Amount Percent
Amount Percent
Amount Percent
2018
2017
2016
2015
2014
At December 31,
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
$ 1,100,009
15�29% $ 1,142,914
15�73% $ 1,212,255
17�46% $ 1,255,159
19�38% $ 1,252,526
20�79%
2,299,417
31�96
2,171,174
29�88
1,978,700
28�50
1,716,117
26�50
1,695,822
28�15
1,339,800
18�62
1,404,005
19�32
1,402,169
20�20
1,234,066
19�06
1,042,223
17�30
388,999
5�41
392,580
5�40
264,814
3�81
331,649
5�12
221,102
3�67
Total mortgage
loans
5,128,225
Commercial loans
1,695,148
Consumer loans
431,428
71�28
23�56
6�00
5,110,673
70�33
4,857,938
69�97
4,536,991
70�06
4,211,673
69�91
1,745,301
24�02
1,630,887
23�49
1,434,291
22�15
1,263,618
20�98
473,958
6�52
516,755
7�44
566,175
8�74
611,596
10�15
Total gross
loans
Premiums on
purchased loans
Unearned
discounts
7,254,801
100�84
7,329,932 100�87
7,005,580 100�90
6,537,457 100�95
6,086,887 101�04
3,243
0�04
4,029
0�06
4,968
0�07
5,740
0�09
5,307
0�09
(33)
—
(36)
—
(39)
—
(41)
—
(53)
—
Net deferred fees
(7,423)
(0�11)
(8,207)
(0�10)
(7,023)
(0�08)
(5,482)
(0�09)
(6,636)
(0�11)
Total loans
7,250,588
100�77
7,325,718 100�83
7,003,486 100�89
6,537,674 100�95
6,085,505 101�02
Allowance for
loan losses
TOTAL
LOANS, NET
(55,562)
(0�77)
(60,195)
(0�83)
(61,883)
(0�89)
(61,424)
(0�95)
(61,734)
(1�02)
$7,195,026 100.00% $ 7,265,523 100.00% $ 6,941,603 100.00% $ 6,476,250 100.00% $ 6,023,771 100.00%
Loan Maturity Schedule
The following table sets forth certain information as of December 31, 2018, 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�
(In thousands)
Within
One Year
One
Through
Three
Years
Three
Through
Five Years
Five
Through
Ten Years
Ten
Through
Twenty
Years
Beyond
Twenty
Years
Total
Residential mortgage loans
$
130 $
5,817 $
11,175 $
100,219 $
445,379 $
537,289 $ 1,100,009
Commercial mortgage loans
Multi-family mortgage loans
Construction loans
Total mortgage loans
Commercial loans
Consumer loans
183,599
26,833
129,176
339,738
326,610
16,847
336,849
173,031
221,502
737,199
269,749
5,896
544,325
1,021,917
207,913
256,935
15,755
818,322
1,080
828,190
1,941,538
336,179
19,115
478,406
91,452
59,184
19,015
731,491
236,426
227,908
4,814
5,495
2,471
2,299,417
1,339,800
388,999
550,069
5,128,225
47,778
70,210
1,695,148
431,428
TOTAL GROSS LOANS
$ 683,195 $ 1,012,844 $ 1,183,484 $ 2,511,396 $ 1,195,825 $ 668,057 $ 7,254,801
5
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Fixed- and Adjustable-Rate Loan Schedule
The following table sets forth as of December 31, 2018 the amount of all fixed-rate and adjustable-rate loans due after
December 31, 2019�
(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, 2019
Fixed
Adjustable
Total
$
764,118 $
335,761 $
1,099,879
881,988
420,654
—
1,233,830
892,313
259,823
2,066,760
2,721,727
444,395
273,009
924,143
141,572
2,115,818
1,312,967
259,823
4,788,487
1,368,538
414,581
$
2,784,164 $
3,787,442 $
6,571,606
Residential Mortgage Loans
The Bank originates residential mortgage loans secured by first
mortgages on one- to four-family residences, generally located
in the State of New Jersey and the eastern part of Pennsylvania�
The Bank originates residential mortgages primarily through
commissioned mortgage representatives and via the Internet� The
Bank originates both fixed-rate and adjustable-rate mortgages�
As of December 31, 2018, $1�10 billion or 15�3% of the total
portfolio consisted of residential real estate loans� Of the one- to
four-family loans at that date, 69�5% were fixed-rate and 30�5%
were adjustable-rate loans�
The Bank originates fixed-rate fully amortizing residential
mortgage loans with the principal and interest payments due
each month, that typically have maturities ranging from 10 to
30 years� The Bank also originates fixed-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 currently
offers adjustable-rate mortgage loans with a fixed-rate period of
5, 7 or 10 years prior to the first annual interest rate adjustment�
The standard adjustment formula is the one-year constant
maturity Treasury rate plus 2�75%, adjusting annually after its
first 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 programs that will finance up to 97% of the value of
the residence� Generally all fixed-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 2018, $1�5 million or 1�4% of residential real estate loans
originated were sold into the secondary market� All of the loans
sold in 2018 were long-term, fixed-rate mortgages�
The retention of adjustable-rate mortgages, as opposed to longer-
term, fixed-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 fixed-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 fixed-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 five years have
totaled $17�7 million� The Bank also offers a special rate program
for first-time homebuyers under which originations have totaled
over $21�2 million for the past five 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, office buildings and retail and industrial
properties� Commercial real estate loans were 32�0% of the loan
portfolio at December 31, 2018� 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 fixed interest rates for a period that is generally
five to ten years or less, which may adjust after the initial period�
Typically these loans are written for maturities of ten years or less
6
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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 refinance the outstanding balance at the loan
maturity date� The Bank typically lends to experienced owners or
developers who have knowledge and expertise 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 significant 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 significantly
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
financial condition of the borrower and guarantors, which may
include, for example, the review of the rent rolls and the verification
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 professionals to inspect the property
and ascertain any potential environmental risks�
In accordance with regulatory guidelines, the Bank requires a
full independent appraisal for commercial real estate properties�
The appraiser must be selected from the Bank’s approved list, or
otherwise approved by the Chief Credit Officer 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� Financial statements are also
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,
2018 was a $38�2 million loan secured by a first mortgage lien
on eight office buildings and five industrial/flex buildings located
throughout Middlesex and Somerset counties in New Jersey�
This was a refinance and consolidation of several loans to an
existing customer with extensive experience and a successful
track record� 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,
2018� (For the Bank’s largest group borrower exposure —see
discussion on “Loans to One Borrower”)�
Multi-family Loans
The Bank underwrites loans secured by apartment buildings that
have five 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, 2018
was a $41�0 million loan secured by a first leasehold mortgage
lien on a newly renovated 129-unit, six story class A luxury rental
apartment building with 12,000 square feet of office/retail space
located in Morristown, New Jersey� The project sponsor is one
of the largest privately-held real estate owner/developers in the
United States, and has extensive experience and a successful
track record in the development and management of multi-family
projects� 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,
2018� (For the Bank’s largest group borrower exposure —see
discussion on “Loans to One Borrower”)�
Construction Loans
The Bank originates commercial construction loans� Commercial
construction lending includes both new construction of residential
and commercial real estate projects and the rehabilitation of
existing structures�
The Bank’s commercial construction financing includes projects
constructed for investment purposes (rental property), projects for
sale (single family/condominiums) and to a lesser extent, owner-
occupied business properties� To mitigate the speculative nature
of construction loans, the Bank generally requires significant
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 rental 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
floating-rate loans with a maximum 75% loan-to-value ratio for the
completed project� The Bank employs professional engineering
firms to assist in the review of construction cost estimates
and make site inspections to determine if the work has been
completed prior to the advance of funds for the project�
7
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
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 financial impairment of the builder may negatively affect the
borrower’s ability to repay the loan�
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 financing, 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, 2018 was
a $32�1 million commitment secured by a first mortgage lien on
property and improvements related to the construction of a 5-story
275 unit multi-family apartment building with 5,000 square feet of
retail space and a 6-level parking deck with 481 spaces located
in Willow Grove, PA� The loan had an outstanding balance of
$12�0 million at December 31, 2018� This represents the Bank’s
lead position in a total $50�7 million construction loan with the
remainder having been sold to a participating bank� This loan
closed in mid-2018 with construction completion expected by
the end of 2019� The project sponsor is an experienced and long
standing real estate owner and developer with a successful track
record in the development and management of commercial real
estate� The loan has a risk rating of “4” (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) and was performing in accordance with
its terms and conditions as of December 31, 2018�
Commercial Loans
The Bank underwrites commercial loans to corporations,
partnerships and other businesses� Commercial loans represented
23�6% of the loan portfolio at December 31, 2018� 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 floating-rate basis and the
majority of fixed-rate commercial term loans are fully amortized
over a five-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 financial statements of the prospective borrower and
guarantors� In most cases the Bank obtains a general lien on
accounts receivable and inventory, along with the specific
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 flow 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 Bank’s largest commercial loan as of December 31, 2018
was a $30�0 million working capital and bonding line of credit to
a large and long standing general contractor specializing in heavy
bridge and highway construction� The loan, which is annually
renewable at the Bank’s option, is unsecured and primarily used
for working capital and bonding purposes� The loan has a risk
rating of “4” (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)�
At December 31, 2018, there was no outstanding balance under
the line� (For the Bank’s largest group borrower exposure —see
discussion on “Loans to One Borrower”)�
Consumer Loans
The Bank offers a variety of consumer loans on a direct basis to
individuals� Consumer loans represented 6�0% of the loan portfolio
at December 31, 2018� Home equity loans and home equity lines
of credit constituted 94�9% of the consumer loan portfolio and
indirect marine loans constituted 1�8% of the consumer loan
portfolio as of December 31, 2018� The remaining 3�3% of the
consumer loan portfolio includes personal loans and unsecured
lines of credit, direct auto loans and recreational vehicle loans� The
Bank no longer purchases indirect auto, marine or recreational
vehicle loans�
Interest rates on home equity loans are fixed for a term not to
exceed 20 years and the maximum loan amount is $650,000�
A portion of the home equity loan portfolio includes “first lien
product loans,” under which the Bank has offered special rates to
borrowers who refinance first mortgage loans on the home equity
(first lien) basis� At December 31, 2018, first-lien home equity
loans outstanding totaled $238�3 million� The Bank’s home equity
lines of credit are made at floating interest rates and the Bank
provides lines of credit of up to $500,000� The approved home
equity lines and utilization amounts as of December 31, 2018
were $401�8 million and $143�0 million, respectively, representing
utilization of 35�6%�
8
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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 deficiency may
warrant further substantial collection efforts against the borrower�
In addition, consumer loan collections are dependent upon the
borrower’s continued financial stability, 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�
(In thousands)
Originations:
Residential mortgage
Commercial mortgage
Multi-family mortgage
Construction
Commercial
Consumer
Subtotal of loans originated
Loans purchased
Total loans originated and purchased
Loans sold
Repayments:
Residential mortgage
Commercial mortgage
Multi-family mortgage
Construction
Commercial
Consumer
Total repayments
Total reductions
Other items, net(1)
NET INCREASE
Year Ended December 31,
2018
2017
2016
$
108,406
$
121,901
$
448,137
126,159
360,413
1,992,972
120,369
3,156,456
1,344
525,900
51,371
354,594
2,525,921
121,790
3,701,477
—
145,684
427,442
238,386
265,623
1,891,067
125,515
3,093,717
28,590
3,157,800
3,701,477
3,122,307
36,043
24,938
34,976
149,326
348,055
204,781
296,450
2,006,342
162,597
3,167,551
3,203,594
188,103
188,352
150,205
249,872
2,403,945
163,041
3,343,518
3,368,456
197,701
273,469
102,939
129,918
1,735,420
175,658
2,615,105
2,650,081
(29,336)
(10,789)
(6,414)
$
(75,130) $
322,232
$
465,812
(1) Other items, net include charge-offs, deferred fees and expenses, discounts and premiums�
9
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART I
Item 1 Business
Loan Approval Procedures and Authority
The Bank’s Board of Directors approves the Lending Policy on at
least an annual basis and on an interim basis as modifications are
warranted� The Lending Policy sets the Bank’s lending authority
for each type of loan� The Bank’s lending officers are assigned
dollar authority limits based upon their experience and expertise�
All commercial loan approvals require dual signature authority�
The largest individual lending authority is $10�0 million, which is
only available to the Chief Executive Officer, the Chief Lending
Officer and the Chief Credit Officer� The authority of the Chief
Lending Officer and Chief Credit Officer may be increased to
$15�0 million for permanent commercial real estate loans acting
jointly� 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 eleven
senior officers including the Chief Executive Officer, the Chief
Lending Officer, the Chief Financial Officer, the Chief Credit Officer,
the Chief Administrative Officer, the Credit Risk Manager and the
Deputy Lending Officer, and requires a majority vote for credit
approval�
While the Bank discourages loan policy exceptions, 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
Officer 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
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 officers are required to maintain
an appropriate risk rating for each loan in their portfolio� When
the lender learns of important financial developments, the risk
rating is reviewed accordingly� Risk ratings are subject to review
by the Credit Department during the underwriting and loan
review processes� Loan review examinations are performed by
an independent third party which validates the risk ratings on a
sample basis� In addition, a risk rating can be adjusted at the
weekly Credit Committee meeting and quarterly at management’s
Credit Risk Management Committee where they meet to review all
loans rated a “watch” (“5”) or worse� 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 confirm 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, 2018, the regulatory lending limit
was $146�0 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, 2018, the Bank’s largest group exposure with
an individual borrower and its related entities was $107�9 million,
consisting of seven commercial real estate loans totaling
$29�0 million, secured by two office buildings, one multi-family
apartment building, two warehouse/industrial buildings and two
single family dwellings located in New Jersey and Pennsylvania,
three construction loans totaling $59�6 million, secured by a
multi-family apartment and office building project located in
Pennsylvania and a multi-family apartment project located in
New Jersey, a $7�5 million unsecured line of credit, $10�6 million
in interest rate swap exposure, an $800,000 letter of credit, a
$300,000 land loan, and a $100,000 ACH facility� A $25�0 million
multi-family construction project loan paid off in full on January 10,
2019 as expected� The loans have an average risk rating of “4”�
The borrower, headquartered in New Jersey, is an experienced
real estate owner and developer in the states of New Jersey
and Pennsylvania� As of December 31, 2018, all of the loans in
this lending relationship were performing in accordance with their
respective terms and conditions�
As of December 31, 2018, the Bank had $2�0 billion in loans
outstanding to its 50 largest borrowers and their related entities�
10
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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
or other loss mitigation arrangement 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 and loss mitigation guidelines outlined
by those agencies�
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 Officer and Chief Credit
Officer 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 Officer and Chief Credit Officer 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�
Delinquent Loans and Non-performing
Loans and Assets
Bank policy requires that the Chief Credit Officer to continuously
monitor the status of the loan portfolios and report to the Board
of Directors on at least a quarterly basis� These reports include
information on impaired loans, delinquent loans, criticized and
classified assets, and foreclosed assets� An impaired loan is
defined as a non-homogeneous 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 modified
as troubled debt restructurings (“TDRs”)� A loan is deemed to
be a TDR when a modification resulting in a concession is made
by the Bank in an effort to mitigate potential loss arising from
a borrower’s financial difficulty� Smaller balance homogeneous
loans including residential mortgages and other consumer loans
are evaluated collectively for impairment and are excluded from
the definition of impaired loans, except for TDRs� Impaired loans
are individually identified 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 flows�
As of December 31, 2018, there were 152 impaired loans totaling
$50�7 million, of which 148 loans totaling $46�8 million were TDRs�
Included in this total were 129 TDRs related to 124 borrowers
totaling $35�6 million that were performing in accordance with
their restructured terms and which continued to accrue interest
at December 31, 2018�
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, the Bank classifies 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 deficiencies are not corrected� Assets
classified as “doubtful” have all of the weaknesses inherent in
those classified “substandard” with the added characteristic that
the weaknesses present make “collection or liquidation in full,” on
the basis of currently existing facts, conditions, and values, “highly
questionable and improbable�” Assets classified as “loss” are
those considered “uncollectible” and of such little value that their
11
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
continuance as assets without the establishment of a specific loss
reserve is not warranted� Assets which do not currently expose
the Bank to sufficient risk to warrant classification in one of the
aforementioned categories, but possess potential weaknesses,
are designated “special mention�”
Management estimates the amount of loan losses for groups of
loans by applying quantitative loss factors to loan segments at
the risk rating level, and applying qualitative adjustments to each
loan segment at the portfolio level� Quantitative loss factors give
consideration to historical loss experience by loan type based
upon an appropriate look back period and adjusted for a loss
emergence period� Qualitative adjustments give consideration
to other qualitative or environmental factors such as trends and
levels of delinquencies, impaired loans, charge-offs, recoveries
and loan volumes, as well as national and local economic trends
and conditions� Qualitative adjustments reflect risks in the loan
portfolio not captured by the quantitative loss factors and, as
such, are evaluated from a risk level perspective relative to the risk
levels present over the look back period� The reserves resulting
from the application of both of these sets of loss factors are
combined to arrive at the allowance for loan losses� When the
Bank classifies one or more assets, or portions thereof, as “loss,”
the Bank is required either to establish a specific allowance for
losses equal to 100% of the amount of the asset so classified or
to charge-off such amount�
Management’s determination as to the classification 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 specific 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 financial 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 reaffirms
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, 2018, 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 classified in accordance with the risk rating system
described previously� At December 31, 2018, $74�2 million of
loans were classified as “substandard,” which consisted of
$45�2 million in commercial loans, $13�3 million in commercial
and multi-family mortgage loans, $7�9 million in residential loans
and $1�7 million in consumer loans� At that same date, there were
$923,000 loans classified as “doubtful�” Also, there were no loans
classified as “loss” at December 31, 2018� As of December 31,
2018, $87�8 million of loans were designated “special mention�”
The following table sets forth delinquencies in the loan portfolio as of the dates indicated�
At December 31, 2018
At December 31, 2017
At December 31, 2016
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
24 $
5,557
31 $
5,853
27 $
4,325
49 $
8,105
33 $
6,563
67 $ 12,021
—
—
—
24
2
15
—
—
—
5,557
13,565
610
12
—
—
43
19
21
3,180
—
—
9,033
4,309
1,266
—
—
—
27
2
12
—
—
—
4,325
406
487
8
—
—
57
24
41
5,887
—
—
13,992
6,901
2,491
1
—
—
34
4
19
80
—
—
6,643
357
1,199
6
2
1
76
29
43
5,192
553
2,517
20,283
11,857
2,940
(Dollars in
thousands)
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
Total mortgage
loans
Commercial loans
Consumer loans
TOTAL LOANS
41 $ 19,732
83 $ 14,608
41 $ 5,218
122 $ 23,384
57 $ 8,199
148 $ 35,080
12
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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, 2018, there
were 19 TDRs totaling $11�2 million that were classified as non-accrual, compared to 16 non-accrual TDRs which totaled $10�0 million
at December 31, 2017� Loans are generally placed on non-accrual status when they become 90 days or more past due or if they have
been identified 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 - 90 days or more delinquent
Total non-performing loans
Foreclosed assets
At December 31,
2018
2017
2016
2015
2014
$
5,853
$
8,105
$ 12,021
$ 12,031
$ 17,222
3,180
7,090
—
—
15,391
1,266
25,690
—
25,690
1,565
—
—
17,243
2,491
34,929
—
34,929
6,864
7,493
553
2,517
16,787
3,030
42,401
—
42,401
7,991
1,263
742
2,351
23,875
4,109
44,371
165
44,536
10,546
20,026
322
—
12,342
3,944
53,856
—
53,856
5,098
TOTAL NON-PERFORMING ASSETS
$ 27,255
$ 41,793
$ 50,392
$ 55,082
$ 58,954
TOTAL NON-PERFORMING ASSETS AS A
PERCENTAGE OF TOTAL ASSETS
TOTAL NON-PERFORMING LOANS TO TOTAL LOANS
Non-performing commercial mortgage loans decreased
$3�9 million to $3�2 million at December 31, 2018, from
$7�1 million at December 31, 2017� At December 31, 2018, the
Company held 12 non-performing commercial mortgage loans�
The largest non-performing commercial mortgage loan was a
$1�5 million loan secured by a first mortgage on a property located
in Somerville, New Jersey� The loan is presently in default� There
is no contractual commitment to advance additional funds to
this borrower�
Non-performing commercial loans decreased $1�9 million,
to $15�4 million at December 31, 2018, from $17�2 million at
December 31, 2017� Non-performing commercial loans at
December 31, 2018 consisted of 29 loans� The largest non-
performing commercial loan relationship consisted of two loans
to a health and fitness club with total outstanding balances of
$7�9 million at December 31, 2018� Both of these loans are
secured by liens on a commercial property� These loans are
currently paying in accordance with their restructured terms�
There were no non-performing constructions loans at
December 31, 2018 or 2017�
At December 31, 2018, the Company held $1�6 million of
foreclosed assets, compared with $6�9 million at December 31,
2017� Foreclosed assets at December 31, 2018 are carried at fair
value based on recent appraisals and valuation estimates, less
0.28%
0.35%
0.42%
0.48%
0.53%
0.61%
0.62%
0.68%
0.69%
0.88%
estimated selling costs� During the year ended December 31,
2018, there were nine additions to foreclosed assets with a
carrying value of $2�0 million and 20 properties sold with a carrying
value of $7�1 million� Foreclosed assets at December 31, 2018,
consisted of $1�6 million of residential real estate�
Non-performing assets totaled $27�3 million, or 0�28% of total
assets at December 31, 2018, compared to $41�8 million, or
0�42% of total assets at December 31, 2017� If the non-accrual
loans had performed in accordance with their original terms,
interest income would have increased by $1�4 million during
the year ended December 31, 2018� The amount of cash basis
interest income that was recognized on impaired loans during the
year ended December 31, 2018 was not material�
Allowance for Loan Losses
The allowance for loan losses is a valuation account that reflects
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�
13
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Management’s evaluation of the adequacy of the allowance for
loan losses includes a 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 status� For commercial mortgage, multi-family,
construction and commercial loans, an extensive review of
financial performance, payment history and collateral values is
conducted on a quarterly basis�
As part of its 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 classifications (substandard, doubtful or loss) are
rated 7, 8 or 9, respectively� Commercial mortgage, multi-family,
construction and commercial loans are rated individually and each
lending officer is responsible for risk rating loans in their portfolio�
These risk ratings are then reviewed by the department manager
and/or the Chief Lending Officer and the Credit Department�
The risk ratings are also confirmed through periodic loan review
examinations, which are currently performed by an independent
third party, and periodically by the Credit Committee in the credit
renewal or approval process� 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 rating�
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
Officer� Each loan officer reviews the loan and the corresponding
Credit Risk Management Report with the committee and the risk
rating is evaluated for appropriateness�
Management estimates the amount of loan losses for groups of
loans by applying quantitative loss factors to loan segments at
the risk rating level, and applying qualitative adjustments to each
loan segment at the portfolio level� Quantitative loss factors give
consideration to historical loss experience by loan type based
upon an appropriate look-back period and adjusted for a loss
emergence period; these factors are evaluated at least annually�
The most recent periodic review and recalculation of quantitative
loss factors was completed in the third quarter of 2018 using
historical loss data through June 30, 2018 and was applied
effective September 30, 2018� Qualitative adjustments give
consideration to other qualitative or environmental factors such as:
a. levels of and trends in delinquencies and impaired loans;
b. levels of and trends in charge-offs and recoveries;
c. trends in volume and terms of loans;
d. effects of any changes in lending policies, procedures and
practices;
e. changes in the quality or results of the Bank’s loan review
system;
f. experience, ability, and depth of lending management and
other relevant staff;
g. national and local economic trends and conditions;
h. industry conditions;
i. effects of changes in credit concentration; and
j. changes in collateral values�
Qualitative adjustments reflect risks in the loan portfolio not
captured by the quantitative loss factors and, as such, are
evaluated from a risk level perspective relative to the risk levels
present over the look-back period� Qualitative adjustments are
recalibrated at least annually and evaluated at least quarterly�
The range of adjustments to historical loss rates applicable to
qualitative factors were updated in the third quarter of 2018 in
conjunction with the review and recalculation of quantitative loss
factors� The reserves resulting from the application of both of
these sets of loss factors are combined to arrive at the general
allowance for loan losses�
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, significant conditions impacting the credit quality and
collectability of the loan portfolio as of the evaluation date are not
otherwise adequately reflected 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 and
non-performing loan trends and peer group analysis�
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
14
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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
Analysis of the Allowance for Loan Losses
best estimate of probable losses related to specifically identified
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�
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
Years Ended December 31,
2018
2017
2016
2015
2014
$ 60,195
$ 61,883
$ 61,424
$ 61,734
$ 64,664
277
—
—
—
28,986
755
30,018
58
431
—
—
428
768
1,685
28,333
23,700
421
72
2
6
7,187
1,253
8,941
1
59
—
6
800
787
1,653
7,288
5,600
1,033
35
—
—
4,862
1,020
6,950
57
504
67
—
570
811
2,009
4,941
5,400
1,296
1,086
105
—
2,863
3,478
8,828
102
86
2
57
2,413
1,508
4,168
4,660
4,350
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
BALANCE AT END OF PERIOD
$ 55,562
$ 60,195
$ 61,883
$ 61,424
$ 61,734
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
0.39%
0.77%
0.10%
0.82%
0.07%
0.88%
0.07%
0.94%
0.13%
1.01%
216.28% 172.34% 145.95% 137.92% 114.63%
15
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report 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 specific amounts or the loan
categories in which future charge-offs may be taken, nor is it an
indicator of future loss trends� The allocation of the allowance to
each category does not restrict the use of the allowance to absorb
losses in any category�
At December 31,
2018
2017
2016
2015
2014
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
$
3,971
15�16% $
4,328
15�59% $
5,540
17�30 % $
5,110
19�20% $
4,805
20�58%
12,639
31�70
13,136
29�62
12,234
28�24
12,798
26�25
16,645
27�86
4,745
18�46
4,919
19�15
7,481
20�02
7,841
18�88
6,258
17�12
6,323
5�36
5,669
5�35
4,371
3�77
6,345
5�06
4,269
3�62
25,693
23�37
29,814
23�81
29,143
23�28
25,829
21�94
24,381
20�76
(Dollars in
thousands)
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
Commercial
loans
Consumer loans
2,191
Unallocated
—
5�95
—
2,329
—
6�48
—
3,114
—
7�39
—
3,501
—
8�67
—
4,881
495
10�06
—
TOTAL
$ 55,562
100.00% $ 60,195
100.00% $ 61,883
100.00% $ 61,424
100.00% $ 61,734
100.00%
Investment Activities
General
The Board of Directors annually approves the Investment Policy
for the Bank and the Company� The Chief Financial Officer and
the Treasurer are authorized by the Board to implement the
Investment Policy and establish investment strategies� Each of
the Chief Executive Officer, Chief Financial Officer, Treasurer and
Assistant Treasurer is 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 diversification, and to complement the
lending activities of the Bank� Investment decisions are made
in accordance with the policy and are based on credit quality,
interest rate risk, balance sheet composition, market expectations,
liquidity, income and collateral needs�
The Investment Policy does not 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 classified as held to
maturity debt securities, available for sale debt securities, equity
securities, or held for trading� Securities that are classified as
16
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
held to maturity debt securities 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 classified
as available for sale debt securities are reported at fair value�
Available for sale securities debt securities include U�S� Treasury
and Agency obligations, U�S� Agency and privately-issued CMOs,
corporate debt obligations� 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� Equity securities are traded in active
markets with readily accessible quoted market prices, carried
at fair value� At the present time, there are no securities that are
classified 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 was 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 (loss)�
The fair value of the securities portfolio is significantly affected by
changes in interest rates� In general, as interest rates rise, the fair
value of fixed-rate securities decreases and as interest rates fall,
the fair value of fixed-rate securities increases�
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 flow is received (and prepayment risk is shared) pro rata by
all securities holders, the cash flow from the mortgages or
mortgage-related securities underlying CMOs is paid in accordance
with predetermined priority to investors holding various tranches
of such securities or obligations� A particular tranche of CMOs
may therefore carry prepayment risk that differs from that of
both the underlying collateral and other tranches� Accordingly,
CMOs attempt to moderate risks associated with conventional
mortgage-related securities resulting from unexpected
prepayment activity� In declining interest rate environments, 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, 2018, the Bank held $31,000 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�
17
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1. Business
PART I
Item 1 Business
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.
2018
At December 31,
2017
2016
(Dollars in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Held to Maturity Debt Securities:
Mortgage-backed securities
$
187 $
190
$
382 $
FHLB obligations
FHLMC obligations
FNMA obligations
FFCB obligations
1,396
2,195
899
499
1,374
2,162
869
491
410
1,600
1,799
499
396
403
1,564
1,763
491
$
893 $
409
1,600
1,798
499
924
407
1,560
1,762
496
State and municipal obligations
463,801
464,363
462,942
470,484
473,653
474,852
Corporate obligations
10,448
10,291
10,020
9,938
9,331
9,286
TOTAL HELD TO MATURITY
DEBT SECURITIES
Available for Sale Debt Securities:
$ 479,425 $ 479,740
$
477,652 $ 485,039
$
488,183 $ 489,287
U.S Treasury obligations
$
— $
—
$
— $
—
$
7,995 $
8,008
Mortgage-backed securities
1,048,415
1,034,969
993,548
988,367
952,992
951,861
FHLMC obligations
FHLB obligations
FNMA obligations
State and municipal obligations
Corporate obligations
TOTAL AVAILABLE FOR SALE
DEBT SECURITIES
—
—
—
—
—
—
2,828
25,039
2,912
25,198
—
—
19,014
19,005
—
3,259
26,047
—
3,388
26,394
10,009
25,136
21,978
3,727
19,013
10,014
25,164
22,010
3,743
19,037
$1,076,282 $ 1,063,079
$ 1,041,868 $ 1,037,154
$ 1,040,850 $ 1,039,837
EQUITY SECURITIES
$
635 $
635
$
417 $
658
$
397 $
549
Average expected life of securities(1)
4.72 years
4.34 years
4.24 years
(1) Average expected life is based on prepayment assumptions utilizing prevailing interest rates as of the reporting dates and excludes equity securities.
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, 2018:
FNMA
FHLMC
Amortized Cost
Fair Value
$ 480,236
494,200
$ 472,220
486,830
18
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank 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, 2018. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at amortized cost for held to maturity debt securities and at fair value for available for sale debt securities.
At December 31, 2018
One Year
or Less
More Than One
Year to Five Years
More Than Five
Years to Ten Years
After Ten Years
Total
Carrying
Value
Weighted
Average
Yield(1)
Carrying
Value
Weighted
Average
Yield(1)
Carrying
Value
Weighted
Average
Yield(1)
Carrying
Value
Weighted
Average
Yield(1)
Carrying
Value
Weighted
Average
Yield(1)
(Dollars in thousands)
Held to Maturity
Debt Securities:
Mortgage-backed
securities
$
Agency obligations
—
—
—% $
187
5.35% $
—
4,989
1.92
1,809
2.70
8,639
2.80
Corporate
obligations
State and municipal
obligations
—
—
—
—% $
—
—
—
—
—
—% $
187
5.35%
—
—
4,989
1.92
10,448
2.78
6,964
3.22
72,380
2.74
263,750
2.57
120,707
2.84
463,801
2.68
TOTAL HELD TO
MATURITY DEBT
SECURITIES
Available for Sale
Debt Securities:
$ 8,773 3.11% $ 86,195 2.70% $ 263,750
2.57% $ 120,707
2.84% $ 479,425
2.67%
State and municipal
obligations
$
Mortgage-backed
securities
Agency obligations
Corporate
obligations
—
—% $
—
—% $
2,912
2.78% $
—
—% $
2,912
2.78%
211
3.12
23,572
1.73
234,111
2.48
777,075
2.92
1,034,969
2.79
—
—
—
—
—
—
—
—
2,967
2.99
22,231
4.99
—
—
—
—
—
—
25,198
4.75
TOTAL AVAILABLE
FOR SALE DEBT
SECURITIES(2)
$ 211 3.12% $ 26,539 1.87% $ 259,254 2.70% $ 777,075
2.92% $ 1,063,079
2.84%
(1) Yields are not tax equivalent.
