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 Commission File
December 31, 2000 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated Under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 1-800-851-9521 or 513-345-7102
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. Yes _x__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
As of February 28, 2001, there were 48,848,503 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 28, 2001, was
approximately $781,290,000 (based upon non-affiliated holdings of
26,207,000 shares and a market price of $29.8125 per share).
Documents Incorporated by Reference:
Proxy Statement for the 2001 Annual Meeting of Shareholders (portions
which are incorporated by reference into Part III hereof).
Please address all correspondence to:
Christopher J. Carey
Executive Vice President and Chief Financial Officer
Provident Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS .............................................. 1
ITEM 2. PROPERTIES ............................................ 3
ITEM 3. LEGAL PROCEEDINGS ..................................... 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ... 3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ........................... 4
ITEM 6. SELECTED FINANCIAL DATA ............................... 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................... 6
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ........................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................... 71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .... 71
ITEM 11. EXECUTIVE COMPENSATION ................................ 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................ 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........ 71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ........................................... 71
SIGNATURES ......................................................... 75
FORWARD-LOOKING STATEMENTS
Provident Financial Group, Inc. publishes forward-looking statements
that are subject to numerous assumptions, risks or uncertainties. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. Actual results could differ materially
from those contained in or implied by such forward-looking statements
for a variety of factors including sharp and/or rapid changes in
interest rates; significant changes in the anticipated economic
scenario which could materially change anticipated credit quality
trends, the ability to generate loans and leases, the ability to
securitize loans and leases and the spreads realized on
securitizations; significant cost, delay in, or inability to execute
strategic initiatives designed to grow revenues and/or manage expenses;
risks involved with the consummation of significant business
combinations or divestitures; and significant changes in accounting,
tax or regulatory practices or requirements and other factors noted in
connection with forward-looking statements. In addition, borrowers
could suffer unanticipated losses without regard to general economic
conditions. The result of these and other factors could cause a
difference from expectations of the level of defaults and a change in
the risk characteristics of the loan and lease portfolio and a change
in the provision for loan and lease losses. Forward-looking statements
speak only as of the date made. Provident undertakes no obligations to
update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
- -----------------
Provident Financial Group, Inc.
Provident Financial Group, Inc. ("Provident") is a Cincinnati-based
commercial banking and financial services company with full service
banking operations in Ohio, northern Kentucky and southwestern Florida.
Provident also provides commercial financing, equipment leasing and
mortgage lending at a national level. At December 31, 2000, Provident
had total assets of $13.9 billion, loans and leases of $9.1 billion,
deposits of $8.8 billion and shareholders' equity of $991 million.
Provident manages an additional $5.8 billion of loans and leases which
have been sold with servicing retained.
Provident's executive offices are located at One East Fourth Street,
Cincinnati, Ohio 45202 and its Investors Relations telephone number is
(513) 345-7102 or (800) 851-9521.
Provident has expanded its franchise in recent years through internal
growth and acquisitions. Recent examples of Provident's expansion
include the purchase of Bank One Corporation's Housing and Health Care
Capital Business in September 2000 (a financier and loan servicer of
multi-family and health-care facilities); the acquisitions of Fidelity
Financial of Ohio, Inc. in February 2000 and OHSL Financial Corp. in
December 1999 (financial institutions located in Cincinnati, Ohio); the
purchase of Capstone Realty Advisors, LLC in September 1999 (business
specializing in the origination and servicing of commercial real estate
loans); the opening of corporate lending offices in Akron, Pittsburgh,
Baltimore, Dallas, Denver, Chicago and Houston during 1999 and 2000;
and the expansion of four banking centers in Florida during 2000.
Provident conducts its banking operations through The Provident Bank.
Provident Bank of Florida was merged into The Provident Bank in early
December 2000. Major business lines include Commercial Banking, Retail
Banking and Mortgage Banking. See ITEM 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Business
Lines" and Note 17 included in "Notes to Consolidated Financial
Statements" for details as to the types of financial products and
services offered by these business lines.
