2019 ANNUAL REPORT
2019 Annual Report_FRONT.indd 1
1/29/2020 10:11:08 AM
180YEARS 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 eastern 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
At or for the year ended December 31,
Net income
Diluted earnings per share
Net interest margin
Average net interest rate spread
Non-performing loans to total loans
Allowance for loan losses to total loans
Number of branches
2019
2018
2017
$9,808,578
$9,725,769
$9,845,274
7,277,360
7,195,026
7,265,523
453,629
976,919
479,425
477,652
1,063,079
1,037,154
7,102,609
6,830,122
6,714,166
1,125,146
1,442,282
1,742,514
1,413,840
1,358,980
1,298,661
2019
2018
$112,633
$118,387
$1.74
3.35%
3.10%
0.55%
0.76%
83
$1.82
3.39%
3.20%
0.35%
0.77%
84
2017
$93,949
$1.45
3.21%
3.07%
0.48%
0.82%
84
A LETTER FROM
CHRISTOPHER
MARTIN
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER
DEAR FELLOW STOCKHOLDERS:
As the operating environment for the financial services industry
continues to evolve at a rapid pace, one thing has remained
unchanged since Provident Bank’s founding over 180 years
ago: Provident’s commitment to financial performance,
engagement with customers, and dedication to our employees
and the communities we serve.
Consistency has remained the watchword as our economy
experienced its longest expansionary period on record. For
2019, our earnings per share were $1.74, with a return on
average assets of 1.15%. Return on average tangible equity
was 11.71%. We continued to keep our expenses under
control, as evidenced by an efficiency ratio of 55.7%, despite
the increased cost of compliance and expanding regulatory
burden. Total core deposits represented 90% of total deposits,
and the cost of deposits remained one of the best among
our peers.
During 2019, political partisanship, trade war tariffs, and
global economic malaise weighed on the minds of our
commercial clients and tempered their optimism. Despite it
all, we had impressive loan originations in 2019, yet our total
assets remained just below the $10 billion threshold as these
originations were offset by loan prepayments funded by non-
banks, private equity, and life insurance companies. We are
fully prepared to cross the $10 billion asset level in 2020, as
our regulators have been treating us as a large bank for more
than a year. During this time, we continued to invest in risk
and compliance staff to implement the recommendations of
our regulators.
Margin compression has been a challenge for all financial
institutions, and we are not immune to the flattening and
at times, inverted yield curve. With thoughtful pricing and
continued strong growth in our non-interest bearing deposit
accounts, we have been able to mitigate the impact of the
low interest rate environment on our margin. Our long term
success will require balancing our financial performance with
prudent growth while maintaining a well-managed interest rate
risk position.
ONE THING HAS REMAINED UNCHANGED SINCE PROVIDENT
BANK’S FOUNDING OVER 180 YEARS AGO: PROVIDENT’S
COMMITMENT TO FINANCIAL PERFORMANCE, ENGAGEMENT
WITH CUSTOMERS, AND DEDICATION TO OUR EMPLOYEES
AND THE COMMUNITIES WE SERVE.
i
A LETTER FROM CHRISTOPHER MARTIN
OUR LONG TERM
SUCCESS WILL REQUIRE
BALANCING OUR FINANCIAL
PERFORMANCE WITH
PRUDENT GROWTH WHILE
MAINTAINING A WELL-
MANAGED INTEREST RATE
RISK POSITION.
ii
We continue to invest in our digital banking channel to
complement our relationship banking model and our 83
convenient branch locations. We recently replaced our
consumer online and mobile digital solutions, making us a
market leader in terms of functionality and features with an
award winning, intuitive design. Included in our new solution
is the pervasive person-to-person payment application,
Zelle® which will increase our customer engagement and
retention. We have implemented a new online and mobile
account opening solution that enables customers to open a
checking account in under ten minutes. We are also investing
in replacing our entire ATM fleet, using new technology that
will put us on equal footing with banks many times our size.
One of our key corporate strategies is leveraging our data
to be more proactive in fulfilling our customers’ needs, while
identifying trends and opportunities to seize competitive
advantage. We have made sizable investments to make
this strategy a reality where today, we are using artificial
intelligence capabilities and data analytics to gain insight
into our customers and their financial needs.
As we focused on our core business and organic growth in
a challenging environment, we were also actively engaged
in the merger and acquisition space. Beacon Trust, our
wealth management subsidiary, completed its acquisition
of Tirschwell & Loewy which added $750 million in assets
under management, for a combined $3.2 billion after closing.
We continue to seek out opportunities in both the bank and
registered investment advisor arena to augment our scale
and management expertise, further leveraging our capital
and increasing long-term stockholder returns. On that note,
we provided stockholders with a cash dividend of $1.12 per
share for 2019, as our Board approved a special dividend
in the first quarter to supplement our regular quarterly cash
dividend of $0.23. Our capital position remains robust,
supporting future growth, dividend-paying capacity and the
ability to strategically repurchase common stock.
While we did see an increase in nonperforming loans in 2019,
asset quality remained strong by historical standards and
we believe loss content is limited. We continue to exercise
a conservative approach to underwriting and risk rating our
loan portfolio, and we curtail exposure to certain higher-risk
industries wherever appropriate. Our underwriting guidelines
and pricing discipline will serve us well in the future as
our competition continues aggressive tactics of reduced
covenants and extended terms and conditions in pursuit
of loan growth.
A LETTER FROM CHRISTOPHER MARTIN
I AM ALSO PROUD OF OUR ONGOING COMMITMENT TO
STRENGTHEN DIVERSITY AND INCLUSION ACROSS OUR
ORGANIZATION.
I am proud of our dedicated and hardworking employees
who embrace our culture of customer relationship building
with integrity and commitment. They apply this same spirit of
dedication to our communities through personal involvement
with those in need, and by supporting worthwhile endeavors
throughout our markets. These efforts are augmented by The
Provident Bank Foundation which provided grants of more
than $1.3 million in 2019 to benefit health, youth and families,
education, and community enrichment.
I am also proud of our ongoing commitment to strengthen
diversity and inclusion across our organization. In 2019,
we re-launched the ProvidentWomen initiative, an internal
program committed to providing opportunities for all women
at Provident Bank and Beacon Trust to grow personally and
professionally through educational programs, networking
events, and volunteer opportunities that bring together
women from across the organization. In keeping with this
commitment, we hired and/or promoted several women
to key leadership positions in the organization. We also
added Ursuline Foley to our Board of Directors. Ms. Foley
brings more than three decades of global experience in
financial services and technology to the Board, having
most recently served as Chief Corporate Operations Officer,
Chief Information Officer, Chief Data Officer and Managing
Director with XL Group. Her presence will strengthen our
board’s breadth of talent and depth of knowledge, and will
be extremely valuable as Provident continues to enhance its
digital and mobile banking capabilities.
With all the daunting challenges in the financial services
industry, I am fortunate to face them with an outstanding
board of directors, a fully engaged leadership team, and a
staff that is dedicated to serving our customers with pride and
professionalism. As always, we thank you, our stockholders,
for your continued support.
Sincerely,
Chairman, President & Chief Executive Officer
iii
BOARD OF DIRECTORS AND CORPORATE MANAGEMENT
DIRECTORS
Christopher Martin
Chairman, President and
Chief Executive Officer
Laura L. Brooks
Former Vice President–Risk
Management and Chief Risk
Officer, PSEG
Ursuline F. Foley
Former Chief Corporate
Operations Officer, XL Group
Carlos Hernandez
(Lead Director)
Former President,
New Jersey City University
Robert Adamo
Former Partner,
Deloitte & Touche
James P. Dunigan
Former Executive Officer,
PNC Asset Management
Group
Terence Gallagher
President,
Battalia Winston
John Pugliese
Chief Executive Officer,
Motors Management
Corporation
Thomas W. Berry
Former Partner,
Goldman Sachs & Co.
Frank L. Fekete
Managing Partner,
Mandel, Fekete & Bloom, CPAs
Matthew K. Harding
Chief Executive Officer,
Levin Management
Corporation
MANAGEMENT
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
Christopher Martin
Chairman, President
and Chief Executive 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
Thomas M. Lyons
Senior Executive Vice
President and Chief
Financial Officer
Leonard G. Gleason
Senior Vice President
and Investor Relations Officer
John Kuntz
Senior Executive Vice
President and Chief
Administrative Officer
Valerie O. Murray
Executive Vice President and
Chief Wealth Management
Officer
Sheila Leary
Senior Vice President and
BSA/AML Compliance
Director
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
Carolyn Powell
Executive Vice President
and Chief Human Resources
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
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, 2019
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 No.)
07302
(Zip Code)
(732) 590-9200
(Registrant’s Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class
Common
Trading Symbol Symbol(s)
PFS
Name of each Exchange on Which Registered
New York Stock Exchange
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 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.
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 3, 2020, there were 83,209,293 issued and 65,964,970 outstanding shares of the Registrant’s Common
Stock, including 209,685 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, 2019, as quoted by the NYSE, was approximately $1.50 billion.
(1) Proxy Statement for the 2020 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 ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������34
ITEM 1B. Unresolved Staff Comments ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������41
Properties �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������41
ITEM 2.
Legal Proceedings �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������41
ITEM 3.
Mine Safety Disclosures �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������41
ITEM 4.
PART II
42
ITEM 5.
ITEM 6.
ITEM 7.
Market for Registrant’s Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities ���������������������������������������������������������������������������������������������������������������������������������������������������42
Selected Financial Data ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������43
Management’s Discussion and Analysis of Financial
Condition and Results of Operations�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������45
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ���������������������������������������������������������������������������������������������������������������������56
Financial Statements and Supplementary Data ��������������������������������������������������������������������������������������������������������������������������������������������������������������58
ITEM 8.
Changes in and Disagreements With Accountants
ITEM 9.
on Accounting and Financial Disclosure ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������113
ITEM 9A. Controls and Procedures �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������113
ITEM 9B. Other Information ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������113
PART III
114
ITEM 10. Directors, Executive Officers and Corporate Governance �������������������������������������������������������������������������������������������������������������������������114
Executive Compensation �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������114
ITEM 11.
Security Ownership of Certain Beneficial
ITEM 12.
Owners and Management and Related Stockholder Matters �������������������������������������������������������������������������������������������������������������114
Certain Relationships and Related Transactions,
and Director Independence ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������115
ITEM 14. Principal Accountant Fees and Services ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������115
ITEM 13.
PART IV
116
Exhibits and Financial Statement Schedules �������������������������������������������������������������������������������������������������������������������������������������������������������������������116
ITEM 15.
ITEM 16.
Form 10-K Summary ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������117
SIGNATURES ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������118
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 set forth in Item 1A of the Company’s Annual Report
on Form 10-K, as supplemented by its Quarterly Reports on
Form 10-Q, and those related to the economic environment,
particularly in the market areas in which the Company operates,
competitive products and pricing, fiscal and monetary policies
of the U�S� Government, changes in accounting policies and
practices that may be adopted by the regulatory agencies
and the accounting standards setters, 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 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 events or circumstances after the
date of this statement�
1
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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, 2019, the Company had total assets of
$9�81 billion, total loans of $7�33 billion, total deposits of
$7�10 billion, and total stockholders’ equity of $1�41 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 $72�8 million and
repurchased 916,326 shares of its common stock at a cost of
$21�8 million in 2019� At December 31, 2019, 1�6 million shares
remain eligible for repurchase under the board approved stock
repurchase program� The Company and the Bank were “well
capitalized” at December 31, 2019 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
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019, non-performing assets were
$42�9 million or 0�44% of total assets, compared to $27�3 million
or 0�28% of total assets at December 31, 2018� The Bank’s
non-performing asset levels rose from lower levels reported
in the prior year largely due to credit deterioration in several
commercial lending relationships, and is not indicative of credit
deterioration in the broader loan portfolio� 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�37 billion at December 31, 2019, representing
89�7% of total deposits, compared with $6�08 billion, or 89�0%
of total deposits at December 31, 2018� The Bank also focuses
on increasing the number of households and businesses served
and the number of banking products per customer�
Market Area
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 $63�8 million for the year ended December 31, 2019,
compared with $58�7 million for the year ended December 31,
2018, of which fee income and wealth management income
were $28�3 million and $22�5 million, respectively, for the year
ended December 31, 2019, compared with $28�1 million and
$18�0 million, respectively, for the year ended December 31, 2018�
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, 2019, 62�4% of
the Bank’s loan portfolio had a term to maturity of one year or
less, or had adjustable interest rates� At December 31, 2019,
the Bank’s securities portfolio totaled $1�49 billion and had an
expected average life of 3�41 years to manage its exposure to
interest rate movements�
The Company and the Bank are headquartered in Jersey City,
which is located in Hudson County, New Jersey� At December 31,
2019, the Bank operated a network of 83 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 Manasquan, 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�
population of approximately 6�9 million, which was 78�0% of the
state’s total population� The Bank’s Pennsylvania market area has
a population of approximately 1�3 million, which was 10�2% 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 3�5% at December 31,
2019, a decrease from 4�0% at December 31, 2018� The
unemployment rate in Pennsylvania was 4�5% for December 31,
2019, an increase from 4�2% at December 31, 2018�
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
Within its primary market areas in New Jersey and Pennsylvania,
the Bank had an approximate 2�16% and 0�67% share of bank
deposits as of June 30, 2019, respectively, the latest date for which
statistics are available� On a statewide basis, the Bank had an
approximate 1�95% deposit share of the New Jersey market and
an approximate 0�06% deposit share of the Pennsylvania market�
3
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
(dollars in thousands)
Amount Percent
Amount Percent
Amount Percent
Amount Percent
Amount Percent
2019
2018
2017
2016
2015
At December 31,
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
Total mortgage
loans
$ 1,078,227
14�82 % $ 1,100,009
15�29 % $ 1,142,914
15�73 % $ 1,212,255
17�46 % $ 1,255,159
19�38 %
2,578,477
35�43
2,299,417
31�96
2,171,174
29�88
1,978,700
28�50
1,716,117
26�50
1,225,675
16�84
1,339,800
18�62
1,404,005
19�32
1,402,169
20�20
1,234,066
19�06
429,812
5�91
388,999
5�41
392,580
5�40
264,814
3�81
331,649
5�12
5,312,191
73�00
5,128,225
71�28
5,110,673
70�33
4,857,938
69�97
4,536,991
70�06
Commercial loans
1,634,759
22�46
1,695,148
23�56
1,745,301
24�02
1,630,887
23�49
1,434,291
22�15
Consumer loans
391,360
5�38
431,428
6�00
473,958
6�52
516,755
7�44
566,175
8�74
Total gross
loans
Premiums on
purchased loans
Unearned
discounts
7,338,310 100�84
7,254,801 100�84
7,329,932 100�87
7,005,580 100�90
6,537,457 100�95
2,474
0�02
3,243
0�04
4,029
0�06
4,968
0�07
5,740
0�09
(26)
—
(33)
—
(36)
—
(39)
—
(41)
—
Net deferred fees
(7,873)
(0�12)
(7,423)
(0�11)
(8,207)
(0�10)
(7,023)
(0�08)
(5,482)
(0�09)
Total loans
7,332,885 100�74
7,250,588 100�77
7,325,718 100�83
7,003,486 100�89
6,537,674 100�95
Allowance for
loan losses
TOTAL
LOANS, NET
(55,525)
(0�76)
(55,562)
(0�77)
(60,195)
(0�83)
(61,883)
(0�89)
(61,424)
(0�95)
$7,277,360 99.98 % $ 7,195,026 100.00 % $ 7,265,523 100.00 % $ 6,941,603 100.00 % $ 6,476,250 100.00 %
Loan Maturity Schedule
The following table sets forth certain information as of December 31, 2019, 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
$
462 $
4,272 $
13,832 $
94,036 $
425,984 $
539,641 $ 1,078,227
Commercial mortgage loans
Multi-family mortgage loans
Construction loans
Total mortgage loans
Commercial loans
Consumer loans
239,389
125,192
229,644
594,687
371,857
14,260
445,888
117,277
162,602
730,039
302,082
250,969
662,217
7,149
14,900
738,504
2,001,825
215,188
537,366
6,325
16,543
88,579
65,349
15,517
696,367
158,629
211,115
6,457
4,671
2,578,477
1,225,675
—
429,812
550,769
5,312,191
49,637
1,634,759
54,538
391,360
466,554
1,230,672
189,517
TOTAL GROSS LOANS
$ 980,804 $ 1,038,446 $ 970,235 $ 2,627,770 $ 1,066,111 $ 654,944 $ 7,338,310
5
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
Fixed- and Adjustable-Rate Loan Schedule
The following table sets forth as of December 31, 2019 the amount of all fixed-rate and adjustable-rate loans due after
December 31, 2020�
(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, 2020
Fixed
Adjustable
Total
$
805,206 $
272,559 $
1,077,765
970,481
357,754
5,840
1,368,608
2,339,089
742,729
194,328
1,100,483
200,168
2,139,281
2,578,224
4,717,505
394,407
261,189
868,495
115,910
1,262,902
377,099
$
2,794,877 $
3,562,629 $
6,357,506
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, 2019, $1�08 billion or 14�8% of the total loan
portfolio consisted of residential real estate loans� Of the one- to
four-family loans at that date, 74�7% were fixed-rate and 25�3%
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 2019, $1�9 million or 1�2% of residential real estate loans
originated were sold into the secondary market� All of the loans
sold in 2019 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 $16�9 million� The Bank also offers a special rate program
for first-time homebuyers under which originations have totaled
over $41�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 35�4% of the total
loan portfolio at December 31, 2019� 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
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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 an 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�
loan-to-value ratio of 55%� 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, 2019� (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, 2019
was a $41�0 million loan secured by a first leasehold mortgage
lien on a 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, 2019� (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’s largest commercial mortgage loan as of December 31,
2019 was a $38�2 million loan secured by a first mortgage lien on
fifteen mixed-use retail, residential and office buildings located in
Hoboken, NJ� This was for an acquisition and refinance of fifteen
Bank mortgaged properties by a large publicly traded, investment
grade REIT with extensive experience and a successful track
record� The loan has strong debt-service coverage and a low
The Bank generally 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. ❘ 2019 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, 2019
was a $35�5 million commitment secured by a first mortgage
lien on property and improvements related to the construction of
a 382,400 square foot industrial building on 29�7 acres located
in the Township of Monroe, NJ� The loan had an outstanding
balance of $25�7 million at December 31, 2019� This loan closed
in mid-2019 with construction completion expected by the end
of 2020� This project is 100% pre-leased� 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 “3” (loans rated 1-4 are deemed “acceptable quality” – see
discussion of the Bank’s nine-point risk rating system for loans
under “Allowance for Loan Losses” in the “Asset Quality” section)
and was performing in accordance with its terms and conditions
as of December 31, 2019�
Commercial Loans
The Bank underwrites commercial loans to corporations,
partnerships and other businesses� Commercial loans represented
22�5% of the total loan portfolio at December 31, 2019� 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
8
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, 2019
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, 2019, 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 5�4% of the total
loan portfolio at December 31, 2019� Home equity loans and
home equity lines of credit constituted 95�0% of the consumer
loan portfolio and indirect marine loans constituted 1�5% of the
consumer loan portfolio as of December 31, 2019� The remaining
3�5% 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 or originates 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, 2019, first-lien home equity loans
outstanding totaled $228�5 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, 2019
were $363�0 million and $116�7 million, respectively, representing
utilization of 32�2%�
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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)
Year Ended December 31,
2019
2018
2017
$
155,211
$
108,406
$
577,603
154,235
381,775
1,445,345
114,230
2,828,399
—
448,137
126,159
360,413
1,992,972
120,369
3,156,456
1,344
121,901
525,900
51,371
354,594
2,525,921
121,790
3,701,477
—
2,828,399
3,157,800
3,701,477
16,212
36,043
24,938
176,112
361,832
283,085
246,852
1,492,822
154,122
2,714,825
2,731,037
(15,065)
149,326
348,055
204,781
296,450
2,006,342
162,597
3,167,551
3,203,594
(29,336)
188,103
188,352
150,205
249,872
2,403,945
163,041
3,343,518
3,368,456
(10,789)
NET INCREASE (DECREASE)
$
82,297 $
(75,130) $
322,232
(1) Other items, net include charge-offs, deferred fees and expenses, discounts and premiums�
9
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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,
Deputy 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 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, which meets to review all
loans rated a “Pass/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, 2019, the regulatory lending limit
was $147�4 million� The Bank’s current internal policy limit on total
loans to a borrower or related borrowers that constitute a group
exposure is up to $100�0 million for loans with a risk rating of “2”
or better, up to $90�0 million for loans with a risk rating of “3”, and
up to $65�0 million for loans with a risk rating of “4”� For a select