(2) Totals exclude $635,000 equity securities at fair value.
Sources of Funds
General
Primary sources of funds consist of principal and interest cash
flows received from loans and mortgage-backed securities,
contractual maturities on investments, deposits, 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 certificate of deposit accounts at varying
interest rates and terms. The Bank also offers investment,
insurance, IRA and KEOGH products. 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 influenced 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
19
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
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, defined as savings accounts, interest and non-
interest bearing checking accounts and money market deposit
accounts, represented 89.0% of total deposits at December 31,
2018 and 90.5% of total deposits at December 31, 2017. As of
December 31, 2018 and 2017, time deposits maturing in less
than one year amounted to $584.5 million and $424.4 million,
respectively.
The following table indicates the amount of certificates of deposit by time remaining until maturity at December 31, 2018.
(In thousands)
3 Months
or Less
Over 3 to
6 Months
Over 6 to
12 Months
Over 12
Months
Total
Certificates of deposit of $100,000 or more
$
127,146
$ 106,186
$
112,477
$
69,039
$
414,848
Certificates of deposit less than $100,000
74,267
76,726
87,676
96,975
335,644
TOTAL CERTIFICATES OF DEPOSIT
$ 201,413
$ 182,912
$ 200,153
$ 166,014
$ 750,492
Maturity
Certificates of Deposit Maturities
The following table sets forth certain information regarding certificates of deposit.
Period to Maturity from December 31, 2018
At December 31,
Less Than
One Year
One to
Two
Years
Two to
Three
Years
Three to
Four Years
Four to
Five Years
Five Years
or More
2018
2017
2016
(Dollars in thousands)
Rate:
0.00 to 0.99%
$ 179,241 $ 10,874 $
— $
3 $
—
$ — $ 190,118 $ 283,569 $ 421,772
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%
177,766
227,471
60,850
18,338
27,506
19,652
2,087
2,582
10,773
12,508
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
737
104
—
—
—
—
—
297,284
342,692
228,111
263,090
8,544
—
—
—
—
—
4
—
—
—
—
950
4
104
200
6
36
TOTAL
$ 584,478 $ 90,062 $ 29,593 $ 22,237 $ 23,281
$ 841 $ 750,492 $ 634,809 $ 651,183
Borrowed Funds
At December 31, 2018, the Bank had $1.44 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.
20
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
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
Years Ended December 31,
2018
2017
2016
$ 1,256,525
$ 1,288,448
$ 1,343,095
487,000
153,715
472,000
210,702
173,000
283,233
1,136,988
1,237,979
1,315,278
259,197
139,729
179,003
164,982
37,608
224,421
1.90%
2.09
1.04
1.78%
1.17
1.26
1.76%
0.61
1.42
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
Wealth Management Services
As part of the Company’s strategy to increase fee related income,
the Company’s wholly owned subsidiary, Beacon Trust Company
and its registered investment advisory subsidiary Beacon
Investment Advisory Services, Inc., (“Beacon”) are engaged in
providing wealth management and asset management services.
In addition to its trust and estate administration 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-profits, corporations and
pension funds. These services include investment management,
asset allocation, trust and estate administration, financial planning,
tax compliance and planning, and family office services.
At December 31,
2018
2017
2016
$ 1,037,960
$ 1,127,335
$
1,295,080
283,000
121,322
472,000
143,179
161,000
156,665
$ 1,442,282
$ 1,742,514
$
1,612,745
2.08%
2.60%
0.85%
1.74%
1.53%
1.00%
1.77%
0.79%
1.35%
Beacon focuses on delivering personalized investment solutions
based on each client’s risk profile. These strategies are focused
on maximizing clients’ investment returns, while minimizing risk.
The majority of the fee income generated by Beacon is based on
assets under management.
On January 22, 2019, Beacon announced the signing of a
definitive agreement to acquire New York City-based Tirschwell
& Loewy, Inc., an independent registered investment adviser. The
transaction is subject to the satisfaction of customary closing
conditions and is anticipated to close in the second quarter
of 2019.
21
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Subsidiary Activities
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.
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.
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
Personnel
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 Avenue Realty, LLC, a New Jersey limited liability company
is a wholly owned subsidiary of the Bank formed to manage and
sell real estate acquired through foreclosure.
Bergen Avenue Realty PA, LLC, a Pennsylvania limited liability
company is a wholly owned subsidiary of the Bank formed to
manage and sell real estate acquired through foreclosure in
Pennsylvania.
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 and is a registered investment advisor.
As of December 31, 2018, the Company had 959 full-time and 85 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 file
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 files 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 files reports with the Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain
regulatory approval prior to entering into certain transactions, such
as mergers with, or acquisitions of, other depository institutions
and opening or acquiring branch offices. The Commissioner and
the FDIC conduct periodic examinations to assess the 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. This framework also gives the regulatory authorities
extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies
with respect to the classification of assets and the establishment
of adequate loan loss reserves for regulatory purposes.
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.
On May 24, 2018, the Economic Growth, Regulatory Relief, and
Consumer Protection Act (“Economic Growth Act”) was enacted,
which repealed or modified several important provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (“Dodd-Frank Act”) that have impacted the Company. Key
aspects of the Economic Growth Act that have the potential to
affect the Company’s business and results of operations include:
zz Raising the total asset threshold from $10 billion to $250 billion
at which bank holding companies are required to conduct
annual company-run stress tests mandated by the Dodd-Frank
Act; and
22
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
zz Raising the total asset threshold from $10 billion to $50 billion
at which publicly traded bank holding companies are required
to establish risk committees for the oversight of the enterprise-
wide risk management practices of the institution.
To the extent our balance sheet grows organically or through
strategic opportunities, the Company expects to benefit from
the amendments which raised the above asset thresholds
for conducting annual company-run stress tests. However,
notwithstanding this regulatory relief, the Company intends to
continue employing a stress testing protocol commensurate with
the risk of the institution as part of its enterprise risk management
framework. The Company currently has, and will continue to
maintain, a risk committee of its board of directors.
As of December 31, 2018, the Bank had consolidated assets of
$9.73 billion. The Dodd-Frank Act established several measures
that apply to institutions and holding companies once they reach
$10 billion in assets. In addition to Consumer Financial Protection
Bureau compliance examinations, limits on debit card interchange
fees apply, which will reduce the Bank’s fee income. Certain
enhanced prudential standards will also become applicable such as
additional risk management requirements, both from a framework
and corporate governance perspective. These and other
supervisory and regulatory implications of crossing the $10 billion
threshold would likely result in increased regulatory costs.
New Jersey Banking Regulation
The Economic Growth Act also provided regulatory relief to
institutions with less than $10 billion in assets, including by:
Activity Powers
zz Raising the total asset threshold from $2 billion to $10 billion
at which banks may deem certain loans originated and held in
portfolio as “qualified mortgages” for purposes of the Consumer
Financial Protection Bureau’s ability-to-repay rule;
zz Requiring the federal banking agencies to develop a Community
Bank Leverage Ratio of not less than 8% and not more than
10%, under which any qualifying community bank under
$10 billion in total assets that exceeds such ratio would be
considered to have met the existing risk-based capital rules
and be deemed “well capitalized”; and
zz Amending the Bank Holding Company Act to exempt from the
Volcker Rule banks with total assets of $10 billion or less and
which have total trading assets and trading liabilities of 5% or
less of their total consolidated assets.
Although the Company may benefit from these legislative changes
in the short term, the extent of such benefits will be limited if
the Company grows and eventually exceeds $10 billion in total
consolidated assets.
Despite the improvements for community banks and mid-size
financial institutions resulting from the Economic Growth Act,
many provisions of the Dodd-Frank Act and its implementing
regulations remain in place and will continue to result in additional
operating and compliance costs that could have a material
adverse effect on the Company’s business, financial condition,
and results of operation. In addition, the Economic Growth Act
requires the enactment of a number of implementing regulations,
the details of which may have a material effect on the ultimate
impact of the law.
In connection with the adoption of the state of New Jersey’s
budget on July 1, 2018, sweeping changes were made to New
Jersey’s Corporation Business Tax, generally effective January 1,
2019. Among other provisions, a New Jersey surtax was enacted
effective July 1, 2018, for the periods beginning January 1, 2018
through December 31, 2021. This surtax did not have a material
impact on the Company’s income tax expense for the year ended
December 31, 2018.
The material laws and regulations applicable to the Company and
the Bank are summarized below and elsewhere in this Annual
Report on Form 10-K.
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:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate
debt securities and obligations of federal, state and local
governments and agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a “leeway” power that
permits investments not otherwise permitted by the New Jersey
Banking Act, subject to certain restrictions imposed by the FDIC.
“Leeway” investments must comply with a number of limitations
on the individual and aggregate amounts of such investments.
A savings bank may also exercise trust powers upon the approval
of the Commissioner. New Jersey savings banks may exercise
those powers, rights, benefits or privileges authorized for national
banks or out-of-state banks or for federal or out-of-state savings
banks or savings associations, provided that before exercising
any such power, right, benefit or privilege, prior approval by
the Commissioner by regulation or by specific authorization is
required. The exercise of these lending, investment and activity
powers 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 specified exceptions, a New Jersey chartered savings
bank may not make loans or extend credit to a single borrower
and to entities related to the borrower in an aggregate amount
that would exceed 15% of the bank’s capital funds. A 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.
23
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
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, 2018, 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, officer, attorney or
employee of a savings bank engaged in an objectionable activity,
after the Commissioner has ordered the activity to be terminated,
to show cause at a hearing before the Commissioner why such
person should not be removed.
Federal Banking Regulation
Capital Requirements
Federal regulations require federally insured depository institutions
to meet several minimum capital standards: a common equity
Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to
risk-based assets ratio of 6.0%, a total capital to risk-based assets
of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes
of calculating risk-based capital ratios, all assets, including certain
off-balance sheet assets (e.g., recourse obligations, direct credit
substitutes, residual interests) are multiplied by a risk weight
factor assigned by the regulations based on the risks believed
inherent in the type of asset. Higher levels of capital are required
for asset categories believed to present greater risk. Common
equity Tier 1 capital is generally defined as common stockholders’
equity and retained earnings. Tier 1 capital is generally defined
as common equity Tier 1 and additional Tier 1 capital. Additional
Tier 1 capital includes certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts
of consolidated subsidiaries. Total capital includes Tier 1 capital
(common equity Tier 1 capital plus additional Tier 1 capital) and
Tier 2 capital. Tier 2 capital is comprised of capital instruments
and related surplus, meeting specified requirements, and may
include cumulative preferred stock and long-term perpetual
preferred stock, mandatory convertible securities, intermediate
preferred stock and subordinated debt. Also included in Tier 2
capital is the allowance for loan and lease losses limited to a
maximum of 1.25% of risk-weighted assets and, for institutions
that have exercised an opt-out election regarding the treatment
of Accumulated Other Comprehensive Income, up to 45% of
net unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Calculation of all types
of regulatory capital is subject to deductions and adjustments
specified in the regulations. In assessing an institution’s capital
adequacy, the FDIC takes into consideration, not only these
numeric factors, but qualitative factors as well, and has the
authority to establish higher capital requirements for individual
institutions where deemed necessary.
In addition to establishing the minimum regulatory capital
requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution
does not hold a “capital conservation buffer” consisting of 2.5%
of common equity Tier 1 capital to risk-weighted asset above
the amount necessary to meet its minimum risk-based capital
requirements. The capital conservation buffer requirement
was effective on January 1, 2016 at 0.625% of risk-weighted
assets and increases each year until fully implemented at 2.5%
on January 1, 2019. The capital conservation buffer during the
calendar year 2018 was 1.875% and increased to 2.5% on
January 1, 2019.
The following table shows the Bank’s Tier 1 leverage ratio, common equity Tier 1 risk-based capital ratio, Tier 1 risk-based capital ratio,
and total risk-based capital ratio, at December 31, 2018:
As of December 31, 2018
(Dollars in thousands)
Tier 1 leverage capital
Common equity Tier 1 risk-based capital
Tier 1 risk-based capital
Total risk-based capital
Capital
Percent of
Assets(1)
Capital
Requirements(1)
$
917,659
9.86%
917,659
917,659
973,366
12.06
12.06
12.80
4.00%
4.50
6.00
8.00
Capital
Requirements
with Capital
Conservation
Buffer(1)
4.00%
6.38
7.88
9.88
(1) For purposes of calculating regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating common equity Tier 1
risk-based capital, Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets.
24
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank As of December 31, 2018, the Bank was considered “well
capitalized” under FDIC guidelines.
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 specifically
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 significant risk to
the FDIC insurance fund. Certain activities of subsidiaries that are
engaged in activities permitted for national banks only through a
“financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage,
through financial subsidiaries, in any activity in which a national
bank may engage through a financial subsidiary and on
substantially the same terms and conditions. In general, the law
permits a national bank that is well-capitalized and well-managed
to conduct, through a financial subsidiary, any activity permitted
for a financial holding company other than insurance underwriting,
insurance investments, real estate investment or development
or merchant banking. The total assets of all such financial
subsidiaries may not exceed the lesser of 45% of the bank’s total
assets or $50 billion. The bank must have policies and procedures
to assess the financial subsidiary’s risk and protect the bank from
such risk and potential liability, must not consolidate the financial
subsidiary’s assets with the bank’s and must exclude from its
own assets and equity all equity investments, including retained
earnings, in the financial subsidiary. The Bank currently meets
all conditions necessary to establish and engage in permitted
activities through financial subsidiaries.
Federal Home Loan Bank System
The Bank is a member of the FHLB system which consists
of eleven 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. As a member of the FHLB of New York, the Bank
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 FHLBNY stock, although no assurance can be given that
these dividends will continue to be paid. For the year ended
December 31, 2018, dividends paid by the FHLBNY to the Bank
totaled $4.9 million.
PART I
Item 1 Business
Deposit Insurance
As a member institution of the FDIC, deposit accounts at the
Bank are generally insured by the FDIC’s Deposit Insurance Fund
(“DIF”) up to a maximum of $250,000 for each separately insured
depositor.
Under the FDIC’s risk-based assessment system, insured
institutions were originally assigned a risk category based on
supervisory evaluations, regulatory capital levels and certain
other factors. An institution’s assessment rate depended upon
the category to which it was assigned, and certain adjustments
specified by FDIC regulations. Institutions deemed less risky paid
lower assessments. No institution may pay a dividend if it is in
default of its 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 finalized a rule,
effective April 1, 2011, that set the assessment range (inclusive of
possible adjustments) at 25 to 45 basis points of total assets less
tangible equity. However, as described below, there were recent
changes to both the FDIC’s assessment range and its risk-based
assessment procedures.
The FDIC has established a long range target size for the DIF of
2% of insured deposits. The FDIC’s regulations also provided for
a lower assessment rate schedule when the DIF reached 1.15%
of total insured deposits. The 1.15% ratio was achieved as of
June 30, 2016. As a result, effective July 1, 2016, the assessment
range (inclusive of possible adjustments) has been lowered to 1.5
to 30 basis points for banks of less than $10 billion in consolidated
assets. The Dodd-Frank Act required banks of greater than
$10 billion of assets to pay to increase the DIF reserve ratio from
1.15% to 1.35%. Consequently, also effective July 1, 2016, banks
of greater than $10 billion of assets paid a surcharge of 4.5 basis
points on assets above $10 billion. In November 2018, the FDIC
indicated that the 1.35% ratio had been achieved, that surcharges
on banks with more than $10 billion in assets would cease and
that institutions below that size would receive credits for the portion
of their assessment that contributed to the reserve ratio between
1.15% and 1.35%, effective when the ratio reaches 1.38%. Also
on July 1, 2016, the FDIC eliminated the risk categories. Most
institutions are now assessed based on financial ratios derived
from statistical models that estimate the probability of a bank’s
failure within three years. Banks of greater than $10 billion are
assessed based on a rate derived from a scorecard which
assesses certain factors such as examination ratings, financial
measures related to the bank’s ability to withstand stress and
measures of loss severity to the DIF if the bank should fail.
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 officers. In general, these enforcement actions
may be initiated in response to violations of law and to unsafe or
unsound practices.
25
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Transactions with Affiliates
Transactions between an insured bank, such as the Bank, and
any of its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act and its implementing regulations. An affiliate
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, financial subsidiary
or other entity defined by the regulation generally is not treated
as an affiliate of the bank for purposes of Sections 23A and 23B.
Section 23A:
zz limits the extent to which a bank or its subsidiaries may engage
in “covered transactions” with any one affiliate to an amount
equal to 10% of such bank’s capital stock and retained earnings,
and limits all such transactions with all affiliates to an amount
equal to 20% of such capital stock and retained earnings; and
zz requires that all such transactions be on terms that are
consistent with safe and sound banking practices.
The term “covered transaction” includes the making of loans,
purchase of assets, issuance of guarantees and other similar
types of transactions. Further, most loans by a bank to any of its
affiliates must be secured by collateral in amounts ranging from
100 to 130 percent of the loan amounts. In addition, any covered
transaction by a bank with an affiliate and any purchase of assets
or services by a bank from an affiliate must be on terms that are
substantially the same, or at least as favorable to the bank, as
those that would be provided to a non-affiliate.
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 fixing or varying the consideration for such extension
of credit or service, on the condition that the customer obtain
some additional service from the institution or its affiliates or 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 reflect 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 unaffiliated 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 entire communities, including
low- and moderate-income neighborhoods and borrowers
(i.e. assessment(s)). 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 examination and evaluation process focuses on
three tests:
zz a lending test, to evaluate the institution’s record of making
home mortgage, small business, small farm, and consumer
loans, if applicable, in its assessment area(s), with consideration
given towards, amongst other factors, borrower characteristics
and geographic distribution;
zz an investment test, to evaluate the institution’s record of helping
to meet the credit needs of its assessment area(s) through
qualified investments characterized as a lawful investment,
deposit, membership share, or grant that has as its primary
purpose community development; and
zz a service test, to evaluate the institution’s systems for delivering
retail banking services through its branches, ATMs and other
offices and access facilities, including the distribution of its
branches, ATMs and other offices/access facilities, and the
institution’s record of opening and closing branches.
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 a
“Satisfactory” Community Reinvestment Act rating in its most
recently completed federal examination, which was conducted
by the FDIC as of July 2018.
In addition, the Equal Credit Opportunity Act and the Fair Housing
Act prohibit lenders from discriminating in their lending practices
on the basis of the borrower’s characteristics as specified in
those statutes. An institution’s failure to comply with the Equal
Credit Opportunity Act and/or 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 standards relating to
internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings, compensation, fees and benefits.
In general, the guidelines require, among other things, appropriate
26
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholder.
In addition, 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 notified, a bank fails to submit an acceptable
compliance plan or fails in any material respect to implement an
accepted compliance plan, the FDIC may issue an order directing
corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the “prompt corrective
action” provisions 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 five categories, consisting
of “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized.”
The FDIC’s regulations define the five capital categories as follows:
An institution will be treated as “well capitalized” if:
zz its ratio of total capital to risk-weighted assets is at least 10%;
zz its ratio of Tier 1 capital to risk-weighted assets is at least 8%;
zz its ratio of common equity Tier 1 capital to risk-weighted assets
is at least 6.5%; and
zz its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a
specific capital level.
An institution will be treated as “adequately capitalized” if:
zz its ratio of total capital to risk-weighted assets is at least 8%; or
zz its ratio of Tier 1 capital to risk-weighted assets is at least 6%;
zz its ratio of common equity Tier 1 capital to risk-weighted assets
is at least 4.5%; and
zz its ratio of Tier 1 capital to total assets is at least 4% and it is
not a well-capitalized institution.
An institution will be treated as “undercapitalized” if:
zz its total risk-based capital is less than 8%; or
zz its Tier 1 risk-based-capital is less than 6%;
zz its ratio of common equity Tier 1 capital to risk-weighted assets
is less than 4.5%; or
zz its leverage ratio is less than 4%.
An institution will be treated as “significantly undercapitalized” if:
zz its total risk-based capital is less than 6%;
zz its Tier 1 capital is less than 4%;
PART I
Item 1 Business
zz its ratio of common equity to risk-weighted assets is less than
3%; or
zz 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 financial condition or upon the occurrence of certain
events, including:
zz insolvency, or when the assets of the bank are less than its
liabilities to depositors and others;
zz substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices;
zz existence of an unsafe or unsound condition to transact
business;
zz 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
zz insufficient 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 final rule that increased capital
requirements effective January 1, 2015 adjusted the prompt
action categories as reflected above.
Loans to a Bank’s Insiders
Federal Regulation
A bank’s loans to its executive officers, directors, any owner of 10%
or more of its stock (each, an insider) and any of certain entities
affiliated with any such person (an insider’s related interest) are
subject to the conditions and limitations imposed by Section 22(h)
of the Federal Reserve Act and the Federal Reserve Board’s
Regulation O. 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 officer, other than loans for the
education of the officer’s children and certain loans secured by
the officer’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.
27
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report 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 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 benefit or compensation plan of a bank that is widely
available to employees of the bank and that does not give any
preference to insiders of the bank over other employees of the bank.
In addition, 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 owed to a savings bank by its directors
and executive officers and by 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.
The federal bank regulatory agencies have targeted various
aspects of internet banking, including the security and systems.
There can be no assurance that the bank regulatory agencies will
not adopt new regulations that will materially affect the Bank’s
Internet operations or restrict any such further operations.
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
affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money
transfer agents and parties registered under the Commodity
Exchange Act.
The bank regulatory agencies have increased the regulatory
scrutiny of the Bank Secrecy Act and anti-money laundering
programs maintained by financial institutions. Significant penalties
and fines, as well as other supervisory orders may be imposed on
a financial institution for non-compliance with these requirements.
In addition, the federal bank regulatory agencies must consider
the effectiveness of financial 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.
Holding Company Regulation
Federal Reserve System
Federal Regulation
Under Federal Reserve Board regulations, the Bank is required
to maintain non-interest earning reserves against its transaction
accounts. For 2018, the Federal Reserve Board regulations
generally require that reserves of 3% must be maintained against
aggregate transaction accounts over $16.0 million and up to
$122.3 million, and 10% against that portion of total transaction
accounts in excess of up to $122.3 million. The first $16.0 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 defined 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 significantly alter the
ways in which financial institutions and their customers conduct
their business. The growth of the Internet has caused banks to
adopt and refine alternative distribution and marketing systems.
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.
The Dodd-Frank Act directed 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 final rule
regarding regulatory capital requirements implemented the
Dodd-Frank Act as to bank holding company capital standards.
Consolidated regulatory capital requirements identical to those
applicable to the subsidiary banks applied to bank holding
companies (with greater than $1 billion of assets) as of January 1,
2015. As is the case with institutions themselves, the capital
conservation buffer was effective on January 1, 2016, and
increased each year until it is fully implemented on January 1,
2019. As of December 31, 2018, the Company’s regulatory capital
ratios exceed these minimum capital requirements.
28
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
The following table shows the Company’s Tier 1 leverage capital ratio, common equity Tier 1 risk-based capital ratio, Tier 1 risk-based
capital ratio and the total risk-based capital ratio as of December 31, 2018.
(Dollars in thousands)
Tier 1 leverage capital
Common Equity Tier 1 risk-based capital
Tier 1 risk-based capital
Total risk-based capital
As of December 31, 2018
Capital
Percent of
Assets(1)
Capital
Requirements(1)
Capital
Requirements with
Capital Conservation
Buffer(1)
$
953,768
10.24%
953,768
953,768
1,009,475
12.54
12.54
13.27
4.00%
4.50
6.00
8.00
4.00%
6.38
7.88
9.88
(1) For purposes of calculating regulatory Tier 1 leverage capital, assets are based on adjusted total leverage assets. In calculating common equity Tier 1
capital, Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets.
As of December 31, 2018, the Company was “well capitalized”
under Federal Reserve Board guidelines.
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
financial condition. Federal Reserve Board guidance sets forth
the supervisory expectation that bank holding companies will
inform and consult with Federal Reserve Board staff in advance
of issuing a dividend that exceeds earnings for the quarter and
should inform the Federal Reserve Board and should eliminate,
defer or significantly reduce dividends if: (i) net income available to
stockholders for the past four quarters, net of dividends previously
paid during that period, is not sufficient to fully fund the dividends;
(ii) prospective rate of earnings retention is not consistent with the
bank holding company’s capital needs and overall current and
prospective financial condition; or (iii) the bank holding company
will not meet, or is in danger of not meeting, its minimum regulatory
capital adequacy ratios. 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
file an acceptable capital restoration plan or fails to implement an
accepted plan, the Federal Reserve Board may prohibit the bank
holding company parent of the undercapitalized bank from paying
any 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.
Federal Reserve Board regulations require a bank holding
company 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. The regulations provide that 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. Notwithstanding
the aforementioned regulations, the Company has learned that
Federal Reserve Board staff is interpreting its regulatory capital
regulation to require Federal Reserve Board approval for any
redemption or repurchase of stock included in regulatory capital.
In addition, a bank holding company which does not opt to
become a financial 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:
zz making or servicing loans;
zz performing certain data processing services;
zz providing discount brokerage services, or acting as fiduciary,
investment or financial advisor;
zz leasing personal or real property;
zz making investments in corporations or projects designed
primarily to promote community welfare; and
zz acquiring a savings and loan association.
29
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1 Business
Bank holding companies that qualify and opt to become a
financial holding company may engage in activities that are
financial in nature or incident to activities which are financial in
nature. Financial holding companies may engage in a broader
array of activities including insurance and investment banking.
Bank holding companies may qualify to become a financial holding
company if at the time of the election and on a continuing basis:
zz each of its depository institution subsidiaries is “well capitalized”;
zz each of its depository institution subsidiaries is “well managed”;
and
zz each of its depository institution subsidiaries has at least a
“Satisfactory” Community Reinvestment Act rating at its most
recent examination.
The Company filed an election to qualify as a financial holding
company under federal regulations on January 31, 2014 which
was deemed effective by the Federal Reserve Board on March 5,
2015.
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 defines the terms “company” and
“bank holding company” as such terms are defined under the
BHCA. Each bank holding company controlling a New Jersey
chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner.
Acquisition of Control
Under federal law and under the New Jersey Banking Act, no
person may acquire control of the Company or the Bank without
first 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.
Investment Adviser Regulation
Beacon Investment Advisory Services, Inc. is an investment
adviser registered with the SEC. As such, it is required to make
certain filings with and is subject to periodic examination by,
the SEC.
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
Certificate of Incorporation and Bylaws.
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.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”)
was enacted. Included as part of the law, was a permanent
reduction in the federal corporate income tax rate from 35%
to 21% effective January 1, 2018. Based upon the change in
the tax rate, the Company revalued its net deferred tax asset at
December 31, 2017 to reflect the reduced rate that will apply
in future periods when theses deferred taxes are settled or
realized. As a result of the enactment of the Tax Act, the Company
recognized an additional tax expense of $3.9 million for the year
ended December 31, 2017.
30
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 filing 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 specified 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).
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1 Business
Taxable Distributions and Recapture
State Taxation
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 definitional tests. Federal
legislation has eliminated these recapture rules. Retained earnings
at December 31, 2018 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, 2018,
the Bank had an unrecognized tax liability of $14.1 million with
respect to this reserve.
Corporate Alternative Minimum Tax
The Internal Revenue Code of 1986, as amended (the “Code”),
imposed 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 was
payable to the extent such AMTI was in excess of an exemption
amount and the AMT exceeded the regular income tax. Net
operating losses could offset no more than 90% of AMTI. Certain
payments of alternative minimum tax could be used as credits
against regular tax liabilities in future years. The Company was not
subject to the alternative minimum tax and has no such amounts
available as credits for carryover. The Tax Act repealed the
corporate AMT effective for tax years beginning after December 31,
2017.
Net Operating Loss Carryovers
Under the general rule, for tax periods ending 12/31/2017 and
prior a financial institution may carry back net operating losses to
the preceding two taxable years and forward to the succeeding
20 taxable years. At December 31, 2018, the Company had
approximately $1.7 million 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. The Tax Act limits the NOL deduction for
a given year to 80% of taxable income, effective with respect to
losses arising in tax years beginning after December 31, 2017.
It also repealed the pre-enactment carryback provision for NOLs
and provides for the indefinite carryforward of NOLs arising in tax
years ending after December 31, 2017
Corporate Dividends-Received Deduction
The Company may exclude from its income 100% of dividends
received from the Bank as a member of the same affiliated group
of corporations.
New Jersey State Taxation
The Company and the Bank file New Jersey Corporation Business
Tax returns. Generally, the income of financial 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 corporation
business tax at 9% of apportioned taxable income for tax periods
ended December 31, 2017 and prior. As a result of the newly
enacted legislation that New Jersey effectuated on July 1, 2018,
subsequent years will be subject to a temporary surtax effective
for tax years 2018 through 2021, and requiring companies to file
combined tax returns beginning 2019.
Prior to the new legislation, New Jersey tax law did not allow
a taxpayer to file a tax return on a combined or consolidated
basis with another member of the affiliated group where there is
common ownership for tax periods prior to December 31, 2018.
Pennsylvania State Taxation. The Bank is subject to Pennsylvania
Mutual Thrift Institutions Tax. Mutual thrift institutions tax is
imposed at the rate of 11.5% 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.
New York State Taxation
In 2014, New York State enacted significant and comprehensive
reforms to its corporate tax system that went into effect
January 1, 2015. The legislation resulted in significant changes
to the method of calculating income taxes for banks, including
changes to future period tax rates, rules relating to the sourcing
of income, and the elimination of the banking corporation tax
so that banking corporations are taxed under New York State’s
corporate franchise tax. The corporate franchise tax is based on
the combined entire net income of the Company and its affiliates
allocable and apportionable to New York State and taxed at a rate
of 6.5%. The amount of revenues that are sourced to New York
State under the new legislation can be expected to fluctuate over
time. In addition, the Company and its affiliates are subject to the
Metropolitan Transportation Authority (“MTA”) Surcharge allocable
to business activities carried on in the Metropolitan Commuter
Transportation District. The MTA surcharge for 2018 was 28.6%
of a recomputed New York State franchise tax, calculated using
a 6.5% tax rate on allocated and apportioned entire net income.
The examination of the Company’s 2016 and 2015 New York
State tax returns was completed in the first quarter of 2019, and
did not have a material impact on the Company’s effective income
tax rate.
31
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report 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 financial services industry. The
following discusses the significant risk factors that could affect
our business and operations. If any of the following conditions or
events actually occur, our business, financial 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 to the underlying drivers of our
net interest income could adversely affect
our results of operations and financial
condition.
Our financial condition and results of operations are significantly
affected by changes in market interest rates, and the degree to
which these changes disparately impact short-term and long-term
interest rates and influence the behavior of our customer base.
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. The Federal Reserve
Board’s policy action to increase short-term rates could result in
a flattening or inverted yield curve, which could negatively impact
our net interest margin and earnings.
