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 stock-chartered 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 82 full-service branches in ten counties throughout northern and central New Jersey.

The Company completed its acquisition of First Morris Bank & Trust ("First Morris") and the merger of First Morris with and into the Bank, as of April 1, 2007. As a result of the First Morris acquisition, the Company added nine branch locations in Morris County, New Jersey, acquired assets having a fair value of $554.2 million, including $332.5 million of net loans, $138.2 million of investment securities and $60.7 million of cash and cash equivalents, and assumed $509.0 million of deposits.

Strategy

The Bank, established in 1839, is the oldest bank in the state of New Jersey. The Bank offers a full range of retail and commercial loan and deposit products, and emphasizes personal service and convenience as part of its Customer Relationship Management strategy.

The Bank's strategy is to grow profitably through a commitment to credit quality and expanding market share by acquiring, retaining and expanding customer relationships, while carefully managing interest rate risk.

In recent years, the Bank has focused on commercial real estate, construction, multi-family and commercial loans as part of its strategy to diversify the loan portfolio and reduce interest rate risk. These types of loans generally have adjustable rates that initially are higher than residential mortgage loans and generally have a higher rate of risk. The Bank's credit policy focuses on quality underwriting standards and close monitoring of the loan portfolio. At December 31, 2008, retail loans accounted for 53.5% of the loan portfolio and commercial loans accounted for 46.5%. The Company intends to continue to diversify the loan portfolio and to focus on commercial real estate and commercial and industrial lending relationships.

The Company's relationship banking strategy focuses on increasing core accounts and expanding relationships through its branch network, 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 all savings and demand deposit accounts, are generally a stable, relatively inexpensive source of funds. At December 31, 2008, core deposits were 63.7% of total deposits.

A significant amount of capital was raised in the conversion of the Bank to a stock-chartered bank in 2003. Management has developed a capital management strategy to effectively utilize excess capital and improve return on equity and earnings per share growth. The Company's capital management strategy includes the following components: payment of cash dividends; stock repurchases; acquisitions; and use of wholesale leverage. The Company declared and paid its first cash dividend in the second quarter of 2003, and has since increased the quarterly cash dividend per share seven times for a total of 175.0%. The Company's Board of Directors approved the most recent quarterly cash dividend of $0.11 per common share paid on February 27, 2009. In 2008, the Company repurchased 101,200 shares of its common stock at an average cost of $14.30 per share. At December 31, 2008, approximately 2.2 million shares remained eligible for repurchase under the current common stock repurchase authorization.

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, because as a general matter, the Company's interest-bearing liabilities reprice or mature more quickly than its interest-earning assets. An increase in interest rates generally would result in a decrease in the Company's average interest rate spread and net interest income, which could have a negative effect on profitability. The Company generates non-interest income such as income from retail and business account fees, loan servicing fees, loan origination fees, appreciation in the cash surrender value of Bank-owned life insurance, income from loan or securities sales, fees from trust 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, actions of regulatory agencies and government policies.

Critical Accounting Policies

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.

The Company's evaluation of the adequacy of the allowance for loan losses includes a review of all loans on which the collectibility of principal may not be reasonably assured. For residential mortgage and consumer loans this is determined primarily by delinquency and collateral values. For commercial real estate and commercial loans, an extensive review of financial performance, payment history and collateral values is conducted on a quarterly basis.

As part of the evaluation of the adequacy of the allowance for loan losses, each quarter management prepares a worksheet. This worksheet 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 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 and construction loans are rated individually and each lending officer is responsible for risk rating loans in his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Administration Department. The risk ratings are then confirmed by the Loan Review Department and, for loans requiring Credit Committee approval, they are periodically reviewed by the Credit Committee in the credit renewal or approval process.

Management believes the primary risks inherent in the portfolio are a continued decline in the economy, generally, a continued decline in real estate market values, and possible increases in interest rates. 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 the 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 adequate 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 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. In addition, various regulatory agencies periodically review 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.

Additional critical accounting policies relate to judgments about other asset impairments, including goodwill, investment securities and deferred tax assets. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company engages an independent third party to perform an annual analysis during the fourth quarter as of September 30 to test the aggregate balance of goodwill for impairment. For purposes of goodwill impairment evaluation, the Bank is identified as the reporting unit. The fair value of goodwill is determined in the same manner as goodwill recognized in a business combination and uses standard valuation methodologies. Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other factors. Estimated cash flows may extend far into the future and by their nature are difficult to determine over an extended time frame. Factors that may significantly affect the estimates include specific industry or market sector conditions, changes in revenue growth trends, customer behavior, competitive forces, cost structures and changes in discount rates. These fair value measurements are subject to the provisions of SFAS No. 157 which the Company adopted on January 1, 2008.

The goodwill impairment test is performed in two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an additional test must be performed. The second step test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied value.