group of the most credit-worthy and diversified borrowers, the
maximum group exposure limit is up to $130�0 million� 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, 2019, the Bank’s largest group exposure
with an individual borrower and its related entities was
$125�8 million, consisting of eight commercial real estate loans
totaling $98�5 million, secured by five retail properties and two
office buildings located in New Jersey and Pennsylvania, two
construction loans totaling $11�9 million, secured by a retail and
office building project located in Pennsylvania, an $8�4 million
land loan secured by 31 acres in New Jersey, a $6�0 million
unsecured line of credit, $600,000 under seven letters of credit
and $400,000 under eleven ACH facilities� 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,
2019, all of the loans in this lending relationship were performing
in accordance with their respective terms and conditions�
As of December 31, 2019, the Bank had $2�1 billion in loans
outstanding to its 50 largest borrowers and their related entities�
10
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, collection
activities begin on 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�
PART I
Item 1 Business
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, 2019, there were 158 impaired loans totaling
$70�6 million, of which 147 loans totaling $48�3 million were TDRs�
Included in this total were 133 TDRs related to 128 borrowers
totaling $42�7 million that were performing in accordance with
their restructured terms and which continued to accrue interest
at December 31, 2019�
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. ❘ 2019 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, 2019, 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, 2019, $88�5 million of
loans were classified as “substandard,” which consisted of
$57�0 million in commercial loans, $13�5 million in commercial
and multi-family mortgage loans, $10�2 million in residential loans
and $1�7 million in consumer loans� At that same date, there were
$836,000 loans classified as “doubtful�” Also, there were no loans
classified as “loss” at December 31, 2019� As of December 31,
2019, $128�7 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, 2019
At December 31, 2018
At December 31, 2017
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
15 $
2,579
36 $
8,543
24 $
5,557
31 $
5,853
27 $
4,325
49 $
8,105
—
—
—
15
2
12
—
—
—
2,579
95
337
6
5,270
—
—
42
24
18
—
—
13,813
12,137
1,148
—
—
—
24
2
15
—
—
—
5,557
13,565
610
12
3,180
—
—
43
19
21
—
—
9,033
4,309
1,266
—
—
—
27
2
12
—
—
—
4,325
406
487
8
5,887
—
—
57
24
41
—
—
13,992
6,901
2,491
(dollars in
thousands)
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
Total mortgage
loans
Commercial loans
Consumer loans
TOTAL LOANS
29 $ 3,011
84 $ 27,098
41 $ 19,732
83 $ 14,608
41 $ 5,218
122 $ 23,384
12
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019, there
were 14 TDRs totaling $5�6 million that were classified as non-accrual, compared to 19 non-accrual TDRs which totaled $11�2 million
at December 31, 2018� 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,
2019
2018
2017
2016
2015
$
8,543
$
5,853
$
8,105
$ 12,021
$ 12,031
5,270
3,180
7,090
—
—
25,160
1,221
40,194
—
40,194
2,715
—
—
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
TOTAL NON-PERFORMING ASSETS
$ 42,909
$ 27,255
$ 41,793
$ 50,392
$ 55,082
TOTAL NON-PERFORMING ASSETS AS
A PERCENTAGE OF TOTAL ASSETS
TOTAL NON-PERFORMING LOANS TO TOTAL LOANS
Non-performing commercial mortgage loans increased
$2�1 million to $5�3 million at December 31, 2019, from
$3�2 million at December 31, 2018� Non-performing commercial
mortgage loans consisted of six loans at December 31, 2019� The
largest non-performing commercial mortgage loan was a $3�8
million loan secured by a first mortgage on a property located
in Hackettstown, New Jersey� The loan is presently in default�
There is no contractual commitment to advance additional funds
to this borrower�
Non-performing commercial loans increased $9�8 million,
to $25�2 million at December 31, 2019, from $15�4 million at
December 31, 2018� Non-performing commercial loans at
December 31, 2019 consisted of 33 loans� The largest non-
performing commercial loan relationship was a Shared National
Credit (“SNC”) relationship, which consisted of three loans to a
restaurant group with total outstanding balances of $11�6 million
at December 31, 2019� All of these loans are unsecured/non-real
estate secured� These loans are currently paying in accordance
with their restructured terms�
There were no non-performing construction loans at December 31,
2019 or 2018�
At December 31, 2019, the Company held $2�7 million of
foreclosed assets, compared with $1�6 million at December 31,
2018� Foreclosed assets at December 31, 2019 are carried at fair
value based on recent appraisals and valuation estimates, less
0.44 %
0.55 %
0.28 %
0.35 %
0.42 %
0.48 %
0.53 %
0.61 %
0.62 %
0.68 %
estimated selling costs� During the year ended December 31,
2019, there were eleven additions to foreclosed assets with an
aggregate carrying value of $2�3 million and six properties sold
with an aggregate carrying value of $1�0 million� Foreclosed assets
at December 31, 2019, consisted of $2�7 million of residential
real estate�
Non-performing assets totaled $42�9 million, or 0�44% of total
assets at December 31, 2019, compared to $27�3 million, or
0�28% of total assets at December 31, 2018� If the non-accrual
loans had performed in accordance with their original terms,
interest income would have increased by $1�7 million during
the year ended December 31, 2019� The amount of cash basis
interest income that was recognized on impaired loans during the
year ended December 31, 2019 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. ❘ 2019 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 2019 using
historical loss data through June 30, 2019 and was applied
effective September 30, 2019� 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 2019 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�
In addition, the Company separately calculates an allowance for
loan losses on impaired loans� 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� 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� 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�
14
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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
important to maintain the ratio of the allowance for loan losses
to total loans at an acceptable level given current economic
conditions, interest rates and the composition of the portfolio�
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary� The allowance for loan
losses is maintained at a level that represents management’s
best estimate of probable losses related to 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�
Analysis of the Allowance for Loan Losses
The following table sets forth the analysis of the allowance for loan losses for the periods indicated�
(dollars in thousands)
Balance at beginning of period
Charge offs:
Residential mortgage loans
Commercial mortgage loans
Multi-family mortgage loans
Construction loans
Commercial loans
Consumer loans
Total
Recoveries:
Residential mortgage loans
Commercial mortgage loans
Multi-family mortgage loans
Construction loans
Commercial loans
Consumer loans
Total
Net charge-offs
Provision for loan losses
Years Ended December 31,
2019
2018
2017
2016
2015
$ 55,562
$ 60,195
$ 61,883
$ 61,424
$ 61,734
44
222
—
—
277
—
—
—
14,023
28,986
743
755
15,032
30,018
46
376
—
—
665
808
58
431
—
—
428
768
1,895
13,137
13,100
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
BALANCE AT END OF PERIOD
$ 55,525 $ 55,562 $ 60,195 $ 61,883 $ 61,424
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
0.18 %
0.76 %
0.39 %
0.77 %
0.10 %
0.82 %
0.07 %
0.88 %
0.07 %
0.94 %
138.14 % 216.28 % 172.34 % 145.95 % 137.92 %
15
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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,
2019
2018
2017
2016
2015
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
$
3,414
14�69 % $
3,971
15�16 % $
4,328
15�59% $
5,540
17�30 % $
5,110
19�20 %
12,831
35�14
12,639
31�70
13,136
29�62
12,234
28�24
12,798
26�25
3,374
16�70
4,745
18�46
4,919
19�15
7,481
20�02
7,841
18�88
5,892
5�86
6,323
5�36
5,669
5�35
4,371
3�77
6,345
5�06
28,263
22�28
25,693
23�37
29,814
23�81
29,143
23�28
25,829
21�94
(dollars in
thousands)
Residential
mortgage loans
Commercial
mortgage loans
Multi-family
mortgage loans
Construction
loans
Commercial
loans
Consumer loans
1,751
Unallocated
5�33
—
2,191
—
5�95
—
2,329
—
6�48
—
3,114
—
7�39
—
3,501
—
8�67
—
TOTAL
$ 55,525
100.00 % $ 55,562
100.00 % $ 60,195
100.00 % $ 61,883
100.00 % $ 61,424
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
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
16
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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, 2019, the Bank held $17,000 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. ❘ 2019 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.
2019
At December 31,
2018
2017
(dollars in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Held to Maturity Debt Securities:
Mortgage-backed securities
$
118 $
122
$
187 $
190
$
382 $
FHLB obligations
FHLMC obligations
FNMA obligations
FFCB obligations
1,800
1,900
900
1,999
1,806
1,897
898
2,000
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
State and municipal obligations
437,074
451,353
463,801
464,363
462,942
470,484
Corporate obligations
9,838
9,890
10,448
10,291
10,020
9,938
TOTAL HELD-TO-MATURITY
DEBT SECURITIES
Available for Sale Debt Securities:
$ 453,629 $ 467,966
$
479,425 $ 479,740
$
477,652 $ 485,039
U.S Treasury obligations
$
— $
—
$
— $
—
$
— $
—
Mortgage-backed securities
936,196
947,430
1,048,415
1,034,969
993,548
988,367
FHLMC obligations
FHLB obligations
State and municipal obligations
Corporate obligations
TOTAL AVAILABLE FOR SALE
DEBT SECURITIES
—
—
3,907
25,032
—
—
4,079
25,410
—
—
2,828
25,039
—
—
2,912
25,198
—
19,014
3,259
26,047
—
19,005
3,388
26,394
$ 965,135 $ 976,919
$ 1,076,282 $ 1,063,079
$ 1,041,868 $ 1,037,154
EQUITY SECURITIES
$
825 $
825
$
635 $
635
$
417 $
658
Average expected life of securities(1)
3.41 years
4.72 years
4.34 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, 2019:
FNMA
FHLMC
Amortized Cost
Fair Value
$ 415,859
438,869
$ 420,592
444,161
18
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019. 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, 2019
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
$
— — % $
118 5.31 % $
Agency obligations
6,599 1.89
—
—
2,802 1.80
7,036 2.28
Corporate
obligations
State and municipal
obligations
—
—
—
— % $
—
—
—
—
—
— % $
118
5.31 %
—
—
6,599
1.89
9,838
2.14
6,787 2.84
92,080 2.63
249,399
2.59
88,808
2.85
437,074
2.66
TOTAL HELD TO
MATURITY DEBT
SECURITIES
Available for Sale
Debt Securities:
$16,188 2.27 % $ 99,234 2.61 % $ 249,399 2.59 % $ 88,808
2.85 % $ 453,629 2.63 %
State and municipal
obligations
$
Mortgage-backed
securities
— — % $
—
— % $
4,079
2.90 % $
—
— % $
4,079
2.90 %
7,743 1.81
26,435 2.31
194,451
2.48
718,801
2.75
947,430
2.67
Agency obligations
— —
—
—
—
—
Corporate
obligations
— —
3,074 3.00
22,336
4.98
—
—
—
—
—
—
25,410
4.74
TOTAL AVAILABLE
FOR SALE DEBT
SECURITIES(2)
$ 7,743 1.81 % $ 29,509 2.38 % $ 220,866 2.74 % $ 718,801 2.75 % $ 976,919 2.73 %
(1) Yields are not tax equivalent.
(2) Totals exclude $825,000 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 and IRA 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 service and a wide variety of
products and services that meet customers’ needs, including
online and mobile banking.
19
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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 89.7% of total deposits at December 31, 2019
and 89.0% of total deposits at December 31, 2018. As of
December 31, 2019 and 2018, time deposits maturing in less
than one year amounted to $606.9 million and $584.5 million,
respectively.
The following table indicates the amount of certificates of deposit by time remaining until maturity at December 31, 2019.
(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
$
173,815
$ 126,936
$
91,007
$
46,793
$
438,551
Certificates of deposit less than $100,000
67,060
76,894
71,158
80,364
295,476
TOTAL CERTIFICATES OF DEPOSIT
$ 240,875
$ 203,830
$ 162,165
$ 127,157
$ 734,027
Maturity
Certificates of Deposit Maturities
The following table sets forth certain information regarding certificates of deposit.
Period to Maturity from December 31, 2019
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
2019
2018
2017
(in thousands)
Rate:
0.00 to 0.99%
$
78,695 $
1 $
3 $
— $
—
$ — $
78,699 $ 190,118 $ 283,569
1.00 to 2.00%
2.01 to 3.00%
3.01 to 4.00%
Over 4.01%
325,042
51,472
21,402
9,406
7,213
202,887
4,398
4,707
11,405
16,219
246
—
4
—
—
—
—
—
—
—
806
121
—
—
415,341
297,284
342,692
239,737
263,090
8,544
250
—
—
—
4
—
TOTAL
$ 606,870 $ 55,875 $ 26,112 $ 20,811 $ 23,432
$ 927 $ 734,027 $ 750,492 $ 634,809
Borrowed Funds
At December 31, 2019, the Bank had $1.13 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
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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,
2019
2018
2017
$ 1,190,006
$ 1,256,525
$ 1,288,448
451,000
96,914
939,916
325,481
71,234
2.11 %
2.40
0.49
487,000
153,715
472,000
210,702
1,136,988
1,237,979
259,197
139,729
179,003
164,982
1.90 %
2.09
1.04
1.78 %
1.17
1.26
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 Bank’s wholly owned subsidiary, Beacon Trust Company and
its registered investment advisor subsidiary, Beacon Investment
Advisory Services, Inc., (“Beacon”) are engaged in providing
wealth management services. Those services include investment
management, trust and estate administration, financial planning,
tax compliance and planning, and private banking. These services
may be introduced to existing customers through the Bank’s
extensive branch and lending network.
Beacon focuses on delivering personalized solutions based on
the needs and objectives for each client. The majority of the
fee income generated by Beacon is based on assets under
management.
At December 31,
2019
2018
2017
$
766,409
$ 1,037,960
$
1,127,335
298,000
60,737
283,000
121,322
472,000
143,179
$ 1,125,146
$ 1,442,282
$
1,742,514
2.14 %
1.84 %
0.53 %
2.08 %
2.60 %
0.85 %
1.74 %
1.53 %
1.00 %
On April 1, 2019, Beacon Trust Company (“Beacon”) completed
its acquisition of certain assets of Tirschwell & Loewy, Inc. (“T&L”),
a New York City-based registered investment adviser. Beacon is
a wholly owned subsidiary of Provident Bank which, in turn, is
wholly owned by the Company. This acquisition expanded the
Company’s wealth management business by $822.4 million of
assets under management at the time of acquisition.
21
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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, 2019, the Company had 968 full-time and 47 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 (“BHCA”), as
amended, 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 accompanying regulations of the Commissioner of the
New Jersey Department of Banking and Insurance (“Commissioner”)
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. Additionally, 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 authority, including the ability to set policies with
respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
As of December 31, 2019, the Bank had consolidated assets of
$9.81 billion. The Company expects that it will exceed $10 billion
in total consolidated assets in 2020, which will result in increased
supervision and regulation of the Company. In particular, the
company will become subject to the direct supervision of the
Consumer Financial Protection Bureau (“CFPB”). Additionally,
under existing federal laws and regulations, when the Company
exceeds $10 billion in assets, the Company will (1) receive less
debit card fee income; (2) be subject to more stringent compliance
requirements under the “Volcker Rule,” (i.e., a provision of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 (“Dodd-Frank Act”) which prohibits banking entities from
engaging in proprietary trading or investing in or sponsoring hedge
funds or private equity funds); and (3) generally be subject to higher
FDIC assessment rates. 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
22
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report implications of crossing the $10 billion threshold will likely result
in increased regulatory costs, though the Company has incurred
increased regulatory costs in connection with its preparations over
the last several years for exceeding the $10 billion asset threshold.
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 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
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.
When the Company exceeds $10 billion in assets, the Company
will no longer qualify for certain regulatory relief provided under the
Economic Growth Act, but the Company expects to benefit from
the above amendments which raised the above asset thresholds
for conducting annual company-run stress tests. However,
notwithstanding this regulatory relief, the Company intends to
continue to employ stress testing protocols 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.
In addition, the Economic Growth Act also enacted several
important changes in certain technical compliance areas for which
the banking agencies have now issued corresponding guidance
and/or proposed or final rules, including:
zz Prohibiting federal banking regulators from imposing higher
capital standards on High Volatility Commercial Real Estate
(“HVCRE”) exposures unless they are for acquisition,
development or construction (“ADC”), and clarifying ADC status;
zz Requiring the federal banking agencies to amend the liquidity
coverage ratio rule (“LCR”) such that all qualifying investment-
grade, liquid and readily-marketable municipal securities are
treated as level 2B liquid assets (i.e., assets with a lesser
degree of liquidity and more volatility than level 2A assets,
which include, for example, certain government securities,
covered bonds and corporate debt securities), making them
more attractive investment alternatives;
zz Exempting from appraisal requirements certain transactions
involving real property in rural areas and valued at less than
$400,000; and
zz Directing the CFPB to provide guidance on the applicability
of the Truth in Lending Act (“TILA”) Real Estate Settlement
Procedures Act (“RESPA”) Integrated Disclosure rule (the “TRID
Rule”) to mortgage assumption transactions and construction-to-
permanent home loans, as well the extent to which lenders can rely
on model disclosures that do not reflect recent regulatory changes.
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.
PART I
Item 1 Business
New Jersey Banking Regulation
Activity Powers
The Bank derives its lending, investment and other activity powers
primarily from the applicable provisions of the New Jersey Banking
Act and its related regulations. Under these laws and regulations,
savings banks, including the Bank, generally may, subject to
certain limits, invest in:
(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” 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.
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.
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PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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, 2019, the Bank was
considered “well capitalized” under FDIC guidelines.
Loans to a Bank’s Insiders
Provisions of the New Jersey Banking Act also 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 below. 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.
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, federal 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.
On July 15, 2019, the federal banking agencies adopted a final rule
simplifying certain aspects of the capital rules, the key elements of
which apply solely to banking organizations that are not subject to
the advanced approaches capital rule (i.e., banks with $250 billion
or more in total assets or $10 billion or more in total foreign
exposures). Under the rule, non-advanced approaches banking
organizations such as the Bank will apply a simpler regulatory
capital treatment for mortgage servicing assets (“MSAs”); certain
deferred tax assets (“DTAs”) arising from temporary differences;
investments in the capital of unconsolidated financial institutions
other than those currently applied; and capital issued by a
consolidated subsidiary of a banking organization and held by
third parties (often referred to as minority interest) that is includable
in regulatory capital. Specifically, the rule eliminates: (i) the capital
rule’s 10 percent common equity tier 1 capital deduction threshold
that applies individually to MSAs, temporary difference DTAs, and
significant investments in the capital of unconsolidated financial
institutions in the form of common stock; (ii) the aggregate
15 percent common equity tier 1 capital deduction threshold that
subsequently applies on a collective basis across such items;
(iii) the 10 percent common equity tier 1 capital deduction threshold
for non-significant investments in the capital of unconsolidated
financial institutions; and (iv) the deduction treatment for significant
investments in the capital of unconsolidated financial institutions
not in the form of common stock. The capital rule no longer has
distinct treatments for significant and non-significant investments
in the capital of unconsolidated financial institutions, but instead
require that non-advanced approaches banking organizations
deduct from common equity tier 1 capital any amount of MSAs,
temporary difference DTAs, and investments in the capital of
unconsolidated financial institutions that individually exceeds
25 percent of common equity tier 1 capital.
Additionally, in December 2019, the federal banking agencies
issued a final rule on the capital treatment of HVCRE exposures
which brought the regulatory definition of HVCRE exposure in
line with the statutory definition of HVCRE ADC in the Economic
Growth Act. The final rule also clarifies the capital treatment for
loans that finance the development of land under the revised
HVCRE exposure definition and establishes the requirements for
certain exclusions from HVCRE exposure capital treatment.
24
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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, 2019:
As of December 31, 2019
(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)
$
923,471
9.81 %
923,471
923,471
979,136
12.09
12.09
12.82
4.00 %
4.50
6.00
8.00
Capital
Requirements
with Capital
Conservation
Buffer(1)
4.00 %
7.00
8.50
10.50
(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.
As of December 31, 2019, the Bank was considered “well capitalized” under FDIC guidelines.
The Volcker Rule
A provision of the Dodd-Frank Act (known as the “Volcker
Rule”) prohibits insured depository institutions and their holding
companies from engaging in proprietary trading except in limited
circumstances, and it prohibits them from owning equity interests
in excess of three percent of Tier 1 Capital in private equity and
hedge funds. On December 10, 2013, five U.S. financial regulators,
including the Federal Reserve and the OCC, adopted regulations
implementing the Volcker Rule. Those regulations prohibit banking
entities from (1) engaging in short-term proprietary trading for their
own accounts, and (2) having certain ownership interests in and
relationships with hedge funds or private equity funds, which
are referred to as “covered funds.” The regulations also require
each regulated entity to establish an internal compliance program
that is consistent with the extent to which it engages in activities
covered by the Volcker Rule. Historically, this meant that reporting
requirements were tied to a bank’s total assets, where banks
with assets at or below $10 billion had less stringent reporting
requirements and banks with more than $10 billion had increasingly
more stringent requirements as the size of the bank increased.
In November 2019, five federal banking agencies issued a final
rule revising certain aspects of the Volcker Rule. The final rule
simplifies and streamlines compliance requirements for firms
that do not have significant trading activities and enhances
requirements for firms that do. Under the new rule, compliance
requirements will be based on the amount of assets and liabilities
that a bank trades. Firms with significant trading activities (i.e.,
those with $20 billion or more in trading assets and liabilities, will
have heightened compliance obligations). The new rule became
effective on January 1, 2020, but banking entities will not be
required to comply with the new rules until January 1, 2021.