Our interest-bearing liabilities may be subject to repricing or
maturing more quickly than our interest-earning assets. If
short-term rates increase rapidly, we may have to increase the
rates we pay on our deposits and borrowed funds more quickly
than we can increase the interest rates we earn 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 or are lost to competitors offering higher rates
on their deposit products. 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 for such period would decrease 3.5% or
$10.8 million. Conversely, should market interest rates fall below
current levels, our net interest income could also be negatively
affected if competitive pressures prevented us from reducing rates
on our deposits, while the yields on our assets decrease through
loan prepayments and interest rate adjustments.
Changes in interest rates also affect the value of our interest-
earning assets and in particular our securities portfolio. Generally,
the value of securities fluctuates inversely with changes in
interest rates. At December 31, 2018, our available for sale
debt securities portfolio totaled $1.06 billion. Unrealized gains
and losses on securities available for sale are reported as a
separate component of stockholders’ equity. Decreases in the
32
fair value of securities available for sale resulting from increases
in interest rates therefore could have a temporary adverse effect
on stockholders’ equity.
We are also subject to other financial risks related to interest rate
benchmarks and their associated movements. Changes in interest
rates can affect the average lives of loans and mortgage related
securities. Increases in interest rates can result in extending the
average lives of our loans and mortgage related securities, thereby
reducing the amount of cash flows available to invest in higher-
yielding assets. Additionally, our inability to oversee a successful
transition to an alternative reference rate for loans in our portfolio
that use of the London Inter-bank Offered Rate (“LIBOR”) could
impact our costs. At December 31, 2018, loans that tied to the
LIBOR rate totaled $1.48 billion.
We are subject to liquidity risk.
Liquidity risk is the potential that we will be unable to meet our
obligations as they become due, 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, or
meet regulatory-imposed expectations for liquidity levels.
Liquidity is required to fund various obligations, including loan
originations and commitments, withdrawals by depositors,
repayments of borrowings, operating expenses and capital
expenditures. Liquidity is derived primarily from deposit growth
and retention; principal and interest payments, sales, maturities,
and prepayments of loans and investment securities; net cash
provided from operations; and access to other funding sources.
Our access to funding sources in amounts adequate to finance
our activities could be impaired by factors specific to us or the
financial 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, lack of
competitiveness, or adverse regulatory action against us. Our
ability to borrow could also be impaired by factors that are not
specific to us, such as a severe disruption of the financial markets
or negative views and expectations about the prospects for the
financial services industry.
If our allowance for loan losses is not
sufficient 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 quality reviews, our credit risk rating process, loan
portfolio trends, our experience and our evaluation of economic
conditions, among other factors. If our assumptions prove to be
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1A Risk Factors
incorrect, or if delinquencies or non-accrual and non-performing
loans increase, the allowance for loan losses may not be sufficient
to cover losses inherent in our loan portfolio, resulting in additions
to our allowance. Material additions to the allowance would
materially decrease our net income.
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. In 2016, the Financial
Accounting Standards Board released an updated standard
for determining credit losses, which fundamentally changes
how financial institutions calculate their allowance reserves. The
new standard, which will become effective for reporting periods
beginning after December 15, 2019, will require us to adopt a
“Current Expected Credit Loss” model that measures projected
credit losses over the estimated life of the asset. This approach is a
significant departure from the current accounting standard, which
estimates potential credit losses based on losses considered to
be probable and reasonably estimable. When adopted, this new
standard may increase our allowance for credit losses, which
could materially affect our financial condition and future results
of operations. The extent of the increase, if any, will ultimately
depend upon the nature and characteristics of our loan portfolio
at the adoption date, as well as the macroeconomic assumptions
and forecasts used at that date. Therefore, the potential financial
impact is currently unknown.
Our commercial real estate, multi-family,
and commercial loans expose us to
increased lending risks.
A significant portion of our loan portfolio consists of commercial
real estate, multi-family, commercial and construction loans for
borrowers whose properties are located in areas where we face
significant competition. These loans are generally regarded as
having a higher inherent risk of default and potential 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,
multi-family loans, commercial mortgage loans and commercial
loans have significantly larger average loan balances compared
to our single-family residential mortgage loans and typically face
higher environmental-related risks. Also, many of our borrowers of
these types of loans have more than one loan outstanding with us.
Consequently, any adverse development with respect to one loan
or one credit relationship can expose us to a significantly greater
risk of loss compared to an adverse development with respect
to one single-family residential mortgage loan.
The FDIC, the OCC and the FRB (collectively, the “Agencies”) have
issued joint guidance entitled “Concentrations in Commercial
Real Estate Lending, Sound Risk Management Practices” (the
“CRE Guidance”). Although the CRE Guidance did not establish
specific lending limits, it provides that a bank’s commercial real
estate lending exposure may receive increased supervisory
scrutiny where total non-owner occupied commercial real
estate loans, including loans secured by apartment buildings,
investor commercial real estate and construction and land loans
(“CRE Loans”), represent 300% or more of an institution’s total
risk-based capital and the outstanding balance of the CRE Loan
portfolio has increased by 50% or more during the preceding
36 months. While our level of CRE Loans equaled 422% of
total risk-based capital at December 31, 2018, our CRE Loan
portfolio has not increased by 50% or more during the preceding
36 months.
In December 2015, the Agencies released a new statement on
prudent risk management for commercial real estate lending (the
“2015 Statement”). In the 2015 Statement, the Agencies express
concerns about easing commercial real estate underwriting
standards, direct financial institutions to maintain underwriting
discipline and exercise risk management practices to identify,
measure and monitor lending risks, and indicate that the
Agencies will continue “to pay special attention” to commercial
real estate lending activities and concentrations going forward.
If our regulators were to impose restrictions on the amount of
commercial real estate loans we can hold in our loan portfolio, or
require higher capital ratios as a result of the level of commercial
real estate loans held, our earnings or our ability to engage in
certain merger and acquisition activity could be adversely affected.
Our continuing concentration of business
in a relatively confined region may increase
our risk.
Our success is significantly affected by general economic
conditions in northern and central New Jersey, and eastern
Pennsylvania. Unlike some larger banks that are more
geographically diversified, we provide banking, financial, and
wealth management services to customers mostly located in
our primary markets. Consequently, a downturn in economic
conditions in our local markets would have a significant impact
on our loan portfolios, the ability of borrowers to meet their loan
payment obligations and the value of the collateral securing our
loans. Adverse local economic conditions caused by inflation,
recession, unemployment, state or local government action,
or other factors beyond our control would impact these local
economic conditions and could negatively affect the financial
results of our business.
Because we have a significant amount of real estate loans,
depressed real estate values and real estate sales could 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 financial condition. The recent
changes in the federal tax laws enacted in 2017 under the Tax
Cuts and Jobs Act may have an adverse effect on the market for,
and the valuation of, residential properties, and on the demand for
such loans in the future, and could make it harder for borrowers to
make their loan payments. These recent changes may also have a
disproportionate effect on taxpayers in states with high residential
home prices and high state and local taxes, like New Jersey. If
home ownership becomes less attractive, demand for mortgage
loans could decrease. The value of the properties securing loans
33
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1A Risk Factors
in our loan portfolio may be adversely impacted as a result of the
changing economics of home ownership, which could require an
increase in our provision for loan losses, which would reduce our
profitability and could materially adversely affect our business,
financial condition and results of operations.
Additionally, we target our business development and marketing
strategy for loans to serve primarily the banking and financial
services needs of small- to medium-sized businesses in northern
and central New Jersey and eastern Pennsylvania. These
businesses generally have fewer financial resources in terms
of capital or borrowing capacity than larger entities. If general
economic conditions negatively impact these businesses,
our results of operations and financial condition may be
adversely affected.
We may be adversely affected by recent
changes in tax laws.
The Tax Act is likely to have both positive and negative effects
on our financial performance. For example, the new legislation
resulted in a reduction in the federal corporate tax rate from 35%
to 21% beginning in 2018, which will have a favorable impact
on our earnings and capital generation abilities. However, the
new legislation also enacted limitations on certain deductions that
will have an impact on the banking industry, borrowers and the
market for single-family residential real estate. These limitations
include (1) a lower limit on the deductibility of mortgage interest
on single-family residential mortgage loans, (2) the elimination of
interest deductions for certain home equity loans, (3) a limitation
on the deductibility of business interest expense, and (4) a
limitation on the deductibility of property taxes and state and
local income taxes.
The recent changes in the federal tax laws may have an adverse
effect on the market for, and the valuation of, residential properties,
and on the demand for such loans in the future and could make
it harder for borrowers to make their loan payments. In addition,
these recent changes may also have a disproportionate effect
on taxpayers in states with high residential home prices and high
state and local taxes, like New Jersey and New York. If home
ownership becomes less attractive, demand for mortgage loans
could decrease. The value of the properties securing loans in
our loan portfolio may be adversely impacted as a result of the
changing economics of home ownership, which could require an
increase in our provision for loan losses, which would reduce our
profitability and could materially adversely affect our business,
financial condition and results of operations.
Additionally, legislation in New Jersey that was adopted in July
2018 will increase our state income tax liability and could increase
our overall tax expense. The legislation imposes a temporary
surtax on corporations earning New Jersey allocated income
in excess of $1 million of 2.5% for tax years beginning on or
after January 1, 2018 through December 31, 2019, and of 1.5%
for tax years beginning on or after January 1, 2020 through
December 31, 2021. The new legislation also requires combined
filing for members of an affiliated group for tax years beginning
on or after January 1, 2019, changing New Jersey’s current
status as a separate return state, and limits the deductibility of
dividends received. These changes are not temporary. Regulations
implementing the legislative changes have not yet been issued, so
we cannot yet fully evaluate the impact of the legislation on our
overall tax expense. However, the new legislation may cause us
to lose the benefit of certain of our tax management strategies
and may cause our total tax expense to increase.
A failure in or breach of our operational
or security systems or infrastructure, or
those of third parties, could disrupt our
businesses, and adversely impact our
results of operations, liquidity and
financial condition, as well as cause
reputational harm.
The Bank collects, processes and stores sensitive consumer data
by utilizing computer systems and telecommunications networks
operated by both the Bank and third-party service providers. Our
operational and security systems, infrastructure, including our
computer systems, data management, and internal processes, as
well as those of third parties, are integral to our business. We rely
on our employees and third parties in our day-to-day and ongoing
operations, who may, as a result of human error, misconduct
or malfeasance, or failure or breach of third- party systems or
infrastructure, expose us to risk. We have taken measures to
implement backup systems and other safeguards to support our
operations, but our ability to conduct business may be adversely
affected by any significant disruptions to us or to third parties with
whom we interact. In addition, our ability to implement backup
systems and other safeguards with respect to third-party systems
is more limited than with our own systems.
We handle a substantial volume of customer and other financial
transactions every day. Our financial, accounting, data processing,
check processing, electronic funds transfer, loan processing,
online and mobile banking, automated teller machines, or ATMs,
backup or other operating or security systems and infrastructure
may fail to operate properly or become disabled or damaged as
a result of a number of factors including events that are wholly
or partially beyond our control. This could adversely affect our
ability to process these transactions or provide these services.
There could be sudden increases in customer transaction
volume, electrical, telecommunications or other major physical
infrastructure outages, natural disasters, events arising from
local or larger scale political or social matters, including terrorist
acts, and cyber attacks. We continuously update these systems
to support our operations and growth. This updating entails
significant costs and creates risks associated with implementing
new systems and integrating them with existing ones. Operational
risk exposures could adversely impact our results of operations,
liquidity and financial condition, and cause reputational harm.
34
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1A Risk Factors
A cyber attack, information or security
breach, or a technology failure of ours or
of a third-party could adversely affect our
ability to conduct our business or manage
our exposure to risk, result in the disclosure
or misuse of confidential or proprietary
information, increase our costs to maintain
and update our operational and security
systems and infrastructure, and adversely
impact our results of operations, liquidity
and financial condition, as well as cause
reputational harm.
Our business is highly dependent on the security and efficacy of
our infrastructure, computer and data management systems, as
well as those of third parties with whom we interact. Cyber security
risks for financial institutions have significantly increased in recent
years in part because of the proliferation of new technologies,
the use of the Internet and telecommunications technologies to
conduct financial transactions, and the increased sophistication
and activities of organized crime, hackers, terrorists and other
external parties, including foreign state actors. Our operations rely
on the secure processing, transmission, storage and retrieval of
confidential, proprietary and other information in our computer and
data management systems and networks, and in the computer
and data management systems and networks of third parties.
We rely on digital technologies, computer, database and email
systems, software, and networks to conduct our operations.
In addition, to access our network, products and services, our
customers and third parties may use personal mobile devices or
computing devices that are outside of our network environment.
Financial services institutions have been subject to, and are
likely to continue to be the target of, cyber attacks, including
computer viruses, malicious or destructive code, phishing attacks,
denial of service or other security breaches that could result in
the unauthorized release, gathering, monitoring, misuse, loss or
destruction of confidential, proprietary and other information of
the institution, its employees or customers or of third parties,
or otherwise materially disrupt network access or business
operations. For example, denial of service attacks have been
launched against a number of large financial institutions and
several large retailers have disclosed substantial cyber security
breaches affecting debit and credit card accounts of their
customers. We have experienced cyber security incidents in the
past, although not material, and we anticipate that, as a larger
bank, we could experience further incidents. There can be no
assurance that we will not suffer material losses or other material
consequences relating to technology failure, cyber attacks or
other information or security breaches.
In addition, there have been instances where financial institutions
have been victims of fraudulent activity in which criminals pose
as customers to initiate wire and automated clearinghouse
transactions out of customer accounts. The recent massive breach
of the systems of a credit bureau presents additional threats as
criminals now have more information about a larger portion of the
population of the United States than past breaches have involved,
which could be used by criminals to pose as customers initiating
transfers of money from customer accounts. Although the Bank
has policies and procedures in place to verify the authenticity of
its customers, the Bank cannot assure that such policies and
procedures will prevent all fraudulent transfers. Such activity can
result in financial liability and harm to our reputation.
Misconduct by employees could also result in fraudulent, improper
or unauthorized activities on behalf of clients or improper use of
confidential information. The Bank may not be able to prevent
employee errors or misconduct, and the precautions the Bank
takes to detect this type of activity might not be effective in all
cases. Employee errors or misconduct could subject the Bank
to civil claims for negligence or regulatory enforcement actions,
including fines and restrictions on our business.
As cyber threats and other fraudulent activity continues to evolve,
we may be required to expend significant additional resources to
continue to modify and enhance our protective measures or to
investigate and remediate any information security vulnerabilities
or incidents. Any of these matters could result in our loss of
customers and business opportunities, significant disruption
to our operations and business, misappropriation or destruction
of our confidential information and/or that of our customers, or
damage to our customers’ and/or third parties’ computers or
systems, and could result in a violation of applicable privacy laws
and other laws, litigation exposure, regulatory fines, penalties
or intervention, loss of confidence in our security measures,
reputational damage, reimbursement or other compensatory
costs, and additional compliance costs. In addition, any of the
matters described above could adversely impact our results of
operations and financial condition.
We rely on third-party providers and other
suppliers for a number of services that are
important to our business. An interruption
or cessation of an important service by any
third-party could have a material adverse
effect on our business.
We are dependent for the majority of our technology, including our
core operating system, on third-party providers. If these companies
were to discontinue providing services to us, we may experience
significant disruption to our business. In addition, each of these
third parties faces the risk of cyber attack, information breach or
loss, or technology failure. If any of our third-party service providers
experience such difficulties, or if there is any other disruption in
our relationships with them, we may be required to find alternative
sources of such services. We are dependent on these third-party
providers securing their information systems, over which we have
limited control, and a breach of their information systems could
adversely affect our ability to process transactions, service our
clients or manage our exposure to risk and could result in the
disclosure of sensitive, personal customer information, which
could have a material adverse impact on our business through
damage to our reputation, loss of business, remedial costs,
additional regulatory scrutiny or exposure to civil litigation and
possible financial liability. Assurance cannot be provided that we
35
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1A Risk Factors
could negotiate terms with alternative service sources that are
as favorable or could obtain services with similar functionality as
found in existing systems without the need to expend substantial
resources, if at all, thereby resulting in a material adverse impact
on our business and results of operations.
We operate in a highly regulated
environment and may be adversely affected
by changes in laws and regulations.
We are subject to the extensive regulation, supervision and
examination of various regulatory authorities, but primarily by the
New Jersey Department of Banking and Insurance, our chartering
authority, and by the FDIC, as insurer of our deposits. As a bank
holding company, we are subject to regulation and oversight
by the Federal Reserve Board. 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
classification 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
trends identified in examinations, including the potential issuance
of formal enforcement orders. Actions taken to date, as well as
potential actions, may not have the beneficial 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 significantly affect
the markets in which we do business, the markets for and value
of our loans and investments, and our ongoing operations, costs
and profitability.
We will be subject to heightened regulatory
requirements when we exceed total assets
of $10 billion.
Provident’s total assets were $9.73 billion at December 31,
2018. Banks with assets in excess of $10 billion are subject
to requirements imposed by the Dodd-Frank Act and its
implementing regulations including the examination authority
of the Consumer Financial Protection Bureau to assess our
compliance with federal consumer financial laws, imposition of
higher FDIC premiums, reduced debit card interchange fees, and
enhanced risk management frameworks, all of which increase
operating costs and reduce earnings.
As we approach $10 billion in assets, we continue to incur
additional costs to prepare for the implementation of these
imposed requirements. We may be required to invest more
significant management attention and resources to evaluate and
continue to make any changes necessary to comply with new
statutory and regulatory requirements under the Dodd-Frank Act.
Further, federal financial regulators may require us to accelerate
our actions and investments to prepare for compliance before we
exceed $10 billion in total consolidated assets, and may suspend
or delay certain regulatory actions, such as approving a merger
agreement, if they deem our preparations to be inadequate. Upon
reaching this threshold, we face the risk that we may fail to meet
these requirements, which may negatively impact our results of
operations and financial condition. While we cannot predict what
effect any presently contemplated or future changes in the laws
or regulations or their interpretations would have on us, these
changes could be material.
A general economic slowdown or uncertainty
that produces either reduced returns or
excessive market volatility could adversely
impact our overall profitability, including our
wealth management fee income.
A general economic slowdown could affect our core banking
business. Furthermore, uncertainty and market volatility regardless
of overall market conditions could affect the value of the assets
under management in our wealth management business resulting
in lower fee income. Conditions that produce extended market
volatility could affect our ability to provide our clients with an
adequate return, thereby impacting our ability to attract new
clients or causing existing clients to seek more stable investment
opportunities with alternative wealth advisors.
Strong competition within our market area
may limit our growth and profitability.
Competition in the banking and financial services industry is
intense and expanding with entrants into our market providing
new and innovative technology-driven financial solutions. Our
profitability depends upon our continued ability to successfully
compete in our market area. We compete with commercial banks,
savings institutions, mortgage banking firms, credit unions, finance
companies, investment advisers, wealth managers, mutual funds,
insurance companies, online lenders, large non-bank participants,
and brokerage and investment banking firms operating both
locally and elsewhere.
In particular, over the past decade, our local markets have
experienced the effects of substantial banking consolidation, and
large out-of-state competitors have grown significantly. 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. There are
also a number of strong locally-based competitors with large capital
positions in our market who may deploy aggressive strategies to
drive growth, take our customers and win market share.
36
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART I
Item 1A Risk Factors
Furthermore, key components of the financial services value chain
have been replicated by digital innovation, commonly referred
to as Fintech. The adoption of these Fintech solutions within
our market area may cause greater and faster disruption to our
business model if we are unable to keep pace with, or invest
wisely in, these enabling technologies.
Because the financial services business
involves a high volume of transactions, we
face significant operational risks.
We operate in diverse market segments and rely on the ability
of our employees, systems and third party providers, who are
used extensively in support of our operations, 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 deficiency
or as a result of noncompliance with applicable regulatory
standards, adverse business decisions or their implementation,
and customer attrition due to potential negative publicity. While we
maintain a risk management program that is designed to minimize
risk, we could suffer losses, face regulatory action, and suffer
damage to our reputation as a result of our failure to properly
anticipate and manage these risks.
Acts of terrorism 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 Philadelphia areas
remain central targets for potential acts of terrorism, including
cyber terrorism, which could affect not only our operations but
those of our customers. Events such as these may become more
common in the future and could cause significant damage such as
disrupt 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, which could 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 financial condition.
A State Bank in New Jersey could be
disruptive to our overall strategies and
potentially reduce the level of public funds
held on deposit with us.
We maintain a large and relatively stable level of deposits from
local government entities, primarily through relationships we have
cultivated with New Jersey municipalities. These deposits are a
relatively low-cost source used to fund our loans and investments.
The State of New Jersey is considering creating a State Bank,
whose purpose would be to promote small businesses, fair
educational lending, housing, infrastructure improvements,
community development, economic development, commerce
and industry in the State. As currently proposed, it intends to
permit State funds, including funds from State institutions and
any State public source, to be held by the State Bank. There can
be no assurance that legislation to create a State Bank will pass
or whether it will pass as currently proposed.
Given the degree of our funding reliance on many New Jersey-
based public entities and the potential scope of the proposed
State Bank’s lending activities, we are uncertain of the impact this
proposal may have on us. If we are unable to retain the current
level of public funds on deposit, we may need to increase the
costs associated with our funding needs, which could have a
negative impact on our net income.
37
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART I
Item 1B Unresolved Staff Comments
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, 2018, the Bank conducted business through
84 full-service branch offices located in Bergen, Essex, Hudson,
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 Bank maintains satellite loan production offices in Convent
Station, Flemington, Paramus and Princeton, New Jersey,
as well as in Bethlehem, Newtown and Wayne, Pennsylvania.
The aggregate net book value of premises and equipment was
$58.1 million at December 31, 2018.
Item 3. Legal Proceedings
On December 13, 2017, the Company completed the sale and
leaseback of 12 of its New Jersey banking offices, which had a
net book value of $14.5 million. Net proceeds from the sale totaled
$20.7 million. The transaction did not have a significant immediate
impact on the Company’s financial statements as the resultant
net gain on sale will be recognized over the 10 year term of the
leases as a reduction of rent expense.
The Company’s executive offices are located in a leased facility at
239 Washington Street, Jersey City, New Jersey, which is also the
Bank’s Main Office. The Bank’s administrative offices 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 financial condition and results
of operations.
Item 4. Mine Safety Disclosures
Not applicable.
38
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART II
Item 5 Market For Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
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 1, 2019, there were 83,209,293 shares of the
Company’s common stock issued and 66,580,600 shares
outstanding, and approximately 4,731 stockholders of record.
On February 1, 2019, the Board of Directors declared a quarterly
cash dividend of $0.23 per common share and a special cash
dividend of $0.20 per common share, which were both paid on
February 28, 2019, to common stockholders of record as of the
close of business on February 15, 2019. 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 financial 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.
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, 2013 through December 31, 2018, (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
NYSE and NASDAQ stock exchange. Cumulative return assumes
the reinvestment of dividends and is expressed in dollars based
on an assumed investment of $100 on December 31, 2013.
Total Return Performance
$148.25
$124.09
$123.87
$
180
160
140
120
100
80
l
e
u
a
V
x
e
d
n
I
2013
2014
2015
2016
2017
2018
● Provident Financial Services, Inc. ● Russell 2000 ● SNL Thrift
Period Ending
Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Provident Financial Services, Inc.
Russell 2000
SNL Thrift
100.00
100.00
100.00
96.80
104.89
107.55
111.72
100.26
120.94
162.44
121.63
148.14
160.48
139.44
147.06
148.25
124.09
123.87
39
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART II
Item 6 Selected Financial Data
The following table reports information regarding purchases of the Company’s common stock during the fourth quarter of 2018 under
the stock repurchase plan approved by the Company’s Board of Directors:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of
Shares Purchased
(b) Average Price
Paid per Share
October 1, 2018 through October 31, 2018
36,247
$ 22.47
November 1, 2018 through November 30,
2018
December 1, 2018 through December 31,
2018
TOTAL
1,713
25.24
519,710
557,670
23.41
$ 23.36
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs(1)
(d) Maximum
Number of Shares that
May Yet Be Purchased
Under the Plans or
Programs(1)(2)
36,247
1,713
519,710
557,670
3,032,480
3,030,767
2,511,057
(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. The allotment of shares for repurchase under this program was filled in December 2018, whereafter repurchases of the Company’s
common stock were made under the eighth general repurchase program.
(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.
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 financial statements of the Company presented in Item 8.
(In thousands)
Selected Financial Condition Data:
Total assets
Loans, net(1)
Held to maturity debt securities
Available for sale debt securities
Deposits
Borrowed funds
Stockholders’ equity
At December 31,
2018
2017
2016
2015
2014
$ 9,725,769 $ 9,845,274 $ 9,500,465 $ 8,911,657 $ 8,523,377
7,195,026
7,265,523
6,941,603
6,476,250
6,023,771
479,425
477,652
488,183
1,063,079
1,037,154
1,039,837
473,684
964,014
469,528
1,073,871
6,830,122
6,714,166
6,553,629
5,923,987
5,792,523
1,442,282
1,742,514
1,612,745
1,707,632
1,509,851
1,358,980
1,298,661
1,251,781
1,196,065
1,144,099
(1) Loans are shown net of allowance for loan losses, deferred fees and unearned discount.
40
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART II
Item 6 Selected Financial Data
For the Years Ended December 31,
2018
2017
2016
2015
2014
$
359,829 $
323,846 $
302,315 $
291,781 $
279,361
59,153
300,676
23,700
276,976
58,676
191,735
143,917
25,530
45,644
278,202
5,600
272,602
55,697
187,822
140,477
46,528
43,748
258,567
5,400
253,167
55,393
183,778
124,782
36,980
41,901
249,880
4,350
245,530
55,222
180,589
120,163
36,441
40,472
238,889
4,650
234,239
41,168
169,991
105,416
31,785
$
118,387 $
93,949 $
87,802 $
83,722 $
73,631
$
$
1.82 $
1.82 $
1.46 $
1.45 $
1.38 $
1.38 $
1.33 $
1.33 $
1.22
1.22
At or For the Years Ended December 31,
2018
2017
2016
2015
2014
1.22%
0.99%
0.95%
0.96%
0.92%
8.93
3.20
3.39
1.29
0.60
1.97
7.28
3.07
3.21
1.27
0.58
1.97
7.12
2.98
3.11
1.25
0.60
1.99
7.12
3.07
3.20
1.24
0.64
2.07
6.75
3.18
3.30
1.22
0.51
2.11
53.36
56.25
58.54
59.19
60.70
(In thousands, except per share data)
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
Earnings per share:
Basic earnings per share
Diluted earnings per share
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
Efficiency ratio(3)
Asset Quality Ratios:
Non-performing loans to total loans
Non-performing assets to total assets
Allowance for loan losses to non-performing loans
Allowance for loan losses to total loans
0.35%
0.28
216.28
0.77
0.48%
0.42
172.34
0.82
0.61%
0.53
145.95
0.88
0.68%
0.62
137.92
0.94
0.88%
0.69
114.63
1.01
Capital Ratios:
Leverage capital(4)
Total risk based capital(4)
Average equity to average assets
Other Data:
Number of full-service offices
Full time equivalent employees
10.24%
9.65%
9.25%
9.25%
9.21%
13.27
13.61
84
1,002
12.67
13.53
84
1,006
12.50
13.38
87
1,001
12.57
13.53
87
1008
13.06
13.57
86
967
(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.
41
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In thousands)
Efficiency Ratio Calculation:
Net interest income
Non-interest income
TOTAL INCOME
2018
2017
2016
2015
2014
At December 31,
$
300,676
$
278,202
$
258,567
$
249,880
$
238,889
58,676
55,697
55,393
55,222
41,168
$ 359,352
$ 333,899
$ 313,960
$ 305,102
$ 280,057
NON-INTEREST EXPENSE
$ 191,735
$ 187,822
$ 183,778
$ 180,589
$ 169,991
EXPENSE/INCOME
53.36%
56.25%
58.54%
59.19%
60.70%
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
full-service branches and loan production offices 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.
The Bank’s strategy is to grow profitably 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 mortgage,
multi-family, construction 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 lending policy focuses on quality underwriting
standards and close monitoring of the loan portfolio. At December
31, 2018, these commercial loan types accounted for 78.9% of the
loan portfolio and retail loans accounted for 21.1%. The Company
intends to continue to focus on commercial mortgage, multi-family,
construction 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 markets. Core deposits, consisting of
savings and demand deposit accounts, are generally a stable,
relatively inexpensive source of funds. At December 31, 2018,
core deposits were 89.0% of total deposits.
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 may result in a decrease in the Company’s
average interest rate spread and net interest income, which could
have a negative effect on profitability. The Company generates
non-interest income such as income from retail and business
account fees, loan servicing fees, loan origination fees, loan
level swap 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 benefits 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.
42
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Acquisition
On January 22, 2019, Beacon announced the signing of a definitive agreement to acquire New York City-based Tirschwell & Loewy,
Inc., an independent registered investment adviser. The transaction is subject to the satisfaction of customary closing conditions and
is anticipated to close in the second quarter of 2019.
Critical Accounting Policies
The Company considers certain accounting policies to be critically
important to the fair presentation of its financial 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 financial statements to these critical accounting
policies, and the assumptions and estimates applied, could
have a significant impact on its financial condition and results
of operations. These assumptions, estimates and judgments
made by management can be influenced by a number of factors,
including the general economic environment. The Company has
identified the following as critical accounting policies:
zz Adequacy of the allowance for loan losses
zz 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 reflects 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.
Management’s evaluation of the adequacy of the allowance for
loan losses includes a 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 status. For commercial mortgage, multi-family,
construction and commercial loans, an extensive review of
financial performance, payment history and collateral values is
conducted on a quarterly basis.
As part of its 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 classifications (substandard, doubtful or loss) are rated
7, 8 or 9, respectively. Commercial mortgage, multi-family,
construction and commercial loans are rated individually and each
lending officer is responsible for risk rating loans in their portfolio.
These risk ratings are then reviewed by the department manager
and/or the Chief Lending Officer and the Credit Department.
The risk ratings are also confirmed through periodic loan review
examinations, which are currently performed by an independent
third party, and periodically by the Credit Committee in the credit
renewal or approval process. 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 rating.
Management estimates the amount of loan losses for groups of
loans by applying quantitative loss factors to loan segments at
the risk rating level, and applying qualitative adjustments to each
loan segment at the portfolio level. Quantitative loss factors give
consideration to historical loss experience by loan type based
upon an appropriate look-back period and adjusted for a loss
emergence period. Quantitative loss factors are evaluated at
least annually. Management completed its annual evaluation of
the quantitative loss factors for the quarter ended September 30,
2018. Qualitative adjustments give consideration to other
qualitative or environmental factors such as trends and levels
of delinquencies, impaired loans, charge-offs, recoveries and
loan volumes, as well as national and local economic trends and
conditions. Qualitative adjustments reflect risks in the loan portfolio
not captured by the quantitative loss factors and, as such, are
evaluated from a risk level perspective relative to the risk levels
present over the look-back period. Qualitative adjustments are
recalibrated at least annually and evaluated at least quarterly. The
reserves resulting from the application of both of these sets of loss
factors are combined to arrive at the allowance for loan losses.
Management believes the primary risks inherent in the portfolio
are a general decline in the economy, a decline in real estate
market values, rising unemployment or a protracted period of
elevated unemployment, 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.