At December 31, 2000, Provident and its subsidiaries employed
approximately 3,000 full-time-equivalent employees.
Competition
The financial services business is highly competitive. Provident
competes actively with both national and state chartered banks, savings
and loan associations, securities dealers, mortgage bankers, finance
companies and other financial service entities.
1
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Supervision and Regulation
Provident is registered as a bank holding company, and is subject to
the regulations of the Board of Governors of the Federal Reserve under
the Bank Holding Company Act of 1956, as amended. Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve. The Act requires Federal Reserve
approval of acquisitions of control of more than 5% of the voting stock
or substantially all of the assets of any bank or bank holding company.
The Act authorizes interstate bank acquisitions anywhere in the country
and allows interstate branching by acquisition and consolidation in
those states that have not opted out. Ohio, Kentucky and Florida did
not opt out of interstate branching.
Provident is prohibited by the Bank Holding Company Act from engaging
in nonbanking activities, unless such activities are determined by the
Federal Reserve to be financial in nature or closely related to
banking. The Act does not place territorial restrictions on the
activities of such nonbanking-related activities.
There are various legal and regulatory limits on the extent to which
The Provident Bank, Provident's Ohio chartered banking subsidiary, may
pay dividends or otherwise supply funds to Provident. In addition,
federal and state regulatory agencies also have the authority to
prevent a bank or bank holding company from paying a dividend or
engaging in any other activity that, in the opinion of the agency,
would constitute an unsafe or unsound practice. See ITEM 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity" and Note 21 included in "Notes to
Consolidated Financial Statements".
Federal and state laws regulate the operations of The Provident Bank,
requiring the maintenance of reserves against deposits, limiting the
nature of loans and interest that may be charged thereon, restricting
investments and other activities, and subjecting the banking affiliate
to regulation and examination by the Federal Reserve, state banking
authorities and the FDIC.
Legislation to overturn Depression-era restrictions on bank
affiliations, the Gramm-Leach-Bliley Act, became law on November 12,
1999. This Act eliminates certain barriers to and restrictions on
affiliations between banks and securities firms, insurance companies
and other financial services organizations. It provides for a new type
of "Financial Holding Company" under which affiliations among these
entities may occur, subject to the umbrella regulation of the Board of
Governors of the Federal Reserve System and affiliate regulation by the
functional financial regulators. Provident has elected to become a
"Financial Holding Company". The Act permits certain non-banking
financial activities to be conducted in an operating subsidiary of a
bank. In addition, the Act imposes new privacy disclosure and "opt out"
requirements on virtually all regulated financial services
organizations.
2
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
provides that a holding company's controlled insured depository
institutions can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with the default of
an affiliated insured bank or savings association.
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of
banks and bank holding companies. The nature of future monetary
policies and the effect of such policies on the future business and
income of Provident and its subsidiaries cannot be predicted.
Red Capital Markets, Inc., a Provident Bank subsidiary, is licensed as
a securities broker-dealer and is subject to regulation by the
Securities and Exchange Commission, state securities authorities and
the National Association of Securities Dealers, Inc. Provident
Insurance Agency, Inc., a subsidiary of Red Capital Markets, is subject
to regulation by state insurance authorities. Provident Investment
Advisors, Inc., a Provident subsidiary, is a registered investment
advisor, subject to regulation by the Securities and Exchange
Commission and state securities authorities.
ITEM 2. PROPERTIES
- -------------------
Provident and its subsidiaries occupy their headquarters located at One
East Fourth Street, Cincinnati, Ohio and additional office space in
downtown Cincinnati under long-term leases. Provident Bank owns five
buildings in the Queensgate area of Cincinnati that contain
approximately 200,000 square feet which are used for offices, data
processing and warehouse facilities. Provident Bank owns forty of its
branch locations and leases thirty-nine. For information concerning
rental obligations, see Note 5 included in "Notes to Consolidated
Financial Statements".