On January 30, 2020, five federal financial regulators issued a
notice of proposed rule making to modify the “covered funds”
portion of the Volcker rule by streamlining the rule, addressing
the treatment of certain foreign funds, and permitting banking
entities to offer financial services and engage in other permissible
activities that do not raise concerns that the Volcker rule was
intended to address.
Although the Bank does not engage in proprietary trading, if the
Company exceeds $10 billion in assets in 2020, as anticipated,
the Bank will likely incur costs in developing and implementing
revised controls as part of an internal compliance to conform with
the covered funds portions of the Volcker rule.
Current Expect Credit Loss (“CECL”) Treatment
In June 2016, the Financial Accounting Standards Board
(“FASB”) issued an accounting standard update, “Financial
Instruments-Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments,” which replaces the current
“incurred loss” model for recognizing credit losses with an
“expected loss” model referred to as the CECL model. Under
the CECL model, we will be required to present certain financial
assets carried at amortized cost, such as loans and leases
held for investment and held-to-maturity debt securities, at the
net amount expected to be collected. The measurement of
expected credit losses is to be based on information about
past events, including historical experience, current conditions,
and reasonable and supportable forecasts that affect the
collectability of the reported amount. On December 21, 2018,
the federal banking agencies approved a final rule modifying
their regulatory capital rules and providing an option to phase
in over a period of three years the day-one regulatory capital
effects of the CECL model. The final rule also revises the
agencies’ other rules to reflect the update to the accounting
standards. The final rule took effect April 1, 2019.
The new CECL standard will become effective for the Bank for
fiscal years beginning after December 15, 2019. We expect
to recognize a one-time cumulative-effect adjustment to our
allowance for loan losses as of the beginning of the first reporting
period in which we adopt the new standard, consistent with
regulatory expectations set forth in interagency guidance issued
at the end of 2016. We also expect to incur both transition costs
and ongoing costs in developing and implementing the CECL
methodology, and that the methodology will result in increased
capital costs upon initial adoption as well as over time.
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PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
In October 2019, four federal banking agencies issued a request
for comment on a proposed interagency policy statement on
the new CECL methodology. The policy statement proposes
to harmonize the agencies’ policies on allowances for credit
losses with the FASB’s new accounting standards. Specifically,
the statement (1) updates concepts and practices from prior
policy statements issued in December 2006 and July 2001 and
specifies which prior guidance documents are no longer relevant;
(2) describes the appropriate CECL methodology, in light of Topic
326, for determining allowances for credit losses (“ACLs”) on
financial assets measured at amortized cost, net investments in
leases, and certain off-balance sheet credit exposures; and (3)
describes how to estimate an ACL for an impaired available-for-
sale debt security in line with Topic 326. The Company has taken
the proposed policy statement into account in its implementation
of the CECL methodology effective January 1, 2020.
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, 2019,
dividends paid by the FHLBNY to the Bank totaled $4.4 million.
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 2.5 to 45 basis points of total assets less
tangible equity. However, as described below, there have been
changes to both the FDIC’s assessment range and its risk-based
assessment procedures.
The FDIC 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) was lowered to 1.5 to 30 basis
points for banks of less than $10 billion in consolidated assets.
The Dodd-Frank Act required banks with greater than $10 billion
in 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 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. When
26
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
the Company exceeds $10 billion in assets for four consecutive
calendar quarters, it will be classified as a large institution for
deposit insurance assessment purposes. Generally, such a
reclassification would result in a higher FDIC insurance premium.
On December 12, 2019, the FDIC issued a proposed rule
on brokered deposits. The proposed rule aims to clarify and
modernize the FDIC’s existing regulatory framework for brokered
deposits. Notable aspects of the proposed rule include language
(1) defining the operative prongs of the definition of a “deposit
broker”; (2) creating three general tests to determine the
applicability of the “primary purpose” exception; (3) establishing
an application process for entities that wish to make use of
the primary purpose exception; and (4) allowing wholly-owned
subsidiaries of IDIs to make use of the “IDI” (or the “own bank”)
exception. For insured entities that accept deposits classified
as “brokered” under the FDIC’s current regulatory framework, a
change in that regulatory framework could result in a change in
those entities’ DIF assessment rate, depending on the size of the
entities’ brokered deposit activity.
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.
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 (“CRA”). Among other things, the current CRA
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 CRA
could, at a minimum, result in regulatory restrictions on its
activities, including, but not limited to, engaging in acquisitions
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PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
and mergers. The Bank received a “Satisfactory” CRA rating
in its most recently completed federal examination, which was
conducted by the FDIC as of July 2018.
On December 12, 2019, the FDIC and the OCC issued a proposed
rule to modernize their respective agencies’ regulations under the
CRA. The proposed rule would (1) clarify which activities qualify
for CRA credit and (2) require banks to identify an additional
assessment area based on where they receive a significant portion
of their domestic retail deposits, thus creating two assessment
areas: a deposit-based assessment area and a facility-based
assessment area.
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
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%;
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.
Consumer Financial Protection
Bank regulatory agencies are increasingly focusing attention
on consumer protection laws and regulations. To promote
fairness and transparency for mortgages, credit cards, and
28
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
other consumer financial products and services, the Dodd-
Frank Act established the CFPB. This agency is responsible
for interpreting and enforcing federal consumer financial laws,
as defined by the Dodd-Frank Act, that, among other things,
govern the provision of deposit accounts along with mortgage
origination and servicing. Some federal consumer financial laws
enforced by the CFPB include the Equal Credit Opportunity Act,
Truth in Lending Act (“TILA”), the Truth in Savings Act, the Home
Mortgage Disclosure Act, Real Estate Settlement Procedures
Act (“RESPA”), the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act, and the Fair Credit Reporting Act.
The CFPB is also authorized to prevent any institution under its
authority from engaging in an unfair, deceptive, or abusive act
or practice in connection with consumer financial products and
services. As a residential mortgage lender, the Company and
its bank subsidiaries are subject to multiple federal consumer
protection statutes and regulations, including, but not limited
to, TILA, the Home Mortgage Disclosure Act, the Equal Credit
Opportunity Act, RESPA, the Fair Credit Reporting Act, the Fair
Debt Collection Act and the Flood Disaster Protection Act. Failure
to comply with these and similar statutes and regulations can
result in the Corporation and its bank subsidiaries becoming
subject to formal or informal enforcement actions, the imposition
of civil money penalties and consumer litigation.
The CFPB has exclusive examination and primary enforcement
authority with respect to compliance with federal consumer
financial protection laws and regulations by institutions under
its supervision and is authorized, individually or jointly with the
federal bank regulatory agencies (the Agencies), to conduct
investigations to determine whether any person is, or has,
engaged in conduct that violates such laws or regulations. The
CFPB may bring an administrative enforcement proceeding or
civil action in Federal district court. In addition, in accordance
with a memorandum of understanding entered into between the
CFPB and the Department of Justice (DOJ), the two agencies
have agreed to coordinate efforts related to enforcing the fair
lending laws, which includes information sharing and conducting
joint investigations. As an independent bureau within the FRB,
the CFPB may impose requirements that are more severe than
those of the other bank regulatory agencies. When the Company
exceeds $10 billion in assets in 2020, it will be subject to the
supervisory and enforcement authority of the CFPB.
The Dodd-Frank Act also permits states to adopt stricter
consumer protection laws and state attorneys general to enforce
consumer protection rules issued by the CFPB. As a result of
these aspects of the Dodd-Frank Act, going forward, the Bank
will operate in a stringent consumer compliance environment
and is incurring additional costs related to consumer protection
compliance, including but not limited to potential costs associated
with CFPB examinations, regulatory and enforcement actions and
consumer-oriented litigation, which is likely to increase as a result
of the consumer protection provisions of the Dodd-Frank Act. The
CFPB, other financial regulatory agencies, including the OCC, as
well as the Department of Justice have recently pursued a number
of enforcement actions against depository institutions with respect
to compliance with fair lending laws.
Anti-Money Laundering
The Bank must comply with the anti-money laundering (“AML”)
provisions of the Bank Secrecy Act (“BSA”) as amended by the
USA PATRIOT Act and implementing regulations issued by the
FDIC and the Financial Crimes Enforcement Network (“FinCEN”)
of the U.S. Department of the Treasury.
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.
In December 2019, three federal banking agencies and FinCEN
issued a joint statement clarifying the compliance procedures
and reporting requirements that banks must follow for customers
engaged in the growth or cultivation of hemp, including a clear
statement that banks need not file a Suspicious Activity Report
(“SAR”) on customers engaged in the growth or cultivation of
hemp in accordance with applicable laws and regulations. This
statement does not apply to cannabis-related business; therefore,
the statement pertains only to customers who are unlawfully
growing or cultivating hemp and are not otherwise engaged in
unlawful or suspicious activity.
Loans to a Bank’s Insiders
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,
29
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
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.
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.
Federal Reserve System
Under Federal Reserve Board regulations, the Bank is required
to maintain non-interest earning reserves against its transaction
accounts. For 2020, the Federal Reserve Board regulations
generally require that reserves of 3% must be maintained against
aggregate transaction accounts over $16.9 million and up to
$127.5 million, and 10% against that portion of total transaction
accounts in excess of up to $127.5 million. The first $16.9
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.
Income on Interchange Fees
When the Company exceeds $10 billion in assets in 2020,
the Company will become subject to the interchange fee cap
mandated by the Dodd-Frank Act. As such, the fees the Company
may receive for an electronic debit transaction will be capped at
the statutory limit. Historically, the Company has been exempt
from the interchange fee cap under the “small issuer” exemption,
which applies to any debit card issuer with total worldwide assets
(including those of its affiliates) of less than $10 billion as of the
end of the previous calendar year. Pursuant to FRB regulations
mandated by the Dodd-Frank Act, interchange fees on debit card
transactions are limited to a maximum of $0.21 per transaction
plus 5 basis points of the transaction amount. A debit card issuer
may recover an additional one cent per transaction for fraud
prevention purposes if the issuer complies with certain fraud-
related requirements prescribed by the FRB.
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 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.
Holding Company Regulation
Federal Regulation
The Company is regulated as a bank holding company, and as
such, is subject to examination, regulation and periodic reporting
under the Bank Holding Company Act, as administered by the
Federal Reserve Board.
The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis.
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. The rule limits a banking
organization’s capital distributions and certain discretionary bonus
payments if the banking organization does not hold a “capital
conservation buffer,” of 2.5% in addition to the amount necessary
to meet its minimum risk-based capital requirements.
30
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019.
(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, 2019
Capital
Percent of
Assets(1)
Capital
Requirements(1)
Capital
Requirements with
Capital Conservation
Buffer(1)
$
973,214
10.34 %
973,214
973,214
1,028,879
12.74
12.74
13.47
4.00 %
4.50
6.00
8.00
4.00 %
7.00
8.50
10.50
(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, 2019, 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, Federal
Reserve Board guidance indicates that bank holding companies
should inform Federal Reserve staff of certain proposed repurchases
of redemptions of common stock, sufficiently in advance to allow
for supervisory review and possible objection.
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.
31
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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.
On January 30, 2020, the Federal Reserve finalized a rule to
codify and simplify its interpretations and opinions regarding
regulatory presumptions of control. The rule, which will be
effective April 1, 2020, will likely have a meaningful impact on
control determinations related to investments in banks and bank
holding companies and investments by bank holding companies
in nonbank companies.
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 Corporate 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.
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.
32
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1 Business
Bad Debt Reserves
Corporate Dividends-Received Deduction
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).
Taxable Distributions and Recapture
Prior to the 1996 Act, bad debt reserves created prior to
January 1, 1988 were subject to recapture into taxable income
should the Bank fail to meet certain asset and definitional
tests. Federal legislation has eliminated these recapture
rules. Retained earnings at December 31, 2019 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, 2019, the Bank had an
unrecognized tax liability of $13.4 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 December 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.
The Company may exclude from its income 100% of dividends
received from the Bank as a member of the same affiliated group
of corporations.
State Taxation
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 subject to the corporation business
tax at 9% of apportioned taxable income. As a result of legislation
that New Jersey enacted on July 1, 2018, the Company and the
Bank are subject to an additional temporary surtax effective for
tax years 2018 through 2021, and are required 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. The Company’s 2017 and 2018 New York State returns
are currently under audit.
33
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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. A flattening yield curve, or
one that inverts, 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 2.5% or $7.1 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, 2019, our available for sale
debt securities portfolio totaled $976.9 million. Unrealized gains
and losses on securities available for sale are reported as a
separate component of stockholders’ equity. Decreases in the
fair value of securities available for sale resulting from increases
in interest rates therefore could have a temporary adverse effect
on stockholders’ equity.
34
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 monitoring program, 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 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. In
addition, bank regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan
losses or recognize further loan charge-offs.
CECL may introduce added volatility.
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 is effective for
reporting periods beginning after December 15, 2019, requires
us to adopt a CECL model that measures projected credit losses
over the estimated life of the asset and subject to quantitative
and qualitative loss factors we derive using a macroeconomic
forecast that we deem most likely to occur. This approach is a
significant departure from the prior accounting standard, which
estimated potential credit losses based on conditions existing as
of the reporting date. This new standard may increase not only
the amount of allowance for credit losses but also the volatility of
our provisions for loan losses. These factors could materially affect
our financial condition and future results of operations.
Commercial real estate, commercial &
industrial and construction loans expose us
to increased risk and earnings volatility.
We consider our commercial real estate loans, commercial &
industrial loans and construction loans to be higher risk categories in
our loan portfolio. These loans are particularly sensitive to economic
conditions. At December 31, 2019, our portfolio of commercial
real estate loans, including multi-family loans, totaled $3.80 billion,
or 52.3% of total loans, our commercial & industrial loans totaled
$1.63 billion, or 22.5% of portfolio loans, and our construction loans
totaled $429.8 million, or 5.9% of total loans. We plan to continue
to emphasize the origination of these types of loans.
Commercial real estate loans generally involve a higher degree
of credit risk because they typically have larger balances and are
more affected by adverse conditions in the economy. Payments
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
on loans secured by commercial real estate also often depend
on the successful operation and management of the businesses
that occupy these properties. Furthermore, these loans may
be affected by factors outside the borrower’s control, such as
adverse conditions in the real estate market or the economy or
changes in government regulation. In the case of commercial
& industrial loans, although we strive to maintain high credit
standards and limit exposure to any one borrower, the collateral
for these loans often consists of accounts receivable, inventory
and equipment. This type of collateral typically does not yield
substantial recovery in the event we need to foreclose on it and
may rapidly deteriorate, disappear, or be misdirected in advance
of foreclosure. This adds to the potential that our charge-offs will
be more volatile than we have experienced in the past, which
could significantly negatively affect our earnings in any quarter. In
addition, some of our construction loans pose higher risk levels
than the levels expected at origination, as projects may stall or sell
at prices lower than expected. In addition, many of our borrowers
also have more than one commercial real estate or construction
loan outstanding with us. Consequently, an adverse development
with respect to one loan or one credit relationship may expose us
to significantly greater risk of loss.
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.
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. 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 changes 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 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.
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.
Furthermore, key components of the financial services value
chain have been replicated by digital innovation, commonly
referred to as Fintech. As customer preferences and expectations
continue to evolve, technology has lowered barriers to entry and
made it possible for nonbanks to offer products and services
traditionally provided by banks, such as automatic transfer and
automatic payment systems. In addition, some of the largest
technology firms are engaging in joint ventures with the largest
banks to provide and or expand financial service offerings with
a technological sophistication and breadth of marketing that
smaller institutions do not have. Many of our competitors have
fewer regulatory constraints and may have lower cost structures.
Additionally, due to their size, many competitors may be able to
achieve economies of scale and, as a result, may offer a broader
range of products and services as well as better pricing for those
products and services than we can. 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.
35
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
Failure to keep pace with technological
changes could adversely affect our
business.
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new
technology-driven products and services. The effective use
of technology increases efficiency and enables financial institutions
to better serve customers and to reduce costs. Our future
success depends, in part, upon our ability to address the needs
of our customers by using technology to provide products and
services that will satisfy customer demands, as well as to create
additional efficiencies in our operations. Many of our competitors
have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in
marketing these products and services to our customers. Failure
to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results
of operations.
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.
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 anticipate that our total consolidated
assets will exceed $10 billion in 2020; if
that occurs, we will be subject to additional
regulation and increased supervision,
including by the CFPB.
Provident’s total assets were $9.81 billion at December 31,
2019. 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 enhanced
regulatory expectations. 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.
36
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
We face regulatory scrutiny based on our
commercial real estate lending.
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 425.6% of
total risk-based capital at December 31, 2019, 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.
We may not be able to detect money
laundering and other illegal or improper
activities fully or on a timely basis, which
could expose us to additional liability and
could have a material adverse effect on us.
We are required to comply with anti-money laundering, anti-
terrorism and other laws and regulations in the United States.
These laws and regulations require us, among other things, to
adopt and enforce “know-your-customer” policies and procedures
and to report suspicious and large transactions to applicable
regulatory authorities. These laws and regulations have become
increasingly complex and detailed, require improved systems and
sophisticated monitoring and compliance personnel and have
become the subject of enhanced government supervision.
While we have adopted policies and procedures aimed at
detecting and preventing the use of our banking network for
money laundering and related activities, those policies and
procedures may not completely eliminate instances in which we
may be used by customers to engage in money laundering and
other illegal or improper activities. To the extent we fail to fully
comply with applicable laws and regulations, the FDIC, along
with other banking agencies, has the authority to impose fines
and other penalties and sanctions on us. In addition, our business
and reputation could suffer if customers use our banking network
for money laundering or illegal or improper purposes.
Acquisitions may be delayed, impeded, or
prohibited due to regulatory issues.
Acquisitions by the Company, particularly those of financial
institutions, are subject to approval by a variety of federal and
state regulatory agencies (collectively, “regulatory approvals”).
The process for obtaining these required regulatory approvals
has become substantially more difficult in recent years. Regulatory
approvals could be delayed, impeded, restrictively conditioned or
denied due to existing or new regulatory issues the Company has,
or may have, with regulatory agencies, including, without limitation,
issues related to BSA compliance, CRA issues, fair lending laws,
fair housing laws, consumer protection laws, unfair, deceptive, or
abusive acts or practices regulations, and other similar laws and
regulations. We may fail to pursue, evaluate or complete strategic
and competitively significant acquisition opportunities as a result of
our inability, or perceived or anticipated inability, to obtain regulatory
approvals in a timely manner, under reasonable conditions or at all.
The regulatory approvals may contain conditions on the completion
of the merger that adversely affect our business following the
closing, or which are not anticipated or cannot be met. Difficulties
associated with potential acquisitions that may result from these
factors could have a material adverse impact on our business, and,
in turn, our financial condition and results of operations.
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
37
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
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.
A cyber-attack, data breach, or a technology
failure of ours 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.
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.
We rely on digital technologies, computer, database and email
systems, software, and networks to conduct our operations.
Financial 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, customers or 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 adverse 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 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 could
result in financial liability and harm to our reputation.
Misconduct by our employees could also result in fraudulent,
improper or unauthorized activities on behalf of customers 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 these types 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’ 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. A breach, failure,
interruption, cessation of an important
service by any third-party could have a
material adverse effect on our business, as
well as cause reputational harm.
We are dependent for the majority of our technology, including
our core operating system, on third-party providers. The Bank
collects, processes and stores sensitive consumer data by utilizing
computer systems and telecommunications networks operated
by third-party service providers, which are integral to our business.
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.
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 third parties with whom we interact. In addition,
38
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
our ability to implement backup systems and other safeguards
with respect to third-party systems is more limited than with our
own systems. If these third parties 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 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 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. 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.
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. Headwinds facing the U.S. economy strengthened
during 2019, despite the continuation of the current U.S.
economic expansion, noting in particular that manufacturing
activity slowed more sharply than the rest of the economy. The
consensus forecast indicates that the U.S. economy will continue
to slow down towards its long-run potential rate of growth, but
the risk of a recession is rising. Adverse changes in the economy
could negatively affect the ability of our borrowers to repay their
loans or force us to offer lower interest rates to encourage new
borrowing activity.
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.
Changes in U.S. trade policies, including
the imposition of tariffs and retaliatory
tariffs, may adversely impact our business,
financial condition and results of operations
There continues to be discussion and dialogue regarding potential
changes to U.S. trade policies, legislation, treaties and tariffs with
countries such as China and the European Union. Tariffs and
retaliatory tariffs have been imposed, and additional tariffs and
retaliatory tariffs have been proposed. Such tariffs, retaliatory
tariffs or other trade restrictions on products and materials that
our customers import or export could cause the prices of our
customers’ products to increase, which could reduce demand for
such products, or reduce our customers’ margins, and adversely
impact their revenues, financial results and ability to service debt.
This in turn, could adversely affect our financial condition and
results of operations. In addition, to the extent changes in the
political environment have a negative impact on us or on the
markets in which we operate our business, results of operations
and financial condition could be materially and adversely impacted
in the future. It remains unclear what the U.S. government or
foreign governments will or will not do with respect to tariffs
already imposed, additional tariffs that may be imposed, or
international trade agreements and policies.
Acts of terrorism, severe weather, natural
disasters, public health issues and other
external events could impact our ability to
conduct business.