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
43
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
significantly from these estimates. Changes in estimates resulting
from continuing changes in the economic environment will be
reflected in the financial 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 significant
judgment and short-term change.
The determination of whether deferred tax assets will be realizable
is predicated on the reversal of existing deferred tax liabilities and
estimates of future taxable income. Such estimates are subject
to management’s judgment. 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. The Company did not require a valuation
allowance at December 31, 2018 and 2017.
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, 2018, 2017 and 2016. 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.
44
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
For the Years Ended December 31,
2018
2017
2016
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
$
13,867 $
269
1.91% $
19,670 $
199
1.00% $
62,704 $
314
.50%
50,351
1465
2.92
51,790
1071
2.07
13,010
184
1.42
472,690
12,606
2.67
487,616
13,027
2.67
478,901
13,208
2.76
1,046,701
26,074
2.49
1,044,116
22,384
2.14
1,008,372
19,377
1.92
683
—
—
587
—
—
528
—
—
72,364
7,208,420
4,907
314,508
6.78
4.36
73,995
6,971,512
4,061
283,104
5.49
4.06
72,928
6,669,778
3,513
265,719
4.82
3.98
8,865,076
359,829
4.06
8,649,286
323,846
3.74
8,306,221
302,315
3.64
871,373
$ 9,736,449
885,499
$ 9,534,785
906,332
$ 9,212,553
$ 1,070,868
3,575,306
671,671
1,535,906
1,923
20,450
8,320
28,460
0.18% $
0.57
1.24
1,101,103
3,477,413
649,195
2,092
12,205
5,144
0.19% $
0.35
0.79
1,047,061
3,305,269
725,802
1,709
10,106
5,132
0.16%
0.31%
0.71%
1.85
1,581,964
26,203
1.66
1,577,307
26,801
1.70
6,853,751
59,153
0.86
6,809,675
45,644
0.67
6,655,439
43,748
0.66
1,463,662
93,825
1,557,487
8,411,238
1,325,211
1,366,354
68,783
1,435,137
8,244,812
1,289,973
1,243,224
81,044
1,324,268
7,979,707
1,232,846
$ 9,736,449
$ 9,534,785
$ 9,212,553
$ 300,676
$278,202
$ 258,567
(Dollars in thousands)
Interest-earning assets:
Deposits
Federal funds sold and
short-term investments
Held to maturity debt
securities
Available for sale debt
securities
Equity Securities, At Fair
Value
Federal Home Loan Bank
NY Stock
Net loans(2)
Total interest-earning
assets
Non-interest earning
assets
TOTAL ASSETS
Interest-bearing
liabilities:
Savings deposits
Demand deposits
Time deposits
Borrowed funds
Total interest-bearing
liabilities
Non-interest bearing
liabilities:
Non-interest bearing
deposits
Other Non-interest
bearing liabilities
Total Non-Interest
Bearing Liabilities
Total liabilities
Stockholders’ equity
TOTAL LIABILITIES
AND EQUITY
NET INTEREST
INCOME
NET INTEREST RATE
SPREAD
Net interest earning assets $ 2,011,325
NET INTEREST
MARGIN(3)
RATIO OF INTEREST-
EARNING ASSETS
TO TOTAL INTEREST-
BEARING LIABILITIES
1.29x
3.20%
3.39%
$
1,839,611
$
1,650,782
3.07%
3.21%
2.98%
3.11%
1.27x
1.25x
(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.
45
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 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.
Years Ended December 31,
2018 vs. 2017
2017 vs. 2016
Increase/(Decrease)
Due to
Volume
Rate
Total
Increase/
(Decrease)
Increase/(Decrease)
Due to
Volume
Rate
Total
Increase/
(Decrease)
$
(779) $
1,243
$
464
$
1
$
771
$
(398)
58
(91)
9,844
8,634
(9)
330
20
(781)
(440)
(23)
3,632
937
21,560
27,349
(160)
7,915
3,156
3,038
(421)
3,690
846
31,404
35,983
(169)
8,245
3,176
2,257
13,949
13,509
238
706
52
12,185
13,182
92
547
(572)
79
146
(419)
2,301
496
5,200
8,349
292
1,551
584
(677)
1,750
772
(181)
3007
548
17,385
21,531
384
2,098
12
(598)
1,896
(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
NET INTEREST INCOME
$
9,074 $
13,400 $
22,474
$
13,036
$
6,599
$
19,635
Comparison of Financial Condition at December 31, 2018 and December 31, 2017
Total assets decreased $119.5 million to $9.73 billion at
December 31, 2018, from $9.85 billion at December 31, 2017.
The decrease in total assets was primarily due to a $75.1 million
decrease in total loans and a $48.2 million decrease in total cash
and cash equivalents, partially offset by a $15.3 million increase
in total investments.
Total loans decreased $75.1 million to $7.25 billion at December 31,
2018, from $7.33 billion at December 31, 2017. For the year
ended December 31, 2018, loan originations, including advances
on lines of credit, totaled $3.16 billion, compared with $3.07 billion
at December 31, 2017. The loan portfolio had net decreases
of $64.2 million in multi-family mortgage loans, $50.2 million in
commercial loans, $42.9 million in residential mortgage loans and
$3.6 million in construction loans, partially offset by a net increase
of $128.2 million in commercial mortgage loans.
Commercial loans, consisting of commercial real estate,
multi-family, construction and commercial loans, totaled
$5.72 billion, accounting for 78.9% of the loan portfolio at
December 31, 2018, compared to $5.71 billion, or 77.9% of the
loan portfolio at December 31, 2017. 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 fixed-rate home equity
loans and lines of credit, totaled $1.53 billion and accounted for
21.1% of the loan portfolio at December 31, 2018, compared to
$1.62 billion, or 22.1%, of the loan portfolio at December 31, 2017.
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 $266.8 million and
$146.0 million, respectively, at December 31, 2018. At December
31, 2018, no SNC relationships were classified as substandard.
The Company had outstanding junior lien mortgages totaling
$171.1 million at December 31, 2018. Of this total, nine loans
totaling $579,000 were 90 days or more delinquent, and were
allocated total loss reserves of $104,000.
The allowance for loan losses decreased $4.6 million to
$55.6 million at December 31, 2018, as a result of net charge-offs
of $28.3 million during 2018, partially offset by provisions for
loan losses of $23.7 million. The decrease in the allowance for
loan losses was a function of the decline in non-performing
46
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
loans and a decrease in the loan portfolio. Total non-performing
loans at December 31, 2018 were $25.7 million, or 0.35% of
total loans, compared with $34.9 million, or 0.48% of total loans
at December 31, 2017. At December 31, 2018, impaired loans
totaled $50.7 million with related specific reserves of $1.2 million,
compared with impaired loans totaling $52.0 million with related
specific reserves of $2.7 million at December 31, 2017. Within
total impaired loans, there were $31.1 million of loans for which
the present value of expected future cash flows or current
collateral valuations exceeded the carrying amounts of the loans
and for which no specific reserves were required in accordance
with GAAP. At December 31, 2018, the Company’s allowance
for loan losses was 0.77% of total loans, compared with 0.82%
of total loans at December 31, 2017. The decline in the loan
coverage ratio from December 31, 2017, resulted from an overall
improvement in asset quality.
Non-performing commercial mortgage loans decreased
$3.9 million to $3.2 million at December 31, 2018, from $7.1 million
at December 31, 2017. At December 31, 2018, the Company
held 12 non-performing commercial mortgage loans. The largest
non-performing commercial mortgage loan was a $1.5 million loan
secured by a first mortgage on a property located in Somerville,
New Jersey. The loan is presently in default. There is no contractual
commitment to advance additional funds to this borrower.
Non-performing commercial loans decreased $1.9 million
to $15.4 million at December 31, 2018, from $17.2 million
at December 31, 2017. Non-performing commercial loans
at December 31, 2018 consisted of 29 loans. The largest
non-performing commercial loan relationship consisted of two
loans to a health and fitness club with total outstanding balances
of $7.9 million at December 31, 2018. Both of these loans are
secured by liens on a commercial property. These loans are
currently paying in accordance with their restructured terms.
There were no non-performing constructions loans at either
December 31, 2018 or the prior year-end.
At December 31, 2018, the Company held $1.6 million of
foreclosed assets, compared with $6.9 million at December 31,
2017. Foreclosed assets are carried at the lower of the outstanding
loan balance at the time of foreclosure or fair value, less estimated
costs to sell. During the year ended December 31, 2018, there
were nine additions to foreclosed assets with a carrying value
of $2.0 million and 20 properties sold with a carrying value of
$7.1 million. Foreclosed assets at December 31, 2018 consisted
of $1.6 million of residential real estate.
Non-performing assets totaled $27.3 million, or 0.28% of total
assets at December 31, 2018, compared to $41.8 million, or
0.42% of total assets at December 31, 2017. If the non-accrual
loans had performed in accordance with their original terms,
interest income would have increased by $1.4 million during
the year ended December 31, 2018. The amount of cash basis
interest income that was recognized on impaired loans during the
year ended December 31, 2018 was not material.
Total deposits increased $116.0 million, or 1.7%, during the
year ended December 31, 2018 to $6.83 billion. Time deposits
increased $115.7 million to $750.5 million at December 31,
2018, while total core deposits, which consist of savings and
demand deposit accounts, increased $273,000 to $6.08 billion at
December 31, 2018. The increase in time deposits was primarily
the result of a 13-month certificate of deposit promotional
campaign which provided the Company a lower-cost funding
alternative to wholesale borrowings. The increase in core deposits
for the year ended December 31, 2018 was largely attributable
to a $38.3 million increase in interest bearing demand deposits
and a $28.8 million increase in non-interest bearing demand
deposits, partially offset by a $35.7 million decrease in money
market deposits and a $31.1 million decrease in savings deposits.
At December 31, 2018, core deposits represented 89.0% of total
deposits compared to 90.5% at December 31, 2017.
Borrowed funds decreased $300.2 million, or 17.2%, during the
year ended December 31, 2018, to $1.44 billion, The decrease
in borrowings for the year was primarily a function of the inflow
of lower-cost deposits and lower asset funding requirements.
Borrowed funds represented 14.8% of total assets at December
31, 2018, a decrease from 17.7% at December 31, 2017.
Total stockholders’ equity increased $60.3 million, or 4.6%, to
$1.36 billion at December 31, 2018, from $1.30 billion at December
31, 2017. This increase resulted from net income earned during
the year of $118.4 million, partially offset by cash dividends paid
to stockholders of $53.6 million and a $4.7 million decrease in
other comprehensive income. Common stock repurchases for
the year ended December 31, 2018 totaled 635,436 shares at
an average cost of $23.69 per share. At December 31, 2018,
approximately 2.5 million shares remained eligible for repurchase
under the current authorization.
Comparison of Operating Results for the Years Ended December 31, 2018
and December 31, 2017
General
Net income for the year ended December 31, 2018 was
$118.4 million, compared to $93.9 million for the year ended
December 31, 2017. Basic and diluted earnings per share were
both $1.82 for the year ended December 31, 2018, compared
to basic and diluted earnings per share of $1.46 and $1.45,
respectively for 2017.
For the year ended December 31, 2018, the Company’s earnings
were positively impacted by lower Federal income tax rates,
period over period growth in average loans outstanding, growth
in both average non-interest and interest bearing deposits and the
continued expansion of the net interest margin. The improvement
in the net interest margin was driven by an increase in the yield
on interest-earning assets, growth in average non-interest
bearing deposits and a less sensitive and lagging cost of funds.
Included was a non-recurring $1.9 million tax benefit stemming
47
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
from the Company’s completion of a cost segregation study that
assigned shorter taxable lives to certain fixed assets. This benefit
contributed $0.03 per basic and diluted share for both the quarter
and year ended December 31, 2018. In addition, the Company
realized a $1.6 million, or $0.02 per share, net of tax gain on the
sale of Visa Class B common shares in the fourth quarter of 2018.
Net Interest Income
Net interest income increased $22.5 million to $300.7 million
for 2018, from $278.2 million for 2017. The interest rate spread
increased 13 basis points to 3.20% for 2018, from 3.07% for
2017. The net interest margin increased 18 basis points to 3.39%
for 2018, compared to 3.21% for 2017. For the year ended
December 31, 2018, the increase in net interest income was
primarily due to growth in average loans outstanding resulting
from organic originations and increases in both average interest
bearing core deposits and average non-interest bearing demand
deposits, combined with period-over-period expansion of the net
interest margin.
Interest income increased $36.0 million to $359.8 million for 2018,
compared to $323.8 million for 2017. The increase in interest
income was attributable to an increase in average earning asset
balances and an increase in the yield on average interest-earning
assets. Average interest-earning assets increased $215.7 million
to $8.87 billion for 2018, compared to $8.65 billion for 2017. The
increase in average earning assets was largely attributable to a
$236.9 million increase in average outstanding loan balances to
$7.21 billion for 2018 from $6.97 billion for 2017. This was partially
offset by a $13.9 million decrease in the average balance of the
total investment portfolio. The yield on interest-earning assets
increased 32 basis points to 4.06% for 2018, from 3.74% for
2017, mainly due to increases in the weighted average yields
on total loans, FHLBNY stock and the available for sale debt
securities portfolio. The weighted average yield on total loans
increased 30 basis points to 4.36% for 2018. The weighted
average yield on FHLBNY stock increased to 6.78% for 2018,
compared to 5.49% for 2017, and the weighted average yield
of available for sale debt securities increased 35 basis points to
2.49% for 2018, from 2.14% for 2017.
Interest expense increased $13.5 million to $59.2 million for 2018,
from $45.6 million for 2017. The increase in interest expense was
primarily attributable to an increase in average interest-bearing
deposits and an increase in the cost of interest-bearing liabilities.
The average rate paid on interest-bearing liabilities increased 19
basis points to 0.86% for 2018, compared to 2017. The average
rate paid on interest-bearing deposits increased 21 basis points
to 0.58% for 2018, from 0.37% for 2017. The average rate paid
on borrowings increased 19 basis points to 1.85% for 2018, from
1.66% for 2017. The average balance of interest-bearing liabilities
increased $44.1 million to $6.85 billion for 2018, compared to
$6.81 billion for 2017. Average interest-bearing deposits increased
$90.1 million to $5.32 billion for 2018, from $5.23 billion for 2017.
Within average interest-bearing deposits, average interest-bearing
core deposits increased $67.7 million to $4.65 billion for 2018,
compared with 2017, while average time deposits increased
$22.5 million for 2018, compared with 2017. Average non-interest
bearing demand deposits increased $97.3 million, or 7.1%,
to $1.46 billion for 2018, from $1.37 billion for 2017. Average
outstanding borrowings decreased $46.1 million, or 2.9%, to
$1.54 billion for 2018, compared to 2017.
Provision for Loan Losses
Provisions for loan losses are charged to operations in order 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 classified loans. The amount of the
allowance is based on estimates, and the ultimate losses may
vary from such estimates as more information becomes available
or later events change. Management assesses the 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
the origination of commercial loans has been one of the more
significant factors management has considered in evaluating the
allowance for loan losses and provision for loan losses for the
past several years. As the Company looks to further increase 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 $23.7 million in 2018, compared
to $5.6 million in 2017. The increase in the provision for loan
losses was primarily attributable to a $14.9 million loss related
to a commercial borrower that filed a Chapter 7 petition in
bankruptcy on March 27, 2018 for a liquidation of assets. Net
charge-offs for 2018 were $28.3 million, compared to $7.3 million
for 2017. Total charge-offs for the year ended December 31, 2018
were $30.0 million, compared to $8.9 million for the year
ended December 31, 2017. Recoveries for the year ended
December 31, 2018, were $1.7 million, compared to $1.7 million
for the year ended December 31, 2017. The allowance for loan
losses at December 31, 2018 was $55.6 million, or 0.77% of
total loans, compared to $60.2 million, or 0.82% of total loans,
at December 31, 2017. At December 31, 2018, non-performing
loans as a percentage of total loans were 0.35%, compared
to 0.48% at December 31, 2017. Non-performing assets as a
percentage of total assets were 0.28% at December 31, 2018,
compared to 0.42% at December 31, 2017. At December 31,
2018, non-performing loans were $25.7 million, compared
to $34.9 million at December 31, 2017, and non-performing
assets were $27.3 million at December 31, 2018, compared to
$41.8 million at December 31, 2017.
Non-Interest Income
For the year ended December 31, 2018, non-interest income
totaled $58.7 million, an increase of $3.0 million, compared to
the same period in 2017. Net gains on securities transactions
increased $2.2 million for the year ended December 31, 2018, due
48
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
to the sale of Visa Class B common shares. Fee income increased
$866,000 to $28.1 million, compared to the same period in 2017,
largely due to a $287,000 increase in income from non-deposit
investment products, a $248,000 increase in loan related fee
income and a $238,000 increase in debit card revenue, partially
offset by a $126,000 decrease in prepayment fees on commercial
loans. Other income increased $775,000 to $4.9 million for the
year ended December 31, 2018, primarily due to a $764,000
increase in net fees on loan-level interest rate swap transactions.
Also, wealth management income increased $353,000 to
$18.0 million for the year ended December 31, 2018, compared
to $17.6 million for the same period in 2017, due to increased
revenue from investment advisory fees, including revenue from
two mutual funds that were established in October 2017.
Partially offsetting these increases, income from bank owned life
insurance decreased $1.2 million to $5.5 million for the year ended
December 31, 2018, compared to the same period in 2017, due
to a decrease in benefit claims and lower equity valuations.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2018
was $191.7 million, an increase of $3.9 million from 2017. Other
operating expenses increased $2.3 million to $31.1 million for the
year ended December 31, 2018, compared to $28.8 million for
the same period in 2017, largely due to increases in consulting,
examination and debit card maintenance expenses, partially
offset by decreases in loan collection expense and foreclosed real
estate expense. Compensation and benefits expense increased
$2.1 million to $111.5 million for the year ended December 31,
2018, compared to $109.4 million for the year ended December
31, 2017. This increase was primarily due to additional salary
expense related to annual merit increases, combined with
increases in severance, stock-based compensation and employee
medical expenses, partially offset by a decrease in the accrual
for incentive compensation. Data processing costs increased
$742,000 to $14.7 million for the year ended December 31, 2018,
compared with 2017, due to increases in software maintenance,
online and mobile banking expenses. Partially offsetting these
increases in non-interest expense, amortization of intangibles
decreased $543,000 for the year ended December 31, 2018,
compared with 2017, as a result of scheduled reductions in
amortization. FDIC insurance expense decreased $405,000
to $3.5 million for year ended December 31, 2018, compared
to $3.9 million for the same period in 2017, primarily due to a
reduction in the insurance assessment rate. Additionally, net
occupancy costs decreased $234,000, to $25.1 million for the
year ended December 31, 2018, compared to 2017, primarily
due to a decrease in building depreciation.
Income Tax Expense
For the year ended December 31, 2018, the Company’s income
tax expense was $25.5 million, compared with $46.5 million, for
the same period in 2017. The Company’s effective tax rate was
17.7% for the year ended December 31, 2018, compared with
33.1% for the year ended December 31, 2017. The decrease
in tax expense and the lower effective tax rates for year ended
December 31, 2018, were favorably impacted by the Tax Act,
which, effective January 1, 2018, reduced the statutory federal
income tax rate from 35% to 21%; and the recognition of a
non-recurring $1.9 million tax benefit related to the Company’s
completion of a cost segregation study that assigned shorter
taxable lives to select fixed assets. The tax rates for 2017 included
an additional tax expense of $4.0 million related to the enactment
of the Tax Act.
Comparison of Operating Results for the Years Ended December 31, 2017
and December 31, 2016
General
Net Interest Income
Net income for the year ended December 31, 2017 was
$93.9 million, compared to $87.8 million for the year ended
December 31, 2016. Basic and diluted earnings per share
were $1.46 and $1.45 for the year ended December 31, 2017,
respectively, compared to basic and diluted earnings per share
of $1.38 for 2016.
As a result of the enactment of the Tax Act on December 22,
2017, the Company recognized additional tax expense of
$3.9 million for the year ended December 31, 2017. Offsetting
the effect of the change in tax law, earnings for the year ended
December 31, 2017 were favorably impacted by year-over-year
growth in average loans outstanding, growth in both average
non-interest bearing and interest bearing core deposits and
expansion of the net interest margin. The improvement in the net
interest margin was driven by the upward repricing of adjustable
rate assets and relatively stable cost of funds.
Net interest income increased $19.6 million to $278.2 million for
2017, from $258.6 million for 2016. The average interest rate
spread increased nine basis points to 3.07% for 2017, from
2.98% for 2016. The net interest margin increased ten basis
points to 3.21% for 2017, compared to 3.11% for 2016. For
the year ended December 31, 2017, the increase in net interest
income was largely due to growth in average loans outstanding,
growth in average core deposits, and expansion in the net interest
margin.
Interest income increased $21.5 million, or 7.1%, to $323.8 million
for 2017, compared to $302.3 million for 2016. The increase
in interest income was attributable to an increase in average
earning asset balances and an increase in the yield on average
interest-earning assets. Average interest-earning assets increased
$343.1 million, or 4.1%, to $8.65 billion for 2017, compared to
$8.31 billion for 2016. The average outstanding loan balances
increased $301.7 million, or 4.5%, to $6.97 billion for 2017 from
49
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
$6.67 billion for 2016, the average balance of securities available
for sale increased $35.8 million, or 3.5%, to $1.04 billion for 2017,
compared to $1.01 billion for 2016, and the average balance of
investment securities held to maturity increased $8.7 million, or
1.8%, to $487.6 million for 2017, compared to $478.9 million for
2016. The yield on interest-earning assets increased ten basis
points to 3.74% for 2017, from 3.64% for 2016, mainly due to
increases in the weighted average yields on total loans, FHLBNY
stock and the securities available for sale portfolio.
Interest expense increased $1.9 million, or 4.3%, to $45.6 million
for 2017, from $43.7 million for 2016. The increase in interest
expense was primarily attributable to an increase in average
interest-bearing deposits for the year, which combined with
an increase in non-interest bearing deposits largely funded the
growth in average interest-earning assets. The increase in interest
expense was partially offset by a shift in the funding composition
to lower-costing core deposits from time deposits and borrowings.
The average rate paid on interest-bearing liabilities increased one
basis point to 0.67% for 2017, compared to 2016. The average
rate paid on interest-bearing deposits increased four basis points
to 0.37% for 2017, from 0.33% for 2016. The average rate paid on
borrowings decreased four basis points to 1.66% for 2017, from
1.70% for 2016. The average balance of interest-bearing liabilities
increased $154.2 million to $6.81 billion for 2017, compared to
$6.66 billion for 2016. Average interest-bearing deposits increased
$149.6 million, or 2.9%, to $5.23 billion for 2017, from $5.08 billion
for 2016. Within average interest-bearing deposits, average
interest-bearing core deposits increased $226.2 million, or 5.2%
for 2017, compared with 2016, while average time deposits
decreased $76.6 million, or 10.6% for 2017, compared with 2016.
Average non-interest bearing demand deposits increased
$123.1 million, or 9.9%, to $1.37 billion for 2017, from $1.24 billion
for 2016. Average outstanding borrowings decreased $4.7 million,
or 0.3%, to $1.58 billion for 2017, compared to 2016.
Provision for Loan Losses
The provision for loan losses was $5.6 million in 2017,
compared to $5.4 million in 2016. The increase in the
provision for loan losses was primarily attributable to
year-over-year growth in the loan portfolio. Net charge-offs for
2017 were $7.3 million, compared to $4.9 million for 2016. Total
charge-offs for the year ended December 31, 2017 were
$8.9 million, compared to $7.0 million for the year ended
December 31, 2016. Recoveries for the year ended December 31,
2017, were $1.7 million, compared to $2.0 million for the year
ended December 31, 2016. The allowance for loan losses at
December 31, 2017 was $60.2 million, or 0.82% of total loans,
compared to $61.9 million, or 0.88% of total loans, at December
31, 2016. At December 31, 2017, non-performing loans as a
percentage of total loans were 0.48%, compared to 0.61% at
December 31, 2016. Non-performing assets as a percentage
of total assets were 0.42% at December 31, 2017, compared
to 0.53% at December 31, 2016. At December 31, 2017,
non-performing loans were $34.9 million, compared to
$42.4 million at December 31, 2016, and non-performing
assets were $41.8 million at December 31, 2017, compared to
$50.4 million at December 31, 2016.
Non-Interest Income
For the year ended December 31, 2017, non-interest income
totaled $55.7 million, an increase of $304,000, compared
to the same period in 2016. Income from Bank-owned life
insurance increased $1.2 million to $6.7 million for the year
ended December 31, 2017, compared to the same period in
2016, primarily due to the recognition of death benefit claims.
Fee income also increased $1.2 million to $27.2 million for the
year ended December 31, 2017, compared to the same period
in 2016, largely due to a $657,000 increase in commercial
loan prepayment fee income, a $397,000 increase in deposit
related fee income and a $229,000 increase in merchant fee
income, partially offset by a $218,000 decrease in income from
non-deposit investment products and a $43,000 decrease
in debit card revenue. Partially offsetting these increases in
non-interest income, other income decreased $2.1 million for
the year ended December 31, 2017, compared with the same
period in 2016, mainly due to a $910,000 decrease in net fees on
loan-level interest rate swap transactions, a $583,000 decrease in
net gains recognized on loan sales and a $335,000 non-recurring
gain recognized on the sale of deposits resulting from a strategic
branch divestiture in the prior year.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2017
was $187.8 million, an increase of $4.0 million from the year
ended December 31, 2016. Compensation and benefits expense
increased $3.2 million to $109.4 million for the year ended
December 31, 2017, compared to $106.1 million for the year
ended December 31, 2016. This increase was primarily due to
additional salary expense related to annual merit increases, an
increase in the accrual for incentive compensation and an increase
in stock-based compensation, partially offset by a decrease in
retirement benefit costs. Other operating expenses increased
$1.2 million to $28.8 million for the year ended December 31,
2017, compared to $27.6 million for the same period in 2016,
largely due to increases in consulting and debit card maintenance
expenses, partially offset by a decrease in loan collection expense.
Data processing costs increased $694,000 to $13.9 million for
the year ended December 31, 2017, compared with the same
period in 2016, due to increased software maintenance and
telecommunication costs. Net occupancy costs increased
$437,000, to $25.3 million for the year ended December 31,
2017, compared to the same period in 2016, resulting from an
increase in snow removal costs, combined with an increase in
facilities maintenance costs. Partially offsetting these increases
in non-interest expense, FDIC insurance expense decreased
$1.0 million to $3.9 million for year ended December 31,
2017, compared to $4.9 million for the same period in 2016.
This decrease was primarily due to the FDIC’s reduction of
assessment rates for depository institutions with less than
$10.0 billion in assets, which became effective in the quarter
ended September 30, 2016. Additionally, amortization of
intangibles decreased $721,000 for the year ended December 31,
2017, compared with the same period in 2016, as a result of
scheduled reductions in amortization.
50
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Income Tax Expense
For the year ended December 31, 2017, the Company’s income
tax expense was $46.5 million, compared with $37.0 million, for
the same period in 2016. The Company’s effective tax rate was
33.1% for the year ended December 31, 2017, compared with
29.6% for the year ended December 31, 2016. For the year ended
December 31, 2017, the increases in income tax expense and
the effective tax rate were a function of growth in pre-tax income
and the enactment of the Tax Act, which resulted in additional tax
expense of $3.9 million.
Liquidity and Capital Resources
Liquidity refers to the Company’s ability to generate adequate
amounts of cash to meet financial obligations to its depositors,
to fund loans and securities purchases, deposit outflows and
operating expenses. Sources of funds include scheduled
amortization of loans, loan prepayments, scheduled maturities
of investments, cash flows from mortgage-backed securities
and the ability to borrow funds from the FHLBNY and approved
broker-dealers.
Cash flows from loan payments and maturing investment
securities are fairly predictable sources of funds. Changes in
interest rates, local economic conditions and the competitive
marketplace can influence loan prepayments, prepayments on
mortgage-backed securities and deposit flows. For each of the
years ended December 31, 2018 and 2017, loan repayments
totaled $3.17 billion and $3.34 billion, respectively.
compared to $276.3 million for the year ended December 31,
2017. At December 31, 2018, the Bank had outstanding loan
commitments to borrowers of $1.49 billion, including undisbursed
home equity lines and personal credit lines of $233.9 million.
Total deposits increased $116.0 million for the year ended
December 31, 2018. Deposit activity is affected by changes in
interest rates, competitive pricing and product offerings in the
marketplace, local economic conditions, customer confidence
and other factors such as stock market volatility. Certificate of
deposit accounts that are scheduled to mature within one year
totaled $584.5 million at December 31, 2018. Based on its current
pricing strategy and customer retention experience, the Bank
expects to retain a significant share of these accounts. The Bank
manages liquidity on a daily basis and expects to have sufficient
cash to meet all of its funding requirements.
Commercial real estate loans, multi-family loans, commercial
loans, one- to four-family residential loans and consumer 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 liquidity.
Loan originations and purchases totaled $3.16 billion for the year
ended December 31, 2018, compared to $3.70 billion for the year
ended December 31, 2017. Purchases for the investment portfolio
totaled $281.0 million for the year ended December 31, 2018,
As of December 31, 2018, the Bank exceeded all minimum
regulatory capital requirements. At December 31, 2018, the
Bank’s leverage (Tier 1) capital ratio was 9.86%. FDIC regulations
require banks to maintain a minimum leverage ratio of Tier 1
capital to adjusted total assets of 4.00%. At December 31, 2018,
the Bank’s total risk-based capital ratio was 12.80%. Under
current regulations, the minimum required ratio of total capital
to risk-weighted assets is 9.88%. 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, 2018, are summarized below:
(In thousands)
Off-Balance Sheet:
Long-term commitments
Letters of credit
Total Off-Balance Sheet
Contractual Obligations:
Operating leases
Certificate 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
$ 1,459,712 $
572,905 $
516,942 $
106,572 $
263,293
33,227
1,492,939
38,850
750,492
789,342
32,414
605,319
8,012
584,479
592,491
813
—
—
517,755
106,572
263,293
12,914
119,653
132,567
7,191
45,519
52,710
10,733
841
11,574
$ 2,282,281 $ 1,197,810 $
650,322 $
159,282 $
274,867
51
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 7A Quantitative and Qualitative Disclosures About Market Risk
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
$1.49 billion at December 31, 2018, a decrease of $483.3 million,
or 24.5%, from $1.98 billion at December 31, 2017, largely due
to a decrease in commercial lines of credit.
Contractual obligations consist of operating leases and certificate
of deposit liabilities. There was one security purchase totaling
$500,000 in 2018 which settled in January 2019. There were
no security purchases in 2017 which were settled in 2018.
Total contractual obligations at December 31, 2018 were
$789.3 million, an increase of $109.2 million, or 16.06%, compared to
$680.1 million at December 31, 2017. Contractual obligations
under operating leases decreased $6.5 million, or 14.30%,
to $38.9 million at December 31, 2018, from $45.3 million at
December 31, 2017, and certificate of deposit accounts increased
$115.7 million, or 18.2%, to $750.5 million at December 31, 2018,
from $634.8 million at December 31, 2017.
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 all 20- and 30-year fixed-rate
residential mortgage loans at origination. The Company retains
residential fixed rate mortgages with terms of 15 years or less and
biweekly payment residential mortgages with a term of 30 years
or less. Commercial real estate loans generally have interest
rates that reset in five years, and other commercial loans such
as construction loans and commercial lines of credit reset with
changes in the Prime rate, the Federal Funds rate or LIBOR.