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Provident and its subsidiaries are not parties to any pending legal
proceedings other than routine litigation incidental to their business,
the results of which will not be material to Provident or its financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None in the fourth quarter.
3
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Common Stock is traded on the NASDAQ Stock Market under the symbol
"PFGI". The following table sets forth, for the periods indicated, the
high, low and period end closing sales prices as reported on NASDAQ and
the quarterly dividends paid by Provident.
2000 1999
---------------------------------- ----------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
High Close $37.81 $29.88 $34.25 $34.78 $43.31 $45.88 $44.38 $41.94
Low Close 24.50 23.94 23.81 25.38 33.63 36.13 35.56 35.31
Period End Close 37.50 29.38 23.81 34.06 35.88 36.56 43.75 38.38
Cash Dividends .24 .24 .24 .24 .22 .22 .22 .22
At February 28, 2001, there were 5,504 holders of record and an
additional 6,744 non-registered or "street name" holders of Provident's
Common Stock.
Provident paid dividends on its Common Stock of $46.8 million and $40.1
million during 2000 and 1999, respectively, and $.9 million on its
Preferred Stock for both years. Provident increased its quarterly
dividend rate per share from $.22 to $.24 beginning in the first
quarter of 2000. It is expected that in the next several years,
Provident's (Parent's) revenues will consist principally of dividends
paid to it by its subsidiaries and interest generated from lending and
investing activities. A discussion of limitations and restrictions on
the payment of dividends by subsidiaries to Provident is contained
under ITEM 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity" and Note 21 included
in "Notes to Consolidated Financial Statements".
4
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Five Year For Year Ended December 31,
(Dollars In Millions Compound ------------------------------------------------------------
Except Per Share Amounts) Growth Rate 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
Earnings:
Total Interest Income 14% $ 971 $ 731 $ 694 $ 632 $ 564
Total Interest Expense 16 (583) (394) (383) (345) (305)
-------- -------- -------- -------- --------
Net Interest Income 12 388 337 311 287 259
Provision for Loan and Lease Losses 56 (131) (48) (32) (45) (47)
Noninterest Income 32 254 272 225 175 102
Noninterest Expense 21 (393) (327) (317) (241) (191)
-------- -------- -------- -------- --------
Income Before Income Taxes 1 118 234 187 176 123
Applicable Income Taxes 4 (44) (83) (65) (61) (42)
-------- -------- -------- -------- --------
Net Income (1) - $ 74 $ 151 $ 122 $ 115 $ 81
======== ======== ======== ======== ========
Per Common Share Data:
Basic Earnings (1) (4)% $ 1.49 $ 3.18 $ 2.57 $ 2.51 $ 1.84
Diluted Earnings (1) (3) 1.46 3.08 2.48 2.38 1.76
Dividends Paid 15 .96 .88 .80 .72 .54
Book Value 13 20.15 18.91 16.83 15.28 13.38
Selected Balances at December 31:
Total Investment Securities 24% 3,014 2,111 1,598 1,468 1,132
Total Loans and Leases 11 9,077 7,011 6,303 5,748 5,939
Reserve for Loan and Lease Losses 20 154 94 79 75 69
Total Assets 16 13,857 10,538 8,950 7,947 7,603
Noninterest Bearing Deposits 20 1,293 1,185 679 610 558
Interest Bearing Deposits 13 7,536 6,045 5,277 4,747 4,675
Long-Term Debt and Junior
Subordinated Debentures 29 3,104 1,171 1,112 863 989
Total Shareholders' Equity 15 991 926 802 719 607
Off Balance Sheet Managed Assets - 5,756 5,938 3,220 1,533 257
Other Statistical Information:
Return on Average Assets (1) 0.61% 1.53% 1.40% 1.49% 1.16%
Return on Average Equity (1) 7.75 18.34 15.57 17.47 15.03