Our business is subject to risk from external events that could
affect the stability of our deposit base, impair the ability of
borrowers to repay outstanding loans, impair the value of collateral
securing loans, cause significant property damage, result in loss
of revenue, and/or cause us to incur additional expenses. For
example, 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. Additionally, 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
39
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 1A Risk Factors
or social matters, including terrorist acts, and cyber attacks. The
emergence of widespread health emergencies or pandemics,
such as the potential spread of the coronavirus (“Covid-19”),
could lead to regional quarantines, business shutdowns, labor
shortages, disruptions to supply chains, and overall economic
instability. 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.
Uncertainty about the future of LIBOR may
adversely affect our business.
The London Interbank Offered Rate (“LIBOR”) is a global financial
benchmark and reference rate that we use to set interest rates
for a significant portion of our commercial loan portfolio. At
December 31, 2019, loans that tied to the LIBOR rate totaled
$1.75 billion. The marketplace that sets the LIBOR rate has
announced that it will no longer support LIBOR after 2021.
depending on the terms of the governing instruments, and such
discontinuation may increase operational and other risks to the
Company and the industry.
In addition, the implementation of LIBOR alternatives may increase
compliance costs and operational costs.
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.
Provident has not yet determined which alternative rate is most
applicable, and there can be no assurances on which benchmark
rate(s) may replace LIBOR or how LIBOR will be determined for
purposes of financial instruments that are currently referencing
LIBOR if and when it ceases to exist. If LIBOR is discontinued
after 2021 as expected, there may be uncertainty or differences in
the calculation of the applicable interest rate or payment amount
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.
40
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART I
Item 4 Mine Safety Disclosures
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, 2019, the Bank conducted business through
83 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 Manasquan, New Jersey,
as well as in Bethlehem, Newtown and Wayne, Pennsylvania.
The aggregate net book value of premises and equipment was
$55.2 million at December 31, 2019.
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.
Item 3. Legal Proceedings
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.
41
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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 3, 2020, there were 83,209,293 shares of the
Company’s common stock issued and 65,964,970 shares
outstanding, and approximately 4,539 stockholders of record.
On January 31, 2020, the Board of Directors declared a quarterly
cash dividend of $0.23 per common share which was paid on
February 28, 2020, to common stockholders of record as of the
close of business on February 14, 2020. 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, 2014 through December 31, 2019, (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, 2014.
$
250
200
150
100
50
l
e
u
a
V
x
e
d
n
I
Total Return Performance
$163.49
$148.49
$141.80
2014
2015
2016
2017
2018
2019
Provident Financial Services, Inc.
Russell 2000
SNL Thrift
Period Ending
Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Provident Financial Services, Inc.
Russell 2000
SNL Thrift
100.00
100.00
100.00
115.42
95.59
112.45
167.81
115.95
137.74
165.79
132.94
136.74
153.15
118.30
115.17
163.49
148.49
141.80
42
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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 2019 under
the stock repurchase plan approved by the Company’s Board of Directors:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
October 1, 2019 through October 31, 2019
November 1, 2019 through November 30, 2019
December 1, 2019 through December 31, 2019
TOTAL
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid per
Share
(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)
—
—
—
—
$ —
—
—
$ —
—
—
—
—
1,594,731
1,594,731
1,594,731
(1) 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 commenced upon completion of the seventh repurchase program. The repurchase program has no expiration date.
There were no purchases of the Company’s common stock during the fourth quarter of 2019 under the stock repurchase plan approved
by the Company’s Board of Directors. The Company repurchased 916,326 shares of its common stock at a cost of $21.8 million in
2019. At December 31, 2019, 1.6 million shares were eligible for repurchase under the board approved stock repurchase program.
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,
2019
2018
2017
2016
2015
$ 9,808,578 $ 9,725,769 $ 9,845,274 $ 9,500,465 $ 8,911,657
7,277,360
7,195,026
7,265,523
6,941,603
6,476,250
453,629
479,425
477,652
488,183
976,919
1,063,079
1,037,154
1,039,837
473,684
964,014
7,102,609
6,830,122
6,714,166
6,553,629
5,923,987
1,125,146
1,442,282
1,742,514
1,612,745
1,707,632
1,413,840
1,358,980
1,298,661
1,251,781
1,196,065
(1) Loans are shown net of allowance for loan losses, deferred fees and unearned discount.
43
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 6 Selected Financial Data
(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:
For the Years Ended December 31,
2019
2018
2017
2016
2015
$
371,470 $
359,829 $
323,846 $
302,315 $
291,781
73,497
297,973
13,100
284,873
63,794
201,579
147,088
34,455
59,153
45,644
43,748
41,901
300,676
278,202
258,567
249,880
23,700
5,600
5,400
4,350
276,976
272,602
253,167
245,530
58,676
191,735
143,917
25,530
55,697
187,822
140,477
46,528
55,393
183,778
124,782
36,980
55,222
180,589
120,163
36,441
$
112,633 $
118,387 $
93,949 $
87,802 $
83,722
$
$
1.74 $
1.74 $
1.82 $
1.82 $
1.46 $
1.45 $
1.38 $
1.38 $
1.33
1.33
At or For the Years Ended December 31,
2019
2018
2017
2016
2015
1.15%
1.22%
0.99%
0.95%
0.96%
8.07
3.10
3.35
1.31
0.65
2.05
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
55.72
53.36
56.25
58.54
59.19
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
0.55%
0.44
138.14
0.76
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
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
10.34%
10.24%
9.65%
9.25%
9.25%
13.47
14.20
83
992
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
1,008
(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.
44
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
(in thousands)
Efficiency Ratio Calculation:
Net interest income
Non-interest income
TOTAL INCOME
2019
2018
2017
2016
2015
At December 31,
$
297,973
$
300,676
$
278,202
$
258,567
$
249,880
63,794
58,676
55,697
55,393
55,222
$ 361,767
$ 359,352
$ 333,899
$ 313,960
$ 305,102
NON-INTEREST EXPENSE
$ 201,579
$ 191,735
$ 187,822
$ 183,778
$ 180,589
EXPENSE/INCOME
55.72%
53.36%
56.25%
58.54%
59.19%
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.
The Bank continues to maintain a diversified loan portfolio with
an emphasis on commercial mortgage, multi-family, construction
and commercial loans in its efforts to 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, 2019, these commercial loan types accounted for
80.0% of the loan portfolio and retail loans accounted for 20.0%. 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, 2019,
core deposits were 89.7% 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.
45
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Acquisition
On April 1, 2019, Beacon Trust Company (“Beacon”) completed
its acquisition of certain assets of Tirschwell & Loewy, Inc. (“T&L”),
a New York City-based independent registered investment adviser.
Beacon is a wholly owned subsidiary of Provident Bank which, in
turn, is wholly owned by the Company. This acquisition expanded
the Company’s wealth management business by $822.4 million
of assets under management at the time of acquisition.
The acquisition was accounted for under the acquisition method
of accounting. The Company recorded goodwill of $8.2 million, a
customer relationship intangible of $12.6 million and $800,000 of
other identifiable intangibles related to the acquisition. In addition,
the Company recorded a contingent consideration liability at its fair
value of $6.6 million. The contingent consideration arrangement
requires the Company to pay additional cash consideration to
T&L’s former stakeholders over a three-year period after the
closing date of the acquisition if certain financial and business
retention targets are met. The acquisition agreement limits the
total additional payment to a maximum of $11.0 million, to be
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 performs a quarterly evaluation of the adequacy of
the allowance for loan losses. The analysis of the allowance for loan
losses has two elements: collectively evaluated for impairment and
individually evaluated for impairment. Management’s evaluation of
the adequacy of the allowance for loan losses includes a review
determined based on actual future results. Total cost of the
acquisition was $21.6 million, which included cash consideration
of $15.0 million and contingent consideration with a fair value
of $6.6 million. Tangible assets acquired in the transaction
were nominal. No liabilities were assumed in the acquisition.
The goodwill recorded in the transaction is deductible for tax
purposes. The calculation of goodwill is subject to change for up
to one year after the closing date of the transaction as additional
information relative to closing date estimates and uncertainties
becomes available. As the Company finalizes its analysis of these
assets, there may be adjustments to the recorded carrying values.
In the fourth quarter of 2019, the Company increased the
estimated fair value of the contingent consideration liability by
$2.8 million. This was based upon recent favorable performance
and improved projections for the remaining measurement period.
The total contingent consideration liability at December 31, 2019
was $9.4 million.
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 segments the entire loan portfolio based on similar risk
characteristics, primarily loan type (residential mortgage,
commercial mortgage, construction, commercial, etc.) and risk
rating level.
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.
46
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
The allowance for loan losses collectively evaluated for impairment
consists of both quantitative and qualitative loss components.
Management estimates the quantitative component by segmenting
the loan portfolio based on similar risk characteristics and applying
quantitative loss factors to each loan segment and applying
qualitative adjustments to each loan segment at the portfolio
level. Quantitative loss factors give consideration to historical loss
experience by loan segment based upon a 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, 2019. 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 loans
collectively evaluated for impairment.
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 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, 2019 and 2018.
Recent Accounting Pronouncements Not Yet Adopted
In April 2019, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2019-04, “Codification Improvements to Topic
326, Financial Instruments-Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments” which
clarifies and improves areas of guidance related to the recently
issued standards on credit losses, hedging, recognition and
measurement. The most significant provisions of the ASU relate
to how companies will estimate expected credit losses under
Topic 326 by incorporating (1) expected recoveries of financial
assets, including recoveries of amounts expected to be written off
and those previously written off, and (2) clarifying that contractual
extensions or renewal options that are not unconditionally
cancellable by the lender are considered when determining the
contractual term over which expected credit losses are measured.
ASU No. 2019-04 is effective for reporting periods beginning
January 1, 2020. The Company does not expect the adoption
of this guidance to have a significant impact on the Company’s
consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-05, “Financial
Instruments - Credit Losses (Topic 326); Targeted Transition
Relief.” This ASU allows entities to irrevocably elect, upon adoption
of ASU 2016-13, the fair value option on financial instruments that
(1) were previously recorded at amortized cost and (2) are within
the scope of ASC 326-20 if the instruments are eligible for the
fair value option under ASC 825-10. The fair value option election
does not apply to held-to-maturity debt securities. Entities are
required to make this election on an instrument-by-instrument
basis. ASU 2019-05 has the same effective date as ASU 2016-
13 (i.e., the first quarter of 2020). The Company does not expect
the adoption of this guidance to have a significant impact on the
Company’s consolidated financial statements.
47
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
does not expect the adoption of this guidance to 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. Furthermore, ASU
2016-13 will necessitate establishing an allowance for expected
Analysis of Net Interest Income
credit losses on held to maturity debt securities. The amendments
in ASU 2016-13 are effective for fiscal years, including interim
periods, beginning after December 15, 2019. Early adoption of
this ASU was permitted for fiscal years beginning after December
15, 2018. The adoption of ASU 2016-13 involves changing from
an “incurred loss” model, which encompasses allowances for
current known and inherent losses within the portfolio, to an
“expected loss” model (“CECL”), which encompasses allowances
for losses expected to be incurred over the life of the portfolio.
As previously disclosed, the Company formed, in the first quarter
of 2017, a cross-functional working group, under the 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, finance and
information technology, among others. Management developed
a detailed implementation plan which included an assessment of
processes, portfolio segmentation, model development, model
validation, system requirements, the identification of data and
resource needs and the development of a governance and
control structure, among other things. Management selected a
system platform and has engaged with third-party vendors to
assist with model development, data governance and financial
and operational controls to support the adoption of this ASU. In
addition, the Company identified and segmented the loan portfolio
into several distinct portfolios for CECL modeling. The data sets
for these portfolios have been identified, populated and validated.
In the fourth quarter of 2019, Management ran the existing
incurred loss model in parallel with the CECL model, along with
model sensitivity analysis, determination of qualitative adjustments
and the execution of the governance, data control, analytic and
approval processes. Based on the fourth quarter parallel run,
review of the portfolio, including the composition, characteristics
and quality of the underlying loans, and the prevailing economic
conditions and forecasts as of the adoption date, the January
1, 2020 adoption of ASU 2016-13 will result in an increase of
approximately 15-20% to the allowance for credit losses and
will be recorded as a cumulative-effect adjustment to retained
earnings. With regard to regulatory capital, the Company will elect
the option to phase in the adjustment over a period of three years.
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, 2019, 2018 and 2017. For the periods indicated,
the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense
on average interest-bearing liabilities is expressed both in dollars and rates. No tax equivalent adjustments were made. Average
balances are daily averages.
48
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
For the Years Ended December 31,
2019
2018
2017
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
$
36,592 $
854
2.32% $
13,867 $
269
1.91% $
19,670 $
199
1.00%
61,032
1,870
3.07
50,351
1,465
2.92
51,790
1,071
2.07
467,711
12,424
2.66
472,690
12,606
2.67
487,616
13,027
2.67
1,072,106
27,455
2.56
1,046,701
26,074
2.49
1,044,116
22,384
2.14
724
—
—
683
—
—
587
—
—
66,285
7,190,113
4,387
324,480
6.62
4.51
72,364
4,907
7,208,420 314,508
6.78
4.36
73,995
6,971,512
4,061
283,104
5.49
4.06
8,894,563
371,470
4.18
8,865,076 359,829
4.06
8,649,286
323,846
3.74
926,269
$ 9,820,832
871,373
$ 9,736,449
885,499
$ 9,534,785
$ 1,015,547 $
3,625,989
801,374
1,681
29,542
14,271
1.17 % $
0.81
1.78
1,070,868 $
3,575,306
671,671
1,923
20,450
8,320
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
1,336,631
28,003
2.10
1,535,906
28,460
1.85
1,581,964
26,203
1.66
6,779,541
73,497
1.08
6,853,751
59,153
0.86
6,809,675
45,644
0.67
1,502,672
143,760
1,646,432
8,425,973
1,394,859
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
$ 9,820,832
$ 9,736,449
$ 9,534,785
$297,973
$300,676
$ 278,202
3.10 %
3.20 %
$ 2,115,022
$ 2,011,325
$ 1,839,611
3.35 %
3.39 %
3.07 %
3.21 %
1.31x
1.29x
1.27x
(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
NET INTEREST
MARGIN(3)
RATIO OF INTEREST-
EARNING ASSETS
TO TOTAL INTEREST-
BEARING LIABILITIES
(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.
49
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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,
2019 vs. 2018
2018 vs. 2017
Increase/(Decrease)
Due to
Volume
Rate
Total
Increase/
(Decrease)
Increase/(Decrease)
Due to
Volume
Rate
Total
Increase/
(Decrease)
$
930 $
59 $
989 $
(779)
$
1,243
$
(133)
641
(404)
(800)
234
(614)
174
126
(3,933)
(4,247)
(50)
739
(114)
10,773
11,407
371
8,919
5,825
3,476
(183)
1,380
(518)
9,973
11,641
(243)
9,093
5,951
(457)
18,591
14,344
(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
464
(421)
3,690
846
31,404
35,983
(169)
8,245
3,176
2,257
(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
13,949
13,509
NET INTEREST INCOME
$
4,481 $
(7,184) $
(2,703) $
9,074 $
13,400 $
22,474
Comparison of Financial Condition at December 31, 2019 and December 31, 2018
Total assets at December 31, 2019 were $9.81 billion, an
$82.8 million increase from December 31, 2018. The increase
in total assets was primarily due to an $82.3 million increase in
total loans, a $62.6 million increase in other assets, a $44.1 million
increase in total cash and cash equivalents and an $18.8 million
increase in intangible assets, partially offset by a $123.3 million
decrease in total investments.
The increase in other assets was largely due to the Company’s
January 1, 2019 adoption of a new lease accounting standard. The
Company recorded a right of use asset (“ROU”) of $44.9 million,
which was based on the present value of the expected remaining
lease payments at January 1, 2019. At December 31, 2019, the
ROU was $41.8 million.
Total loans increased $82.3 million to $7.33 billion at December 31,
2019, from $7.25 billion at December 31, 2018. For the year
ended December 31, 2019, loan originations, including advances
on lines of credit, totaled $2.83 billion, compared with $3.16 billion
at December 31, 2018. The loan portfolio had net increases of
$279.1 million in commercial mortgage loans and $40.8 million
in construction loans, partially offset by net decreases of $114.1
million in multi-family mortgage loans, $60.4 million in commercial
loans and $21.8 million in residential mortgage loans.
Commercial loans, consisting of commercial real estate, multi-
family, construction and commercial loans, totaled $5.87 billion,
accounting for 80.0% of the loan portfolio at December 31,
2019, compared to $5.72 billion, or 78.9% of the loan portfolio
at December 31, 2018. 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 $1.47 billion and accounted for
20.0% of the loan portfolio at December 31, 2019, compared
to $1.53 billion, or 21.1%, of the loan portfolio at December 31,
2018.
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 $213.2 million and
$105.3 million, respectively, at December 31, 2019. At
December 31, 2019, one SNC relationship was classified as
substandard. The gross commitments and oustanding balances
for this substandard SNC relationship totaled $13.7 million and
$11.6 million, respectively.
50
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
The Company had outstanding junior lien mortgages totaling
$143.4 million at December 31, 2019. Of this total, 11 loans
totaling $661,000 were 90 days or more delinquent, and were
allocated total loss reserves of $115,000.
The allowance for loan losses was $55.5 million at December 31,
2019, compared to $55.6 million at December 31, 2018. During
2019, the Company recorded a $13.1 million provision for loan
losses and incurred net charge-offs of $13.1 million. Total non-
performing loans at December 31, 2019 were $40.2 million, or
0.55% of total loans, compared with $25.7 million, or 0.35%
of total loans at December 31, 2018. At December 31, 2019,
impaired loans totaled $70.6 million with related specific reserves
of $5.1 million, compared with impaired loans totaling $50.7 million
with related specific reserves of $1.2 million at December 31,
2018. Within total impaired loans, there were $16.0 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, 2019, the Company’s
allowance for loan losses was 0.76% of total loans, compared
with 0.77% of total loans at December 31, 2018.
Non-performing commercial mortgage loans increased
$2.1 million to $5.3 million at December 31, 2019, from $3.2
million at December 31, 2018. At December 31, 2019, the
Company held six non-performing commercial mortgage loans.
The largest non-performing commercial mortgage loan was a $3.8
million loan secured by a first mortgage on a property located
in Hackettstown, New Jersey. The loan is presently in default.
There is no contractual commitment to advance additional funds
to this borrower.
Non-performing commercial loans increased $9.8 million to
$25.2 million at December 31, 2019, from $15.4 million at
December 31, 2018. Non-performing commercial loans at
December 31, 2019 consisted of 33 loans. The largest non-
performing commercial loan relationship was a SNC relationship,
which consisted of three loans to a restaurant group with total
outstanding balances of $11.6 million at December 31, 2019.
All of these loans are unsecured/non-real estate secured. These
loans are currently paying in accordance with their restructured
terms.
There were no non-performing constructions loans at either
December 31, 2019 or the prior year-end.
At December 31, 2019, the Company held $2.7 million of
foreclosed assets, compared with $1.6 million at December 31,
2018. 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, 2019, there
were 11 additions to foreclosed assets with an aggregate carrying
value of $2.3 million and 6 properties sold with an aggregate
carrying value of $1.0 million. Foreclosed assets at December 31,
2019 consisted of $2.7 million of residential real estate.
Non-performing assets totaled $42.9 million, or 0.44% of total
assets at December 31, 2019, compared to $27.3 million, or
0.28% of total assets at December 31, 2018. If the non-accrual
loans had performed in accordance with their original terms,
interest income would have increased by $1.7 million during
the year ended December 31, 2019. The amount of cash basis
interest income that was recognized on impaired loans during the
year ended December 31, 2019 was not material.
Total deposits increased $272.5 million during the year ended
December 31, 2019 to $7.10 billion. Total core deposits,
consisting of savings and demand deposit accounts, increased
$289.0 million to $6.37 billion at December 31, 2019, while
total time deposits decreased $16.5 million to $734.0 million
at December 31, 2019. The increase in core deposits for the
year ended December 31, 2019 was largely attributable to
a $241.9 million increase in money market deposits, a $72.5
million increase in non-interest bearing demand deposits and
a $42.8 million increase in interest bearing demand deposits,
partially offset by a $68.2 million decrease in savings deposits.
At December 31, 2019, core deposits represented 89.7% of total
deposits compared to 89.0% at December 31, 2018.
Borrowed funds decreased $317.1 million, during the year ended
December 31, 2019, to $1.13 billion. The decrease in borrowings
for the year was primarily the result of wholesale funding being
partially replaced by the net inflows of deposits. Borrowed funds
represented 11.5% of total assets at December 31, 2019, a
decrease from 14.8% at December 31, 2018.
Total stockholders’ equity increased $54.9 million to $1.41 billion
at December 31, 2019, from $1.36 billion at December 31, 2018.
This increase resulted from net income earned during the year of
$112.6 million and a $16.2 million increase in other comprehensive
income, partially offset by cash dividends paid to stockholders
of $72.8 million. Common stock repurchases for the year ended
December 31, 2019 totaled 916,326 shares at an average cost
of $23.81, of which 73,311 shares, at an average cost of $27.08,
were made in connection with withholding to cover income taxes
on the vesting of stock-based compensation. At December 31,
2019, approximately 1.6 million shares remained eligible for
repurchase under the current authorization.