Investment securities purchases generally have maturities of five
years or less, and mortgage-backed securities have weighted
average lives between three and five years.
The Asset/Liability Committee meets on at least a monthly basis
to review the impact of interest rate changes on net interest
income, net interest margin, net income and the economic
Quantitative Analysis
Current and future sensitivity to changes in interest rates are
measured through the use of balance sheet and income simulation
models. The analysis captures changes in net interest income
using flat rates as a base, a most likely rate forecast and rising and
declining interest rate forecasts. Changes in net interest income
and net income for the forecast period, generally twelve to twenty-
four months, are measured and compared to policy limits for
acceptable change. The Company periodically reviews historical
deposit re-pricing activity and makes modifications to certain
assumptions used in its income simulation model regarding the
interest rate sensitivity of deposits without maturity dates. These
modifications are made to more closely reflect the most likely
results under the various interest rate change scenarios. Since
it is inherently difficult 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
value of equity. 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. Certificate
of deposit accounts as a percentage of total deposits were 11.0%
at December 31, 2018, compared to 9.5% at December 31,
2017. Certificate of deposit accounts are generally short-term.
As of December 31, 2018, 77.9% of all certificates of deposit had
maturities of one year or less compared to 66.9% at December 31,
2017. The Company’s ability to retain maturing time deposit
accounts is the result of its strategy to remain competitively
priced within its marketplace. The Company’s pricing strategy
may vary depending upon current funding needs and the ability
of the Company to fund operations through alternative sources,
primarily by accessing short-term lines of credit with the FHLBNY
during periods of pricing dislocation.
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.
Specific assumptions used in the simulation model include:
zz Parallel yield curve shifts for market rates;
zz Current asset and liability spreads to market interest rates are
fixed;
zz Traditional savings and interest bearing demand accounts move
at 10% of the rate ramp in either direction;
zz Retail Money Market and Business Money Market accounts
move at 25% and 75% of the rate ramp in either direction,
respectively; and
zz Higher-balance demand deposit tiers and promotional demand
accounts move at 50% to 75% of the rate ramp in either
direction.
52
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 7A Quantitative and Qualitative Disclosures About Market Risk
PART II
The following table sets forth the results of the twelve month projected net interest income model as of December 31, 2018.
(Dollars in thousands)
Change in Interest Rates in Basis Points (Rate Ramp)
-100
Static
100
200
300
Net Interest Income
Amount ($)
Change ($)
Change (%)
312,916
312,059
308,862
305,157
301,248
857
—
(3,197)
(6,902)
(10,811)
0.3
—
(1.0)
(2.2)
(3.5)
The above table indicates that as of December 31, 2018, 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 3.5%, or $10.8 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 0.3%, or $857,000 increase in net interest income.
Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained
interest rate shocks. The following table illustrates the economic value of equity model results as of December 31, 2018.
(Dollars in thousands)
Change in Interest Rates
-100
Flat
100
200
300
Present Value of Equity
Dollar Amount
Dollar Change
Percent Change
Present Value of Equity
as Percent of Present
Value of Assets
Present Value
Ratio
Percent Change
1,583,600
1,564,381
1,499,923
1,435,251
1,375,471
19,219
—
(64,458)
(129,130)
(188,910)
1.2
—
(4.1)
(8.3)
(12.1)
16.1
16.3
16.0
15.7
15.4
(1.1)
—
(1.7)
(3.7)
(5.5)
The preceding table indicates that as of December 31, 2018, in
the event of an immediate and sustained 300 basis point increase
in interest rates, the Company would experience a 12.1%, or
$188.9 million reduction in the present value of equity. If rates were
to decrease 100 basis points, the Company would experience
a 1.2%, or $19.2 million increase in the present value of equity.
Certain shortcomings are inherent in the methodologies used in
the above interest rate risk measurements. Modeling changes
in net interest income requires the use of certain assumptions
regarding prepayment and deposit decay rates, which may or may
not reflect the manner in which actual yields and costs respond
to changes in market interest rates. While 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 reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the net interest income
table provides an indication of the Company’s interest rate risk
exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect
of changes in market interest rates on the Company’s net interest
income and will differ from actual results.
53
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 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, 2018 and 2017
(2) Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
(3) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
(4) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
(5) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
(6) Notes to Consolidated Financial Statements
D. Provident Financial Services, Inc., Condensed Financial Statements:
(1) Condensed Statement of Financial Condition as of December 31, 2018 and 2017
(2) Condensed Statement of Income for the years ended December 31, 2018, 2017 and 2016
(3) Condensed Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016
The supplementary data required by this Item is provided in Note 19 of the Notes to Consolidated Financial Statements.
54
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Provident Financial Services, Inc.:
Opinion on the Consolidated Financial
Statements
We have audited the accompanying consolidated statements
of financial condition of Provident Financial Services, Inc. and
subsidiary (the “Company”) as of December 31, 2018 and 2017,
the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for
each of the years in the three - year period ended December 31,
2018, and the related notes (collectively, the “consolidated
financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017,
and the results of its operations and its cash flows for each
of the years in the three - year period ended December 31,
2018, 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)
(“PCAOB”), the Company’s internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission,
and our report dated March 1, 2019 expressed an unqualified
opinion on the effectiveness of the Company’s internal control
over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of
the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have not been able to determine the specific year that we
began serving as the Company’s auditor; however, we are aware
that we have served as the Company’s auditor since at least 1997.
Short Hills, New Jersey
March 1, 2019
55
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 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 Stockholders and Board of Directors
Provident Financial Services, Inc.:
Opinion on Internal Control Over Financial
Reporting
We have audited Provident Financial Services, Inc. and subsidiary’s
(the “Company”) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our
opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated statements of financial condition of
the Company as of December 31, 2018 and 2017, the related
consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2018, and the
related notes (collectively, the “consolidated financial statements”),
and our report dated March 1, 2019, expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
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 financial
reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of
the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in
all material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control
over financial 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.
Definition and Limitations of Internal
Control Over Financial Reporting
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation
of financial 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 financial statements.
Because of its inherent limitations, internal control over financial
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.
/s/ KPMG LLP
Short Hills, New Jersey
March 1, 2019
56
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
December 31, 2018 and 2017
(Dollars in Thousands, except share data)
ASSETS
Cash and due from banks
Short-term investments
Total cash and cash equivalents
Available for sale debt securities, at fair value
Held to maturity debt securities (fair value of $479,740 and $485,039 at December 31, 2018 and
December 31, 2017, respectively).
Equity securities, at fair value
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
Certificates of deposit of $100,000 or more
Other time deposits
Total deposits
Mortgage escrow deposits
Borrowed funds
Other liabilities
TOTAL LIABILITIES
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
Common stock, $0.01 par value, 200,000,000 shares authorized, 83,209,293 shares issued and
66,325,458 shares outstanding at December 31, 2018, and 83,209,293 shares issued and
66,535,017 shares outstanding at December 31, 2017, respectively.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
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
See accompanying notes to consolidated financial statements.
$
$
$
December 31,
2018
December 31,
2017
$
$
86,195
56,466
142,661
1,063,079
139,557
51,277
190,834
1,037,154
477,652
658
81,184
7,325,718
60,195
7,265,523
6,864
63,185
29,646
420,290
189,525
82,759
9,845,274
4,996,345
1,083,012
316,074
318,735
6,714,166
25,933
1,742,514
64,000
8,546,613
479,425
635
68,813
7,250,588
55,562
7,195,026
1,565
58,124
31,475
418,178
193,085
73,703
9,725,769
5,027,708
1,051,922
414,848
335,644
6,830,122
25,568
1,442,282
68,817
8,366,789
$
$
—
—
832
1,021,533
651,099
(12,336)
(272,470)
(29,678)
(4,504)
4,504
1,358,980
9,725,769
$
832
1,012,908
586,132
(7,465)
(259,907)
(33,839)
(5,175)
5,175
1,298,661
9,845,274
57
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART II
Item 8 Financial Statements and Supplementary Data
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2018, 2017 and 2016
Years ended December 31,
2018
2017
2016
$
215,231
$
189,896
$
180,868
79,371
19,906
30,981
12,606
1,734
72,907
20,301
26,445
13,027
1,270
63,022
21,829
22,890
13,208
498
359,829
323,846
302,315
30,693
28,460
59,153
300,676
23,700
276,976
28,084
17,957
5,514
2,221
4,900
58,676
111,496
25,056
14,664
3,482
3,836
2,127
31,074
191,735
143,917
25,530
118,387
1.82
64,942,886
1.82
19,441
26,203
45,644
278,202
5,600
272,602
27,218
17,604
6,693
57
4,125
16,947
26,801
43,748
258,567
5,400
253,167
26,047
17,556
5,470
64
6,256
55,697
55,393
109,353
25,290
13,922
3,887
3,904
2,670
28,796
187,822
140,477
46,528
93,949
1.46
64,384,851
1.45
106,141
24,853
13,228
4,887
3,685
3,391
27,593
183,778
124,782
36,980
87,802
1.38
63,643,622
1.38
$
$
$
$
$
$
65,103,097
64,579,222
63,851,986
$
$
$
(Dollars in Thousands, except share data)
Interest income:
Real estate secured loans
Commercial loans
Consumer loans
Available for sale debt securities and Federal Home Loan Bank Stock
Held to maturity debt securities
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
Wealth management income
Bank-owned life insurance
Net gain on securities transactions
Other income
TOTAL NON-INTEREST INCOME
Non-interest expense:
Compensation and employee benefits
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
See accompanying notes to consolidated financial statements.
58
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2018, 2017 and 2016
(Dollars in Thousands)
Net income
Other comprehensive loss, net of tax:
Unrealized gains and losses on available for sale debt securities:
Net unrealized losses arising during the period
Reclassification adjustment for gains included in net income
Total
Unrealized gains on derivatives
Amortization related to post-retirement obligations
Total other comprehensive loss
TOTAL COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
Years ended December 31,
2018
2017
$
118,387
$
93,949
$
(6,129)
—
(6,129)
221
1,221
(4,687)
(2,163)
—
(2,163)
379
(889)
(2,673)
2016
87,802
(4,431)
(30)
(4,461)
242
3,368
(851)
$
113,700
$
91,276
$
86,951
59
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report 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, 2018, 2017 and 2016
(Dollars in
Thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Unallocated
Esop
Shares
Common
Stock
Acquired
by DDFP
Deferred
Compensation
DDFP
Total
Stockholders’
Equity
$
832 $ 1,000,810 $ 507,713
$
(2,546) $ (269,014) $
(41,730) $ (6,517) $
6,517 $
1,196,065
87,802
—
—
—
—
—
(45,369)
(851)
—
—
—
—
(622)
622
—
—
—
(1,557)
87,802
(851)
(45,369)
—
131
—
—
—
(671)
—
(1,557)
—
—
—
—
—
—
—
671
—
131
—
—
356
(81)
1,199
3,812
172
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,225)
—
—
—
(1,225)
—
—
—
—
—
1,296
6,279
—
—
—
—
—
3,752
—
—
—
—
—
—
—
—
—
—
—
—
1,652
6,198
4,951
3,812
172
$
832 $ 1,005,777 $ 550,768 $
(3,397) $ (264,221) $ (37,978) $ (5,846) $
5,846 $ 1,251,781
Balance at
December 31,
2015
Net income
Other
comprehensive
loss, net of tax
Cash dividends
paid
Effect of
adopting
Accounting
Standards
Update ("ASU")
No. 2016-09
Distributions
from DDFP
Purchases of
treasury stock
Purchase of
employee
restricted shares
to fund statutory
tax withholding
Shares issued
dividend
reinvestment
plan
Option exercises
Allocation of
ESOP shares
Allocation of
SAP shares
Allocation of
stock options
BALANCE AT
DECEMBER
31, 2016
60
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders’ Equity
For the Years Ended December 31, 2018, 2017 and 2016 (Continued)
(Dollars in
Thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Unallocated
Esop
Shares
Common
Stock
Acquired
by DDFP
Deferred
Compensation
DDFP
Total
Stockholders’
Equity
$
832 $ 1,005,777 $ 550,768
$
(3,397) $ (264,221) $
(37,978) $ (5,846) $
5,846 $
1,251,781
Balance at
December 31,
2016
Net income
Other
comprehensive
loss, net of tax
Reclassification
due to the
adoption of ASU
No. 2018-02
Cash dividends
paid
Distributions
from DDFP
Purchases of
treasury stock
Purchase of
employee
restricted shares
to fund statutory
tax withholding
Shares issued
dividend
reinvestment
plan
Option exercises
Allocation of
ESOP shares
Allocation of
SAP shares
Allocation of
stock options
BALANCE AT
DECEMBER
31, 2017
—
—
—
—
—
—
—
—
—
—
—
—
—
232
—
—
712
(1,179)
2,200
4,963
203
—
—
—
—
—
—
—
93,949
—
(2,673)
1,395
(1,395)
(59,980)
—
—
—
—
—
(443)
—
—
—
—
—
—
—
671
—
—
(778)
—
—
—
—
—
—
—
1,402
4,133
—
—
—
—
—
4,139
—
—
—
—
—
—
—
93,949
(2,673)
—
(59,980)
232
(443)
(778)
2,114
2,954
6,339
4,963
203
—
—
—
(671)
—
—
—
—
—
—
—
$
832 $ 1,012,908 $ 586,132 $
(7,465) $(259,907) $ (33,839) $ (5,175) $
5,175 $ 1,298,661
61
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report 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, 2018, 2017 and 2016 (Continued)
(Dollars in
Thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Unallocated
Esop
Shares
Common
Stock
Acquired
by DDFP
Deferred
Compensation
DDFP
Total
Stockholders’
Equity
$
832 $ 1,012,908 $ 586,132
$
(7,465) $ (259,907) $
(33,839) $ (5,175) $
5,175 $
1,298,661
Balance at
December 31,
2017
Net income
Other
comprehensive
loss, net of tax
Cash dividends
paid
Effect of
adopting
Accounting
Standards
Update ("ASU")
No. 2016-01
Distributions
from DDFP
Purchases of
treasury stock
Purchase of
employee
restricted shares
to fund statutory
tax withholding
Shares issued
dividend
reinvestment
plan
Option exercises
Allocation of
ESOP shares
Allocation of
SAP shares
Allocation of
stock options
BALANCE AT
DECEMBER
31, 2018
—
—
—
—
—
—
—
—
—
—
—
—
—
156
—
—
577
(366)
2,022
6,046
190
—
—
—
—
—
—
—
118,387
—
(4,687)
(53,604)
—
—
—
184
(184)
—
—
(13,172)
118,387
(4,687)
(53,604)
—
156
—
—
—
(671)
—
(13,172)
—
—
—
—
—
—
—
671
—
—
(1,896)
—
—
—
(1,896)
—
—
—
—
—
1,132
1,373
—
—
—
—
—
4,161
—
—
—
—
—
—
—
—
—
—
—
—
1,709
1,007
6,183
6,046
190
$
832 $1,021,533 $ 651,099 $
(12,336) $(272,470) $ (29,678) $ (4,504) $
4,504 $ 1,358,980
See accompanying notes to consolidated financial statements.
62
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
(Dollars in Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years ended December 31,
2018
2017
2016
$
118,387
$
93,949
$
87,802
Depreciation and amortization of intangibles
Provision for loan losses
Deferred tax (benefit) expense
Income on 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
Net increase in loans originated for sale
Proceeds from sales of loans originated for sale
Proceeds from sales and paydowns of foreclosed assets
ESOP expense
Allocation of stock award shares
Allocation of stock options
Net gain on sale of loans
Net gain on securities transactions
Net gain on sale of premises and equipment
Net gain on sale of foreclosed assets
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of held to maturity debt
securities
Purchases of held to maturity debt securities
Proceeds from sales of securities
Proceeds from maturities, calls and paydowns of available for sale debt
securities
Purchases of available for sale debt securities
Proceeds from redemption of Federal Home Loan Bank stock
Purchases of Federal Home Loan Bank stock
Proceeds from bank-owned life insurance claims
Purchases of loans
Net decrease (increase) in loans
Proceeds from sales of premises and equipment
Purchases of premises and equipment
Net cash provided by (used in) investing activities
10,101
23,700
(18,541)
(5,514)
8,540
(5,773)
894
(36,043)
37,386
7,963
4,516
6,046
190
(1,343)
(2,221)
(25)
(798)
(1,829)
5,266
4,817
155,719
39,534
(43,887)
2,212
196,690
(237,076)
145,191
(132,820)
1,954
(1,344)
79,388
25
(3,162)
46,705
11,623
5,600
40,634
(6,693)
9,948
(4,655)
1,021
(24,938)
26,387
5,423
4,600
4,963
203
(1,449)
(57)
(20)
(819)
(2,564)
(52,078)
6,142
117,220
55,720
(47,894)
—
220,138
(228,363)
130,125
(135,583)
4,428
—
(322,443)
20,766
(3,231)
(306,337)
12,760
5,400
3,160
(5,470)
10,831
(3,408)
1,311
(34,976)
37,008
6,109
3,706
3,812
172
(2,032)
(64)
(14)
(585)
(1,316)
5,873
(2,770)
127,309
62,975
(80,349)
3,401
211,440
(306,151)
56,505
(54,050)
—
(28,590)
(440,999)
14
(4,995)
(580,799)
63
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 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, 2018, 2017 and 2016 (Continued)
(Dollars in Thousands)
Cash flows from financing activities:
Net increase in deposits
(Decrease) increase in mortgage escrow deposits
Purchase of treasury stock
Purchase of employee restricted shares to fund statutory tax withholding
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 financing 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
Cash paid during the period for:
Interest on deposits and borrowings
Income taxes
Non cash investing activities:
TRANSFER OF LOANS RECEIVABLE TO FORECLOSED ASSETS
See accompanying notes to consolidated financial statements.
Years ended December 31,
2018
2017
2016
115,956
(365)
(13,172)
(1,896)
(53,604)
1,709
1,007
695,000
(804,375)
(190,857)
(250,597)
(48,173)
190,834
160,537
1,481
(443)
(778)
(59,980)
2,114
2,954
347,000
(539,745)
322,514
235,654
46,537
144,297
629,642
1,107
(1,557)
(1,225)
(45,369)
1,652
6,198
355,000
(485,202)
35,315
495,561
42,071
102,226
$
$
$
$
142,661
$
190,834
$
144,297
58,959
15,259
$
$
46,391
40,566
$
$
44,004
33,886
1,965
$
3,845
$
3,631
64
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART II
Item 8. Financial Statements and
Supplementary Data
Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies ����������������������������������������������������������������������������������������������������������������������������������������������������������������������66
NOTE 1
Stockholders’ Equity and Acquisition ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������73
NOTE 2
Restrictions on Cash and Due from Banks ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������73
NOTE 3
Held to Maturity Debt Securities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������73
NOTE 4
Available for Sale Debt Securities ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������75
NOTE 5
Loans Receivable and Allowance for Loan Losses �������������������������������������������������������������������������������������������������������������������������������������������������76
NOTE 6
Banking Premises and Equipment ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������83
NOTE 7
Intangible Assets ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������83
NOTE 8
Deposits ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������85
NOTE 9
NOTE 10 Borrowed Funds �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������85
NOTE 11 Benefit Plans �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������86
Income Taxes ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������92
NOTE 12
Lease Commitments ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������94
NOTE 13
NOTE 14 Commitments, Contingencies and Concentrations of Credit Risk �����������������������������������������������������������������������������������������������94
NOTE 15 Regulatory Capital Requirements ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������95
Fair Value Measurements ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������96
NOTE 16
NOTE 17 Selected Quarterly Financial Data (Unaudited) ������������������������������������������������������������������������������������������������������������������������������������������������������������102
NOTE 18
Earnings Per Share ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������102
NOTE 19 Parent-only Financial Information �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������103
NOTE 20 Other Comprehensive Loss �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������105
NOTE 21 Derivative and Hedging Activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������106
NOTE 22 Revenue Recognition ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������108
NOTE 23 Subsequent Events ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������108
65
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
NOTE 1 Summary of Significant Accounting Policies
Principles of Consolidation
Securities
The consolidated financial statements include the accounts of
Provident Financial Services, Inc. (the “Company”), Provident
Bank (the “Bank”) and their wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated
in consolidation. Certain reclassifications have been made in the
consolidated financial statements to conform with current year
classifications.
Business
The Company, through the Bank, provides a full range of banking
services to individual and business customers through branch
offices in New Jersey and eastern Pennsylvania. The Bank is
subject to competition from other financial institutions and to the
regulations of certain federal and state agencies, and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements of the Company have
been prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”). In preparing the consolidated
financial 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 financial 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 benefits, 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 significantly from these estimates. Changes in estimates
resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, Federal funds sold and
commercial paper with original maturity dates less than 90 days.
Securities include held to maturity debt securities and available
for sale debt securities. The available for sale debt 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.
Securities which the Company has the positive intent and ability
to hold to maturity are classified as held to maturity debt securities
and carried at amortized cost. Management 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, management 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 (loss).
The fair value of the securities portfolio is significantly affected by
changes in interest rates. In general, as interest rates rise, the
fair value of fixed-rate securities decreases and as interest rates
fall, the fair value of fixed-rate securities increases. 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 entire
decline in value is considered other-than-temporary and would be
recognized as an expense in the current period.
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
specific identification 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 financial instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant to the fair value
measurement.
Federal Home Loan Bank of New York Stock
The Bank, as a member of the Federal Home Loan Bank of New
York (“FHLBNY”), is required to hold shares of capital stock of the
FHLBNY at cost based on a specified formula. The Bank carries
this investment at cost, which approximates fair value.
66
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
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 the 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 collectability is reasonably assured.
An impaired loan is defined 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 flows.
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
flows 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 flows expected at acquisition represent the non-accretable
discount and are not recognized as a yield adjustment or a
valuation allowance. Reclassifications of the non-accretable to
accretable yield may occur subsequent to the loan acquisition
dates due to an increase in expected cash flows of the loans and
results in an increase in interest income on a prospective basis.
Allowance for Loan Losses
Losses on loans are charged to the allowance for loan losses.
Additions to this allowance are made by recoveries of loans
previously charged off and by a provision charged to expense.
The determination of the balance of the allowance for loan losses
is based on an analysis of the loan portfolio, economic conditions,
historical loan loss experience and other factors that warrant
recognition in providing for an adequate allowance.
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, fixtures and
equipment are carried at cost, less accumulated depreciation,
computed using the straight-line method based on their estimated
useful lives (generally 25 to 40 years for buildings, and 3 to 5
years for furniture and equipment). Leasehold improvements,
carried at cost, net of accumulated 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 financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in tax expense in the period that includes the
enactment date. Deferred tax assets and liabilities are reported
as a component of other assets on the Consolidated Statements
of Financial Condition. 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
67
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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 benefits 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 fiduciary or agency capacities
for customers of the Bank’s wholly owned subsidiary, Beacon)
are not included in the accompanying consolidated statements
of financial 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 identifiable net assets
acquired through purchase acquisitions. In accordance with
GAAP, goodwill with an indefinite 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 financial performance of the
Company, among others. The Company completed its annual
goodwill impairment test as of September 30, 2018. 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
Trust Company (“Beacon”) and The MDE Group, Inc. (“MDE”)
and are amortized on an accelerated basis over 12.0 years and
10.4 years, respectively. 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 Benefit 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
68
the minimum contribution required by the Employee Retirement
Income Security Act of 1974. GAAP requires an employer to:
(a) recognize in its statement of financial position the over-funded
or under-funded status of a defined benefit postretirement plan
measured as the difference between the fair value of plan assets
and the benefit obligation; (b) measure a plan’s assets and its
obligations that determine its funded status at the end of the
employer’s fiscal 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 first 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 return on average
assets 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.
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank 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, 2018, there were 257,665 shares held by the
DDFP.
The Bank maintains a non-qualified plan that provides
supplemental benefits to certain executives who are prevented
from receiving the full benefits contemplated by the 401(k)
Plan’s and the ESOP’s benefit formulas under tax law limits for
tax-qualified plans.
Post-retirement Benefits Other Than
Pensions
The Bank provides post-retirement 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 benefits are
accrued based on actuarial assumptions from the date of hire
to the date the employee is fully eligible to receive the benefits.
On December 31, 2002, the Bank eliminated postretirement
healthcare benefits for employees with less than 10 years
of service. GAAP requires an employer to: (a) recognize in its
statement of financial position the over-funded or under-funded
status of a defined benefit post-retirement plan measured as the
difference between the fair value of plan assets and the benefit
obligation; (b) measure a plan’s assets and its obligations that
determine its funded status as of the end of the employer’s fiscal
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 Consolidated
Statements of Financial Condition 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 satisfied
the criteria necessary to apply hedge accounting. These 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 the fair value of these derivatives
are recognized directly in earnings.
Item 8 Financial Statements and Supplementary Data
PART II
The Company also uses interest rate swaps as part of its interest
rate risk management strategy. Interest rate swaps designated
as cash flow hedges, and which satisfy hedge accounting
requirements, involve the receipt of variable amounts from a
counterparty in exchange for the Company making fixed-rate
payments over the life of the agreements without the exchange
of the underlying notional amount. These derivatives were used to
hedge the variable cash outflows associated with Federal Home
Loan Bank borrowings. The effective portion of changes in the
fair value of these derivatives are recorded in accumulated other
comprehensive income (loss), and are subsequently reclassified
into earnings in the period that the hedged forecasted transaction
affects earnings. The ineffective portion of the change in fair value
of these derivatives are recognized directly in earnings.
The fair value of the Company’s derivatives are determined using
discounted cash flow analyses using observable market-based
inputs.
Comprehensive Income
Comprehensive income is divided into net income and other
comprehensive income (loss). Other comprehensive income
(loss) includes items previously recorded directly to equity, such as
unrealized gains and losses on available for sale debt securities,
unrealized gains and losses on derivatives and amortization
related to post-retirement obligations. Comprehensive
income is presented in a separate Consolidated Statement of
Comprehensive Income.
Segment Reporting
The Company’s operations are solely in the financial services
industry and include providing traditional banking and other
financial services to its customers. 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 financial results. Therefore, the
Company has a single operating segment for financial 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
reflects 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.
69
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Impact of Recent Accounting
Pronouncements
Accounting Pronouncements Adopted in 2018
In March 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2017-07,
“Compensation - Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic
Post-retirement Benefit Cost,” which requires that companies
disaggregate the service cost component from other components
of net benefit cost. This update calls for companies that offer
post-retirement benefits to present the service cost, which is the
amount an employer has to set aside each quarter or fiscal year
to cover the benefits, in the same line item with other current
employee compensation costs. Other components of net benefit
cost will be presented in the income statement separately from
the service cost component and outside the subtotal of income
from operations, if one is presented. ASU 2017-07 is effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company adopted ASU
2017-07 effective January 1, 2018, and it did not have a material
impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation-
Stock Compensation (Topic 718): Scope of Modification
Accounting.” This ASU provides guidance about changes to
terms or conditions of a share-based payment award which would
require modification accounting. In particular, an entity is required
to account for the effects of a modification if the fair value, vesting
condition or the equity/liability classification of the modified award
is not the same immediately before and after a change to the
terms and conditions of the award. ASU 2017-09 is effective on
a prospective basis for fiscal years beginning after December 15,
2017, with early adoption permitted. The Company adopted ASU
2017-09 effective January 1, 2018, and it did not have a material
impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying
the Test for Goodwill Impairment.” The main objective of this
ASU is to simplify the accounting for goodwill impairment
by requiring that impairment charges be based upon the first
step in the current two-step impairment test under Accounting
Standards Codification (ASC) 350. Currently, if the fair value
of a reporting unit is lower than its carrying amount (Step 1),
an entity calculates any impairment charge by comparing the
implied fair value of goodwill with its carrying amount (Step 2).
The implied fair value of goodwill is calculated by deducting the
fair value of all assets and liabilities of the reporting unit from the
reporting unit’s fair value as determined in Step 1. To determine
the implied fair value of goodwill, entities estimate the fair value
of any unrecognized intangible assets and any corporate-level
assets or liabilities that were included in the determination of the
carrying amount and fair value of the reporting unit in Step 1.
Under ASU 2017-04, if a reporting unit’s carrying amount exceeds
its fair value, an entity will record an impairment charge based
on that difference. The impairment charge will be limited to the
amount of goodwill allocated to that reporting unit. This standard
eliminates the requirement to calculate a goodwill impairment
charge using Step 2. ASU 2017-04 does not change the guidance
on completing Step 1 of the goodwill impairment test. Under ASU
2017-04, an entity will still be able to perform the current optional
qualitative goodwill impairment assessment before determining
whether to proceed to Step 1. The standard will be applied
prospectively and is effective for annual and interim impairment
tests performed in periods beginning after December 15,
2019. Early adoption is permitted for annual and interim goodwill
impairment testing dates after January 1, 2017. The Company
adopted ASU 2017-04 effective September 2018, and it did not
have a material impact on the Company’s consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments,” a new ASU which addresses diversity
in practice related to eight specific cash flow issues: debt
prepayment or extinguishment costs, settlement of zero-coupon
debt instruments or other debt instruments with coupon interest
rates that are insignificant in relation to the effective interest rate of
the borrowing, contingent consideration payments made after a
business combination, proceeds from the settlement of insurance
claims, proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies),
distributions received from equity method investees, beneficial
interests in securitization transactions and separately identifiable
cash flows and application of the predominance principle. ASU
2016-15 is effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years.
Entities will apply the standard’s provisions using a retrospective
transition method to each period presented. If it is impracticable
to apply the amendments retrospectively for some of the issues,
the amendments for those issues would be applied prospectively
as of the earliest date practicable. The Company adopted this
guidance for the interim reporting period ended March 31, 2018.
The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements, nor was additional
disclosure deemed necessary.
In January 2016, the FASB issued ASU 2016-01, “Financial
Instruments - Overall: Recognition and Measurement of Financial
Assets and Liabilities.” This ASU addresses certain aspects of
recognition, measurement, presentation, and disclosure of
financial instruments. This amendment supersedes the guidance
to classify equity securities with readily determinable fair values
into different categories, requires equity securities, except
equity method investments, to be measured at fair value with
changes in the fair value recognized through net income, and
simplifies the impairment assessment of equity investments
without readily determinable fair values. The amendment requires
public business entities that are required to disclose the fair
value of financial instruments measured at amortized cost on
the balance sheet to measure that fair value using the exit price
notion. The amendment requires an entity to present separately
in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair value
option. The amendment requires separate presentation of financial
70
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
assets and financial liabilities by measurement category and form of
financial asset on the balance sheet or in the accompanying notes
to the financial statements. The amendment reduces diversity in
current practice by clarifying that an entity should evaluate the
need for a valuation allowance on a deferred tax asset related to
available for sale securities in combination with the entity’s other
deferred tax assets. This amendment is effective for fiscal years
beginning after December 15, 2017, including interim periods
within those fiscal years. Entities should apply the amendment by
means of a cumulative-effect adjustment as of the beginning of
the fiscal year of adoption, with the exception of the amendment
related to equity securities without readily determinable fair values,
which should be applied prospectively to equity investments
that exist as of the date of adoption. The Company adopted
this ASU effective January 1, 2018. As a result, $658,000 of
equity securities, as of December 31, 2017, were reclassified
from securities available for sale and presented as a separate
item on the Consolidated Statements of Financial Condition.
The $184,000 after-tax unrealized gain on these securities, at
the time of adoption, was reclassified from accumulated other
comprehensive income (loss) to retained earnings and is reflected
in the Consolidated Statements of Changes in Stockholders’
Equity. For financial instruments that are measured at amortized
cost, the Company measures fair value utilizing an exit pricing
methodology, and as such, no changes were required as a result
of the adoption of this guidance.