Dividend Payout Ratio 64.85 27.14 30.93 33.12 29.44
Capital Ratios at December 31:
Total Equity to Total Assets 7.15% 8.79% 8.96% 9.05% 7.99%
Tier 1 Leverage Ratio 9.56 10.87 9.13 9.92 9.24
Tier 1 Capital to Risk-Weighted Assets 9.18 9.97 9.03 10.09 9.66
Total Risk-Based Capital to
Risk-Weighted Assets 11.10 11.93 11.53 13.36 13.26
Loan Quality Ratios at December 31:
Reserve for Loan and Lease Losses to
Total Loans and Leases 1.70% 1.34% 1.25% 1.30% 1.16%
Reserve for Loan and Lease Losses to
Nonaccrual Loans 160.70 168.94 175.18 157.28 307.67
Nonaccrual Loans to Total Loans
and Leases 1.06 0.79 0.71 0.83 0.38
Net Charge-Offs to Average Total
Loans and Leases 0.97 0.49 0.43 0.69 0.77
(1) Selected Financial Data on Operating Income follows (excludes Merger and
Restructuring Charges (1998 - 2000) and One-Time Deposit Insurance Charges (1996):
Net Income 6% $ 101 $ 154 $ 137 $ 115 $ 88
Basic Earnings 2 2.04 3.24 2.87 2.51 2.02
Diluted Earnings 4 2.00 3.14 2.77 2.38 1.93
Return on Average Assets 0.83% 1.56% 1.56% 1.49% 1.27%
Return on Average Equity 10.59 18.68 17.39 17.47 16.45
5
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
This discussion should be read in conjunction with the audited
consolidated financial statements. Average balances reported are based
on daily calculations.
INTRODUCTION
Provident Financial Group, Inc. ("Provident") is a holding company for
The Provident Bank, an FDIC member bank. Major business lines are:
Commercial Banking, a provider of credit products and cash management
services to commercial customers; Retail Banking, a provider of
consumer lending, deposit accounts, trust, brokerage and investment
products and services; and Mortgage Banking, an originator and servicer
of conforming and nonconforming residential loans to consumers and
short-term financing to mortgage originators and brokers.
PERFORMANCE SUMMARY
The following table summarizes three-year financial data for Provident,
along with calculated variances from the prior year:
Year Ending 2000 Year Ending 1999 Year Ending 1998
(Dollars in Millions ----------------------------- ---------------------------- -----------------------------
Except Per Share Data) Amount $ Chg % Chg Amount $ Chg % Chg Amount $ Chg % Chg
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 388 $ 51 15% $ 337 $ 26 8% $ 311 $ 24 8%
Noninterest Income 254 (18) (7) 272 47 21 225 50 29
Total Revenue 642 33 5 609 73 14 536 74 16
Provision for Loan
and Lease Losses 131 83 173 48 16 50 32 (13) (29)
Noninterest Expense (1) 393 66 20 327 10 3 317 76 32
Net Income (1) 74 (77) (51) 151 29 24 122 7 6
Total Loans and Leases 9,077 2,066 29 7,011 708 11 6,303 555 10
Total Assets 13,857 3,319 31 10,538 1,588 18 8,950 1,003 13
Total Off Balance Sheet
Managed Assets 5,756 (182) (3) 5,938 2,718 84 3,220 1,687 110
Total Deposits 8,829 1,599 22 7,230 1,274 21 5,956 599 11
Long-Term Debt and Junior
Subordinated Debentures 3,104 1,933 165 1,171 59 5 1,112 249 29
Stockholders' Equity 991 65 7 926 124 15 802 83 12
Per Common Share:
Book Value 20.15 1.24 7 18.91 2.08 12 16.83 1.55 10
Diluted Earnings (1) 1.46 (1.62) (53) 3.08 0.60 24 2.48 0.10 4
Ratio Analysis:
Net Interest Margin 3.58% 3.80% 3.84%
Return on Average Equity (1) 7.75% 18.34% 15.57%
Return on Average Assets (1) 0.61% 1.53% 1.40%
Average Equity to
Average Assets 7.82% 8.34% 8.97%
Dividend Payout to
Net Earnings 64.85% 27.14% 30.93%
(1) Financial Data based on Operating Income follows (excludes Merger and Restructuring Charges):
Noninterest Expense $ 354 $31 10 $ 323 $28 9 $ 295 $54 22
Net Income 101 (53) (34) 154 17 12 137 22 19
Diluted Earnings 2.00 (1.14) (36) 3.14 0.37 13 2.77 0.39 16
Return on Average Equity 10.59% 18.68% 17.39%