Impairment tests were performed at September 30, 2008 and December 31, 2008 and the results of both analyses indicated no impairment. Subsequent to the year-end testing, there has been a significant decline in the stock market, the financial sector of the market and of the market price of the Company's common stock. Although it was determined that no impairment existed at September 30 or December 31, 2008, any continued decline in the market price of the Company's common stock could be considered a triggering event, requiring a re-measurernent of goodwill in order to determine if impairment exists. If the carrying amount of goodwill pursuant to this analysis were to exceed the implied fair value of goodwill, an impairment loss would be recognized. No impairment loss was required to be recognized for the years ended December 31, 2008, 2007 or 2006. Notwithstanding the foregoing, the results of impairment testing on goodwill has no impact on the Company's tangible book value or regulatory capital levels.

The Company's available for sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income (loss) in stockholders' equity. Estimated fair values are based on market quotations or matrix pricing as discussed in Note 18 to the consolidated financial statements. Securities which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. The Company conducts a periodic review and evaluation of securities available for sale and held to maturity to determine if any declines in the fair values of securities are other than temporary. If such a decline were deemed other than temporary, the Company

would write down the security to fair value through a charge to current period operations. The market value of the securities portfolio is significantly affected by changes in interest rates. In general, as interest rates rise, the market value of fixed-rate securities decreases and as interest rates fall, the market value of fixed-rate securities increases. The current turmoil in the credit markets, primarily as a result of the continued fallout from sub-prime lending, has resulted in a lack of liquidity in the mortgage-backed securities market. Increases in delinquencies and foreclosures, primarily in securities that are backed by sub-prime loans, have resulted in limited trading activity and significant price declines, regardless of favorable movements in interest rates. The Company evaluates its intent and ability to hold securities to maturity or for a sufficient period of time to recover the recorded principal balance. The Company also has investments in common stock issued by several publicly-traded financial institutions, the valuation of which is affected by the institutions' performance and market conditions. During the year ended December 31, 2008, the Company recognized impairment charges totaling $1.4 million related to investments in a debt security issued by Lehman Brothers Holdings, Inc. and the common stock of two publicly-traded financial institutions. During the year ended December 31, 2007, the Company recognized an impairment charge totaling $1.0 million, related to an investment in the common stock of a publicly-traded financial institution.

The determination of whether deferred tax assets will be realizable is predicated on estimates of future taxable income. Such estimates are subject to management's judgment. A valuation reserve is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. A valuation reserve of $1.7 million that had been established in 2007 pertaining primarily to state tax benefits on net operating losses at the Bank was eliminated in 2008 due to a large dividend payment the Bank received from a subsidiary, which reduced the state net operating losses to zero.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the rates of interest earned on such assets and paid on such liabilities.

Average Balance Sheet. The following table sets forth certain information for the years ended December 31, 2008, 2007 and 2006. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, is expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances are daily averages.

                                                                                    For the Year Ended December 31,
                                                       2008                                       2007                                       2006
                                        Average                      Average       Average                      Average       Average                      Average
                                      Outstanding      Interest      Yield/      Outstanding      Interest      Yield/      Outstanding      Interest      Yield/
                                        Balance       Earned/Paid     Rate         Balance       Earned/Paid     Rate         Balance       Earned/Paid     Rate
                                                                                         (Dollars in thousands)
Interest-earning assets:
Federal funds sold and short-term
investments                           $     16,238   $         510      3.14 %   $      5,200   $         275      5.28 %   $      7,655   $         404      5.27 %
Investment securities(1)                   354,079          14,431      4.08          373,733          15,406      4.12          405,701          16,828      4.15
Securities available for sale              839,226          40,158      4.79          780,836          35,794      4.58          925,010          39,758      4.30
Federal Home Loan
Bank Stock                                  39,424           2,432      6.17           31,470           2,313      7.35           36,015           2,118      5.88
Net loans(2)                             4,280,478         246,789      5.77        4,036,193         248,789      6.16        3,714,388         223,031      6.00

Total interest-earning assets            5,529,445         304,320      5.50        5,227,432         302,577      5.79        5,088,769         282,139      5.54

Non-interest earning assets                862,104                                    843,310                                    754,789

Total assets                          $  6,391,549                               $  6,070,742                               $  5,843,558


Interest-bearing liabilities:
Savings deposits                      $    941,057           9,915      1.05 %   $  1,168,530          18,674      1.60 %   $  1,313,997          18,198      1.38 %
Demand deposits                          1,215,059          23,273      1.92          849,235          21,269      2.50          579,366           8,020      1.38
Time deposits                            1,545,794          55,699      3.60        1,659,191          72,980      4.40        1,527,721          57,973      3.79
Borrowed funds                           1,163,531          43,364      3.73          832,961          34,776      4.17          875,011          33,420      3.82

Total interest-bearing liabilities       4,865,441         132,251      2.72        4,509,917         147,699      3.27        4,296,095         117,611      2.74

Non-interest bearing liabilities           515,142                                    532,070                                    508,840

Total liabilities                        5,380,583                                  5,041,987                                  4,804,935
Stockholders' equity                     1,010,966                                  1,028,755                                  1,038,623

Total liabilities and equity          $  6,391,549                               $  6,070,742                               $  5,843,558

Net interest income                                  $     172,069                              $     154,878                              $     164,528

Net interest rate spread                                                2.78 %                                     2.52 %                                     2.80 %

Net interest earning assets           $    664,004                               $    717,515                               $    792,674

Net interest margin(3)                                                  3.11 %                                     2.96 %                                     3.23 %

Ratio of interest-earning assets to
total interest-bearing liabilities           1.14x                                      1.16x                                      1.18x

(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.