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606).” The objective of this ASU
is to clarify the principles for recognizing revenue and to develop a
common revenue standard for U.S. GAAP and IFRS. 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-financial assets unless those contracts are in the
scope of other standards. The ASU is effective for public business
entities for financial statements issued for fiscal years beginning
after December 15, 2017, and early adoption is permitted.
Subsequently, the FASB issued the following standards related
to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations;”
ASU 2016-10, “Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing;” ASU
2016-11, “Revenue Recognition (Topic 605) and Derivatives and
Hedging (Topic 815): Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant
to Staff Announcements at the March 3, 2016 EITF Meeting;” and
ASU 2016-12, “Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients.”
These amendments are intended to improve and clarify the
implementation guidance of ASU 2014-09 and have the same
effective date as the original standard. The Company’s revenue
is comprised of net interest income on interest earning assets
and liabilities and non-interest income. The scope of guidance
explicitly excludes net interest income as well as other revenues
associated with financial assets and liabilities, including loans,
leases, securities and derivatives. Accordingly, the majority of
the Company’s revenues are not affected. The Company formed
a working group to guide implementation efforts including the
identification of revenue within the scope of the guidance, as
well as the evaluation of revenue contracts and the respective
performance obligations within those contracts. The Company
completed its evaluation of this guidance and concluded there are
no material changes related to the timing or amount of revenue
recognized. The Company adopted this ASU effective January 1,
2018. The adoption of this guidance did not have a significant
impact on the Company’s consolidated financial statements,
but resulted in additional footnote disclosures, including the
disaggregation of certain categories of revenue (see Note 22 -
“Revenue Recognition”).
Accounting Pronouncements Not Yet Adopted
In October 2018, the FASB issued ASU No. 2018-16, “Derivatives
and Hedging (Topic 815) – Inclusion of the Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a
Benchmark Interest Rate for Hedge Accounting Purposes.” This
ASU permits the use of the OIS rate based upon SOFR as a
U.S. benchmark interest rate for hedge accounting purposes
under Topic 815 in addition to the UST, the LIBOR swap rate,
the OIS rate based on the Fed Funds Effective Rate, and the
SIFMA Municipal Swap Rate. The amendments in ASU 2018-16
are required to be adopted concurrently with ASU 2017-12,
“Derivatives and Hedging: Targeted Improvements to Accounting
for Hedging,” which is effective for public business entities for
fiscal years beginning after December 15, 2018, with early
adoption, including adoption in an interim period, permitted.
The amendments should be adopted on a prospective basis for
qualifying new or redesignated hedging relationships entered into
on or after the date of adoption. The Company’s adoption of
this ASU will not have a significant impact on the Company’s
consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure
Framework - Changes to the Disclosure Requirements for Fair
Value Measurement.” This ASU eliminates, adds and modifies
certain disclosure requirements for fair value measurements.
Among the changes, entities will no longer be required to disclose
the amount of and reasons for transfers between Level 1 and
Level 2 of the fair value hierarchy, but will be required to disclose
the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. ASU
No. 2018-13 is effective for interim and annual reporting periods
beginning after December 15, 2019; early adoption is permitted.
Entities are also allowed to elect early adoption of the eliminated or
modified disclosure requirements and delay adoption of the new
disclosure requirements until their effective date. The Company’s
adoption of this ASU will not have a significant impact on the
Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and
Hedging: Targeted Improvements to Accounting for Hedging.” The
purpose of this updated guidance is to better align a company’s
financial reporting for hedging activities with the economic
objectives of those activities. ASU 2017-12 is effective for public
business entities for fiscal years beginning after December 15,
2018, with early adoption, including adoption in an interim period,
permitted. ASU 2017-12 requires a modified retrospective
transition method in which the Company will recognize the
cumulative effect of the change on the opening balance of each
71
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
affected component of equity in the statement of financial position
as of the date of adoption. The Company’s adoption of this ASU
will not have a significant impact on the Company’s consolidated
financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables -
Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities.” This ASU
shortens the amortization period for premiums on callable debt
securities by requiring that premiums be amortized to the first
(or earliest) call date instead of as an adjustment to the yield
over the contractual life. This change more closely aligns the
accounting with the economics of a callable debt security and
the amortization period with expectations that already are included
in market pricing on callable debt securities. This ASU does not
change the accounting for discounts on callable debt securities,
which will continue to be amortized to the maturity date. This ASU
only includes instruments that are held at a premium and have
explicit call features. It does not include instruments that contain
prepayment features, such as mortgage backed securities; nor
does it include call options that are contingent upon future events
or in which the timing or amount to be paid is not fixed. The
effective date for this ASU is fiscal years beginning after December
15, 2018, including interim periods within the reporting period, with
early adoption permitted. Transition is on a modified retrospective
basis with an adjustment to retained earnings as of the beginning
of the period of adoption. If early adopted in an interim period,
adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. The Company’s adoption
of this ASU will not have a significant impact on the Company’s
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement
of Credit Losses on Financial Instruments.” The main objective
of this ASU is to provide financial statement users with more
decision-useful information about the expected credit losses on
financial instruments by a reporting entity at each reporting date.
The amendments in this ASU require financial assets measured
at amortized cost to be presented at the net amount expected
to be collected. The allowance for credit losses would represent
a valuation account that would be deducted from the amortized
cost basis of the financial asset(s) to present the net carrying
value at the amount expected to be collected on the financial
asset. The income statement would reflect the measurement of
credit losses for newly recognized financial assets, as well as
the expected increases or decreases of expected credit losses
that have taken place during the period. The measurement of
expected credit losses would be based on relevant information
about past events, including historical experience, current
conditions, and reasonable and supportable forecasts that
affect the collectability of the reported amount. An entity will be
required to use judgment in determining the relevant information
and estimation methods that are appropriate in its circumstances.
The amendments in ASU 2016-13 are effective for fiscal years,
including interim periods, beginning after December 15, 2019.
Early adoption of this ASU is permitted for fiscal years beginning
after December 15, 2018. The Company continues to evaluate
the potential impact of ASU 2016-13 on the consolidated financial
statements. In that regard, the Company formed, in the first
quarter of 2017, a cross-functional working group, under the
72
direction of the Chief Credit Officer, Chief Financial Officer and
Chief Risk Officer. The working group is comprised of individuals
from various functional areas including credit, risk management,
audit, finance and information technology, among others. The
Company developed a detailed implementation plan to include an
assessment of processes and controls, portfolio segmentation,
model development, model validation, system requirements and
the identification of data and resource needs, among other things.
The Company has engaged third-party vendors to assist with
model development, data governance and operational controls
to support the adoption of this ASU. Model development and
validation is underway, as is the establishment of the control
activities required to support the models. The adoption of the
ASU 2016-13 may result in an increase in the allowance for loan
losses as a result of changing from an “incurred loss” model,
which encompasses allowances for current known and inherent
losses within the portfolio, to an “expected loss” model, which
encompasses allowances for losses expected to be incurred
over the life of the portfolio. Furthermore, ASU 2016-13 will
necessitate establishing an allowance for expected credit losses
on debt securities. The Company is currently unable to reasonably
estimate the impact of adopting ASU 2016-13. It is expected
that the impact of adoption will be significantly influenced by the
composition, characteristics and quality of our loan and securities
portfolios as well as the prevailing economic conditions and
forecasts as of the adoption date.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842).” This ASU requires all lessees to recognize a lease liability
and a right-of-use asset (“ROU”), measured at the present value of
the future minimum lease payments, at the lease commencement
date. Lessor accounting remains largely unchanged under the new
guidance. The guidance is effective for fiscal years beginning after
December 15, 2018, including interim reporting periods within
that reporting period, with early adoption permitted. A modified
retrospective approach must be applied for leases existing at, or
entered into after, the beginning of the earliest comparative period
presented in the financial statements. In July 2018, the FASB
issued ASU No. 2018-11, “Leases - Targeted Improvements”
to provide entities with relief from the costs of implementing
certain aspects of ASU No. 2016-02. Specifically, under the
amendments in ASU 2018-11: (1) entities may elect not to recast
the comparative periods presented when transitioning to the new
leasing standard, and (2) lessors may elect not to separate lease
and non-lease components when certain conditions are met. The
amendments have the same effective date as ASU 2016-02. In
the first quarter of 2018, the Company formed a working group
to guide the implementation efforts, including the identification
and review of all lease agreements within the scope of the
guidance. The working group has identified the inventory of leases
and actively accumulated the requisite lease data necessary
to apply the guidance. Also, the working group purchased
and implemented a software platform to properly record and
track all leases, monitor ROU and lease liabilities and support
all accounting and disclosure requirements of the guidance.
The Company adopted both ASU No. 2016-02 and ASU No.
2018-11 effective January 1, 2019 and elected to apply the
guidance as of the beginning of the period of adoption (January 1,
2019) and not restate comparative periods. The Company also
elected certain optional practical expedients, which allow the
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Company to forego a reassessment of (1) whether any expired or
existing contracts are or contain leases, (2) the lease classification
for any expired or existing leases, and (3) the initial direct costs for
any existing leases. The adoption of the new standard resulted in
the Company recording a ROU and an additional lease liability on
its consolidated statement of financial condition of approximately
$44.9 million and $46.1 million, respectively, based on the present
value of the expected remaining lease payments. The Company
also anticipates additional disclosures to be provided on its
quarterly report on Form 10-Q for the quarter ended March 31,
2019. Adoption of the standard did not result in material changes
to the Company’s consolidated results of operations.
NOTE 2 Stockholders’ Equity and Acquisition
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 benefit, 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 defined 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,
2018, the liquidation account, which is an off-balance sheet
memorandum account, amounted to $10.4 million.
NOTE 3 Restrictions on Cash and Due from Banks
Included in cash on hand and due from banks at December 31, 2018 and 2017 was $35.0 million and $39.5 million, respectively,
representing reserves required by banking regulations.
NOTE 4 Held to Maturity Debt Securities
Held to maturity debt securities at December 31, 2018 and 2017 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
4,989
187
463,801
10,448
$
479,425
$
Amortized
cost
4,308
382
462,942
10,020
$
477,652
2018
Gross
unrealized
gains
Gross
unrealized
losses
(4,019)
479,740
2017
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
4,896
190
464,363
10,291
Fair
value
4,221
396
470,484
9,938
(94)
—
(3,767)
(158)
(87)
—
(1,738)
(83)
1
3
4,329
1
4,334
—
14
9,280
1
9,295
(1,908)
485,039
73
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART II
Item 8 Financial Statements and Supplementary Data
The Company generally purchases securities for long-term
investment purposes, and differences between carrying and
fair values may fluctuate during the investment period. Held to
maturity debt securities having a carrying value of $453.1 million
and $409.7 million at December 31, 2018 and 2017, respectively,
were pledged to secure other borrowings, securities sold under
repurchase agreements and government deposits.
The amortized cost and fair value of held to maturity debt securities
at December 31, 2018 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 five years
Due after five years through ten years
Due after ten years
$
2018
Amortized
cost
8,773
86,008
263,750
120,707
Fair
value
8,771
86,126
264,093
120,560
$
479,238
479,550
Mortgage-backed securities totaling $187,000 at amortized cost
and $190,000 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 2018, the Company recognized gains of $10,000 and
losses of $1,000 related to calls on securities in the held to
maturity debt securities portfolio, with total proceeds from the
calls totaling $32.0 million. There were no sales of securities from
the held to maturity debt securities portfolio for the year ended
December 31, 2018.
For 2017, the Company recognized gains of $60,000 and losses
of $3,000 related to calls on securities in the held to maturity
debt securities portfolio, with total proceeds from the calls
totaling $32.9 million. There were no sales of securities from
the held to maturity debt securities portfolio for the year ended
December 31, 2017.
For the 2016 period, the Company recognized gains of $15,000
and $1,000 losses related to calls on certain securities in the held
to maturity debt securities portfolio, with total proceeds from the
calls totaling $45.9 million. There were no sales of securities from
the held to maturity debt securities portfolio for the year ended
December 31, 2016.
The following table represents the Company’s disclosure on held to maturity debt securities with temporary impairment (in thousands):
December 31, 2018 Unrealized Losses
Less than 12 months
12 months or longer
Total
$
Fair value
—
96,412
—
Gross
unrealized
losses
—
(918)
—
Gross
unrealized
losses
Fair value
(94)
4,525
(2,849)
178,075
(158)
9,004
Gross
unrealized
losses
(94)
(3,767)
(158)
Fair value
4,525
81,663
9,004
$
96,412
(918)
95,192
(3,101)
191,604
(4,019)
December 31, 2017 Unrealized Losses
Less than 12 months
12 months or longer
Total
$
Fair value
3,821
37,317
9,662
Gross
unrealized
losses
Gross
unrealized
losses
Fair value
(87)
(295)
(83)
—
—
49,488
(1,443)
—
Gross
unrealized
losses
(87)
(1,738)
(83)
Fair value
3,821
86,805
9,662
$
50,800
(465)
49,488
(1,443)
100,288
(1,908)
Agency obligations
State and municipal obligations
Corporate obligations
Agency obligations
State and municipal obligations
Corporate obligations
74
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank
Item 8 Financial Statements and Supplementary Data
PART II
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 specific assumptions about collateral and
vintage, a range of possible cash flows was identified to determine
whether other-than-temporary impairment existed during the year
ended December 31, 2018. Based on its detailed review of the
held to maturity debt securites portfolio, the Company believes
that as of December 31, 2018, securities with unrealized loss
positions shown above do not represent impairments that are
other-than-temporary. The Company does not have the intent to
sell securities in a temporary loss position at December 31, 2018,
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, 2018 totaled 334, compared with 184 at
December 31, 2017. All temporarily impaired investment securities
were investment grade at December 31, 2018.
NOTE 5 Available for Sale Debt Securities
Available for sale debt securities at December 31, 2018 and 2017 are summarized as follows (in thousands):
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Amortized
cost
$
1,048,415
2,828
25,039
$ 1,076,282
$
Amortized
cost
19,014
993,548
3,259
26,047
$ 1,041,868
2018
Gross
unrealized
gains
2,704
84
268
3,056
Gross
unrealized
losses
(16,150)
—
(109)
Fair value
1,034,969
2,912
25,198
(16,259)
1,063,079
2017
Gross
unrealized
gains
Gross
unrealized
losses
—
4,914
129
359
5,402
(9)
(10,095)
—
(12)
Fair value
19,005
988,367
3,388
26,394
(10,116)
1,037,154
Available for sale debt securities having a carrying value of
$524.2 million and $939.4 million at December 31, 2018 and
2017, respectively, are pledged to secure other borrowings and
securities sold under repurchase agreements.
The amortized cost and fair value of available for sale debt
securities at December 31, 2018, 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 after one year through five years
Due after five years through ten years
2018
Amortized
cost
3,006
24,861
27,867
$
$
Fair
value
2,967
25,143
28,110
Mortgage-backed securities totaling $1.05 billion at amortized
cost and $1.03 billion 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 2018, the Company sold 15,046 VISA Class B common
shares at a gross gain of approximately $2.2 million. For 2017 and
2016, there were no sales or calls of securities from the available
for sale debt securities portfolio.
For the years ended December 31, 2018, 2017 and 2016, the
Company did not incur an other-than-temporary impairment
charge on available for sale debt securities.
75
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART II
Item 8 Financial Statements and Supplementary Data
The following table represents the Company’s disclosure on available for sale debt securities with temporary impairment (in thousands):
December 31, 2018 Unrealized Losses
Less than 12 months
12 months or longer
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Mortgage-backed securities
$
218,175
(2,173)
545,880
(13,977)
764,055
(16,150)
Corporate obligations
7,897
(109)
—
—
7,897
(109)
$
226,072
(2,282)
545,880
(13,977)
771,952
(16,259)
Agency obligations
Mortgage-backed securities
Corporate obligations
December 31, 2017 Unrealized Losses
Less than 12 months
12 months or longer
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Fair value
$
12,006
(8)
6,999
(1)
19,005
(9)
420,746
(3,936)
235,056
(6,159)
655,802
(10,095)
—
—
989
(12)
989
(12)
$
432,752
(3,944)
243,044
(6,172)
675,796
(10,116)
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 specific assumptions about collateral and
vintage, a range of possible cash flows was identified to determine
whether other-than-temporary impairment existed during the year
ended December 31, 2018. Based on its detailed review of the
available for sale debt securities portfolio, the Company believes
that as of December 31, 2018, securities with unrealized loss
positions shown above do not represent impairments that are
other-than-temporary. The Company does not have the intent to
sell securities in a temporary loss position at December 31, 2018,
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, 2018 totaled 175, compared with 122 at
December 31, 2017. There was one private label mortgage-backed
security in an unrealized loss position at December 31, 2018, with
an amortized cost of $32,000 and unrealized loss of $1,000. This
private label mortgage-backed security was investment grade at
December 31, 2018.
NOTE 6 Loans Receivable and Allowance for Loan Losses
Loans receivable at December 31, 2018 and 2017 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
TOTAL LOANS
76
2018
2017
$
$
1,099,464
2,299,313
1,339,677
388,999
5,127,453
1,695,021
431,428
7,253,902
899
3,243
(33)
(7,423)
7,250,588
1,142,347
2,171,056
1,403,885
392,580
5,109,868
1,745,138
473,957
7,328,963
969
4,029
(36)
(8,207)
7,325,718
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank
Item 8 Financial Statements and Supplementary Data
PART II
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, 2018, 2017 and
2016, $894,000, $1.0 million and $1.3 million decreased interest
income, respectively, as a result of prepayments and normal
amortization.
The following table summarizes the aging of loans receivable by portfolio segment and class of loans, excluding PCI loans (in thousands):
30-59 Days
60-89 Days Non-accrual
and accruing Total Past Due
Current
At December 31, 2018
90 days or
more past due
Total Loans
Receivable
Mortgage loans:
Residential
Commercial
Multi-family
Construction
Total mortgage loans
Commercial loans
Consumer loans
$
4,188
5,557
—
—
—
4,188
425
1,238
—
—
—
5,557
13,565
610
5,853
3,180
—
—
9,033
15,391
1,266
TOTAL GROSS LOANS $
5,851
19,732
25,690
—
—
—
—
—
—
—
—
15,598
1,083,866
1,099,464
3,180
2,296,133
2,299,313
— 1,339,677
1,339,677
—
388,999
388,999
18,778
5,108,675
5,127,453
29,381
1,665,640
1,695,021
3,114
428,314
431,428
51,273 7,202,629
7,253,902
30-59 Days
60-89 Days Non-accrual
and accruing Total Past Due
Current
At December 31, 2017
90 days or
more past due
Total Loans
Receivable
Mortgage loans:
Residential
Commercial
Multi-family
Construction
Total mortgage loans
Commercial loans
Consumer loans
$
7,809
1486
—
—
9,295
551
2,465
4,325
—
—
—
4,325
406
487
8,105
7,090
—
—
15,195
17,243
2,491
TOTAL GROSS LOANS $
12,311
5,218
34,929
—
—
—
—
—
—
—
—
20,239
1,122,108
1,142,347
8,576
2,162,480
2,171,056
— 1,403,885
1,403,885
—
392,580
392,580
28,815
5,081,053
5,109,868
18,200
1,726,938
1,745,138
5,443
468,514
473,957
52,458 7,276,505
7,328,963
Included in loans receivable are loans for which the accrual of
interest income has been discontinued due to deterioration in
the financial condition of the borrowers. The principal amount
of these nonaccrual loans was $25.7 million and $34.9 million
at December 31, 2018 and 2017, respectively. There were no
loans ninety days or greater past due and still accruing interest
at December 31, 2018 and 2017.
If the non-accrual loans had performed in accordance with
their original terms, interest income would have increased by
$1.4 million, $1.9 million and $2.2 million, for the years ended
December 31, 2018, 2017 and 2016, respectively. The amount
of cash basis interest income that was recognized on impaired
loans during the years ended December 31, 2018, 2017 and
2016 was $2.0 million, $1.8 million and $1.5 million respectively.
The Company defines an impaired loan as a non-homogeneous
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 modified as troubled debt restructurings
(“TDRs”). A loan is deemed to be a TDR when a loan modification
resulting in a concession is made by the Bank in an effort to
mitigate potential loss arising from a borrower’s financial difficulty.
Smaller balance homogeneous loans including residential
mortgages and other consumer loans are evaluated collectively for
impairment and are excluded from the definition of impaired loans,
unless modified 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 flows 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.
77
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The Company uses third-party appraisals to determine the
fair value of the underlying collateral in its analysis 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 specific 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 specific 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 fiscal 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 financial 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 specific reserves are adjusted to reflect
the appraised value. The Company believes there have been no
significant time lapses as a result of this process.
At December 31, 2018, there were 152 impaired loans totaling
$50.7 million, of which 148 loans totaling $46.8 million were TDRs.
Included in this total were 129 TDRs related to 124 borrowers
totaling $35.6 million that were performing in accordance with
their restructured terms and which continued to accrue interest
at December 31, 2018. At December 31, 2017, there were
149 impaired loans totaling $52.0 million, of which 141 loans
totaling $41.7 million were TDRs. Included in this total were 125
TDRs related to 121 borrowers totaling $31.7 million that were
performing in accordance with their restructured terms and which
continued to accrue interest at December 31, 2017.
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, 2018
Mortgage
loans
Commercial
loans
$
24,680
23,747
5,102,773
1,671,274
Consumer
loans
2,257
429,171
Total
Portfolio
Segments
50,684
7,203,218
$
5,127,453
1,695,021
431,428
7,253,902
At December 31, 2017
Mortgage
loans
Commercial
loans
$
28,459
21,223
5,081,409
1,723,915
Consumer
loans
2,359
471,598
Total
Portfolio
Segments
52,041
7,276,922
$
5,109,868
1,745,138
473,957
7,328,963
The allowance for loan losses is summarized by portfolio segment and impairment classification, excluding PCI loans as follows
(in thousands):
At December 31, 2018
Mortgage
loans
Commercial
loans
Consumer
loans
1,026
26,652
27,678
92
25,601
25,693
47
2,144
2,191
At December 31, 2017
Mortgage
loans
Commercial
loans
Consumer
loans
1,486
26,566
28,052
1,134
28,680
29,814
70
2,259
2,329
Total
Portfolio
Segments
1,165
54,397
55,562
Total
Portfolio
Segments
2,690
57,505
60,195
$
$
$
$
Total
1,165
54,397
55,562
Total
2,690
57,505
60,195
Individually evaluated for impairment
Collectively evaluated for impairment
TOTAL
Individually evaluated for impairment
Collectively evaluated for impairment
TOTAL
78
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank
Item 8 Financial Statements and Supplementary Data
PART II
Loan modifications to borrowers experiencing financial difficulties
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 reflected
in the interest rate, or a combination of these two methods. These
modifications 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.
The following tables present the number of loans modified as TDRs during the years ended December 31, 2018 and 2017 and their
balances immediately prior to the modification date and post-modification as of December 31, 2018 and 2017.
($ in thousands)
Troubled Debt Restructurings
Mortgage loans:
Residential
Total mortgage loans
Commercial loans
Consumer loans
TOTAL RESTRUCTURED LOANS
($ in thousands)
Troubled Debt Restructurings
Mortgage loans:
Residential
Total mortgage loans
Commercial loans
Consumer loans
TOTAL RESTRUCTURED LOANS
Year Ended December 31, 2018
Pre-Modification
Outstanding
Recorded
Investment
Number of
Loans
Post-
Modification
Outstanding
Recorded
Investment
$
6
6
8
1
981
981
9,192
336
15
$
10,509
945
945
7,888
332
9,165
Year Ended December 31, 2017
Pre-Modification
Outstanding
Recorded
Investment
Number of
Loans
Post-
Modification
Outstanding
Recorded
Investment
5
5
1
2
8
$
$
2,468
2,468
874
262
3,604
2,260
2,260
874
257
3,391
All TDRs are impaired loans, which are individually evaluated for
impairment, as previously discussed. Estimated collateral values
of collateral dependent impaired loans modified during the years
ended December 31, 2018 and 2017 exceeded the carrying
amounts of such loans. During the year ended December 31,
2018, there were $8.3 million of charge-offs recorded on collateral
dependent impaired loans. There were $5.1 million of charge-
offs recorded on collateral dependent impaired loans for the
year ended December 31, 2017. The allowance for loan losses
associated with the TDRs presented in the preceding tables
totaled $119,000 and $166,000 at December 31, 2018 and 2017,
respectively and were included in the allowance for loan losses
for loans individually evaluated for impairment.
The TDRs presented in the preceding tables had a weighted
average modified interest rate of approximately 5.41% and 4.18%,
compared to a yield of 5.46% and 4.19% prior to modification
for the years ended December 31, 2018 and 2017, respectively.
79
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The following table presents loans modified as TDRs within the previous 12 months from December 31, 2018 and 2017, and for which
there was a payment default (90 days or more past due) at the quarter ended December 30, 2018 and 2017.
($ in thousands)
Troubled Debt Restructurings Subsequently Defaulted
Commercial Loans
TOTAL RESTRUCTURED LOANS
There were three loans to one borrower which had a payment
default (90 days or more past due) for loans modified as TDRs
within the 12 month period ending December 31, 2018.
There were no payment defaults (90 days or more past due)
for loans modified as TDRs within the 12 month period ending
December 31, 2017.
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.
December 31, 2018
December 31, 2017
Number of
Loans
Outstanding
Recorded
Investment
Number of
Loans
Outstanding
Recorded
Investment
3
3
$
$
1,344
1,344
— $
— $
—
—
PCI loans are loans acquired at a discount primarily due to
deteriorated credit quality. These loans are accounted for at fair
value, based upon the present value of expected future cash
flows, with no related allowance for loan losses. At December 31,
2018, PCI loans totaled $899,000, compared to $1.0 million at
December 31, 2017. The $70,000 decrease from December 31,
2017 was largely due to the full repayment and greater than
projected cash flows on certain PCI loans.
The following table summarizes the changes in the accretable yield for PCI loans for the years ended December 31, 2018 and 2017
(in thousands):
Beginning balance
Accretion
Reclassification from non-accretable difference
ENDING BALANCE
Year ended December 31,
2018
101
(88)
99
112
$
$
2017
200
(320)
221
101
The activity in the allowance for loan losses for the years ended December 31, 2018, 2017 and 2016 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,
2018
60,195
23,700
1,685
(30,018)
55,562
$
$
2017
61,883
5,600
1,653
(8,941)
2016
61,424
5,400
2,009
(6,950)
60,195
61,883
The activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2018 and 2017 are as follows
(in thousands):
For the Year Ended December 31, 2018
Mortgage
loans
Commercial
loans
Consumer
loans
Balance at beginning of period
Provision charged to operations
Recoveries of loans previously charged off
Loans charged off
$
28,052
(586)
489
(277)
BALANCE AT END OF PERIOD
$
27,678
29,814
24,437
428
(28,986)
25,693
2,329
(151)
768
(755)
2,191
Total
Portfolio
Segments
60,195
23,700
1,685
(30,018)
55,562
Total
60,195
23,700
1,685
(30,018)
55,562
80
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank
Item 8 Financial Statements and Supplementary Data
PART II
For the Year Ended December 31, 2017
Mortgage
loans
Commercial
loans
Consumer
loans
Total
Portfolio
Segments
Balance at beginning of period
Provision charged to operations
Recoveries of loans previously charged off
Loans charged off
$
29,626
(1,139)
66
(501)
29,143
7,058
800
(7,187)
BALANCE AT END OF PERIOD
$
28,052
29,814
3,114
61,883
(319)
787
(1,253)
2,329
5,600
1,653
(8,941)
60,195
60,195
Total
61,883
5,600
1,653
(8,941)
Impaired loans receivable by class, excluding PCI loans are summarized as follows (in thousands):
At December 31, 2018
At December 31, 2017
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
$ 15,013
12,005
Commercial
Multi-family
Construction
Total
Commercial loans
Consumer loans
1,550
1,546
—
—
16,563
21,746
1,871
—
—
13,551
16,254
1,313
—
—
—
—
—
—
—
12,141
1,546
—
—
13,687
17,083
1,386
594 $
13,239
10,477
— 10,552
—
—
—
594
328
90
5,037
4,908
—
—
18,276
19,196
1,582
—
—
15,385
14,984
1,041
—
—
—
5,022
—
—
— 15,574
— 15,428
—
1,150
— 32,152
TOTAL LOANS $ 40,180
31,118
— 32,156
1,012 $ 39,054
31,410
Loans with an
allowance
recorded
Mortgage loans:
Residential
$ 10,573
10,090
Commercial
Multi-family
Construction
1,039
1,039
—
—
—
—
954
72
—
—
10,186
1,052
—
—
Total
11,612
11,129
1,026
11,238
Commercial loans
7,493
7,493
Consumer loans
954
944
92
47
9,512
962
425 $
13,052
12,010
1,351
12,150
53
—
—
478
435
40
1,064
1,064
135
1,076
—
—
—
—
14,116
13,074
7,097
1,329
6,239
1,318
—
—
1,486
1,134
70
—
—
13,226
7,318
1,349
TOTAL LOANS $ 20,059
19,566
1,165
21,712
953 $ 22,542
20,631
2,690
21,893
Total
Mortgage loans:
Residential
$ 25,586
22,095
954
22,327
1019 $
26,291
22,487
1,351
22,702
954
Commercial
Multi-family
Construction
2,589
2,585
—
—
—
—
72
—
—
2,598
—
—
53
—
—
6,101
5,972
135
6,098
—
—
—
—
—
—
—
—
Total
28,175
24,680
1,026
24,925
1,072
32,392
28,459
Commercial loans
29,239
23,747
Consumer loans
2,825
2,257
92
47
26,595
2,348
763
130
26,293
21,223
1,486
1,134
28,800
22,746
2,911
2,359
70
2,499
TOTAL LOANS $ 60,239
50,684
1,165
53,868
1,965 $ 61,596
52,041
2,690
54,045
1,756
81
479
12
—
—
491
395
69
955
475
54
—
—
529
208
64
801
66
—
—
1,020
603
133
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report
PART II
Item 8 Financial Statements and Supplementary Data
At December 31, 2018, impaired loans consisted of 152
residential, commercial and commercial mortgage loans totaling
$50.7 million, of which 23 loans totaling $15.1 million were
included in nonaccrual loans. At December 31, 2017, impaired
loans consisted of 149 residential, commercial and commercial
mortgage loans totaling $52.0 million, of which 24 loans totaling
$20.3 million were included in nonaccrual loans. Specific
allocations of the allowance for loan losses attributable to impaired
loans totaled $1.2 million and $2.7 million at December 31, 2018
and 2017, respectively. At December 31, 2018 and 2017, impaired
loans for which there was no related allowance for loan losses
totaled $31.1 million and $31.4 million, respectively. The average
balances of impaired loans during the years ended December 31,
2018 and 2017 were $53.9 million and $54.0 million, respectively.
In the normal course of conducting its business, the Bank extends
credit to meet the financing needs of its customers through
commitments. Commitments and contingent liabilities, such
as commitments to extend credit (including loan commitments
of $1.26 billion and $1.71 billion, at December 31, 2018 and
2017, respectively, and undisbursed home equity and personal
credit lines of $233.9 million and $270.9 million, at December
31, 2018 and 2017, respectively) exist, which are not reflected
in the accompanying consolidated financial statements. These
instruments involve elements of credit and interest rate risk in
excess of the amount recognized in the consolidated financial
statements. The Bank uses the same credit policies and collateral
requirements in making commitments and conditional obligations
as it does for on-balance sheet loans. Commitments generally
have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire
without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
The Bank evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management’s credit evaluation of the borrower.