Return on Average Assets 0.83% 1.56% 1.56%
Efficiency Ratio 55.07% 52.97% 56.38%
6
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident reported net income of $73.6 million, $150.9 million and
$122.4 million for 2000, 1999 and 1998, respectively. On an operating
income basis (excludes unusual and significant expenses), net income
was $100.6 million, $153.7 million and $136.7 million, for 2000, 1999
and 1998, respectively. Operating earnings per diluted share was $2.00
for 2000, compared to $3.14 for 1999 and $2.77 for 1998. On an
operating basis, return on average equity was 10.59%, 18.68% and 17.39%
and return on average assets was 0.83%, 1.56% and 1.56% for the three
years ended 2000, 1999 and 1998, respectively.
The lower net income and financial performance ratios for 2000 were
principally the result of two events. First, during the third quarter
of 2000, Management decided to change the structure of its
securitizations to secured financings, eliminating the use of
gain-on-sale accounting. The switch to a secured financing structure
does not affect the total profit Provident will recognize over the life
of a loan, but rather impacts the timing of income recognition. Secured
financing transactions cause reported earnings from securitized loans
to be lower in the initial periods, resulting from the absence of gains
on loan and lease sales, and higher in later periods, as interest is
earned on the loans. As a result, moving away from transaction
structures that use gain-on-sale accounting will temporarily cause
Provident's earnings to be lower over the next several quarters.
A second reason for the lower net income in 2000 was higher loan loss
provision expense, resulting from the following factors. First, general
economic conditions weakened during the fourth quarter of 2000 as
evidenced by the Federal Reserve reducing key interest rates in early
January of 2001. Second, higher charge-offs and declining credit
quality ratios were experienced by Provident during the fourth quarter
of 2000. Unfavorable business conditions related to three loans
totaling $52 million required Provident to move the loans to nonaccrual
status. In light of the change in Provident's asset quality indicators
and the uncertain economic environment, Provident increased its loan
loss reserve ratio from 1.44% at the end of the third quarter to 1.70%
at the end of the fourth quarter of 2000.
Provident experienced revenue growth despite the absence of gains on
sale of loans and leases during the second half of 2000. Revenue (net
interest income plus noninterest income) increased 5% during 2000 over
1999 and 14% during 1999 over 1998. Net interest income increased $51
million, or 15%, for 2000 compared to 1999, after increasing $26
million, or 8%, in 1999 compared to 1998. Higher net interest income
was the result of strong loan growth from all business lines.
Noninterest income decreased $18 million in 2000 as compared to 1999.
However, excluding gains on sale of loans and leases, noninterest
income increased $35 million. Accounting for the growth was fee
revenue, primarily from increased loan servicing and other fees and
charges.
7
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident's efficiency ratio, on an operating basis, for 2000, 1999 and
1998 was 55.07%, 52.97% and 56.38%, respectively. The absence of gains
on sale of loans and leases was primarily responsible for the higher
efficiency ratio during 2000. Total noninterest expense, on an
operating basis, was $354 million, $323 million and $295 million for
2000, 1999 and 1998, respectively. Strong cost control measures have
held the annual growth of these operating expenses to 10% or less over
the past two years.