Comparison of Operating Results for the Years Ended December 31, 2019
and December 31, 2018
General
Net income for the year ended December 31, 2019 was
$112.6 million, compared to $118.4 million for the year ended
December 31, 2018. Basic and diluted earnings per share were
both $1.74 for the year ended December 31, 2019, compared to
basic and diluted earnings per share of $1.82 for 2018.
For the year ended December 31, 2019, the Company’s earnings
were adversely impacted by a $2.0 million, or $0.03 per basic and
diluted share, net of tax expense, increase in the estimated fair
value of the contingent consideration related to the April 1, 2019
acquisition of T&L. The earn-out of this contingent consideration
is based upon T&L achieving certain revenue growth and retention
targets over a three-year period from the date of acquisition.
51
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Based upon recent performance and improved projections for
the remaining measurement period, an increase to the fair value of
the contingent liability was warranted. At December 31, 2019, the
contingent liability was $9.4 million, with maximum potential future
payments totaling $11.0 million. For the year ended December
31, 2018, a non-recurring $1.9 million tax benefit was recorded
stemming 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
the 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.
2018. Average interest-bearing deposits increased $125.1 million
to $5.44 billion for 2019, from $5.32 billion for 2018. The average
balance of interest-bearing liabilities decreased $74.2 million
to $6.78 billion for 2019, compared to $6.85 billion for 2018.
Within average interest-bearing deposits, average time deposits
increased $129.7 million for 2019, compared with 2018, while
average interest-bearing core deposits decreased $4.6 million
to $4.64 billion for 2019, compared with 2018. Average non-
interest bearing demand deposits increased $39.0 million to $1.50
billion for 2019, from $1.46 billion for 2018. Average outstanding
borrowings decreased $199.3 million to $1.34 billion for 2019,
compared to 2018.
Net Interest Income
Provision for Loan Losses
Net interest income decreased $2.7 million to $298.0 million
for 2019, from $300.7 million for 2018. The interest rate spread
decreased 10 basis points to 3.10% for 2019, from 3.20% for
2018. The net interest margin decreased four basis points to
3.35% for 2019, compared to 3.39% for 2018. For the year ended
December 31, 2019, the decrease in net interest income was
primarily due to compression in the net interest margin as the
increase in the cost of the Company’s average interest-bearing
deposits and borrowings outpaced the improvement in the yield
on average total loans. Net interest income for the year ended
December 31, 2019 was aided by the recognition of $2.2 million
in interest income, in the second quarter of 2019, upon the
prepayment of loans which had previously been non-accruing.
Interest income increased $11.6 million to $371.5 million for 2019,
compared to $359.8 million for 2018. 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 $29.4 million
to $8.89 billion for 2019, compared to $8.87 billion for 2018.
The increase in average earning assets was largely attributable
to a $47.8 million increase in the average balance of the total
investment portfolio. This was partially offset by an $18.3 million
decrease in average outstanding loan balances to $7.19 billion
for 2019 from $7.21 billion for 2018. The yield on interest-earning
assets increased 12 basis points to 4.18% for 2019, from 4.06%
for 2018, mainly due to increases in the weighted average yields
on total loans and the available for sale debt securities portfolio,
partially offset by a decrease in FHLBNY stock yield. The weighted
average yield on total loans increased 15 basis points to 4.51%
for 2019 and the weighted average yield on available for sale debt
securities increased seven basis points to 2.56% for 2019, from
2.49% for 2018. The weighted average yield on FHLBNY stock
decreased to 6.62% for 2019, compared to 6.78% for 2018.
Interest expense increased $14.3 million to $73.5 million for 2019,
from $59.2 million for 2018. The increase in interest expense was
primarily attributable to an increase in the cost of interest-bearing
liabilities and an increase in average interest-bearing deposits,
partially offset by a decline in average borrowings. The average
rate paid on interest-bearing liabilities increased 22 basis points
to 1.08% for 2019, compared to 2018. The average rate paid on
interest-bearing deposits increased 26 basis points to 0.84% for
2019, from 0.58% for 2018. The average rate paid on borrowings
increased 25 basis points to 2.10% for 2019, from 1.85% for
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 $13.1 million in 2019, compared
to $23.7 million in 2018. The decrease 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 2019 were $13.1 million, compared to $28.3 million for
2018. Total charge-offs for the year ended December 31, 2019
were $15.0 million, compared to $30.0 million for the year
ended December 31, 2018. Recoveries for the year ended
December 31, 2019, were $1.9 million, compared to $1.7 million
for the year ended December 31, 2018. The allowance for loan
losses at December 31, 2019 was $55.5 million, or 0.76% of
total loans, compared to $55.6 million, or 0.77% of total loans,
at December 31, 2018. At December 31, 2019, non-performing
loans as a percentage of total loans were 0.55%, compared
to 0.35% at December 31, 2018. Non-performing assets as a
percentage of total assets were 0.44% at December 31, 2019,
compared to 0.28% at December 31, 2018. At December 31,
2019, non-performing loans were $40.2 million, compared
to $25.7 million at December 31, 2018, and non-performing
assets were $42.9 million at December 31, 2019, compared to
$27.3 million at December 31, 2018.
52
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Non-Interest Income
For the year ended December 31, 2019, non-interest income
totaled $63.8 million, an increase of $5.1 million, compared to
the same period in 2018. Wealth management income increased
$4.5 million to $22.5 million for the year ended December 31,
2019, compared to $18.0 million for the same period in 2018,
primarily due to fees earned from assets under management
acquired in the T&L transaction, partially offset by a decrease in
managed mutual fund fees. Other income increased $1.7 million
to $6.6 million for the year ended December 31, 2019, primarily
due to a $2.6 million increase in net fees on loan-level interest
rate swap transactions, partially offset by decreases of $659,000
and $353,000 in net gains on the sale of foreclosed real estate
and net gains on the sale of loans, respectively. Income from
BOLI increased $783,000 to $6.3 million for the year ended
December 31, 2019, compared to the same period in 2018, due
to an increase in benefit claims and greater equity valuations,
while fee income increased $237,000 to $28.3 million, compared
to the same period in 2018, largely due to a $1.0 million increase
in prepayment fees on commercial loans, partially offset by a
$264,000 decrease in debit card revenue, a $144,000 decrease
in income from non-deposit investment products and a $125,000
decrease in deposit related fee income. Partially offsetting
increases in other income, net gains on securities transactions
decreased $2.1 million for the year ended December 31, 2019,
due to the sale of Visa Class B common shares in 2018.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2019
was $201.6 million, an increase of $9.8 million from 2018.
Compensation and benefits expense increased $5.4 million to
$116.8 million for the year ended December 31, 2019, compared
to $111.5 million for the year ended December 31, 2018. This
increase was due to additional compensation expense arising
from the T&L acquisition, increased salary expense related to
annual merit increases and additions of risk management and
compliance professionals, along with increases in the accrual for
incentive compensation and stock-based compensation. Other
operating expenses increased $2.8 million for the year ended
December 31, 2019, compared to $31.1 million for the year
ended December 31, 2018. This increase was primarily due to a
$2.8 million increase in the estimated fair value of the contingent
consideration related to the T&L purchase transaction. Data
processing costs increased $2.2 million to $16.8 million for the
year ended December 31, 2019, compared with 2018, primarily
due to increases in software subscription service expense and
implementation costs. Additionally, net occupancy costs increased
$839,000, to $25.9 million for the year ended December 31,
2019, compared to 2018, primarily due to an increase in rent
expense, a portion of which was related to the T&L acquisition,
while the amortization of intangibles increased $613,000 for the
year ended December 31, 2019, compared with 2018, largely due
to an increase in the customer relationship intangible amortization
attributable to the acquisition of T&L. Partially offsetting these
increases in non-interest expense, FDIC insurance expense
decreased $2.2 million to $1.3 million for year ended December
31, 2019, compared to $3.5 million for the same period in 2018,
largely due to the receipt of the small bank assessment credit for
the second and third quarters of 2019 and the discontinuance of
the FICO assessment.
Income Tax Expense
For the year ended December 31, 2019, the Company’s income
tax expense was $34.5 million, compared with $25.5 million, for
the same period in 2018. The Company’s effective tax rate was
23.4% for the year ended December 31, 2019, compared with
17.7% for the year ended December 31, 2018. The increase in
tax expense and the higher effective tax rates for the year ended
December 31, 2019 were primarily attributable to the effects of
a technical bulletin issued by the New Jersey Division of Taxation
in the second quarter of 2019 that specified treatment of real
estate investment trusts in connection with combined reporting
for New Jersey corporate business tax purposes. For the year
ended December 31, 2018, tax expense and the effective tax
rate were favorably impacted by 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.
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 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.
53
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Interest Income
Provision for Loan Losses
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.
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
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 BOLI 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,
54
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
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.
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, 2019 and 2018, loan repayments
totaled $2.71 billion and $3.17 billion, respectively.
compared to $281.0 million for the year ended December 31,
2018. At December 31, 2019, the Bank had outstanding loan
commitments to borrowers of $1.47 billion, including undisbursed
home equity lines and personal credit lines of $212.4 million.
Total deposits increased $272.5 million for the year ended
December 31, 2019. 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 $606.9 million at December 31, 2019. 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 $2.83 billion for the year
ended December 31, 2019, compared to $3.16 billion for the year
ended December 31, 2018. Purchases for the investment portfolio
totaled $137.3 million for the year ended December 31, 2019,
As of December 31, 2019, the Bank exceeded all minimum
regulatory capital requirements. At December 31, 2019, the
Bank’s leverage (Tier 1) capital ratio was 9.81%. FDIC regulations
require banks to maintain a minimum leverage ratio of Tier 1
capital to adjusted total assets of 4.00%. At December 31, 2019,
the Bank’s total risk-based capital ratio was 12.82%. Under
current regulations, the minimum required ratio of total capital
to risk-weighted assets is 10.50%. 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%.
55
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Off-Balance Sheet and Contractual Obligations
Off-balance sheet and contractual obligations as of December 31, 2019, are summarized below:
(in thousands)
Off-Balance Sheet:
Long-term commitments
Letters of credit
Total off-balance sheet
Contractual Obligations:
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
$ 1,440,163 $
563,077 $
522,821 $
112,772 $
241,493
32,774
31,353
1,421
—
—
1,472,937
594,430
524,242
112,772
241,493
734,027
734,027
606,870
606,870
81,987
81,987
44,243
44,243
927
927
$ 2,206,964 $ 1,201,300 $
606,229 $
157,015 $
242,420
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
$1.47 billion at December 31, 2019, a decrease of $20.0 million,
or 1.3%, from $1.49 billion at December 31, 2018, largely due to
a decrease in commercial lines of credit.
Contractual obligations consist of certificate of deposit liabilities. Total
certificate of deposits at December 31, 2019 were $734.0 million,
a decrease of $55.3 million, compared to $789.3 million at
December 31, 2018. There were no security purchases in 2019
which settled in January 2020, while for 2018, there was one
security purchase for $500,000 which settled in 2019.
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 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 10.3% at December 31, 2019, compared to
11.0% at December 31, 2018. Certificate of deposit accounts
are generally short-term. As of December 31, 2019, 82.7%
of all certificates of deposit had maturities of one year or less
compared to 77.9% at December 31, 2018. 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.
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
56
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 7A Quantitative and Qualitative Disclosures About Market Risk
PART II
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
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.
The following table sets forth the results of the twelve month projected net interest income model as of December 31, 2019.
(dollars in thousands)
Change in Interest Rates in Basis Points (Rate Ramp)
-100
Static
100
200
300
Net Interest Income
Amount ($)
Change ($)
Change (%)
287,862
288,644
286,864
284,464
281,513
(782)
—
(1,780)
(4,180)
(7,131)
(0.3)
—
(0.6)
(1.4)
(2.5)
The above table indicates that as of December 31, 2019, 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 2.5%, or $7.1 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 $782,000 decrease 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, 2019.
(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
1,407,091
1,436,286
1,408,762
1,362,734
1,317,021
(29,195)
—
(27,524)
(73,552)
(119,265)
(2.0)
—
(1.9)
(5.1)
(8.3)
14.0
14.6
14.7
14.5
14.3
(4.0)
—
0.2
(0.8)
(1.9)
The preceding table indicates that as of December 31, 2019, in
the event of an immediate and sustained 300 basis point increase
in interest rates, the Company would experience an 8.3%, or
$119.3 million reduction in the present value of equity. If rates were
to decrease 100 basis points, the Company would experience
a 2.0%, or $29.2 million decrease 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.
57
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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, 2019 and 2018
(2) Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
(3) Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
(4) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
(5) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
(6) Notes to Consolidated Financial Statements
D. Provident Financial Services, Inc., Condensed Financial Statements:
(1) Condensed Statement of Financial Condition as of December 31, 2019 and 2018
(2) Condensed Statement of Income for the years ended December 31, 2019, 2018 and 2017
(3) Condensed Statement of Cash Flows for the years ended December 31, 2019, 2018 and 2017
The supplementary data required by this Item is provided in Note 18 of the Notes to Consolidated Financial Statements.
58
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019 and 2018,
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, 2019,
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, 2019 and 2018, and the results
of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2019, 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, 2019, 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 2, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter
arising from the current period audit of the consolidated
financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging,
subjective, or complex judgment. The communication of a
critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Assessment of the allowance for loan losses
related to loans collectively evaluated for
impairment
As discussed in Notes 1 and 6 to the consolidated financial
statements, the Company’s allowance for loan losses related to
loans collectively evaluated for impairment (ALL) was $50.5 million
as of December 31, 2019. The ALL estimate consists of both
quantitative and qualitative loss components. The quantitative
component of the ALL is estimated by segmenting the loan
portfolio based on similar risk characteristics, primarily loan type
and risk rating level, and applying quantitative loss factors to
each loan segment. Quantitative loss factors give consideration
to historical loss experience by loan segment based upon a look-
back period and adjusted for a loss emergence period. Qualitative
adjustments to such loss factors are made to give consideration
to other qualitative or environmental factors not captured by the
quantitative loss factors.
We identified the assessment of the ALL as a critical audit matter
because it involved significant measurement uncertainty requiring
complex auditor judgment, and knowledge and experience in the
industry. The assessment of the ALL encompassed the evaluation
of the (1) methodology and data to derive the quantitative loss
factors developed from the historical loss experience, (2) key
assumptions, including the segmenting of the loan portfolio by
similar risk characteristics, the look-back period and the loss
emergence periods, (3) risk ratings assigned to commercial
mortgage, multi-family mortgage, construction and commercial
loans, and (4) qualitative adjustments framework.
59
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The primary procedures we performed to address the critical audit
matter included the following. We tested certain internal controls
over the Company’s ALL process, including controls related to
the (1) development of the ALL methodology, (2) determination
of the key assumptions used to estimate the quantitative loss
factors, (3) periodic testing of the risk ratings for commercial
mortgage, multi-family mortgage, construction and commercial
loans, (4) determination of the qualitative adjustments, and (5)
analysis of the ALL results, trends and ratios. We evaluated the
segmenting of loans with similar risk characteristics by assessing
the relevant characteristics of the loan portfolio, including loan
type and risk rating level. We tested the relevance of sources of
internal and external data and key assumptions, including the
look-back period, by evaluating the (1) loss data in the look-
back period was representative of the credit characteristics of
the current loan segment, and (2) sufficiency of loss data within
the look-back period. We assessed the appropriateness of the
loss emergence period by considering the Company’s credit risk
policies and testing the relevance and reliability of the sources of
data and assumptions of the Company’s observable loss data.
We evaluated the metrics, including the relevance and reliability
of the sources of data and assumptions used to estimate the
qualitative adjustments. We involved credit risk professionals with
specialized industry knowledge and experience, who assisted in
evaluating the:
zz Company’s ALL methodology for compliance with U.S.
generally accepted accounting principles,
zz look-back period assumptions to evaluate the length of that
period,
zz methodology used to develop the loss emergence periods,
zz risk ratings for a selection of commercial mortgage, multi-family
mortgage, construction and commercial loans
zz qualitative adjustments framework to determine if it identified
the relevant incremental risks not captured by the quantitative
component, and
zz effect of qualitative adjustments on the ALL compared with
relevant credit risk factors and credit trends.
/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 2, 2020
60
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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, 2019, 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, 2019,
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, 2019 and 2018, 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, 2019, and the
related notes (collectively, the consolidated financial statements),
and our report dated March 2, 2020 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 2, 2020
61
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
December 31, 2019 and 2018
(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 $467,966 and $479,740 at December 31, 2019 and
December 31, 2018, 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 65,787,900 shares outstanding at December 31, 2019, and 83,209,293 shares issued and
66,325,458 shares outstanding at December 31, 2018, respectively.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (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.
62
December 31,
2019
December 31,
2018
$
131,555
55,193
186,748
976,919
86,195
56,466
142,661
1,063,079
453,629
825
57,298
7,332,885
55,525
7,277,360
2,715
55,210
29,031
437,019
195,533
136,291
9,808,578 $
$
5,384,868
983,714
438,551
295,476
7,102,609
26,804
1,125,146
140,179
8,394,738
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
1,007,303
695,273
3,821
(268,504)
(24,885)
(3,833)
3,833
1,413,840
9,808,578 $
832
1,021,533
651,099
(12,336)
(272,470)
(29,678)
(4,504)
4,504
1,358,980
9,725,769
$
$
$
$
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2019, 2018 and 2017
(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.
Years ended December 31,
2019
2018
2017
$
223,361
$
215,231
$
189,896
82,540
18,579
31,842
12,424
2,724
371,470
45,494
28,003
73,497
297,973
13,100
284,873
28,321
22,503
6,297
72
6,601
79,371
19,906
30,981
12,606
1,734
359,829
30,693
28,460
59,153
300,676
23,700
276,976
28,084
17,957
5,514
2,221
4,900
72,907
20,301
26,445
13,027
1,270
323,846
19,441
26,203
45,644
278,202
5,600
272,602
27,218
17,604
6,693
57
4,125
63,794
58,676
55,697
116,849
25,895
16,836
1,316
4,115
2,740
33,828
201,579
147,088
34,455
111,496
25,056
14,664
3,482
3,836
2,127
31,074
191,735
143,917
25,530
$
$
$
112,633 $
118,387 $
1.74
64,604,224
1.74
$
$
1.82
64,942,886
1.82
$
$
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
64,734,591
65,103,097
64,579,222
63
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2019, 2018 and 2017
(dollars in thousands)
Net income
Other comprehensive loss, net of tax:
Unrealized gains and losses on available for sale debt securities:
Net unrealized gains (losses) arising during the period
Reclassification adjustment for gains (losses) included in net income
Total
Unrealized (losses) gains on derivatives
Amortization related to post-retirement obligations
Total other comprehensive income (loss)
TOTAL COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
Years ended December 31,
2019
2018
$
112,633
$
118,387
$
18,351
—
18,351
(579)
(1,615)
16,157
(6,129)
—
(6,129)
221
1,221
(4,687)
2017
93,949
(2,163)
—
(2,163)
379
(889)
(2,673)
$
128,790
$
113,700 $
91,276
64
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019, 2018 and 2017
(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
Balance at
December 31,
2016
Net income
Other
comprehensive
loss, net of tax
Cash dividends
paid ($0.93 per
share)
Reclassification
due to adopting
Accounting
Standards
Update ("ASU")
No. 2018-02
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
Stock Award
Plan ("SAP")
shares
Allocation of
stock options
BALANCE AT
DECEMBER
31, 2017
$
832 $ 1,005,777 $ 550,768
$
(3,397) $ (264,221) $
(37,978) $ (5,846) $
5,846 $
1,251,781
93,949
93,949
—
—
—
—
(2,673)
—
(59,980)
—
—
—
—
—
—
(2,673)
—
—
—
(59,980)
—
—
1,395
(1,395)
—
—
—
232
671
—
(671)
—
232
—
—
—
—
(443)
—
—
—
(443)
—
—
—
—
(778)
—
—
—
(778)
—
—
—
—
—
712
(1,179)
2,200
4,963
203
—
—
—
—
—
—
—
—
—
—
1,402
4,133
—
—
—
4,139
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,114
2,954
6,339
4,963
203
$
832 $ 1,012,908 $ 586,132 $
(7,465) $ (259,907) $ (33,839) $ (5,175) $
5,175 $ 1,298,661
65
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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, 2019, 2018 and 2017 (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
Balance at
December 31,
2017
Net income
Other
comprehensive
loss, net of tax
Reclassification
due to the
adoption of ASU
No. 2016-01
Cash dividends
paid ($0.82 per
share)
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
$
832 $ 1,012,908 $ 586,132
$
(7,465) $ (259,907) $
(33,839) $ (5,175) $
5,175 $
1,298,661
118,387
118,387
—
—
—
—
—
—
—
—
—
—
—
—
(4,687)
—
—
—
—
(4,687)
—
184
(184)
—
(53,604)
—
—
—
—
—
—
—
—
—
—
(53,604)
156
671
(671)
156
—
—
—
(13,172)
—
—
—
(13,172)
—
—
—
(1,896)
—
—
—
(1,896)
577
(366)
2,022
6,046
190
—
—
—
—
—
—
—
—
—
—
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
66
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019, 2018 and 2017 (Continued)
(dollars in
thousands)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury
Stock
Unallocated
Esop
Shares
Common
Stock
Acquired
by DDFP
Deferred
Compensation
DDFP
Total
Stockholders’
Equity
Balance at
December 31,
2018
Net income
Other
comprehensive
income, net of
tax
Cash dividends
paid ($1.12 per
share)
Effect of
adopting ASU
No. 2016-02
Distributions
from DDFP
Purchases of
treasury stock
Purchase of
employee
restricted shares
to fund statutory
tax withholding
Shares issued
dividend
reinvestment
plan
Reclass of stock
award shares
Option exercises
Allocation of
ESOP shares
Allocation of
SAP shares
Allocation of
stock options
BALANCE AT
DECEMBER
31, 2019
$
832 $ 1,021,533 $ 651,099
$
(12,336) $ (272,470) $
(29,678) $ (4,504) $
4,504 $
1,358,980
112,633
112,633
—
—
—
—
—
16,157
—
(72,809)
—
4,350
164
—
—
—
—
—
—
—
—
16,157
—
—
—
(72,809)
—
—
—
4,350
671
(671)
164
—
—
—
—
(19,867)
—
—
—
(19,867)
—
—
—
—
(1,985)
—
—
—
(1,985)
—
—
—
—
—
—
671
(24,024)
(96)
2,203
6,671
181
—
—
—
—
—
—
—
—
—
—
—
—
1,559
24,024
235
—
—
—
—
—
—
4,793
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,230
—
139
6,996
6,671
181
$
832 $1,007,303 $ 695,273 $
3,821 $(268,504) $ (24,885) $ (3,833) $
3,833 $ 1,413,840
See accompanying notes to consolidated financial statements.