The Bank grants residential real estate loans on single- and
multi-family dwellings to borrowers primarily in New Jersey. Its
borrowers’ abilities to repay their obligations are dependent upon
various factors, including the borrowers’ income and net worth,
cash flows generated by the underlying collateral, value of the
underlying collateral, and priority of the Bank’s lien on the property.
Such factors are dependent upon various economic conditions
and individual circumstances beyond the Bank’s control; the Bank
is therefore subject to risk of loss. The Bank believes that its
lending policies and procedures adequately minimize the potential
exposure to such risks and that adequate provisions for loan
losses are provided for all known and inherent risks. Collateral
and/or guarantees are required for virtually all loans.
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
classifications (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 officer is
responsible for risk rating loans in their portfolio. These risk ratings
are then reviewed by the department manager and/or the Chief
Lending Officer and by the Credit Department. The risk ratings are
also confirmed 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, 2018
Commercial
Residential
mortgages Multi-family Construction
Total
mortgages
Commercial
loans
Consumer
loans
Total loans
5,071
7,878
—
—
14,496
13,292
—
—
228
—
—
—
—
6,181
—
—
19,795
27,351
—
—
67,396
45,180
923
—
610
1,711
—
—
87,801
74,242
923
—
12,949
27,788
228
6,181
47,146
113,499
2,321
162,966
1,086,515
2,271,525 1,339,449
382,818
5,080,307
1,581,522
429,107
7,090,936
$ 1,099,464 2,299,313 1,339,677
388,999 5,127,453 1,695,021
431,428 7,253,902
Special mention
$
Substandard
Doubtful
Loss
Total classified and
criticized
Acceptable/watch
TOTAL OUTSTANDING
LOANS
82
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
At December 31, 2017
Commercial
Residential
mortgages Multi-family Construction
Total
mortgages
Commercial
loans
Consumer
loans
Total loans
4,325
8,105
—
—
19,172
25,069
—
—
12,430
44,241
15
—
—
—
15
—
—
—
—
—
23,512
33,174
—
—
20,738
29,734
428
—
486
2,491
—
—
44,736
65,399
428
—
56,686
50,900
2,977
110,563
1,129,917
2,126,815
1,403,870
392,580
5,053,182
1,694,238
470,980
7,218,400
$ 1,142,347 2,171,056 1,403,885
392,580 5,109,868 1,745,138
473,957 7,328,963
Special mention
$
Substandard
Doubtful
Loss
Total classified and
criticized
Acceptable/watch
TOTAL OUTSTANDING
LOANS
NOTE 7 Banking Premises and Equipment
A summary of banking premises and equipment at December 31, 2018 and 2017 is as follows (in thousands):
Land
Banking premises
Furniture, fixtures and equipment
Leasehold improvements
Construction in progress
Less accumulated depreciation and amortization
TOTAL BANKING PREMISES AND EQUIPMENT
On December 13, 2017, the Company completed the sale and
leaseback of 12 of its New Jersey banking offices, which had
a net book value of $14.5 million. Net proceeds from the sale
totaled $20.7 million. The net gain on sale of $6.2 million is being
recognized over the 10 year term of the leases as a reduction of
rent expense.
2018
12,440
58,351
44,602
35,106
1,563
152,062
93,938
58,124
$
$
2017
12,440
58,523
45,184
35,240
1,036
152,423
89,238
63,185
Depreciation expense for the years ended December 31, 2018,
2017 and 2016 amounted to $8.0 million, $9.0 million and
$9.4 million, respectively.
NOTE 8 Intangible Assets
Intangible assets at December 31, 2018 and 2017 are summarized as follows (in thousands):
Goodwill
Core deposit premiums
Customer relationship and other intangibles
Mortgage servicing rights
TOTAL INTANGIBLE ASSETS
2018
$
411,600
2,539
3,410
629
2017
411,600
3,470
4,483
737
$
418,178
420,290
83
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Amortization expense of intangible assets for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):
Core deposit premiums
Customer relationship and other intangibles
Mortgage servicing rights
TOTAL AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
2018
931
1,073
123
2,127
$
$
2017
1,076
1,474
120
2,670
2016
1,300
1,909
182
3,391
Scheduled amortization of core deposit premiums and customer relationship and other intangibles for each of the next five years is
as follows (in thousands):
Year ended December 31,
2019
2020
2021
2022
2023
Scheduled
Amortization
$
1,709
1,415
1,120
825
533
84
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank
PART II
Item 8.
Financial
Statements and
Supplementary
Data
Item 8 Financial Statements and Supplementary Data
PART II
NOTE 9 Deposits
Deposits at December 31, 2018 and 2017 are summarized as follows (in thousands):
0.36
0.46
—
0.94
2017
424,448
150,280
56,529
3,552
Savings deposits
Money market accounts
NOW accounts
Non-interest bearing deposits
Certificates of deposit
TOTAL DEPOSITS
Weighted
average
interest rate
2018
Weighted
average
interest rate
2017
$ 1,051,922
0.16% $
1,083,012
0.17%
1,496,310
2,049,645
1,481,753
750,492
0.63
0.73
—
1.58
1,532,024
2,011,334
1,452,987
634,809
$ 6,830,122
$ 6,714,166
Scheduled maturities of certificates of deposit accounts at December 31, 2018 and 2017 are as follows (in thousands):
Within one year
One to three years
Three to five years
Five years and thereafter
2018
$
584,478
119,655
45,518
841
Interest expense on deposits for the years ended December 31, 2018, 2017 and 2016 is summarized as follows (in thousands):
$ 750,492
634,809
Savings deposits
NOW and money market accounts
Certificates of deposits
Years ended December 31,
$
2018
1,923
20,450
8,320
2017
2,092
12,205
5,144
2016
1,709
10,106
5,132
$
30,693
19,441
16,947
NOTE 10 Borrowed Funds
Borrowed funds at December 31, 2018 and 2017 are summarized as follows (in thousands):
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
TOTAL BORROWED FUNDS
2018
$
121,322
283,000
2017
143,179
472,000
1,037,960
1,127,335
$ 1,442,282
1,742,514
At December 31, 2018, FHLB advances were at fixed rates and mature between January 2019 and April 2022, and at December 31,
2017, FHLB advances were at fixed rates and mature between January 2018 and April 2022. These advances are secured by loans
receivable and investment securities under a blanket collateral agreement.
85
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Scheduled maturities of FHLB advances at December 31, 2018 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
Thereafter
TOTAL FHLB ADVANCES
2018
$
601,551
359,169
67,240
10,000
—
$ 1,037,960
Scheduled maturities of securities sold under repurchase agreements at December 31, 2018 are as follows (in thousands):
Due in one year or less
Thereafter
TOTAL SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
2018
$
121,322
—
$
121,322
The following tables set forth certain information as to borrowed funds for the years ended December 31, 2018 and 2017 (in thousands):
2018:
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
2017:
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
Maximum
balance
$
153,715
487,000
Average
balance
139,729
259,189
1,256,525
1,136,988
$
210,702
472,000
164,982
179,003
1,288,448
1,237,979
Weighted
average
interest rate
1.04%
2.09
1.90
1.26%
1.17
1.78
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 available for sale debt securities to pledge as
collateral for the repurchase agreements.
NOTE 11 Benefit Plans
Pension and Post-retirement Benefits
The Bank has a noncontributory defined benefit 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, 2018, no contributions
will be made to the pension plan in 2019.
In addition to pension benefits, certain health care and life
insurance benefits are currently made available to certain of
the Bank’s retired employees. The costs of such benefits are
accrued based on actuarial assumptions from the date of hire
to the date the employee is fully eligible to receive the benefits.
Effective January 1, 2003, eligibility for retiree health care benefits
was frozen as to new entrants and benefits 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
benefits was frozen as to new entrants and retiree life insurance
benefits were eliminated for employees with less than ten years
of service as of December 31, 2006.
86
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
The following table sets forth information regarding the pension plan and post-retirement healthcare and life insurance plans
(in thousands):
Change in benefit obligation:
Benefit obligation at beginning of year
$
31,970
29,533
28,274
22,757
20,805
25,694
Pension
Post-retirement
2018
2017
2016
2018
2017
2016
Service cost
Interest cost
Actuarial loss
Benefits paid
Change in actuarial assumptions
BENEFIT 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
Benefits paid
Fair value of plan assets at end of year
—
1,094
—
(1,401)
(2,785)
—
1,227
—
(1,590)
2,800
—
1,247
70
(1,247)
1,189
115
786
18
(590)
(3,058)
105
871
—
(560)
1,536
150
1,138
—
(682)
(5,495)
28,878
31,970
29,533
20,028
22,757
20,805
46,870
(2,020)
—
(1,401)
43,449
43,153
5,307
—
(1,590)
46,870
41,448
2,952
—
(1,247)
43,153
—
—
590
(590)
—
—
—
560
(560)
—
—
—
682
(682)
—
FUNDED STATUS AT END OF YEAR
$
14,571
14,900
13,620
(20,028)
(22,757)
(20,805)
For the years ended December 31, 2018 and 2017, the Company,
in the measurement of its pension plan and post-retirement
obligations updated its mortality assumptions to the RP 2014
mortality table with the fully generational projection scale MP
2018 and MP 2017 issued by The Society of Actuaries (‘‘SOA’’) in
October 2018 and 2017, respectively. The prepaid pension benefits
of $14.6 million and the unfunded post-retirement healthcare and
life insurance benefits of $20.0 million at December 31, 2018 are
included in other assets and other liabilities, respectively, in the
Consolidated Statements of Financial Condition.
The components of accumulated other comprehensive loss (gain) related to the pension plan and other post-retirement benefits, on
a pre-tax basis, at December 31, 2018 and 2017 are summarized in the following table (in thousands):
Unrecognized prior service cost
Unrecognized net actuarial loss (gain)
$
2018
—
12,300
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS (GAIN)
$
12,300
2017
—
11,091
11,091
2018
—
(7,425)
(7,425)
2017
—
(4,781)
(4,781)
Pension
Post-retirement
Net periodic benefit (increase) cost for the years ending December 31, 2018, 2017 and 2016, included the following components
(in thousands):
Service cost
Interest cost
Return on plan assets
Amortization of:
Net loss (gain)
Unrecognized prior service cost
$
2018
—
1,094
(2,769)
795
—
NET PERIODIC BENEFIT (INCREASE) COST $
(880)
Pension
Post-retirement
2017
—
1,227
(2,550)
920
—
(403)
2016
—
1,247
(2,449)
943
—
(259)
2018
115
786
—
(396)
—
505
2017
105
871
—
(677)
—
299
2016
150
1,138
—
—
—
1,288
87
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The weighted average actuarial assumptions used in the plan determinations at December 31, 2018, 2017 and 2016 were as follows:
Discount rate
Rate of compensation increase
Expected return on plan assets
Medical and life insurance benefits cost rate
of increase
Pension
Post-retirement
2018
4.25%
—
6.00
—
2017
3.50%
—
6.00
—
2016
4.25%
—
6.00
2018
4.25%
—
—
2017
3.50%
—
—
2016
4.25%
—
—
—
6.00
6.00
6.00
The Company provides its actuary with certain rate assumptions
used in measuring the benefit obligation. The most significant of
these is the discount rate used to calculate the period-end present
value of the benefit obligations, and the expense to be included
in the following year’s financial statements. A lower discount
rate will result in a higher benefit obligation and expense, while
a higher discount rate will result in a lower benefit obligation and
expense. The discount rate assumption was determined based
on a cash flow-yield curve model specific 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 4.25% was selected for the December 31,
2018 measurement date.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A 1% change in the
assumed health care cost trend rate would have had the following effects on post-retirement benefits at December 31, 2018 (in
thousands):
Effect on total service cost and interest cost
Effect on post-retirement benefits obligation
1% increase
1% decrease
$
$
160
3,200
130
2,600
Estimated future benefit payments, which reflect expected future service, as appropriate for the next five years, are as follows
(in thousands):
2019
2020
2021
2022
2023
Pension
Post-retirement
$
$
1,528
1,566
1,621
1,645
1,712
682
708
770
828
834
The weighted-average asset allocation of pension plan assets at December 31, 2018 and 2017 were as follows:
Asset Category
Domestic equities
Foreign equities
Fixed income
Real estate
Cash
TOTAL
2018
2017
34%
11%
53%
2%
—%
38%
11%
49%
2%
—%
100%
100%
The Company’s expected return on pension plan assets assumption is based on historical investment return experience and evaluation
of input from the Plan’s Investment Consultant and the Company’s Benefits Committee which manages 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.
88
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Management strives to have pension plan assets sufficiently diversified so that adverse or unexpected results from one security class
will not have a significant detrimental impact on the entire portfolio. The target allocation of assets and acceptable ranges around the
targets are as follows:
Asset Category
Domestic equities
Foreign equities
Fixed income
Real estate
Cash
TOTAL
Target
Allowable
Range
37%
11%
50%
2%
—%
100%
30-41%
5-13%
40-65%
0-4%
—%
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.
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 benefits at December 31, 2018 and 2017, respectively. Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Fair value measurements at December 31, 2018
(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
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
TOTAL INVESTMENTS
401(k) Plan
Total
100
$
(Level 1)
(Level 2)
(Level 3)
—
100
15,252
15,252
4,649
1,224
772
21,897
21,452
4,649
1,224
772
21,897
—
$
43,449
21,897
—
—
—
—
—
21,452
21,552
Fair value measurements at December 31, 2017
Total
120
$
(Level 1)
(Level 2)
(Level 3)
—
120
13,725
13,725
5,110
1,431
950
21,216
25,534
5,110
1,431
950
21,216
—
$
46,870
21,216
—
—
—
—
—
25,534
25,654
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The Bank has a 401(k) plan covering substantially all employees of the Bank. For 2018, 2017 and 2016, the Bank matched 25% of
the first 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 2018, 2017 and 2016 were $973,000, $890,000 and $850,000, respectively.
89
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Supplemental Executive Retirement Plan
The Bank maintains a non-qualified supplemental retirement plan
for certain senior officers of the Bank. This plan was frozen as
of April 1, 2003. The Supplemental Executive Retirement Plan,
which is unfunded, provides benefits in excess of the benefits
permitted to be paid by the pension plan under provisions of the
tax law. Amounts expensed under this supplemental retirement
plan amounted to $82,000, $91,000 and $96,000 for the years
2018, 2017 and 2016, respectively. At December 31, 2018 and
2017, $2.0 million and $2.0 million, respectively, were recorded
in other liabilities on the Consolidated Statements of Financial
Condition for this supplemental retirement plan. In connection
with this supplemental retirement plan, an increase of $119,000,
a decrease of $120,000, and a decrease of $30,000, net of tax,
were recorded in other comprehensive income (loss) for 2018,
2017 and 2016, respectively.
Retirement Plan for the Board of Directors
of Provident Bank
The Bank maintains a Retirement Plan for the Board of Directors
of the Bank, a non-qualified 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 benefit previously accrued to a board member
without his or her consent. The plan was amended in December
2005 to terminate benefits 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.
The plan further provides that, in the event of a change in control
(as defined in the plan), the undistributed balance of a director’s
accrued benefit will be distributed to him or her within 60 days
of the change in control. The Bank paid $10,000, $12,500, and
$17,500 to former board members under this plan for each of the
years ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, $139,000 and $142,000,
respectively, were recorded in other liabilities on the Consolidated
Statements of Financial Condition for this retirement plan. An
increase of $3,000, a decrease of $1,000, and a decrease of
$3,000, net of tax, were recorded in other comprehensive income
(loss) for 2018, 2017 and 2016, respectively, in connection with
this plan.
Employee Stock Ownership Plan
The ESOP is a tax-qualified plan designed to invest primarily in
the Company’s common stock that provides employees with the
opportunity to receive a funded retirement benefit from the Bank,
based primarily on the value of the Company’s common stock. The
90
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, 2018, was $36.8 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 years ending December 31, 2018 and 2017, 243,527
shares and 242,254 shares from the ESOP were released,
respectively. Unallocated ESOP shares held in suspense totaled
1,737,009 at December 31, 2018, and had a fair value of
$41.9 million. ESOP compensation expense for the years ended
December 31, 2018, 2017 and 2016 was $4.5 million, $4.6 million
and $3.7 million, respectively.
Non-Qualified Supplemental Defined
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 Provident Bank Non-Qualified
Supplemental Employee Stock Ownership Plan (the “Supplemental
ESOP”). The Supplemental ESOP was amended and restated
as the Non-Qualified Supplemental Defined Contribution Plan
(the “Supplemental DC Plan”), effective January 1, 2010. The
Supplemental DC Plan is a non-qualified plan that provides
additional benefits to certain executives whose benefits under the
401(k) Plan and ESOP are limited by tax law limitations applicable
to tax-qualified 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 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 qualified contributions that may not be accrued in
the qualified ESOP and for matching contributions that may not
be accrued in the qualified 401(k) Plan due to tax law limitations.
Under the Supplemental 401(k) provision, the estimated expense
for the years ending December 31, 2018, 2017 and 2016 was
$18,000, $17,500 and $14,500, 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 years ending December 31, 2018, 2017 and
2016 was $121,000, $105,000 and $93,000, 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.
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Stock Awards
As a general rule, restricted stock grants are held in escrow for
the benefit of the award recipient until vested. Awards outstanding
generally vest in three annual installments, commencing one
year from the date of the award. Additionally, certain awards
are three-year performance vesting awards, which may or may
not vest depending upon the attainment of certain corporate
financial targets. Expense attributable to stock awards amounted
to $6.0 million, $5.0 million and $3.8 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
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 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.
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
2018
660,783
296,411
(56,296)
(249,799)
651,099
2017
547,698
288,519
(62,677)
(112,757)
660,783
2016
591,746
351,836
(178,632)
(217,252)
547,698
As of December 31, 2018, unrecognized compensation cost relating to unvested restricted stock totaled $6.2 million. This amount
will be recognized over a remaining weighted average period of 1.7 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 five-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 financial targets.
A summary of the status of the granted but unexercised stock options as of December 31, 2018, 2017 and 2016, and changes during
the year is presented below:
2018
2017
2016
Outstanding at beginning of year
507,656
$
Number of
stock
options
Granted
Exercised
Forfeited
Expired
43,124
(79,801)
—
—
Weighted
average
exercise
price
16.84
25.58
12.61
—
—
Number of
stock
options
703,669
$
42,857
(238,370)
—
(500)
Weighted
average
exercise
price
14.70
26.31
12.22
—
17.94
Number of
stock
options
1,084,686
$
76,327
(368,838)
(82,006)
(6,500)
Weighted
average
exercise
price
15.32
18.70
16.92
16.42
18.55
OUTSTANDING AT THE END
OF YEAR
470,979
$
18.36
507,656
$
16.84
703,669
$
14.70
The total fair value of options vesting during 2018, 2017 and 2016 was $189,000, $168,000 and $247,000, respectively.
Compensation expense of approximately $128,000, $72,000 and $10,000 is projected for 2019, 2020 and 2021, respectively, on
stock options outstanding at December 31, 2018.
91
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The following table summarizes information about stock options outstanding at December 31, 2018:
Range of exercise prices
$10.34-15.23
$16.38-26.31
Options Outstanding
Options Exercisable
Number of
options
outstanding
161,938
309,041
Average
remaining
contractual
life
Weighted
average
exercise
price
Number of
options
exercisable
Weighted
average
exercise
price
3.0 years
6.8 years
$
$
14.50
20.03
161,938
204,905
$
$
14.50
18.28
The stock options outstanding and stock options exercisable
at December 31, 2018 have an aggregate intrinsic value of
$3.0 million and $2.8 million, 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.
Compensation expense related to the Company’s stock option
plan totaled $190,000, $203,000 and $172,000 for 2018, 2017
and 2016, respectively.
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 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,
2018
3.13%
20.65%
2.65%
2017
2.89%
20.34%
2.05%
2016
3.64%
20.71%
1.21%
8 years
8 years
8 years
The weighted average fair value of options granted during 2018, 2017 and 2016 was $4.29, $4.20 and $2.26 per option, respectively.
NOTE 12 Income Taxes
The Tax Cuts and Jobs Act (‘‘Tax Act’’) was signed into law on December 22, 2017. Included as part of the law, was a permanent
reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Based upon the change in the tax rate,
the Company revalued its net deferred tax asset at December 31, 2017. As a result of the enactment of the Tax Act, the Company
recognized an additional tax expense of $3.9 million for the year ended December 31, 2017.
The current and deferred amounts of income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 are as
follows (in thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
92
Years ended December 31,
2018
2017
2016
$ 41,578
2,493
44,071
(17,302)
(1,239)
(18,541)
4,163
1,731
5,894
39,003
1,631
40,634
32,506
1,314
33,820
2,606
554
3,160
$ 25,530
46,528
36,980
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
The Company recorded a deferred tax benefit of ($2.4) million,
($1.4) million and ($3.0) million during 2018, 2017 and 2016,
respectively, related to the unrealized (loss) gain on securities
available for sale, which is reported in accumulated other
comprehensive income (loss), net of tax. Additionally, the
Company recorded a deferred tax expense (benefit) of $379,000,
($315,000) and $2.3 million in 2018, 2017 and 2016, respectively,
related to the amortization of post-retirement benefit obligations,
which is reported in accumulated other comprehensive income
(loss), net of tax.
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 rates(1)
Increase (decrease) in taxes resulting from:
State tax, net of federal income tax benefit
Tax-exempt interest income
Bank-owned life insurance
Enactment of Tax Act
Other, net
Years ended December 31,
2018
$ 30,223
1,002
(2,839)
(1,158)
—
(1,698)
2017
49,167
2,185
(5,097)
(2,343)
3,912
(1,296)
2016
43,674
1,215
(5,286)
(1,915)
—
(708)
$ 25,530
46,528
36,980
(1) The statutory tax rate for 2018 was 21% and 35% for 2017 and 2016.
The net deferred tax asset is included in other assets in the consolidated statements of financial condition. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017
are as follows (in thousands):
Deferred tax assets:
Allowance for loan losses
Post-retirement benefit
Deferred compensation
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
Deferred tax liabilities:
Deferred REIT dividend
Pension expense
Deferred loan costs
Investment securities, principally due to accretion of discounts
Intangibles
Originated mortgage servicing rights
Total gross deferred tax liabilities
NET DEFERRED TAX ASSET
2018
2017
$
13,968
14,884
7,481
1,371
1,562
215
694
1,929
4,464
867
3,599
—
363
1,358
2,164
40,035
—
7,322
4,872
93
1,159
165
13,611
$
26,424
7,265
1,382
1,242
2,284
651
2,000
4,066
839
1,180
18
270
1,495
2,561
40,137
22,264
6,857
4,043
79
775
184
34,202
5,935
93
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Retained earnings at December 31, 2018 includes approximately
$51.8 million for which no provision for income tax has been
made. This amount represents an allocation of income to bad
debt deductions for tax purposes only. Events that would result in
taxation of these reserves include 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, 2018, the Company had an unrecognized tax
liability of $14.1 million with respect to this reserve.
As a result of the Beacon Trust acquisition in 2011, the
Company acquired federal net operating loss carryforwards.
There are approximately $1.7 million of net operating loss
(‘‘NOL’’) carryforwards available to offset future taxable income
as of December 31, 2018. If not utilized, these carryforwards
will expire in 2031. Pursuant to the Tax Act, NOLs created after
December 31, 2017 may be carried forward indefinitely and
utilization is subject to 80% of taxable income. The federal NOLs
are subject to a combined annual Code Section 382 limitation
in the amount of approximately $197,000. 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
sufficient 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 benefits in income tax expense. The
Company did not have any liabilities for uncertain tax positions
or any known unrecognized tax benefits at December 31, 2018
and 2017.
The Company and its subsidiaries file a consolidated U.S. Federal
income tax return. For tax periods prior to December 31, 2018,
New Jersey tax law does not and has not allowed for a taxpayer to
file a tax return on a combined or consolidated basis with another
member of the affiliated group where there is common ownership.
As a result of the newly enacted legislation that New Jersey
effectuated on July 1, 2018, beginning in 2019, the Company will
be required to file a combined New Jersey state income tax return.
Also, the Company and its subsidiaries file a combined New York
State income tax return on apportioned and allocated income.
The Company, through its bank subsidiary, files a Pennsylvania
Mutual Thrift Institution Tax return. The Company’s Federal and
New York State income tax returns are open for examination
from 2016, the New Jersey State income tax returns are open
for examination from 2015, and the Pennsylvania Mutual Thrift
Institutions return is open from 2015. During the fourth quarter
of 2017, the Internal Revenue Service completed its examination
of the Company’s 2014 Federal tax return. The completion of the
examination did not have a material impact on the Company’s
effective income tax rate. The examination of the Company’s
2016 and 2015 New York State tax returns was completed in
the first quarter of 2019, and did not have a material impact on
the Company’s effective income tax rate.
NOTE 13 Lease Commitments
The approximate future minimum rental commitments, exclusive of taxes and other related charges, for all significant non-cancellable
operating leases at December 31, 2018, are summarized as follows (in thousands):
Year ending December 31,
2019
2020
2021
2022
2023
Thereafter
$
8,012
7,562
5,352
3,808
3,383
10,733
$
38,850
Rental expense was $10.5 million, $8.8 million and $8.7 million for the years ended December 31, 2018, 2017 and 2016, 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 reflected in
the accompanying consolidated financial statements. In the
opinion of management, the consolidated financial position of
the Company will not be materially affected by the outcome of
such commitments or contingent liabilities.
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 financial
condition or results of operations.
A substantial portion of the Bank’s loans are 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 and general business environment.
94
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
NOTE 15 Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of
regulatory capital. Under the regulations in effect at December 31,
2018, the Bank is required to maintain: (1) a Tier 1 capital to total
assets leverage ratio of 4.0%; (2) a common equity Tier 1 capital
to risk-based assets ratio of 4.5%; (3) a Tier 1 capital to risk-based
assets ratio of 6.0%; and (4) a total capital to risk-based assets
ratio of 8.0%. In addition to establishing the minimum regulatory
capital requirements, the regulations limit capital distributions
and certain discretionary bonus payments to management if the
institution does not hold a “capital conservation buffer” consisting
of 2.5% of common equity Tier 1 capital to risk-weighted asset
above the amount necessary to meet its minimum risk-based
capital requirements. The capital conservation buffer requirement
was effective on January 1, 2016 at 0.625% of risk-weighted
assets and increased each year until fully implemented at 2.5%
on January 1, 2019. The capital conservation buffer during the
calendar year 2018 was 1.875% and increased to 2.5% on
January 1, 2019.
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
financial statements. The regulations establish a framework for
the classification of savings institutions into five categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has: a leverage (Tier 1)
capital ratio of at least 5.00%; a common equity Tier 1 risk-based
capital ratio of 6.50%; a Tier 1 risk-based capital ratio of at least
8.00%; and a total risk-based capital ratio of at least 10.00%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by the FDIC about capital components, risk weightings
and other factors.
As of December 31, 2018 and 2017, the Bank exceeded all
minimum capital adequacy requirements to which it is subject.
Further, the most recent FDIC notification categorized the Bank
as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank’s
capital classification.
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, 2018 and 2017, 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 file 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.
The following table shows the Company’s actual capital amounts
and ratios as of December 31, 2018 and 2017, compared to
the FRB minimum capital adequacy requirements and the FRB
requirements for classification as a well-capitalized institution
(dollars in thousands).
Actual capital
FRB minimum
capital adequacy
requirements
FRB minimum capital
adequacy requirements
with capital
conservation buffer
To be well-capitalized
under prompt
corrective action
provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2018
Tier 1 leverage capital
$ 953,768
10.24% $ 372,458
4.00% $ 372,458
4.00% $ 465,573
5.00%
Common equity Tier 1
risk-based capital
Tier 1 risk-based capital
953,768
953,768
Total risk-based capital
1,009,475
12.54
12.54
13.27
342,277
456,370
608,493
4.50
6.00
8.00
484,893
598,985
751,108
6.38
7.88
9.88
494,400
608,493
6.50
8.00
760,616
10.00
95
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Actual capital
FRB minimum capital
adequacy requirements
FRB minimum capital
adequacy requirements
with capital
conservation buffer
To be well-capitalized
under prompt
corrective action
provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017
Tier 1 leverage capital
$ 887,924
9.65% $ 367,999
4.00% $ 367,999
4.00% $ 459,999
5.00%
Common equity Tier 1
risk-based capital
Tier 1 risk-based capital
Total risk-based capital
887,924
887,924
948,119
11.87
11.87
12.67
336,736
448,981
598,642
4.50
6.00
8.00
430,260
542,502
692,157
5.75
7.25
9.25
486,381
598,623
6.50
8.00
748,278
10.00
The following table shows the Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017, compared to the
FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution (dollars in
thousands).
Actual capital
FDIC minimum capital
adequacy requirements
FDIC minimum capital
adequacy requirements
with Capital
Conservation buffer
To be well-capitalized
under prompt
corrective action
provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2018
Tier 1 leverage capital
$ 917,659
9.86% $ 372,443
4.00% $ 372,443
4.00% $ 465,553
5.00%
Common equity Tier 1
risk-based capital
Tier 1 risk-based capital
Total risk-based capital
917,659
917,659
973,366
12.06
12.06
12.80
342,279
456,372
608,496
4.50
6.00
8.00
484,895
598,988
751,113
6.38
7.88
9.88
494,403
608,496
6.50
8.00
760,620
10.00
Actual capital
FDIC minimum capital
adequacy requirements
FRB minimum capital
adequacy requirements
with capital
conservation buffer
To be well-capitalized
under prompt
corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017
Tier 1 leverage capital
$ 834,084
9.07% $ 367,986
4.00% $ 367,986
4.00% $ 459,983
5.00%
Common equity Tier 1
risk-based capital
Tier 1 risk-based capital
Total risk-based capital
834,084
834,084
894,430
11.15
11.15
11.95
336,721
448,961
598,615
4.50
6.00
8.00
430,254
542,494
692,148
5.75
7.25
9.25
486,374
598,615
6.50
8.00
748,268
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 financial 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.
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:
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 financial instrument.
96
Level 1: Unadjusted quoted market prices in active markets that
are accessible at the measurement date for identical,
unrestricted assets or liabilities;
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
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 significant to the fair value measurement and
unobservable (i.e., supported by little or no market
activity).
A financial instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant 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 financial instruments in the table below on a recurring
basis as of December 31, 2018 and December 31, 2017.
Available for Sale Debt Securities
For available for sale debt securities, fair value was estimated
using a market approach. The majority of the Company’s
securities are fixed 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 flows. 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. Specifically, 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 verification procedures and review of fair value
methodology documentation provided by independent pricing
services has not historically resulted in an adjustment in the prices
obtained from the pricing service.
Equity Securities, at Fair Value
The Company holds equity securities 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 statements of financial
condition 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 satisfied the criteria necessary
to apply hedge accounting. The Company has interest rate
derivatives resulting from a service provided to certain qualified
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 Company also uses interest rate swaps as part of its interest
rate risk management strategy. Interest rate swaps designated
as cash flow hedges, and which satisfy hedge accounting
requirements, involve the receipt of variable amounts from a
counterparty in exchange for the Company making fixed-rate
payments over the life of the agreements without the exchange
of the underlying notional amount. These derivatives were
used to hedge the variable cash outflows associated with
FHLBNY borrowings. The effective portion of changes in the
fair value of these derivatives are recorded in accumulated other
comprehensive income, and are subsequently reclassified into
earnings in the period that the hedged forecasted transaction
affects earnings. The ineffective portion of the change in fair value
of these derivatives are recognized directly in earnings.