Provident incurred unusual and significant expenses during each of the
past three years. During 2000, merger and restructuring charges of
$39.3 million were expensed in connection with the acquisition of
Fidelity Financial of Ohio and other post-merger business line
restructurings. During 1999, Fidelity Financial had taken merger
charges of $4.2 million related to their acquisition of Glenway
Financial Corporation. Provident initiated a reengineering project and
discontinued two business units which resulted in a charge to earnings
of $22.0 million during 1998.
Total assets at December 31, 2000, 1999 and 1998 were $13.9 billion,
$10.5 billion and $8.9 billion, respectively. Total loans increased to
$9.1 billion in 2000 compared to $7.0 billion in 1999 and $6.3 billion
in 1998. The growth in loans for 2000 was a result of increased loan
originations and the decision to restructure loan securitizations where
loans are no longer removed from the balance sheet. Credit quality
ratios weakened during 2000 as compared to 1999 and 1998. The ratio of
nonperforming assets to total assets was .76%, .56% and .53% as of
December 31, 2000, 1999 and 1998, respectively. As a result, Provident
increased the ratio of reserve for loan and lease losses to total loans
and leases to 1.70% as of December 31, 2000, compared to 1.34% and
1.25% at December 31, 1999 and 1998, respectively.
Total deposits for 2000, 1999 and 1998 were $8.8 billion, $7.2 billion
and $6.0 billion. Average core deposits grew 14% from 1999 to 2000 with
significant contribution coming from internet deposit-gathering
initiatives, a new index checking account product and deposit growth at
the Florida banking centers.
Shareholders' equity increased $65 million and $124 million during 2000
and 1999, respectively. The growth in equity has been the result of
income exceeding dividends paid, shares of stock issued in connection
with acquisitions, and the exercise of stock options.
8
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS LINES
The following table summarizes net operating income by major lines of
business for the past three years:
Percentage
Increase (Decrease)
-------------------
(Dollars in Millions) 2000 1999 1998 '00/'99 '99/'98
- ---------------------------------------------------------------------
Commercial Banking $ 60.8 $ 69.8 $ 92.4 (13)% (24)%
Retail Banking 37.0 44.2 17.3 (16) 155
Mortgage Banking 2.7 39.7 18.5 (93) 115
Corporate Center .1 - 8.5 - -
------ ------ ------
$100.6 $153.7 $136.7 (35)% 12 %
====== ====== ======
Key components of the management reporting process follow:
o Risk-Based Equity Allocations: Provident uses a comprehensive
approach for measuring risk and making risk-based equity
allocations. Risk measurements are applied to credit, residual,
operational and corporate-level risks.
o Transfer Pricing: Provident utilizes a matched funded transfer
pricing methodology that isolates the business units from
fluctuations in interest rates, and provides management with the
ability to measure business unit, product and customer level
profitability based on the financial characteristics of the products
rather than the level of interest rates.
o Provision for Loan and Lease Losses: Business lines are charged for
provision based upon its level of net charge-offs and the size of
its loan/lease portfolio.
o Cost Allocations: Provident applies a detailed approach to
allocating costs at the business unit, product and customer levels.
Allocations are generally based on volume/activity and are reviewed
and updated regularly.
o "Corporate Center": Corporate Center includes revenue and expenses
not allocated to the primary business lines, gain/loss on the sale
of investment securities, and any nonrecurring business revenues and
expenses.
o Prior Periods: Prior periods have been restated to conform with the
current business line reporting structure and current methodology of
allocating revenue and expense between business lines.
Business line descriptions and fluctuation analysis follow:
o Commercial Banking is a provider of credit products and cash
management services to commercial customers. The group includes
Commercial Lending, serving middle market clients in the Midwest;
Provident Capital Corp., a national financier of business
expansions, re-capitalizations, and provider of asset based lending
services; Commercial Mortgage, a provider of construction and
permanent mortgage financing; Capstone Realty Advisors, a commercial
real estate servicing and origination business, Information Leasing
Corporation, a national small to mid-ticket equipment leasing
company; Provident Commercial Group, a national lessor of large
9
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
equipment; and Red Capital Group, a financier and loan servicer of
multi-family and health-care facilities.