67
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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, 2019, 2018 and 2017
(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,
2019
2018
2017
$
112,633
$
118,387
$
93,949
Depreciation and amortization of intangibles
Provision for loan losses
Deferred tax expense (benefit)
Amortization of operating lease right-of-use assets
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
Decrease (increase) in accrued interest receivable
(Increase) decrease in other assets
Increase 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 available for sale debt 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
BOLI claim benefits received
Net cash paid in acquisition
Purchases of loans
Net (increase) decrease in loans
Proceeds from sales of premises and equipment
Purchases of premises and equipment
Net cash provided by (used in) investing activities
68
10,395
13,100
1,674
8,433
(6,297)
7,789
(5,643)
845
(16,212)
17,202
1,354
4,533
6,671
181
(990)
(72)
—
(190)
2,444
(46,237)
25,312
136,925
42,696
(20,303)
—
223,806
(117,022)
172,293
(160,778)
1,891
(15,022)
—
(79,812)
—
(4,882)
42,867
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)
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
Provident Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2019, 2018 and 2017 (Continued)
(dollars in thousands)
Cash flows from financing activities:
Net increase in deposits
Increase (decrease) 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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF PERIOD
Cash paid during the period for:
Interest on deposits and borrowings
Income taxes
Non cash investing activities:
Initial recognition of operating lease right-of-use assets
Initial recognition of operating lease liabilities
Transfer of loans receivable to foreclosed assets
Acquisitions:
Non-cash assets acquired:
Goodwill and other intangible assets, net
Other assets
TOTAL NON-CASH ASSETS ACQUIRED
See accompanying notes to consolidated financial statements.
Years ended December 31,
2019
2018
2017
272,487
1,236
(19,867)
(1,985)
(72,809)
2,230
139
1,243,000
(1,549,551)
(10,585)
(135,705)
44,087
142,661
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
$
$
$
$
$
$
$
$
186,748 $
142,661 $
190,834
$
$
$
73,664
34,494
44,946
46,050
2,314
58,959
15,259
$
$
46,391
40,566
— $
—
1,965
—
—
3,845
21,562
71
$
21,633 $
$
—
—
— $
—
—
—
69
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8. Financial Statements
and Supplementary Data
PART II
Item 8 Financial Statements and Supplementary Data
Provident Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies ����������������������������������������������������������������������������������������������������������������������������������������������������������������������71
NOTE 1
Stockholders’ Equity and Acquisitions �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������76
NOTE 2
Restrictions on Cash and Due from Banks ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������76
NOTE 3
Held to Maturity Debt Securities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������76
NOTE 4
Available for Sale Debt Securities ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������78
NOTE 5
Loans Receivable and Allowance for Loan Losses �������������������������������������������������������������������������������������������������������������������������������������������������80
NOTE 6
Banking Premises and Equipment ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������87
NOTE 7
Intangible Assets ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������87
NOTE 8
Deposits ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������88
NOTE 9
NOTE 10 Borrowed Funds �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������88
NOTE 11 Benefit Plans �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������89
NOTE 12
Income Taxes ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������95
NOTE 13 Commitments, Contingencies and Concentrations of Credit Risk �����������������������������������������������������������������������������������������������97
NOTE 14 Regulatory Capital Requirements ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������97
NOTE 15
Fair Value Measurements ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������99
NOTE 16 Selected Quarterly Financial Data (Unaudited) ������������������������������������������������������������������������������������������������������������������������������������������������������������105
NOTE 17
Earnings Per Share ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������105
NOTE 18 Parent-only Financial Information �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������106
NOTE 19 Other Comprehensive Loss �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������108
NOTE 20 Derivative and Hedging Activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
NOTE 21 Revenue Recognition ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������111
Leases ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������111
NOTE 22
70
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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 on securities are amortized to income using a method
that approximates the interest method over the remaining period
to the earliest call date or contractual maturity, adjusted for
anticipated prepayments. Discounts on securities are accreted
to income over the remaining period to the 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.
71
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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 or amortizes 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 Bank 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. 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
realize deferred tax assets based on the nature and timing of
72
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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, 2019. 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 acquisitions of Beacon Trust Company (“Beacon”), The
MDE Group, Inc. (“MDE”) and Tirschwell & Loewy, Inc. (“T&L”), and
are amortized on an accelerated basis over 12.0 years, 10.4 years
and 10.0 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
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. 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.
73
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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,
2019, there were 219,281 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 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 interest rate derivatives not
used to manage interest rate risk 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 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. Changes in the fair value of
derivatives designated and that qualify as cash flow hedges of
interest rate risk are recorded in accumulated other comprehensive
income and are subsequently reclassified into earnings in the
period that the hedged forecasted transaction affects earnings.
These derivatives were used to hedge the variable cash outflows
associated with Federal Home Loan Bank borrowings.
The fair value of the Company’s derivatives is determined using
discounted cash flow analysis using observable market-based
inputs, which are considered Level 2 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.
Impact of Recent Accounting
Pronouncements
Accounting Pronouncements Adopted in 2019
In October 2018, the Financial Accounting Standards Board
(“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
74
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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 was
effective for public business entities for fiscal years beginning after
December 15, 2018, with early adoption, including adoption in an
interim period, permitted. ASU 2018-16 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 adopted this guidance effective January 1, 2019. The
adoption of this guidance had no 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 was effective for public
business entities for fiscal years beginning after December 15,
2018. 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 affected
component of equity in the statement of financial position as of the
date of adoption. The Company adopted this guidance effective
January 1, 2019. The adoption of this guidance had no 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
guidance 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. This ASU was effective for fiscal years beginning
after December 15, 2018, including interim periods within the
reporting period, with early adoption permitted. The Company
adopted this guidance effective January 1, 2019. The adoption
of this guidance had no impact on the Company’s consolidated
financial statements.
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, 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 right-of-use assets
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 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 right-of-use and an
additional lease liability on its consolidated statement of financial
condition of $44.9 million and $46.1 million, respectively, based
on the present value of the expected remaining lease payments at
January 1, 2019. It also resulted in additional footnote disclosures
(see Note 22 - “Leases”).
75
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
NOTE 2 Stockholders’ Equity and Acquisitions
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, 2019, the
liquidation account, which is an off-balance sheet memorandum
account, amounted to $9.6 million.
Acquisitions
On April 1, 2019, Beacon completed its acquisition of certain
assets of T&L, a New York City-based independent registered
investment adviser. Beacon is a wholly owned subsidiary of
Provident Bank which, in turn, is wholly owned by the Company.
This acquisition expanded the Company’s wealth management
business by $822.4 million of assets under management at the
time of acquisition.
The acquisition was accounted for under the acquisition method
of accounting. The Company recorded goodwill of $8.2 million, a
customer relationship intangible of $12.6 million and $800,000 of
other identifiable intangibles related to the acquisition. In addition,
the Company recorded a contingent consideration liability at its fair
value of $6.6 million The contingent consideration arrangement
requires the Company to pay additional cash consideration to
T&L’s former stakeholders over a three year period after the
closing date of the acquisition if certain financial and business
retention targets are met. The acquisition agreement limits the
total additional payment to a maximum of $11.0 million, to be
determined based on actual future results. Total cost of the
acquisition was $21.6 million, which included cash consideration
of $15.0 million and contingent consideration with a fair value of
$6.6 million. Tangible assets acquired in the transaction were
nominal. No liabilities were assumed in the acquisition. The
goodwill recorded in the transaction is deductible for tax purposes.
Based upon recent favorable performance and improved
projections for the remaining measurement period, an increase
to the fair value of the contingent liability was warranted. At
December 31, 2019, the contingent liability was $9.4 million,
with maximum potential future payments totaling $11.0 million.
The calculation of goodwill is subject to change for up to one year
after the closing date of the transaction as additional information
relative to closing date estimates and uncertainties becomes
available. As the Company finalizes its analysis of these assets,
there may be adjustments to the recorded carrying values.
NOTE 3 Restrictions on Cash and Due from Banks
Included in cash on hand and due from banks at December 31, 2019 and 2018 was $36.0 million and $35.0 million, respectively,
representing reserves required by banking regulations.
NOTE 4 Held to Maturity Debt Securities
Held to maturity debt securities at December 31, 2019 and 2018 are summarized as follows (in thousands):
Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
76
$
Amortized
cost
6,599
118
437,074
9,838
$
453,629
2019
Gross
unrealized
gains
Gross
unrealized
losses
11
4
14,394
58
14,467
(9)
—
(115)
(6)
(130)
Fair
value
6,601
122
451,353
9,890
467,966
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
$
Amortized
cost
4,989
187
463,801
10,448
$
479,425
Item 8 Financial Statements and Supplementary Data
PART II
2018
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
4,896
190
464,363
10,291
(94)
—
(3,767)
(158)
(4,019)
479,740
1
3
4,329
1
4,334
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 $428.0 million
and $453.1 million at December 31, 2019 and 2018, respectively,
were pledged to secure municipal deposits.
The amortized cost and fair value of held to maturity debt securities
at December 31, 2019 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
$
2019
Amortized
cost
9,589
105,715
249,399
88,808
Fair
value
9,605
107,873
257,856
92,510
$
453,511
467,844
Mortgage-backed securities totaling $118,000 at amortized cost
and $122,000 at fair value are excluded from the table above
as their expected lives are anticipated to be shorter than the
contractual maturity date due to principal prepayments.
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.
During 2019, the Company recognized gains of $72,000 and no
losses related to calls on securities in the held to maturity debt
securities portfolio, with total proceeds from the calls totaling $33.9
million. There were no sales of securities from the held to maturity
debt securities portfolio for the year ended December 31, 2019.
For 2018, the Company recognized gains of $10,000 and losses
of $1,000 related to calls on securities in the held to maturity
For the 2017 period, the Company recognized gains of $60,000
and $3,000 losses related to calls on certain 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.
The following tables represent the Company’s disclosure on held to maturity debt securities with temporary impairment (in thousands):
Agency obligations
State and municipal obligations
Corporate obligations
December 31, 2019 Unrealized Losses
Less than 12 months
12 months or longer
Total
$
Fair value
3,601
7,675
3,254
$
14,530
Gross
unrealized
losses
(9)
(42)
(6)
(57)
Gross
unrealized
losses
—
(73)
—
(73)
Gross
unrealized
losses
(9)
(115)
(6)
(130)
Fair value
3,601
9,768
3,254
16,623
Fair value
—
2,093
—
2,093
77
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Agency obligations
State and municipal obligations
Corporate obligations
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)
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, 2019. Based on its detailed review of the
held to maturity debt securities portfolio, the Company believes
that as of December 31, 2019, 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, 2019,
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, 2019 totaled 35, compared with 334 at
December 31, 2018. The decrease in the number of securities
in an unrealized loss position at December 31, 2019 was due
to lower current market interest rates compared to rates at
December 31, 2018. All temporarily impaired investment securities
were investment grade at December 31, 2019.
NOTE 5 Available for Sale Debt Securities
Available for sale debt securities at December 31, 2019 and 2018 are summarized as follows (in thousands):
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
$
936,196
12,367
(1,133)
947,430
3,907
25,032
172
393
—
(15)
4,079
25,410
$
965,135
12,932
(1,148)
976,919
Amortized
cost
$
1,048,415
2,828
25,039
2018
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
2,704
84
268
(16,150)
1,034,969
—
(109)
2,912
25,198
$ 1,076,282
3,056
(16,259)
1,063,079
Available for sale debt securities having a carrying value of
$536.4 million and $524.2 million at December 31, 2019 and
2018, respectively, are pledged to secure securities sold under
repurchase agreements and municipal deposits.
The amortized cost and fair value of available for sale debt
securities at December 31, 2019, 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.
78
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
Due after one year through five years
Due after five years through ten years
Item 8 Financial Statements and Supplementary Data
PART II
2019
Amortized
cost
3,003
25,936
28,939
$
$
Fair
value
3,074
26,415
29,489
Mortgage-backed securities totaling $936.2 million at amortized
cost and $947.4 million at fair value are excluded from the table
above as their expected lives are anticipated to be shorter than
the contractual maturity date due to principal prepayments.
For 2019, there were no sales or calls of securities from the
available for sale debt securities. During 2018, the Company
sold 15,046 VISA Class B common shares at a gross gain of
approximately $2.2 million. For 2017, there were no sales or calls
of securities from the available for sale debt securities portfolio.
For the years ended December 31, 2019, 2018 and 2017, the
Company did not incur an other-than-temporary impairment
charge on available for sale debt securities.
The following tables represent the Company’s disclosure on available for sale debt securities with temporary impairment (in thousands):
Mortgage-backed securities
Corporate obligations
December 31, 2019 Unrealized Losses
Less than 12 months
12 months or longer
Total
Fair value
$
136,270
2,013
Gross
unrealized
losses
(629)
(15)
Gross
unrealized
losses
Gross
unrealized
losses
Fair value
(504)
—
183,089
(1,133)
2,013
(15)
Fair value
46,819
—
$
138,283
(644)
46,819
(504)
185,102
(1,148)
December 31, 2018 Unrealized Losses
Less than 12 months
12 months or longer
Total
Gross
unrealized
losses
Fair value
Gross
unrealized
losses
Gross
unrealized
losses
Fair value
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)
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, 2019. Based on its detailed review of the
available for sale debt securities portfolio, the Company believes
that as of December 31, 2019, securities with unrealized loss
positions shown above did 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, 2019,
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, 2019 totaled 50, compared with 175 at
December 31, 2018. The decrease in the number of securities
in an unrealized loss position at December 31, 2019 was due
to lower current market interest rates compared to rates at
December 31, 2018. All temporarily impaired securities were
investment grade at December 31, 2019. There was one private-
label mortgage-backed security in an unrealized loss position at
December 31, 2019, with an amortized cost of $17,000 and
unrealized loss of $1,000. This private-label mortgage-backed
security was investment grade at December 31, 2019.
79
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
NOTE 6 Loans Receivable and Allowance for Loan Losses
Loans receivable at December 31, 2019 and 2018 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
2019
2018
$
$
1,077,689
2,578,393
1,225,551
429,812
5,311,445
1,634,759
391,360
7,337,564
746
2,474
(26)
(7,873)
7,332,885
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
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, 2019, 2018 and
2017, $845,000, $894,000 and $1.0 million decreased interest
income, respectively, as a result of prepayments and normal
amortization.
The following tables summarize 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, 2019
90 days or
more past due
Total Loans
Receivable
Mortgage loans:
Residential
Commercial
Multi-family
Construction
Total mortgage loans
Commercial loans
Consumer loans
$
5,905
2,579
—
—
—
5,905
2,383
1,276
—
—
—
2,579
95
337
8,543
5,270
—
—
13,813
25,160
1,221
TOTAL GROSS LOANS $
9,564
3,011
40,194
—
—
—
—
—
—
—
—
17,027
1,060,662
1,077,689
5,270
2,573,123
2,578,393
—
—
1,225,551
1,225,551
429,812
429,812
22,297
5,289,148
5,311,445
27,638
1,607,121
1,634,759
2,834
388,526
391,360
52,769 7,284,795
7,337,564
80
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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
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 $40.2 million and $25.7 million
at December 31, 2019 and 2018, respectively. There were no
loans ninety days or greater past due and still accruing interest
at December 31, 2019 and 2018.
If the non-accrual loans had performed in accordance with
their original terms, interest income would have increased by
$1.7 million, $1.4 million and $1.9 million, for the years ended
December 31, 2019, 2018 and 2017, respectively. The amount
of cash basis interest income that was recognized on impaired
loans during the years ended December 31, 2019, 2018 and
2017 was $2.1 million, $2.0 million and $1.8 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.
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, 2019, there were 158 impaired loans totaling
$70.6 million, of which 147 loans totaling $48.3 million were TDRs.
Included in this total were 133 TDRs related to 128 borrowers
totaling $42.7 million that were performing in accordance with
their restructured terms and which continued to accrue interest
at December 31, 2019. 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.
81
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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, 2019
Mortgage
loans
Commercial
loans
Consumer
loans
Total
Portfolio
Segments
$
39,910
28,357
2,374
70,641
5,271,535
1,606,402
388,986
7,266,923
$
5,311,445
1,634,759
391,360
7,337,564
At December 31, 2018
Mortgage
loans
Commercial
loans
Consumer
loans
Total
Portfolio
Segments
$
24,680
23,747
2,257
50,684
5,102,773
1,671,274
429,171
7,203,218
$
5,127,453
1,695,021
431,428
7,253,902
The allowance for loan losses is summarized by portfolio segment and impairment classification, excluding PCI loans as follows
(in thousands):
Individually evaluated for impairment
Collectively evaluated for impairment
TOTAL ALLOWANCE FOR LOAN LOSSES
Individually evaluated for impairment
Collectively evaluated for impairment
TOTAL ALLOWANCE FOR LOAN LOSSES
At December 31, 2019
Mortgage
loans
Commercial
loans
Consumer
loans
1,580
23,931
3,462
24,801
25,511
28,263
25
1,726
1,751
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
$
$
$
$
Total
Portfolio
Segments
5,067
50,458
55,525
Total
Portfolio
Segments
1,165
54,397
55,562
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.
82
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
The following tables present the number of loans modified as TDRs during the years ended December 31, 2019 and 2018 and their
balances immediately prior to the modification date and post-modification as of December 31, 2019 and 2018.
Item 8 Financial Statements and Supplementary Data
PART II
($ in thousands)
Troubled Debt Restructurings
Mortgage loans:
Residential
Commercial
Total mortgage loans
Commercial loans
Consumer loans
TOTAL RESTRUCTURED LOANS
($ in thousands)
Troubled Debt Restructurings
Mortgage loans:
Residential
Total mortgage loans
Commercial loans
Consumer loans
TOTAL RESTRUCTURED LOANS
Year Ended December 31, 2019
Pre-Modification
Outstanding
Recorded
Investment
Number of
Loans
Post-
Modification
Outstanding
Recorded
Investment
$
3
1
4
6
4
14
$
1,617
14,010
15,627
1,996
421
18,044
1,584
14,010
15,594
1,888
402
17,884
Year Ended December 31, 2018
Pre-Modification
Outstanding
Recorded
Investment
Number of
Loans
Post-
Modification
Outstanding
Recorded
Investment
$
6
6
8
1
15 $
981
981
9,192
336
10,509
945
945
7,888
332
9,165
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, 2019 and 2018 exceeded the carrying
amounts of such loans. During the year ended December 31,
2019, there were $11.6 million of charge-offs recorded on
collateral dependent impaired loans. There were $8.3 million of
charge-offs recorded on collateral dependent impaired loans
for the year ended December 31, 2018. The allowance for loan
losses associated with the TDRs presented in the preceding
tables totaled $177,130 and $119,000 at December 31, 2019
and 2018, respectively, and were included in the allowance for
loan losses for loans individually evaluated for impairment.
The TDRs presented in the preceding tables had a weighted
average modified interest rate of approximately 3.83% and 5.41%,
compared to a yield of 3.82% and 5.46% prior to modification
for the years ended December 31, 2019 and 2018, respectively.
The following table presents loans modified as TDRs within the previous 12 months from December 31, 2019 and 2018, and for which
there was a payment default (90 days or more past due) at the quarter ended December 31, 2019 and 2018.