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.

                                                                Year Ended December 31,
                                              2008 vs. 2007                                 2007 vs. 2006

                                  Increase/(Decrease)           Total           Increase/(Decrease)           Total
                                         Due to               Increase/                Due to               Increase/
                                  Volume         Rate         (Decrease)        Volume         Rate         (Decrease)
                                                                    (In thousands)
Interest-earning assets:
Federal funds sold and
short-term investments          $      384     $    (149 )   $        235     $     (130 )   $       1     $       (129 )
Investment securities                 (823 )        (152 )           (975 )       (1,303 )        (119 )         (1,422 )
Securities available for sale        2,705         1,659            4,364         (6,450 )       2,486           (3,964 )
Federal Home Loan Bank Stock           527          (408 )            119           (290 )         485              195
Loans                               14,619       (16,619 )         (2,000 )       19,597         6,161           25,758

Total interest-earning assets       17,412       (15,669 )          1,743         11,424         9,014           20,438


Interest-bearing liabilities:
Savings deposits                    (3,167 )      (5,592 )         (8,759 )       (2,174 )       2,650              476
Demand deposits                      7,705        (5,701 )          2,004          4,831         8,418           13,249
Time deposits                       (4,721 )     (12,560 )        (17,281 )        5,228         9,779           15,007
Borrowed funds                      12,575        (3,987 )          8,588         (1,641 )       2,997            1,356

Total interest-bearing
liabilities                         12,392       (27,840 )        (15,448 )        6,244        23,844           30,088

Net interest income             $    5,020     $  12,171     $     17,191     $    5,180     $ (14,830 )   $     (9,650 )

Comparison of Financial Condition at December 31, 2008 and December 31, 2007

Total assets increased to $6.55 billion at December 31, 2008, compared to $6.36 billion at December 31, 2007, due primarily to increases in loans and securities available for sale.

Total loans at December 31, 2008 were $4.53 billion, compared to $4.30 billion at December 31, 2007. For the year ended December 31, 2008, loan originations totaling $1.33 billion and loan purchases of $267.8 million were partially offset by repayments of $1.29 billion, securitizations of $55.2 million and sales of $16.5 million. Residential mortgage loans increased $87.4 million to $1.79 billion at December 31, 2008, compared to $1.71 billion at December 31, 2007. Residential mortgage loan originations totaled $141.3 million and one- to four-family loans purchased totaled $267.8 million for the year ended December 31, 2008. Principal repayments on residential mortgage loans totaled $251.7 million, $55.2 million of conforming one- to four- family 30-year fixed-rate residential mortgage loans were securitized, and residential mortgage loans sold totaled $16.5 million for the year ended December 31, 2008. Commercial real estate loans increased $169.1 million to $1.02 billion at December 31, 2008, compared to $847.9 million at December 31, 2007. Commercial real estate loan originations totaled $258.0 million and repayments on commercial real estate loans totaled $117.8 million for the year ended December 31, 2008. Multi-family loans increased $28.0 million to $95.5 million at December 31, 2008, compared to $67.5 million at December 31, 2007. Construction loans decreased $75.8 million to $233.7 million at December 31, 2008, compared to $309.6 million at December 31, 2007, as a result of de-emphasis due to market conditions. Commercial loans increased $41.1 million to $753.2 million at December 31, 2008, compared

to $712.1 million at December 31, 2007. Consumer loans decreased $19.9 million to $624.3 million at December 31, 2008, compared to $644.1 million at December 31, 2007. Retail loans, which consist of one- to four-family residential mortgages and consumer loans, such as fixed-rate home equity loans and lines of credit, totaled $2.42 billion and accounted for 53.5% of the loan portfolio at December 31, 2008, compared to $2.35 billion, or 54.8%, of the portfolio at December 31, 2007. The decrease in retail loans as a percentage of the total loan portfolio was largely the result of organic growth in the commercial mortgage and commercial loan portfolios. The Company continues to rebalance the loan portfolio over time, consistent with its strategy towards a more commercial mix. Commercial loans, consisting of commercial real estate, multi-family, construction and commercial loans, totaled $2.10 billion, accounting for 46.5% of the loan portfolio at December 31, 2008, compared to $1.94 billion, or 45.2%, at December 31, 2007.

The allowance for loan losses increased $6.9 million to $47.7 million at December 31, 2008, as a result of provisions for loan losses of $15.1 million, partially offset by net charge-offs of $8.2 million during 2008. The increase in the allowance for loan losses was attributable to growth in the loan portfolio, . . .