Commercial Banking is the company's largest line of business
contributing 60% of the Bank's net operating income in 2000. Average
loan balances increased 25% and total revenues were up 16% in 2000
compared to 1999. However, net operating income for 2000 declined
13% compared to 1999. The lower net operating income was from higher
credit losses resulting in an increase in the level of loan loss
reserves and lower cash gains on the securitization and sale of
equipment leases. The decrease in net operating income of 24% in
1999 compared to 1998 was primarily attributable to a decline in
warrant gains, higher loan loss provision expense and rising
operating expenses attributable to the start-up of several new
businesses.
Capstone Realty Advisors and Red Capital Group made significant
contributions to revenue growth in 2000. Capstone, a commercial real
estate servicing and origination business acquired during 1999, was
successfully integrated and its operations expanded during 2000. Red
Capital, acquired late in 2000, provides a national platform to
generate fee income from originating, selling and servicing in the
multi-family housing and health-care real estate markets. Plans are
to expand both the Capstone and Red Capital businesses in 2001,
thereby increasing revenues and improving the balance between spread
and fee-based revenue.
Commercial Banking continued its history of strong asset generation
capabilities as witnessed by average loan balances increasing 25%
from 1999 to 2000. Contributing to this growth was the expansion of
commercial banking offices into the Akron, Baltimore, Chicago,
Dallas, Denver, Houston and Pittsburgh markets.
o Retail Banking provides consumer lending, deposit accounts, trust,
brokerage and investment products and services to its customers.
This business line includes Small Business Banking, Consumer
Lending, Consumer Banking and Provident Financial Advisors business
units. Net operating income decreased by $7.2 million in 2000 as
compared to net operating income growth of $26.9 million in 1999.
The decrease in net operating income for 2000 was related primarily
to two factors. First, the third quarter decision to change the
structure of securitizations to secured financings resulted in the
elimination of gain-on-sale accounting. Second, Retail Banking
incurred higher loan loss provision expense for 2000 due to
on-balance sheet loan growth, and a higher level of loan loss
reserves. Total loans for Retail Banking increased by $767 million,
or 48%, during the current year primarily as a result of securitized
loans now remaining on the balance sheet.
Retail Banking experienced strong growth in deposits during 2000.
Average core deposits for 2000 grew by 14% as compared to 1999.
Major components of the deposit growth included the successful
launch of a new index checking account; internet deposit-gathering
initiatives; increased brand awareness through advertising and
10
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
sponsorship of local sports teams and community events; and the
opening of four new banking centers in Florida, where branch deposit
growth has been strong.
Revenue from deposit and other fees grew during 2000. Growth in deposit
fees resulted from higher volume and improved pricing of deposit
activity, as well as an increased number and usage of Provident
ATMs. Other fee revenue also increased during 2000 primarily from
Provident Financial Advisors, Provident's investment and asset
management business. Several key accomplishments contributed to this
growth, including ongoing investments in training and industry
certifications of associates, the establishment of an institutional
sales effort and expansion into the Dayton, Cleveland, Indianapolis
and Florida markets.
The growth in net operating income for 1999 was the result of loan
growth and lower net charge-offs. Auto lease production and managed
receivables grew significantly during 1999 as Provident expanded the
number of auto dealerships that distribute Provident lease financing
products to their customers. In addition, as a result of enhanced
credit scoring and the implementation of risk-adjusted pricing
systems, direct and indirect installment loans and leases
experienced a significant improvement in net charge-offs.
During 1999, noninterest income increased $23 million due to the
following factors: Credit card balances of $230 million were
securitized, generating a gain of $4 million; auto lease operating
income increased $6 million as a result of higher managed lease
receivables; and higher fees in the areas of loan servicing,
brokerage, fund management and trust contributed to the growth in
net income in 1999.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Net operating income
for 2000 was $2.7 million, as compared to $39.7 million for 1999.