($ in thousands)
Troubled Debt Restructurings Subsequently Defaulted
Mortgage loans:
Residential
Total mortgage loans
Commercial Loans
TOTAL RESTRUCTURED LOANS
December 31, 2019
December 31, 2018
Number of
Loans
Outstanding
Recorded
Investment
Number of
Loans
Outstanding
Recorded
Investment
1
1
—
1
$
$
578
578
—
578
$
—
—
3
3 $
—
—
1,344
1,344
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PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
There was one loan 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, 2019. There were three
payment defaults (90 days or more past due) for loans modified
as TDRs within the 12 month period ending December 31, 2018.
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.
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,
2019, PCI loans totaled $746,000, compared to $899,000 at
December 31, 2018. The $153,000 decrease from December 31,
2018 was largely due to the full repayment and greater than
projected cash flows on certain PCI loans.
The activity in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017 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,
2019
55,562
13,100
1,895
(15,032)
55,525
$
$
2018
60,195
23,700
1,685
(30,018)
55,562
2017
61,883
5,600
1,653
(8,941)
60,195
The activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019 and 2018 are as follows
(in thousands):
For the Year Ended December 31, 2019
Mortgage
loans
Commercial
loans
Consumer
loans
$
27,678
(2,323)
422
(266)
$
25,511
25,693
15,928
665
(14,023)
28,263
2,191
(505)
808
(743)
1,751
Total
Portfolio
Segments
55,562
13,100
1,895
(15,032)
55,525
For the Year Ended December 31, 2018
Mortgage
loans
Commercial
loans
Consumer
loans
$
28,052
(586)
489
(277)
$
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
Balance at beginning of period
Provision charged to operations
Recoveries of loans previously charged off
Loans charged off
BALANCE AT END OF PERIOD
Balance at beginning of period
Provision charged to operations
Recoveries of loans previously charged off
Loans charged off
BALANCE AT END OF PERIOD
84
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
Item 8 Financial Statements and Supplementary Data
PART II
Impaired loans receivable by class, excluding PCI loans are summarized as follows (in thousands):
At December 31, 2019
At December 31, 2018
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
$ 13,478
10,739
Commercial
Multi-family
Construction
—
—
—
—
—
—
Total
Commercial loans
Consumer loans
13,478
10,739
3,927
2,086
3,696
1,517
TOTAL LOANS $ 19,491 15,952
—
—
—
—
—
—
—
—
10,910
533 $
15,013
12,005
—
—
—
10,910
4,015
1,491
—
—
—
1,550
1,546
—
—
—
—
533
16,563
13,551
17
86
21,746
16,254
1,871
1,313
—
—
—
—
—
—
—
12,141
1,546
—
—
13,687
17,083
1,386
594
—
—
—
594
328
90
16,416
636 $ 40,180
31,118
— 32,156
1,012
Loans with
an allowance
recorded
Mortgage loans:
Residential
$ 10,860
10,326
Commercial
Multi-family
Construction
18,845
18,845
—
—
—
—
829
751
—
—
10,454
18,862
—
—
Total
29,705
29,171
1,580
29,316
Commercial loans
27,762
24,661
3,462
27,527
Consumer loans
868
857
25
878
428 $
10,573
10,090
954
10,186
569
—
—
997
444
46
1,039
1,039
—
—
—
—
72
—
—
1,052
—
—
11,612
11,129
1,026
11,238
7,493
7,493
954
944
92
47
9,512
962
TOTAL LOANS $ 58,335 54,689
5,067
57,721
1487 $ 20,059
19,566
1,165 21,712
425
53
—
—
478
435
40
953
Total
Mortgage loans:
Residential
$ 24,338
21,065
Commercial
18,845
18,845
Multi-family
Construction
—
—
—
—
829
751
—
—
21,364
18,862
—
—
961 $
25,586
22,095
954
22,327
1,019
569
2,589
2,585
—
—
—
—
—
—
72
—
—
2,598
—
—
53
—
—
Total
43,183
39,910
1,580
40,226
1,530
28,175
24,680
1,026
24,925
1,072
Commercial loans
31,689
28,357
3,462
31,542
Consumer loans
2,954
2,374
25
2,369
461
132
29,239
23,747
2,825
2,257
92
47
26,595
2,348
763
130
TOTAL LOANS $ 77,826 70,641
5,067
74,137
2,123 $ 60,239
50,684
1,165 53,868
1,965
At December 31, 2019, impaired loans consisted of 158
residential, commercial and commercial mortgage loans totaling
$70.6 million, of which 25 loans totaling $27.9 million were
included in nonaccrual loans. 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. Specific
allocations of the allowance for loan losses attributable to impaired
loans totaled $5.1 million and $1.2 million at December 31, 2019
and 2018, respectively. At December 31, 2019 and 2018, impaired
loans for which there was no related allowance for loan losses
totaled $16.0 million and $31.1 million, respectively. The average
balances of impaired loans during the years ended December 31,
2019 and 2018 were $74.1 million and $53.9 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, at both December 31, 2019 and 2018, respectively,
85
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
and undisbursed home equity and personal credit lines of
$212.4 million and $233.9 million, at December 31, 2019
and 2018, respectively, 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.
Management 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, 2019
Residential
Commercial
mortgages
Multi-
family Construction
Total
mortgages
Commercial
loans
Consumer
loans
Total loans
2,402
10,204
46,758
13,458
—
—
—
—
12,606
60,216
—
—
—
—
—
—
6,181
—
—
49,160
29,843
—
—
79,248
57,015
836
—
286
128,694
1,668
88,526
—
—
836
—
6,181
79,003
137,099
1,954
218,056
1,065,083 2,518,177 1,225,551
423,631 5,232,442
1,497,660
389,406
7,119,508
$ 1,077,689 2,578,393 1,225,551
429,812 5,311,445 1,634,759
391,360 7,337,564
Special mention
$
Substandard
Doubtful
Loss
Total classified and
criticized
Acceptable/watch
TOTAL OUTSTANDING
LOANS
At December 31, 2018
Residential
Commercial
mortgages
Multi-
family Construction
Total
mortgages
Commercial
loans
Consumer
loans
Total loans
5,071
7,878
—
—
14,496
13,292
—
—
228
—
—
—
—
19,795
6,181
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
86
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
NOTE 7 Banking Premises and Equipment
A summary of banking premises and equipment at December 31, 2019 and 2018 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
2019
12,440
59,708
45,660
35,749
3,270
156,827
101,617
55,210
$
$
2018
12,440
58,351
44,602
35,106
1,563
152,062
93,938
58,124
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 amounted to $7.7 million, $8.0 million and $9.0 million,
respectively.
NOTE 8 Intangible Assets
Intangible assets at December 31, 2019 and 2018 are summarized as follows (in thousands):
Goodwill
Core deposit premiums
Customer relationship and other intangibles
Mortgage servicing rights
TOTAL INTANGIBLE ASSETS
2019
$
420,562
1,753
14,142
562
2018
411,600
2,539
3,410
629
$
437,019
418,178
Amortization expense of intangible assets for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
Core deposit premiums
Customer relationship and other intangibles
Mortgage servicing rights
TOTAL AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
2019
786
1,869
85
2,740
$
$
2018
931
1,073
123
2,127
2017
1,076
1,474
120
2,670
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,
2020
2021
2022
2023
2024
Scheduled
Amortization
$
2,675
2,380
2,085
1,793
1,517
87
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
PART II
Item 8.
Financial Statements and Supplementary Data
PART II
Item 8 Financial Statements and Supplementary Data
NOTE 9 Deposits
Deposits at December 31, 2019 and 2018 are summarized as follows (in thousands):
Weighted
average
interest rate
2019
Weighted
average
interest rate
2018
Savings deposits
Money market accounts
NOW accounts
Non-interest bearing deposits
Certificates of deposit
TOTAL DEPOSITS
$
983,714
0.14 % $
1,051,922
1,738,202
2,092,413
1,554,253
734,027
0.79
0.79
—
1.72
1,496,310
2,049,645
1,481,753
750,492
$ 7,102,609
$ 6,830,122
Scheduled maturities of certificates of deposit accounts at December 31, 2019 and 2018 are as follows (in thousands):
Within one year
One to three years
Three to five years
Five years and thereafter
2019
$
606,870
81,987
44,243
927
0.16 %
0.63
0.73
—
1.58
2018
584,478
119,655
45,518
841
Interest expense on deposits for the years ended December 31, 2019, 2018 and 2017 is summarized as follows (in thousands):
$ 734,027
750,492
Savings deposits
NOW and money market accounts
Certificates of deposits
Years ended December 31,
$
2019
1,681
29,542
14,271
2018
1,923
20,450
8,320
2017
2,092
12,205
5,144
$
45,494
30,693
19,441
NOTE 10 Borrowed Funds
Borrowed funds at December 31, 2019 and 2018 are summarized as follows (in thousands):
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
TOTAL BORROWED FUNDS
2019
$
60,737
298,000
766,409
2018
121,322
283,000
1,037,960
$ 1,125,146
1,442,282
At December 31, 2019, FHLB advances were at fixed rates and mature between January 2020 and May 2022, and at December 31,
2018, FHLB advances were at fixed rates and mature between January 2019 and April 2022. These advances are secured by loans
receivable under a blanket collateral agreement.
88
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Scheduled maturities of FHLB advances at December 31, 2019 are as follows (in thousands):
Item 8 Financial Statements and Supplementary Data
PART II
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
2019
$
489,169
146,240
131,000
—
—
$
766,409
Scheduled maturities of securities sold under repurchase agreements at December 31, 2019 are as follows (in thousands):
Due in one year or less
Thereafter
TOTAL SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
2019
60,737
—
60,737
$
$
The following tables set forth certain information as to borrowed funds for the years ended December 31, 2019 and 2018 (in thousands):
2019:
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
2018:
Securities sold under repurchase agreements
FHLB line of credit
FHLB advances
Maximum
balance
Average
balance
Weighted
average
interest rate
$
96,914
451,000
1,190,006
$
153,715
487,000
71,234
325,481
939,916
139,729
259,189
1,256,525
1,136,988
0.49 %
2.40
2.11
1.04 %
2.09
1.90
Securities sold under repurchase agreements include 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.
Interest expense on borrowings for the years ended December 31, 2019, 2018 and 2017 amounted to $28.0 million, $28.5 million
and $26.2 million, respectively.
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, 2019, no contributions
will be made to the pension plan in 2020.
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.
89
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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
$
28,878
31,970
29,533
20,028
22,757
20,805
Pension
Post-retirement
2019
2018
2017
2019
2018
2017
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
—
1,198
63
(1,493)
4,412
—
1,094
—
(1,401)
(2,785)
—
1,227
—
(1,590)
2,800
80
837
—
(600)
2,978
115
786
18
(590)
(3,058)
105
871
—
(560)
1,536
33,058
28,878
31,970
23,323
20,028
22,757
43,449
7,976
—
(1,493)
49,932
46,870
(2,020)
—
(1,401)
43,449
43,153
5,307
—
(1,590)
46,870
—
—
600
(600)
—
—
—
590
(590)
—
—
—
560
(560)
—
FUNDED STATUS AT END OF YEAR
$
16,874
14,571
14,900
(23,323)
(20,028)
(22,757)
For the years ended December 31, 2019 and 2018, 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
2019 and MP 2018 issued by The Society of Actuaries (“SOA”) in
October 2019 and 2018, respectively. The prepaid pension benefits
of $16.9 million and the unfunded post-retirement healthcare and
life insurance benefits of $23.3 million at December 31, 2019 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, 2019 and 2018 are summarized in the following table (in thousands):
Unrecognized prior service cost
Unrecognized net actuarial loss (gain)
2019
—
$
2018
—
10,346
12,300
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS (GAIN)
$
10,346
12,300
2019
—
(3,621)
(3,621)
2018
—
(7,425)
(7,425)
Pension
Post-retirement
Net periodic benefit (increase) cost for the years ending December 31, 2019, 2018 and 2017, included the following components
(in thousands):
Service cost
Interest cost
Return on plan assets
Amortization of:
Net loss (gain)
Unrecognized prior service cost
$
2019
—
1,198
(2,562)
1,015
—
NET PERIODIC BENEFIT (INCREASE) COST $
(349)
Pension
Post-retirement
2018
—
1,094
(2,769)
795
—
(880)
2017
—
1,227
(2,550)
920
—
(403)
2019
80
837
—
(825)
—
92
2018
115
786
—
(396)
—
505
2017
105
871
—
(677)
—
299
90
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
The weighted average actuarial assumptions used in the plan determinations at December 31, 2019, 2018 and 2017 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
2019
3.10 %
—
6.00
2018
4.25 %
—
6.00
2017
3.50 %
—
6.00
2019
3.10 %
—
—
2018
4.25 %
—
—
2017
3.50 %
—
—
—
—
—
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
3.10% was selected for the December 31, 2019 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, 2019
(in thousands):
Effect on total service cost and interest cost
Effect on post-retirement benefits obligation
1% increase
1% decrease
$
$
140
3,900
110
3,100
Estimated future benefit payments, which reflect expected future service, as appropriate for the next five years, are as follows
(in thousands):
2020
2021
2022
2023
2024
Pension
Post-retirement
$
$
1,615
1,670
1,695
1,743
1,805
749
804
817
864
877
The weighted-average asset allocation of pension plan assets at December 31, 2019 and 2018 were as follows:
Asset Category
Domestic equities
Foreign equities
Fixed income
Real estate
Cash
TOTAL
2019
2018
37 %
11 %
50 %
2 %
— %
34 %
11 %
53 %
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.
91
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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 %
0 %
100 %
30-41%
5-13%
40-65%
0-4%
0%
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, 2019 and 2018, 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.
(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 PLAN ASSETS
(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 PLAN ASSETS
401(k) Plan
Fair value measurements at December 31, 2019
Total
(Level 1)
(Level 2)
(Level 3)
$
81
—
16,609
16,609
5,535
1,496
996
24,636
25,215
5,535
1,496
996
24,636
—
25,215
$
49,932
24,636
25,296
Fair value measurements at December 31, 2018
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
21,552
—
21,452
81
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The Bank has a 401(k) plan covering substantially all employees of the Bank. For 2019, 2018 and 2017, 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 2019, 2018 and 2017 were $981,000, $973,000 and $890,000, respectively.
92
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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, 2019, was $31.1 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, 2019 and 2018, 280,522
shares and 243,527 shares from the ESOP were released,
respectively. Unallocated ESOP shares held in suspense totaled
1,456,487 at December 31, 2019, and had a fair value of
$35.9 million. ESOP compensation expense for the years ended
December 31, 2019, 2018 and 2017 was $4.5 million, $4.5 million
and $4.6 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, 2019, 2018 and 2017 was
$22,000, $18,000 and $17,500, 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, 2019, 2018 and
2017 was $140,000, $121,000 and $105,000, 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.
Supplemental Executive Retirement Plan
The Bank maintains a non-qualified supplemental retirement plan
for certain senior officers of the Bank. This unfunded plan, which
was frozen as of April 1, 2003 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 $85,000, $82,000 and $91,000 for
the years 2019, 2018 and 2017, respectively. At December 31,
2019 and 2018, $1.9 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
$187,000, a decrease of $119,000, and a decrease of $120,000,
net of tax, were recorded in other comprehensive income (loss)
for 2019, 2018 and 2017, 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 $15,000, $10,000, and
$12,500 to former board members under this plan for each of the
years ended December 31, 2019, 2018 and 2017, respectively.
At December 31, 2019 and 2018, $130,000 and $139,000,
respectively, were recorded in other liabilities on the Consolidated
Statements of Financial Condition for this retirement plan. An
increase of $730, an increase of $3,000, and a decrease of
$1,000, net of tax, were recorded in other comprehensive income
(loss) for 2019, 2018 and 2017, 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
93
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
2019 Long-Term Equity Incentive Plan
Stock Awards
Upon stockholders’ approval of the 2019 Long-Term Equity
Incentive Plan on April 25, 2019, shares available for stock awards
and stock options under the Amended and Restated Long-Term
Incentive Plan were reserved for issuance under the new 2019
Long-Term Equity Incentive Plan. No additional grants of stock
awards and stock options will be made under the Amended and
Restated Long-Term Incentive Plan. The new plan authorized
the issuance of up to 1,350,000 shares of Company common
stock to be issued as stock awards. Shares previously awarded
under prior equity incentive plans that are subsequently forfeited
or expire may also be issued under this new plan.
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
$6.7 million, $6.0 million and $5.0 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
A summary status of the granted but unvested stock awards as of December 31, and changes during the year, is presented below:
Outstanding at beginning of year
Granted
Forfeited
Vested
OUTSTANDING AT THE END OF YEAR
Restricted Stock Awards
2019
651,099
291,034
(46,914)
(226,393)
668,826
2018
660,783
296,411
(56,296)
(249,799)
651,099
2017
547,698
288,519
(62,677)
(112,757)
660,783
As of December 31, 2019, unrecognized compensation cost relating to unvested restricted stock totaled $6.4 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, 2019, 2018 and 2017, and changes during
the year is presented below:
2019
2018
2017
Number of
stock
options
Weighted
average
exercise
price
Number of
stock
options
Outstanding at beginning of year
470,979
$
18.36
507,656
$
Granted
Exercised
Forfeited
Expired
41,685
(13,463)
—
—
27.25
10.35
—
—
43,124
(79,801)
—
—
Weighted
average
exercise
price
16.84
25.58
12.61
—
—
Number of
stock
options
Weighted
average
exercise
price
703,669
$
14.70
42,857
(238,370)
—
(500)
26.31
12.22
—
17.94
OUTSTANDING AT THE END
OF YEAR
499,201
$
19.32
470,979
$
18.36
507,656
$
16.84
The total fair value of options vesting during 2019, 2018 and 2017 was $193,000, $189,000 and $168,000, respectively.
Compensation expense of approximately $135,000, $74,000 and $11,000 is projected for 2020, 2021 and 2022, respectively, on
stock options outstanding at December 31, 2019.
94
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
The following table summarizes information about stock options outstanding at December 31, 2019:
Range of exercise prices
$14.50-15.23
$16.38-27.25
Options Outstanding
Options Exercisable
Number of
options
outstanding
148,474
350,726
Average
remaining
contractual
life
Weighted
average
exercise
price
Number of
options
exercisable
Weighted
average
exercise
price
2.2
6.2
$
$
14.88
20.89
148,474
204,905
$
$
14.88
18.28
The stock options outstanding and stock options exercisable
at December 31, 2019 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 $181,000, $190,000 and $203,000 for 2019, 2018
and 2017, 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,
2019
3.38 %
22.01 %
2.53 %
2018
3.13 %
20.65 %
2.65 %
2017
2.89 %
20.34 %
2.05 %
8 years
8 years
8 years
The weighted average fair value of options granted during 2019, 2018 and 2017 was $4.57, $4.29 and $4.20 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, 2019, 2018 and 2017 are as
follows (in thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Years ended December 31,
2019
2018
2017
$ 22,427
10,354
32,781
1,650
24
1,674
$ 34,455
41,578
2,493
44,071
(17,302)
(1,239)
(18,541)
25,530
4,163
1,731
5,894
39,003
1,631
40,634
46,528
95
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
The Company recorded a deferred tax expense (benefit) of
$6.6 million, ($2.4) million and ($1.4) million during 2019, 2018
and 2017, respectively, related to the unrealized gains (losses) on
available for sale debt securities, which is reported in accumulated
other comprehensive income (loss), net of tax. Additionally, the
Company recorded a deferred tax (benefit) expense of ($463,000),
$379,000 and ($315,000) in 2019, 2018 and 2017, 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,
2019
$ 30,889
8,197
(3,082)
(1,322)
—
(227)
$ 34,455
2018
30,223
1,002
(2,839)
(1,158)
—
(1,698)
25,530
2017
49,167
2,185
(5,097)
(2,343)
3,912
(1,296)
46,528
(1) The statutory tax rate for both 2019 and 2018 was 21%. For 2017, the statutory tax rate was 35%.
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, 2019 and 2018
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 available for sale debt securities
Federal Net Operating Loss ("NOL")
Pension liability adjustments
Other
Total gross deferred tax assets
Deferred tax liabilities:
Pension expense
Deferred loan costs
Investment securities, principally due to accretion of discounts
Intangibles
Originated mortgage servicing rights
Unrealized gain on available for sale debt securities
Net unrealized gain on hedging activities
Total gross deferred tax liabilities
NET DEFERRED TAX ASSET
96
2019
2018
$
14,313
13,968
6,946
1,175
1,629
750
688
1,606
4,747
417
—
321
1,821
1,223
35,636
7,017
5,064
70
1,393
140
3,038
114
16,836
$
18,800
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
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
Retained earnings at December 31, 2019 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, 2019, the Company had an unrecognized tax
liability of $13.4 million with respect to this reserve.
As a result of the Beacon acquisition in 2011, the Company
acquired federal net operating loss carryforwards. There are
approximately $1.5 million of NOL carryforwards available to
offset future taxable income as of December 31, 2019. 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, 2019
and 2018.
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
and its subsidiaries will be required to file a combined New Jersey
state income tax return on apportioned and allocated income.
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 2017, the New Jersey State
income tax returns are open for examination from 2016, and
the Pennsylvania Mutual Thrift Institutions return is open from
2016. 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. The Company’s 2017 and 2018 New York State returns
are currently under audit.
NOTE 13 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.
NOTE 14 Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of
regulatory capital. Under the regulations in effect at December 31,
2019, 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.
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%.