The fair value of the Company’s derivatives are determined using
discounted cash flow 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 financial instruments measured on a non-recurring
basis as of December 31, 2018 and 2017.
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 between 5% and 10%.
The Company classifies 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, which range between
5% and 10%. Fair value is generally based on independent
appraisals that rely upon quoted market prices for similar assets
97
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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 classified
as Level 3. When an asset is acquired, the excess of the loan
balance over fair value less estimated selling costs 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, 2018
and 2017.
The following tables present the assets and liabilities reported
on the consolidated statements of financial condition at their fair
value as of December 31, 2018 and 2017, by level within the fair
value hierarchy (in thousands).
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
$
$
$
$
$
$
1,034,969
2,912
25,198
1,063,079
635
15,634
1,079,348
14,766
4,285
1,565
5,850
—
—
—
—
635
—
635
—
—
—
—
1,034,969
2,912
25,198
1,063,079
—
15,634
1,078,713
14,766
—
—
—
—
—
—
—
—
—
—
4,285
1,565
5,850
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2017
$
$
$
19,005
988,367
3,388
26,394
19,005
—
—
—
—
988,367
3,388
26,394
1,037,154
19,005
1,018,149
658
7,219
658
—
—
7,219
1,045,031
19,663
1,025,368
—
—
—
—
—
—
—
—
Measured on a recurring basis:
Available for sale debt securities:
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Total available for sale debt securities
Equity Securities
Derivative assets
Derivative liabilities
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:
Available for sale debt securities:
Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Total available for sale debt securities
Equity Securities
Derivative assets
98
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
—
—
—
—
December 31, 2017
$
$
$
6,315
6,971
6,864
13,835
Significant
Other
Observable
Inputs
(Level 2)
6,315
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
6,971
6,864
13,835
Derivative liabilities
Measured on a non-recurring basis:
Loans measured for impairment based on the fair
value of the underlying collateral
Foreclosed assets
There were no transfers between Level 1, Level 2 and Level 3
during the years ended December 31, 2018 and 2017.
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.
Other Fair Value Disclosures
The Company is required to disclose estimated fair value of
financial 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.
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 classifies the estimated fair value as Level 1 within the
fair value hierarchy.
Cash and Cash Equivalents
Loans
For cash and due from banks, federal funds sold and short-term
investments, the carrying amount approximates fair value.
Held to Maturity Debt Securities
For held to maturity debt securities, fair value was estimated using
a market approach. The majority of the Company’s securities are
fixed 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 flows. As
the Company is responsible for the determination of fair value, it
performs quarterly analysis of the prices received from the pricing
service to determine whether the prices are reasonable estimates
of fair value. Specifically, 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 verification 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
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial
mortgage, residential mortgage, commercial, construction and
consumer. Each loan category is further segmented into fixed
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 flow model that utilizes a discount rate that reflects
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 classifies the
estimated fair value of its loan portfolio as Level 3.
The fair value for significant non-performing loans was based
on recent external appraisals of collateral securing such loans,
adjusted for the timing of anticipated cash flows. The Company
classifies 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 classified as Level 1. The
estimated fair value of certificates of deposit was based on the
discounted value of contractual cash flows. The discount rate was
estimated using the Company’s current rates offered for deposits
with similar remaining maturities. The Company classifies the
estimated fair value of its certificates of deposit portfolio as Level 2.
99
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Borrowed Funds
The fair value of borrowed funds was estimated by discounting
future cash flows using rates available for debt with similar terms
and maturities and is classified 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 fixed 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.
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company’s entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the
Company’s financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial
assets or liabilities include goodwill and other intangibles, deferred
tax assets and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and
have not been considered in the estimates.
The following tables present the Company’s financial instruments
at their carrying and fair values as of December 31, 2018 and
December 31, 2017. Fair values are presented by level within
the fair value hierarchy.
(Dollars in thousands)
Financial assets:
Fair Value Measurements at December 31, 2018 Using:
Carrying
value
Fair value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
142,661
142,661
142,661
—
Available for sale debt securities:
Mortgage-backed securities
State and municipal obligations
Corporate obligations
1,034,969
1,034,969
2,912
25,198
2,912
25,198
Total available for sale debt securities
$ 1,063,079
1,063,079
Held to maturity debt securities:
Agency obligations
$
Mortgage-backed securities
State and municipal obligations
Corporate obligations
4,989
187
463,801
10,448
Total held to maturity debt securities
$
479,425
FHLBNY stock
Equity Securities
68,813
635
4,896
190
464,363
10,291
479,740
68,813
635
Loans, net of allowance for loan losses
7,195,026
7,104,380
Derivative assets
Financial liabilities:
15,634
15,634
Deposits other than certificates of deposits
$ 6,079,630
6,079,630
6,079,630
Certificates of deposit
TOTAL DEPOSITS
Borrowings
Derivative liabilities
100
750,492
746,753
—
$ 6,830,122
6,826,383
6,079,630
1,442,282
1,431,001
14,766
14,766
—
—
—
—
—
—
1,034,969
2,912
25,198
1,063,079
4,896
—
—
—
4,896
68,813
635
—
—
—
190
464,363
10,291
474,844
—
—
—
15,634
—
746,753
746,753
1,431,001
14,766
—
—
—
—
—
—
—
—
—
—
—
—
7,104,380
—
—
—
—
—
—
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
Fair Value Measurements at December 31, 2017 Using:
Carrying
value
Fair value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
$
190,834
190,834
190,834
Available for sale debt securities:
Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
19,005
988,367
3,388
26,394
19,005
988,367
3,388
26,394
19,005
—
—
—
—
—
988,367
3,388
26,394
Total available for sale debt securities
$ 1,037,154
1,037,154
19,005
1,018,149
Held to maturity debt securities:
Agency obligations
$
Mortgage-backed securities
State and municipal obligations
Corporate obligations
4,308
382
462,942
10,020
Total held to maturity debt securities
$
477,652
FHLBNY stock
Equity Securities
81,184
658
4,221
396
470,484
9,938
485,039
81,184
658
Loans, net of allowance for loan losses
7,265,523
7,217,705
Derivative assets
Financial liabilities:
7,219
7,219
4,221
—
—
—
4,221
81,184
658
—
—
Deposits other than certificates of deposits
$ 6,079,357
6,079,357
6,079,357
Certificates of deposit
TOTAL DEPOSITS
Borrowings
Derivative liabilities
634,809
632,744
—
$ 6,714,166
6,712,101
6,079,357
1,742,514
1,739,102
—
1,739,102
6,315
6,315
6,315
—
396
470,484
9,938
480,818
—
—
—
7,219
—
632,744
632,744
—
—
—
—
—
—
—
—
—
—
—
—
—
7,217,705
—
—
—
—
101
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
NOTE 17 Selected Quarterly Financial Data (Unaudited)
The following tables are a summary of certain quarterly financial data for the years ended December 31, 2018 and 2017.
(In thousands, except per share data)
March 31
June 30
September 30
December 31
2018 Quarters Ended
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
(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
$
$
$
$
$
$
$
$
86,331
13,054
73,277
5,400
67,877
13,307
46,910
34,274
6,361
88,315
14,035
74,280
15,500
58,780
13,837
48,806
23,811
4,568
91,261
15,475
75,786
1,000
74,786
15,916
46,659
44,043
8,575
93,922
16,589
77,333
1,800
75,533
15,616
49,360
41,789
6,026
27,913
19,243
35,468
35,763
0.43 $
0.43 $
0.30 $
0.30 $
0.55 $
0.54 $
0.55
0.55
2017 Quarters Ended
March 31
June 30
September 30
December 31
77,913
10,878
67,035
1,500
65,535
12,465
46,124
31,876
8,368
80,443
11,388
69,055
1,700
67,355
14,819
47,340
34,834
10,451
81,894
11,682
70,212
500
69,712
15,112
46,280
38,544
11,969
83,596
11,696
71,900
1,900
70,000
13,301
48,078
35,223
15,740
23,508
24,383
26,575
19,483
0.37 $
0.37 $
0.38 $
0.38 $
0.41 $
0.41 $
0.30
0.30
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
For the Year Ended December 31,
2018
$
118,387
2017
93,949
2016
87,802
64,942,886
64,384,851
63,643,622
160,211
194,371
208,364
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
65,103,097
64,579,222
63,851,986
Earnings per share:
Basic
Diluted
$
$
1.82
1.82
1.46
1.45
1.38
1.38
Anti-dilutive stock options and awards totaling 443,748 shares, 369,772 shares and 432,895 shares at December 31, 2018, 2017
and 2016, respectively, were excluded from the earnings per share calculations.
102
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART II
Item 8.
Financial
Statements and
Supplementary
Data
Item 8 Financial Statements and Supplementary Data
PART II
NOTE 19 Parent-only Financial Information
The condensed financial statements of Provident Financial Services, Inc. (parent company only) are presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
Assets
Cash and due from banks
Available for sale debt securities, 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
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
Earnings in excess of dividends (equity in undistributed net income) of
subsidiary
NET INCOME
December 31,
2018
December 31,
2017
$
$
$
$
7,569
635
1,322,871
(7,996)
36,756
92
1,359,927
947
1,358,980
1,359,927
16,921
658
1,244,670
(4,419)
41,419
(37)
1,299,212
551
1,298,661
1,299,212
For the Years Ended December 31,
$
2018
53,604
1,657
2,294
57,555
1,049
1,049
56,506
692
55,814
62,573
$
118,387
2017
59,980
1,839
17
61,836
1,021
1,021
60,815
312
60,503
33,446
93,949
2016
45,369
1,995
15
47,379
902
902
46,477
414
46,063
41,739
87,802
103
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report For the Years Ended December 31,
2018
2017
2016
$
118,387
93,949
87,802
(62,573)
(33,446)
(41,739)
4,516
6,046
190
3,577
(18,598)
396
51,941
4,663
4,663
(13,172)
(1,896)
(53,604)
1,709
1,007
(65,956)
(9,352)
16,921
7,569
4,600
4,963
203
1,415
(34,919)
(114)
36,651
4,552
4,552
(443)
(778)
(59,980)
2,114
2,954
(56,133)
(14,930)
31,851
16,921
3,706
3,812
172
465
(8,177)
(70)
45,971
3,901
3,901
(1,557)
(1,225)
(45,369)
1,652
6,198
(40,301)
9,571
22,280
31,851
PART II
Item 8 Financial Statements and Supplementary Data
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
Earnings in excess of dividends (equity in undistributed net income)
of subsidiary
ESOP allocation
SAP allocation
Stock option allocation
Decrease in due from subsidiary—SAP
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net decrease in ESOP loan
Net cash provided by investing activities
Cash flows from financing activities:
Purchases of treasury stock
Purchase of employee restricted shares to fund statutory tax withholding
Cash dividends paid
Shares issued dividend reinvestment plan
Stock options exercised
Net cash used in financing 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
$
104
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
NOTE 20 Other Comprehensive Loss
The following table presents the components of other comprehensive loss both gross and net of tax, for the years ended December 31,
2018, 2017 and 2016 (in thousands):
For the Years Ended December 31,
2018
Tax
Effect
Before
Tax
After
Tax
Before
Tax
2017
Tax
Effect
After
Tax
Before
Tax
2016
Tax
Effect
After
Tax
Components of Other
Comprehensive Loss:
Unrealized losses on
available for sale debt
securities:
Net losses arising during
the period
Reclassification adjustment
for gains included in net
income
$
(8,425)
2,296
(6,129)
(3,612)
1,449
(2,163)
(7,405)
2,974
(4,431 )
—
—
—
—
—
—
(50)
20
(30)
TOTAL
(8,425)
2,296
(6,129)
(3,612)
1,449
(2,163)
(7,455)
2,994
(4,461)
Unrealized gains on
derivatives (cash flow
hedges)
Amortization related to
post-retirement obligations
TOTAL OTHER
COMPREHENSIVE LOSS $
304
(83)
221
633
(254)
379
404
(162)
242
1,678
(457)
1221
(1,475)
586
(889)
5,628
(2,260)
3,368
(6,443)
1,756
(4,687)
(4,454)
1,781
(2,673)
(1,423)
572
(851)
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the years
ended December 31, 2018 and 2017, including the reclassification of unrealized gains on equity securities due to the adoption of
ASU No. 2016-01 for the year ended December 31, 2018 (in thousands):
Changes in Accumulated Other Comprehensive Loss by Component, net of tax
For the Years Ended December 31,
2018
Unrealized
Losses on
Available for
Sale Debt
Securities
Post-
Retirement
Obligations
Unrealized
Gains on
Derivatives
(cash flow
hedges)
Accumulated
Other
Comprehensive
Loss
Unrealized
Losses on
Available for
Sale Debt
Securities
Post-
Retirement
Obligations
2017
Unrealized
Gains on
Derivatives
(cash flow
hedges)
Accumulated
Other
Comprehensive
Loss
$
(3,292)
(4,846)
673
(7,465)
(510)
(3,056)
169
(3,397)
(6,129)
1,221
221
(4,687)
(2,163)
(889)
379
(2,673)
(184)
—
—
(184)
(619)
(901)
125
(1,395)
$
(9,605)
(3,625)
894
(12,336)
(3,292)
(4,846)
673
(7,465)
Balance at the
beginning of
the period
Current period
change in other
comprehensive
(loss) income
Reclassification of
unrealized gains on
equity securities due
to the adoption of
ASU No. 2016-01
BALANCE AT
THE END OF
THE PERIOD
105
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The following table summarizes the reclassifications out of accumulated other comprehensive (loss) income for the years ended
December 31, 2018, 2017 and 2016 (in thousands):
Details of AOCI:
Securities available for sale:
Realized net gains on the sale of securities
available for sale
$
Post-retirement obligations:
Amortization of actuarial losses
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amount reclassified from AOCI for the
years ended December 31,
2018
2017
2016
Affected line item in the Consolidated
Statement of Income
—
—
—
—
—
—
50 Net gain on securities transactions
(20)
30 Net of tax
Income tax expense
399
(109)
290
290
243
(64)
179
179
Income tax expense
943 Compensation and employee benefits(1)
(379)
564 Net of tax
594 Net of Tax
TOTAL RECLASSIFICATIONS
(1) This item is included in the computation of net periodic benefit cost. See Note 11. Benefit Plans
$
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.
Non-designated Hedges
Derivatives not designated in qualifying hedging relationships are
not speculative and result from a service the Company provides to
certain qualified commercial borrowers in loan related transactions
and, therefore, are not used to manage interest rate risk in the
Company’s assets or liabilities. The Company executes interest
rate swaps with qualified 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. The interest rate swap agreement
which the Company executes with the commercial borrower is
collateralized by the borrower’s commercial real estate financed
by the Company. The collateral exceeds the maximum potential
amount of future payments under the credit derivative. As
these interest rate swaps do not meet the hedge accounting
requirements, changes in the fair value of both the customer
swaps and the offsetting swaps are recognized directly in
earnings. For the years ended December 31, 2018 and 2017, the
Company had 62 and 48 interest rate swaps with an aggregate
notional amount of $1.01 billion and $718.5 million, respectively..
Additionally, at December 31, 2018 and 2017, the Company had
seven and two credit derivatives, respectively, with aggregate
notional amounts of $66.8 million and $15.8 million, respectively,
from participations in interest rate swaps provided to external
lenders as part of loan participation arrangements; therefore, they
are not used to manage interest rate risk in the Company’s assets
or liabilities. At December 31, 2018 and December 31, 2017,
the fair value of these credit derivatives were $251,000 and
$1,000, respectively.
Cash Flow Hedges of Interest Rate Risk
The Company’s objective in using interest rate derivatives is to
add stability to interest expense and to manage its exposure
to interest rate movements. To accomplish this objective, the
Company primarily uses interest rate swaps as part of its interest
rate risk management strategy. Interest rate swaps designated
as cash flow hedges involve the receipt of variable amounts from
a counterparty in exchange for the Company making fixed-rate
payments over the life of the agreements without exchange of the
underlying notional amount.
The effective portion of changes in the fair value of derivatives
designated and that qualify as cash flow hedges are recorded
in accumulated other comprehensive income (loss) and are
subsequently reclassified into earnings in the period that the
hedged forecasted transaction affects earnings. During the years
ended December 31, 2018, 2017 and 2016, such derivatives
were used to hedge the variable cash outflows associated with
FHLBNY borrowings. As of December 31, 2018, the Company
had two outstanding interest rate derivatives with an aggregate
notional amount of $60.0 million that was designated as a cash
flow hedge of interest rate risk. The ineffective portion of the
change in fair value of the derivatives is recognized directly in
earnings. During the years ended December 31, 2018, 2017 and
2016, the Company’s did not record any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income
(loss) related to derivatives will be reclassified to interest expense
as interest payments are made on the Company’s debt. During
106
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 8 Financial Statements and Supplementary Data
PART II
the next twelve months, the Company estimates that $640,125
will be reclassified as a decrease to interest expense. The table
below presents the fair value of the Company’s derivative financial
instruments as well as their classification on the Consolidated
Statements of Financial Condition as of December 31, 2018 and
2017 (in thousands):
Derivatives not designated as hedging instruments:
Interest rate products
Credit contracts
TOTAL DERIVATIVES NOT DESIGNATED AS HEDGING
INSTRUMENTS
Derivatives designated as hedging instruments:
Interest rate products
TOTAL DERIVATIVES DESIGNATED AS HEDGING
INSTRUMENTS
Derivatives not designated as hedging instruments:
Interest rate products
Credit contracts
TOTAL DERIVATIVES NOT DESIGNATED AS HEDGING
INSTRUMENTS
Derivatives designated as hedging instruments:
Interest rate products
TOTAL DERIVATIVES DESIGNATED AS HEDGING
INSTRUMENTS
As of December 31, 2018
Asset Derivatives
Liability Derivatives
Consolidated
Statements
of Financial
Condition
Consolidated
Statements
of Financial
Condition
Fair
Value
Fair
Value
Other assets $
Other assets
14,154
251
Other liabilities $
Other liabilities
14,766
—
$
14,405
$
14,766
Other assets $
1,229
Other liabilities $
$
1,229
$
As of December 31, 2017
Asset Derivatives
Liability Derivatives
Consolidated
Statements
of Financial
Condition
Other assets $
Other assets
Consolidated
Statements
of Financial
Condition
Other liabilities $
Other liabilities
Fair
Value
6,303
1
—
—
Fair
Value
6,315
—
$
6,304
$
6,315
Other assets $
915
Other liabilities $
$
915
$
—
—
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for
the years ended December 31, 2018, 2017 and 2016 (in thousands).
Derivatives not designated as a hedging instruments:
Interest rate products
Credit contracts
TOTAL DERIVATIVES NOT DESIGNATED AS HEDGING
INSTRUMENTS
Derivatives designated as a hedging instruments:
Interest rate products
TOTAL DERIVATIVES DESIGNATED AS A HEDGING
INSTRUMENTS
Gain (loss) recognized in Income on derivatives
For the Year Ended December 31,
Consolidated
Statements of
Income
Other income $
Other income
Interest expense
$
$
2018
(414)
63
(351)
312
312
2017
2016
(422)
2
(420)
(205)
(205)
186
120
306
(394)
(394)
The Company has agreements with certain of its dealer 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.
In addition, the Company has agreements with certain of its dealer
counterparties that contain a provision that if the Company fails
to maintain its status as a well/adequately capitalized institution,
then the counterparty could terminate the derivative positions and
the Company would be required to settle its obligations under
the agreements.
107
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
As of December 31, 2018, the Company had five dealer
counterparties, only two of which was the Company in a net liability
position. The termination value for this net liability position, which
includes accrued interest, was $3.8 million at December 31, 2018.
The Company has minimum collateral posting thresholds with
certain of its derivative counterparties, and has posted collateral of
$3.0 million against its obligations under these agreements. If the
Company had breached any of these provisions at December 31,
2018, it could have been required to settle its obligations under
the agreements at the termination value.
Note 22 Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09
“Revenue from Contracts with Customers” (Topic 606) and all
subsequent ASUs that modified Topic 606. In connection with the
adoption of Topic 606, the Company performed an assessment
of all revenue streams, the related contracts with customers and
the underlying performance obligations in those contracts. This
guidance does not apply to revenue associated with financial
instruments, including interest income on loans and investments,
which comprise the majority of the Company’s revenue. For the
years ended December 31, 2018, 2017 and 2016 the out-of-
scope revenue related to financial instruments were 86%, 85%
and 85% of the Company’s total revenue, respectively. Revenue-
generating activities that are within the scope of Topic 606, are
components of non-interest income. These revenue streams
can generally be classified into wealth management revenue and
banking service charges and other fees. The adoption of this
standard did not change the current measurement or recognition
of revenue. As such, a cumulative effect adjustment to opening
retained earnings was not deemed necessary.
The following table presents non-interest income, segregated by
revenue streams in-scope and out-of-scope of Topic 606, for the
years ended December 31, 2018, 2017 and 2016:
(in-thousands)
Non-interest income
In-scope of Topic 606:
Wealth management fees
Banking service charges and other fees:
Service charges on deposit accounts
Debit card and ATM fees
Total banking service charges and other fees
Total in-scope non-interest income
Total out-of-scope non-interest income
TOTAL NON-INTEREST INCOME
December 31,
2018
2017
2016
$
17,957
17,604
17,556
13,330
5,997
19,327
37,284
21,392
58,676
$
13,120
5,757
18,877
36,481
19,216
55,697
12,541
5,802
18,343
35,899
19,494
55,393
Wealth management fee income represents fees earned from
customers as consideration for asset management, investment
advisory and trust services. The Company’s performance obligation
is generally satisfied monthly and the resulting fees are recognized
monthly based upon the month-end market value of the assets
under management and the applicable fee rate. The monthly
accrual of wealth management fees is recorded in other assets on
the Company’s Consolidated Statements of Financial Condition.
Fees are received from the customer either on a quarterly or
monthly basis. The Company does not earn performance-based
incentives. To a lesser extent, optional services such as tax return
preparation and estate settlement are also available to existing
customers. The Company’s performance obligation for these
transaction-based services are generally satisfied, and related
revenue recognized, at either a point in time when the service is
completed, or in the case of estate settlement, over a relatively
short period of time, as each service component is completed.
Banking service charges on deposit accounts include overdraft
service fees, account analysis fees and other deposit related
fees. These fees are generally transaction-based, or time-based
services. The Company’s performance obligation for these
services are generally satisfied, and revenue recognized, at the
time the transaction is completed, or the service rendered. Fees
for these services are generally received from the customer either
at the time of transaction, or monthly. Debit card and ATM fees
are generally transaction-based. Debit card revenue is primarily
comprised of interchange fees earned when a customer’s
Company card is processed through a card payment network.
ATM fees are largely generated when a Company cardholder
uses a non-Company ATM, or a non-Company cardholder uses a
Company ATM. The Company’s performance obligation for these
services is satisfied when the service is rendered. Payment is
generally received at time of transaction or monthly.
Out-of-scope non-interest income primarily consists of Bank-
owned life insurance and net fees on loan level interest rate swaps,
along with gains and losses on the sale of loans and foreclosed
real estate, loan prepayment fees and loan servicing fees. None of
these revenue streams are subject to the requirements of Topic 606.
Note 23 Subsequent Events
On January 22, 2019, Beacon announced the signing of a definitive agreement to acquire New York City-based Tirschwell & Loewy,
Inc., an independent registered investment adviser. The transaction is subject to the satisfaction of customary closing conditions and is
anticipated to close in the second quarter of 2019.
108
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank 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 Officer, and Thomas M. Lyons, the Company’s Principal Accounting Officer,
conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2018. Based upon their evaluation, they each
found that the Company’s disclosure controls and procedures were effective as of that date.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial 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 financial statements.
The Company’s internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial 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 financial 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
financial 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.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31,
2018. 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 (2013).
Based on the assessment management believes that, as of
December 31, 2018, the Company’s internal control over financial
reporting is effective based on those criteria.
Report of Independent Registered Public Accounting Firm
The Company’s independent registered public accounting firm that audited the consolidated financial statements has issued an audit
report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. This report appears
on page 57 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the last quarter of the year under report, there was no change in the Company’s internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
109
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Information required by this item regarding directors, executive officers and corporate governance is incorporated herein by reference
to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on April 25, 2019.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of
Stockholders to be held on April 25, 2019.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of
Stockholders to be held on April 25, 2019.
110
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank Item 14 Principal Accountant Fees and Services
PART III
Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of December 31, 2018 regarding equity compensation plans categorized by those plans that have
been approved by the Company’s stockholders. There are no plans that have not been approved by the Company’s 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(3)
1,457,429
Equity compensation plans approved by stockholders
1,457,429
TOTAL
(1) Consists of outstanding stock options to purchase 470,979 shares of common stock granted under the Company’s stock-based compensation plans.
(2) The weighted average exercise price reflects an exercise price of $10.40 for 1,349 stock options granted in 2009; an exercise price of $10.34 for 12,114
stock options granted in 2010; an exercise price of $14.50 for 44,052 stock options granted in 2011; an exercise price of $14.88 for 42,542 stock options
and an exercise price of $14.68 for 10,000 stock options granted in 2012; an exercise price of $15.23 for 51,881 stock options granted in 2013; an
exercise price of $16.38 for 80,760 stock options granted in 2014; an exercise price of $18.34 for 65,972 stock options granted in 2015; an exercise price
of $18.70 for 76,327 stock options granted in 2016; an exercise price of $26.31 for 42,857 stock options granted in 2017; and an exercise price of $25.58
for 43,123 stock options granted in 2018 under the Company’s stock-based compensation plans.
470,979 $
470,979 $
18.36
18.36
(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 incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of
Stockholders to be held on April 25, 2019.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of
Stockholders to be held on April 25, 2019.
111
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART IV
Item 15. Exhibits and Financial Statement Schedules
The exhibits and financial statement schedules filed as a part of this Annual Report on 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, 2018 and 2017
Consolidated Statements of Income Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income Years Ended December 31, 2018, 2017 and 2016
Consolidated Statement of Changes in Stockholders’ Equity For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements.
Page
Number
55
56
57
58
59
60
63
65
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial
statements or related notes.
(a)(3) Exhibits
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
Certificate 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 filed with the Securities and Exchange Commission on February 29, 2012/File
No. 001-31566.)
Form of Common Stock Certificate 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 filed 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 as of December
16, 2015. (Filed as Exhibit 10.2 to the Company’s December 31, 2015 Annual Report to Stockholders on Form 10-K filed with
the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
Form of Three-Year Change in Control Agreement between Provident Financial Services, Inc. and each of Messrs. Blum, Kuntz
and Lyons dated as of December 16, 2015. (Filed as Exhibit 10.3 to the Company’s December 31, 2015 Annual Report to
Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016/File No. 001-31566.)
Form of Two-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers.(Filed as
Exhibit 10.4 to the Company’s December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and
Exchange Commission on February 29, 2016/File No. 001-31566.)
Form of One-Year Change in Control Agreement between Provident Financial Services, Inc. and certain senior officers. (Filed as
Exhibit 10.5 to the Company’s December 31, 2015 Annual Report to Stockholders on Form 10-K filed with the Securities and
Exchange Commission on February 29, 2016/File No. 001-31566.)
112
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank PART IV
Item 16 Form 10-K Summary
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
21
23
31.1
31.2
32
101
Supplemental Executive Retirement Plan of Provident Bank. (Filed as Exhibit 10.5 to the Company’s December 31, 2008
Annual Report to Stockholders on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009/File No.
001-31566.)
Retirement Plan for the Board of Managers of Provident Bank. (Filed as Exhibit 10.7 to the Company’s December 31, 2008
Annual Report to Stockholders on Form 10-K filed 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 Exhibit 10.9 to the Company’s
December 31, 2008 Annual Report to Stockholders on Form 10-K filed 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 Exhibit 10.10 to the Company’s September 30, 2004
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2004/File No. 001-
31566.)
Provident Bank Non-Qualified Supplemental Defined Contribution Plan. (Filed as an exhibit to the Company’s May 27, 2010
Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2010/File No. 001-31566.)
Provident Financial Services, Inc. Amended and Restated the Long-Term Equity Incentive Plan. (Filed as an appendix to the
Company’s Proxy Statement for the 2014 Annual Meeting of Stockholders filed with the Securities and Exchange Commission
on March 14, 2014/File No. 001-31566.)
Omnibus Incentive Compensation Plan. (Filed as Exhibit 10.19 to the Company’s December 31, 2011 Annual Report to
Stockholders on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012/File No. 001-31566.)
Provident Financial Services, Inc. Executive Annual Incentive Plan (Filed as an appendix to the Company’s Proxy Statement
for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 13, 2015/File No. 001-
31566.)
Subsidiaries of the Registrant.
Consent of KPMG LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer 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,
2018, 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 XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Item 16. Form 10-K Summary
Not applicable.
113
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Report PART IV
Signatures Form 10-K Summary
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.
Date: March 1, 2019
PROVIDENT FINANCIAL SERVICES, INC.
By:
/s/ Christopher Martin
Christopher Martin
Chairman, President and Chief Executive Officer
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,
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date:
March 1, 2019
By:
/s/ robert adaMo
Robert Adamo,
Director
By:
Date:
By:
Date:
By:
/s/ thoMas M. Lyons
Thomas M. Lyons,
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
March 1, 2019
/s/ Frank s. Muzio
Frank S. Muzio,
Executive Vice President and Chief Accounting
Officer (Principal Accounting Officer)
March 1, 2019
Date:
March 1, 2019
Date:
March 1, 2019
By:
Date:
By:
Date:
By:
Date:
By:
March 1, 2019
March 1, 2019
/s/ Laura L. brooks
Laura L. Brooks,
Director
/s/ Frank L. Fekete
Frank L. Fekete,
Director
/s/ MattheW k. harding
Matthew K. Harding,
Director
By:
Date:
By:
Date:
By:
March 1, 2019
March 1, 2019
March 1, 2019
Date:
March 1, 2019
/s/ John pugLiese
John Pugliese,
Director
Date:
March 1, 2019
114
/s/ thoMas W. berry
Thomas W. Berry,
Director
/s/ JaMes p. dunigan
James P. Dunigan,
Director
/s/ terenCe gaLLagher
Terence Gallagher,
Director
/s/ CarLos hernandez
Carlos Hernandez,
Director
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PROVIDENT FINANCIAL SERVICES, INC. ❘ 2018 Annual Reportwww.provident.bank ANNUAL MEETING
The annual meeting of stockholders will be held on April 25, 2019
at 10:00 a.m. at the Renaissance Woodbridge Hotel, 515 U.S.
Highway 1 South, Iselin, New Jersey.
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.
TRANSFER AGENT
Stockholders wishing to update their address, transfer ownership
of stock certificates, report lost certificates or inquire regarding
other stock registration matters should contact:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, New York 11717
1-888-235-9148
shareholder@broadridge.com
CONTACT INFORMATION
Information regarding Provident Financial Services, Inc. and
Provident Bank is available on our web site: provident.bank
For additional information contact:
Provident Financial Services, Inc.
Investor Relations
100 Wood Avenue South
Iselin, New Jersey 08830
1 (732) 590-9300
investorrelations@provident.bank
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP
51 JFK Parkway
Short Hills, New Jersey 07078
239 WASHINGTON STREET
JERSEY CITY, NJ 07302
2018 Annual Report_BACKv5.indd 1
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PROVIDENT.BANK