97
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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, 2019 and 2018, 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, 2019 and 2018, 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, 2019 and 2018, 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, 2019
Tier 1 leverage capital
$ 973,214
10.34 % $ 376,484
4.00 % $ 376,484
4.00 % $ 470,605
5.00 %
Common equity Tier 1
risk-based capital
973,214
12.74
Tier 1 risk-based capital
973,214
12.74
Total risk-based capital
1,028,879
13.47
343,756
458,342
611,122
4.50
6.00
8.00
534,732
649,317
7.00
8.50
496,537
611,122
6.50
8.00
802,098
10.50
763,903
10.00
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
953,768
12.54
Tier 1 risk-based capital
953,768
12.54
Total risk-based capital
1,009,475
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
98
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
The following table shows the Bank’s actual capital amounts and ratios as of December 31, 2019 and 2018, 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, 2019
Tier 1 leverage capital
$ 923,471
9.81 % $ 376,449
4.00 % $ 376,449
4.00 % $ 470,562
5.00 %
Common equity Tier 1
risk-based capital
923,471
12.09
Tier 1 risk-based capital
923,471
12.09
Total risk-based capital
979,136
12.82
343,716
458,288
611,051
4.50
6.00
8.00
534,670
649,242
7.00
8.50
496,479
611,051
6.50
8.00
802,004
10.50
763,814
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, 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
917,659
12.06
Tier 1 risk-based capital
917,659
12.06
Total risk-based capital
973,366
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
NOTE 15 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.
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.
GAAP establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of fair value hierarchy
are as follows:
Level 1: Unadjusted quoted market prices in active markets that
are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs
that are observable either directly or indirectly, for
substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that
are both 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.
99
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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, 2019 and December 31, 2018.
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 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, 2019 and 2018.
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
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, 2019 and
2018.
100
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value
as of December 31, 2019 and 2018, by level within the fair value hierarchy (in thousands).
Item 8 Financial Statements and Supplementary Data
PART II
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:
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
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, 2019
$
$
$
$
$
$
947,430
4,079
25,410
976,919
825
39,305
1,017,049
39,356
20,403
2,715
23,118
—
—
—
—
825
—
825
—
—
—
—
947,430
4,079
25,410
976,919
—
39,305
1,016,224
39,356
—
—
—
—
—
—
—
—
—
—
20,403
2,715
23,118
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
4,285
—
—
—
—
635
—
635
—
—
—
—
1,034,969
2,912
25,198
1,063,079
—
15,634
1,078,713
14,766
—
—
—
—
—
—
—
—
—
—
—
4,285
1,565
4,285
There were no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2019 and 2018.
101
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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.
Cash and Cash Equivalents
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
by the U.S. government and U.S. government agencies that are
traded in active markets with readily accessible quoted market
prices that are considered Level 1 within the fair value hierarchy.
FHLBNY Stock
The carrying value of FHLBNY stock was its cost. The fair value
of FHLBNY stock is based on redemption at par value. The
Company classifies the estimated fair value as Level 1 within the
fair value hierarchy.
Loans
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.
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.
102
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
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, 2019 and
December 31, 2018. Fair values are presented by level within the fair value hierarchy.
(dollars in thousands)
Financial assets:
Fair Value Measurements at December 31, 2019 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
$
186,748
186,748
186,748
—
Available for sale debt securities:
Mortgage-backed securities
State and municipal obligations
Corporate obligations
Total available for sale debt securities
Held to maturity debt securities:
Agency obligations
Mortgage-backed securities
State and municipal obligations
Corporate obligations
$
$
947,430
4,079
25,410
976,919
6,599
118
437,074
9,838
Total held to maturity debt securities
$
453,629
FHLBNY stock
Equity Securities
57,298
825
947,430
4,079
25,410
976,919
6,601
122
451,353
9,890
467,966
57,298
825
Loans, net of allowance for loan losses
7,277,360
7,296,744
Derivative assets
Financial liabilities:
39,305
39,305
—
—
—
—
6,601
—
—
—
6,601
57,298
825
—
—
947,430
4,079
25,410
976,919
—
122
451,353
9,890
461,365
—
—
—
39,305
Deposits other than certificates of deposits
$ 6,368,582
6,368,582
6,368,582
—
Certificates of deposit
TOTAL DEPOSITS
Borrowings
Derivative liabilities
734,027
734,047
—
734,047
$ 7,102,609
7,102,629
6,368,582
734,047
1,125,146
1,127,569
39,356
39,356
—
—
1,127,569
39,356
—
—
—
—
—
—
—
—
—
—
—
—
7,296,744
—
—
—
—
—
—
103
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
(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:
Agency obligations
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
—
—
—
—
—
4,896
—
—
—
4,896
68,813
635
—
—
—
—
1,034,969
2,912
25,198
1,063,079
—
190
464,363
10,291
474,844
—
—
—
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
750,492
746,753
—
746,753
$ 6,830,122
6,826,383
6,079,630
746,753
1,442,282
1,431,001
14,766
14,766
—
—
1,431,001
14,766
—
—
—
—
—
—
—
—
—
—
—
—
—
7,104,380
—
—
—
—
—
—
104
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
NOTE 16 Selected Quarterly Financial Data (Unaudited)
The following tables are a summary of certain quarterly financial data for the years ended December 31, 2019 and 2018.
(In thousands, except per share data)
March 31
June 30
September 30
December 31
2019 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 17 Earnings Per Share
$
$
$
$
$
$
92,411
17,404
75,007
200
74,807
12,188
48,416
38,579
7,689
95,648
19,093
76,555
9,500
67,055
15,834
49,694
33,195
8,802
93,026
19,498
73,528
500
73,028
18,047
49,738
41,337
9,938
90,385
17,502
72,883
2,900
69,983
17,725
53,731
33,977
8,026
30,890
24,393
31,399
25,951
0.48
0.48
0.38
0.38
0.49
0.49
0.40
0.40
2018 Quarters Ended
March 31
June 30
September 30
December 31
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
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
For the Year Ended December 31,
2019
2018
$
112,633
118,387
2017
93,949
Basic weighted average common shares outstanding
64,604,224
64,942,886
64,384,851
Plus:
Dilutive shares
130,367
160,211
194,371
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
64,734,591
65,103,097
64,579,222
Earnings per share:
Basic
Diluted
$
$
1.74
1.74
1.82
1.82
1.46
1.45
Anti-dilutive stock options and awards totaling 646,457 shares, 443,748 shares and 369,772 shares at December 31, 2019, 2018
and 2017, respectively, were excluded from the earnings per share calculations.
105
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8.
Financial Statements and Supplementary Data
PART II
Item 8 Financial Statements and Supplementary Data
NOTE 18 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
ESOP loan
Other assets
TOTAL ASSETS
Liabilities and Stockholders’ Equity
Due to subsidiary—SAP
Other liabilities
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
CONDENSED STATEMENTS OF OPERATIONS
December 31,
2019
December 31,
2018
$
$
$
$
29,723
825
1,364,097
31,113
37
1,425,795
11,741
214
1,413,840
1,425,795
7,569
635
1,322,871
36,756
92
1,367,923
7,996
947
1,358,980
1,367,923
(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
For the Years Ended December 31,
$
2019
72,809
1,470
162
74,441
1,192
1,192
73,249
127
73,122
39,511
$
112,633
2018
53,604
1,657
2,294
57,555
1,049
1,049
56,506
692
55,814
2017
59,980
1,839
17
61,836
1,021
1,021
60,815
312
60,503
62,573
118,387
33,446
93,949
106
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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
Increase in due to subsidiary—SAP
Decrease (increase) in other assets
(Decrease) increase 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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
Item 8 Financial Statements and Supplementary Data
PART II
For the Years Ended December 31,
2019
2018
2017
$
112,633
118,387
93,949
(39,511)
(62,573)
(33,446)
4,533
6,671
181
3,745
21,285
(734)
108,803
5,643
5,643
(19,867)
(1,985)
(72,809)
2,230
139
(92,292)
22,154
7,569
29,723
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
107
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
NOTE 19 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,
2019, 2018 and 2017 (in thousands):
For the Years Ended December 31,
2019
Tax
Effect
Before
Tax
After
Tax
Before
Tax
2018
Tax
Effect
After
Tax
Before
Tax
2017
Tax
Effect
After
Tax
Components of Other
Comprehensive Loss:
Unrealized losses on
available for sale debt
securities:
Net gains (losses) arising
during the period
Reclassification adjustment
for gains included in
net income
$
24,987
(6,636)
18,351
(8,425)
2,296
(6,129)
(3,612)
1,449
(2,163)
—
—
—
—
—
—
—
—
—
TOTAL
24,987
(6,636)
18,351
(8,425)
2,296
(6,129)
(3,612)
1,449
(2,163)
Unrealized (losses) gains
on derivatives (cash flow
hedges)
Amortization related to
post-retirement obligations
(780)
201
(579)
304
(83)
221
633
(254)
379
(2,176)
561
(1,615)
1,678
(457)
1,221
(1,475)
586
(889)
TOTAL OTHER
COMPREHENSIVE LOSS $ 22,031
(5,874)
16,157
(6,443)
1,756
(4,687)
(4,454)
1,781
(2,673)
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, for the years
ended December 31, 2019 and 2018, 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,
2019
2018
Unrealized
Gains
(Losses) on
Available for
Sale Debt
Securities
Post-
Retirement
Obligations
Unrealized
Gains
(Losses) on
Derivatives
(cash flow
hedges)
Accumulated
Other
Comprehensive
Gain (Loss)
Unrealized
Losses on
Available for
Sale Debt
Securities
Post-
Retirement
Obligations
Unrealized
Gains on
Derivatives
(cash flow
hedges)
Accumulated
Other
Comprehensive
Loss
$
(9,605)
(3,625)
894
(12,336)
(3,292)
(4,846)
673
(7,465)
18,351
(1,615)
(579)
16,157
(6,129)
1,221
221
(4,687)
—
—
—
—
(184)
—
—
(184)
$
8,746
(5,240)
315
3,821
(9,605)
(3,625)
894
(12,336)
Balance at the
beginning of the
period
Current period
change in other
comprehensive
income (loss)
Reclassification of
unrealized gains on
equity securities due
to the adoption of
ASU No. 2016-01
BALANCE AT
THE END OF THE
PERIOD
108
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report The following table summarizes the reclassifications out of accumulated other comprehensive (loss) income for the years ended
December 31, 2019, 2018 and 2017 (in thousands):
Item 8 Financial Statements and Supplementary Data
PART II
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amount reclassified from AOCI for the
years ended December 31,
2019
2018
2017
Affected line item in the Consolidated
Statement of Income
Details of AOCI:
Available for sale debt securities:
Realized net gains on the sale of securities
available for sale
$
Post-retirement obligations:
Amortization of actuarial losses
TOTAL RECLASSIFICATIONS
$
—
—
—
189
(49)
140
140
—
—
—
399
(109)
290
290
— Net gain on securities transactions
— Income tax expense
— Net of tax
Income tax expense
243 Compensation and employee benefits(1)
(64)
179 Net of tax
179 Net of tax
(1) This item is included in the computation of net periodic benefit cost. See Note 11. Benefit Plans
Note 20 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 the Company has not
elected to apply hedge accounting and 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. At December 31, 2019 and 2018,
the Company had 92 and 62 interest rate swaps with an aggregate
notional amount of $1.61 billion and $1.01 billion, respectively.
The Company periodically enters into risk participation agreements
(“RPAs”) with the Company functioning as either the lead institution,
or as a participant when another company is the lead institution on
a commercial loan. These RPA’s are entered into to manage the
credit exposure on interest rate contracts associated with these
loan participation agreements. Under the RPA’s, the Company
will either receive or make a payment if a borrower defaults on
the related interest rate contract. At December 31, 2019 and
2018, the Company had thirteen and seven credit derivatives,
respectively, with aggregate notional amounts of $106.0 million
and $66.8 million, respectively, from participations in interest
rate swaps as part of these loan participation arrangements. At
December 31, 2019 and December 31, 2018, the fair value of
these credit derivatives were $47,323 and $251,000, 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.
Changes in the fair value of derivatives designated and that qualify as
cash flow hedges of interest rate risk are recorded in accumulated
other comprehensive income and are subsequently reclassified
into earnings in the period that the hedged forecasted transaction
affects earnings. During the years ended December 31, 2019, 2018
and 2017, such derivatives were used to hedge the variable cash
outflows associated with Federal Home Loan Bank borrowings.
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 borrowings.
During the next twelve months, the Company estimates that
$193,000 will be reclassified as a decrease to interest expense. As
of December 31, 2019, the Company had five outstanding interest
rate derivatives with an aggregate notional amount of $130.0 million
that was designated as a cash flow hedge of interest rate risk.
109
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
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, 2019 and 2018 (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
At December 31, 2019
Asset Derivatives
Liability Derivatives
Consolidated
Statements
of Financial
Condition
Consolidated
Statements
of Financial
Condition
Fair
Value
Fair
Value
Other assets $
Other assets
38,830
47
Other liabilities $
Other liabilities
39,356
—
$
38,877
$
39,356
Other assets $
428
Other liabilities $
$
428
$
At 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
$
—
—
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, 2019, 2018 and 2017 (in thousands).
Gain (loss) recognized in Income on derivatives
For the Year Ended December 31,
Consolidated
Statements of
Income
2019
2018
2017
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
Other income $
Other income
(64)
(53)
$
(117)
Interest expense $
$
158
158
(414)
63
(351)
312
312
(422)
2
(420)
(205)
(205)
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 or adequately capitalized institution,
then the counterparty could terminate the derivative positions and
the Company would be required to settle its obligations under
the agreements.
110
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Item 8 Financial Statements and Supplementary Data
PART II
As of December 31, 2019, the Company had four dealer
counterparties. The Company had a net liability position with respect
to all four of the counterparties. The termination value for this net
liability position, which includes accrued interest, was $37.2 million
at December 31, 2019. The Company has minimum collateral
posting thresholds with certain of its derivative counterparties, and
has posted collateral of $41.0 million against its obligations under
these agreements. If the Company had breached any of these
provisions at December 31, 2019, it could have been required to
settle its obligations under the agreements at the termination value.
Note 21 Revenue Recognition
The Company generates revenue from several business channels.
The guidance in ASU 2014-09, Revenue from Contracts with
Customers (Topic 606) 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, 2019, 2018 and
2017 the out-of-scope revenue related to financial instruments
were 85%, 86% 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 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, 2019, 2018 and 2017:
(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,
2019
2018
2017
$
22,503
17,957
17,604
13,117
5,734
18,851
41,354
22,440
63,794
$
13,330
5,997
19,327
37,284
21,392
58,676
13,120
5,757
18,877
36,481
19,216
55,697
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. The fee is generally based upon the average market
value of the assets under management (“AUM”) for the month and
the applicable fee rate. For customers acquired in the recently
completed T&L transaction, the fee is based upon AUM at the end
of the preceding quarter 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.
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 22 Leases
On January 1, 2019, the Company adopted ASU 2016-02,
“Leases” (Topic 842) and all subsequent ASU’s that modified
Topic 842. For the Company, Topic 842 primarily affected the
accounting treatment for operating lease agreements in which
the Company is the lessee. The Company elected the modified
retrospective transition option effective with the period of
adoption, elected not to recast comparative periods presented
when transitioning to the new leasing standard and adjustments,
if required, are made at the beginning of the period through a
cumulative-effect adjustment to opening retained earnings. The
111
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART II
Item 8 Financial Statements and Supplementary Data
Company also elected practical expedients, which allowed the
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 right-of-use asset and an operating
lease liability of $44.9 million and $46.1 million, respectively, based
on the present value of the expected remaining lease payments
at January 1, 2019.
Also, on January 1, 2019, the Company had $5.9 million of
net deferred gains associated with several sale and leaseback
transactions executed prior to the adoption of ASU 2016-02. In
accordance with the guidance, these net deferred gains were
adjusted, net of tax, as a cumulative-effect adjustment to opening
retained earnings.
All of the leases in which the Company is the lessee are classified
as operating leases and are primarily comprised of real estate
property for branches and administrative offices with terms
extending through 2040.
The following table represents the consolidated statements of financial condition classification of the Company’s right-of use-assets
and lease liabilities at December 31, 2019 (in thousands):
Lease Right-of-Use Assets:
Operating lease right-of-use assets
Lease Liabilities:
Operating lease liabilities
Classification
December 31, 2019
Other assets
Other liabilities
$
$
41,754
42,815
The calculated amount of the right-of-use assets and lease
liabilities in the table above are impacted by the length of the lease
term and the discount rate used to present value the minimum
lease payments. The Company’s lease agreements often include
one or more options to renew at the Company’s discretion. If at
lease inception the Company considers the exercising of a renewal
option to be reasonably certain, the Company will include the
extended term in the calculation of the right-of-use asset and
lease liability. Generally, the Company considers the first renewal
option to be reasonably certain and includes it in the calculation
of the right-of use asset and lease liability. Regarding the discount
rate, Topic 842 requires the use of the rate implicit in the lease
whenever this rate is readily determinable. As this rate is rarely
determinable, the Company utilizes its incremental borrowing rate
at lease inception based upon the term of the lease. For operating
leases existing prior to January 1, 2019, the rate for the remaining
lease term as of January 1, 2019 was applied.
At December 31, 2019, the weighted-average remaining lease
term and the weighted-average discount rate for the Company’s
operating leases were 9.5 years and 3.47%, respectively.
The following table represents lease costs and other lease
information for the Company’s operating leases. The variable lease
cost primarily represents variable payments such as common area
maintenance and utilities (in thousands):
Lease Costs
Operating lease cost
Variable lease cost
TOTAL LEASE COST
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Year ended
December 31, 2019
$
$
8,433
2,765
11,198
8,304
For the year ended December 31, 2019, the Company entered into one new lease obligation related to the T&L acquisition. The Company
recorded a $1.9 million right-of-use asset for this lease obligation.
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2019 were as
follows (in thousands):
Years ended:
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Amounts representing interest
PRESENT VALUE OF NET FUTURE MINIMUM LEASE PAYMENTS
Operating Leases
$
$
8,316
6,064
5,263
4,752
4,346
22,195
50,936
8,121
42,815
At December 31, 2018, operating lease commitments under lessee arrangements were $8.0 million, $7.6 million, $5.4 million, $3.8 million
and $3.4 million for 2019 through 2023, respectively, and $10.7 million in aggregate for all years thereafter.
112
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019. 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,
2019. 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, 2019, 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, 2019. This report appears
on page 60 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.
113
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 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 23, 2020.
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 23, 2020.
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 23, 2020.
114
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report 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, 2019 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)
Equity compensation plans approved by stockholders
TOTAL
(1) Consists of outstanding stock options to purchase 499,201 shares of common stock granted under the Company’s stock-based compensation plans.
(2) The weighted average exercise price reflects 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; an exercise price of $27.25 for 41,685 stock options granted in 2019 under the Company’s
stock-based compensation plans.
499,201 $
499,201 $
2,525,955
2,525,955
19.32
19.32
(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 23, 2020.
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 23, 2020.
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
115
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, 2019 and 2018
Consolidated Statements of Income Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income Years Ended December 31, 2019, 2018 and 2017
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements.
Page
Number
59
61
62
63
64
65
68
70
(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
4.6
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.)
Description of Capital Stock of Provident Financial Services, Inc.
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.)
116
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report PART IV
Item 16 Form 10-K Summary
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
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.)
Provident Financial Services, Inc. 2019 Long-Term Equity Incentive Plan
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,
2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition,
(ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income,
(iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the
Notes to Consolidated Financial Statements.
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (formatted in iXBRL and contained in exhibit 101).
Item 16. Form 10-K Summary
Not applicable.
PROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report
117
PART IV
Signatures
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 2, 2020
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 2, 2020
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 2, 2020
/s/ Frank s. Muzio
Frank S. Muzio,
Executive Vice President and Chief Accounting
Officer (Principal Accounting Officer)
March 2, 2020
/s/ thoMas W. berry
Thomas W. Berry,
Director
/s/ JaMes p. dunigan
James P. Dunigan,
Director
/s/ ursuLine FoLey
Ursuline Foley,
Director
/s/ MattheW k. harding
Matthew K. Harding,
Director
/s/ John pugLiese
John Pugliese,
Director
Date:
March 2, 2020
Date:
March 2, 2020
By:
Date:
By:
Date:
By:
Date:
By:
March 2, 2020
March 2, 2020
March 2, 2020
/s/ Laura L. brooks
Laura L. Brooks,
Director
/s/ Frank L. Fekete
Frank L. Fekete,
Director
/s/ terenCe gaLLagher
Terence Gallagher,
Director
/s/ CarLos hernandez
Carlos Hernandez,
Director
By:
Date:
By:
Date:
By:
Date:
By:
March 2, 2020
March 2, 2020
March 2, 2020
Date:
March 2, 2020
Date:
March 2, 2020
811
www.provident.bankPROVIDENT FINANCIAL SERVICES, INC. ❘ 2019 Annual Report Designed & published by
labrador-company.com
ANNUAL MEETING
The annual meeting of stockholders will be held on April 23, 2020
at 10:00 a.m. at the Delta Hotels Marriott, 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
PROVIDENT.BANK
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