The lower operating income for 2000 was driven by the decision to
change the structure of securitizations resulting in the elimination
of gain-on-sale accounting for the second half of 2000. No
incremental net interest income occurred during the initial (third)
quarter of this accounting change as prior loan sales had always
occurred at the end of the quarter. However, additional net interest
income was realized during the fourth quarter of 2000 and should
continue to increase in future periods as loans now remain on the
balance sheet. As loans remain on the balance sheet, additional
provision for loan losses was incurred. Provision expense for 2000
was $29.3 million, compared to $3.9 million and $.6 million in 1999
and 1998, respectively. Partially offsetting the absence of
gain-on-sale income and higher provision expense were higher loan
servicing fees that increased $6.8 million for the full year 2000
over 1999.
11
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In conjunction with the decision to eliminate the use of gain-on-sale
accounting, the level of nonconforming loan originations is being
moderated. During the fourth quarter of 2000, Mortgage Banking
originated $327 million of nonconforming loans, compared to $674
million during the fourth quarter of 1999. Mortgage Banking is now
focusing its efforts toward growing its sub-servicing operations for
third-party originators. By leveraging the expertise from its
existing loan servicing platform, Provident expects to see
significant growth from this low-risk area.
Net operating income for 1999 was $39.7 million, an increase of $21.2
million as compared to 1998. The increase in income was primarily
the result of strong nonconforming loan production and accompanying
sales during 1999. In 1999, Mortgage Banking securitized and sold
nonconforming loans totaling $2.3 billion resulting in the
recognition of $73.3 million of gains. This compares to $1.1 billion
of securitized and sold loans resulting in $36.3 million of gains
during 1998.
Total revenue for 1999 was $125.4 million, as compared to $79.9 million
in 1998. The increase in revenue was primarily attributable to an
increase in loan servicing fees as well as the gains on the sale of
nonconforming loans. Operating expenses increased during 1999 due
primarily to increased staffing associated with the higher volume of
loans being generated and serviced by this business line.
DETAILED INCOME ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on
loans, leases and investments and interest incurred on deposits and
other borrowed funds. Net interest income is affected by changes in
both interest rates and the amounts of interest earning assets and
interest bearing liabilities outstanding.
Net interest income represents the principal source of income for
Provident. In 2000, 1999 and 1998, net interest income on a taxable
equivalent basis was $388.1 million, $336.6 million and $311.3 million,
respectively, which represented 60%, 55% and 58% of net revenues (net
interest income plus noninterest income). The ratio increased in 2000
as a result of Provident's decision to change the structure of its
securitization activity from loan sales to secured financings.
Accordingly, loans and leases now remain on the balance sheet resulting
in the recognition of interest income, rather than the recognition of
gains on the sale of loans and leases.
Net interest margin represents net interest income as a percentage of
total interest earning assets. The net interest margin was 3.58%, 3.80%
and 3.84% for 2000, 1999 and 1998, respectively.
12
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table provides an analysis of net interest income and
illustrates the interest income earned and interest expense charged for
each major component of interest earning assets and interest bearing
liabilities. The net interest spread is the difference between the
average yield earned on assets and the average rate incurred on
liabilities. For comparative purposes, the table has been adjusted to
reflect tax-exempt income on a fully taxable equivalent basis assuming
an income tax rate of 35%.
Year Ended December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- -------------------------- --------------------------
Average Income/ Avg. Average Income/ Avg. Average Income/ Avg.
(Dollars in Millions) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest Earning Assets:
Loans/Leases:
Corporate Lending:
Commercial $ 4,345 $411.4 9.47% $3,578 $311.6 8.71% $3,178 $293.6 9.24%
Mortgage 587 53.8 9.17 538 45.9 8.54 558 51.2 9.19
Construction 681 61.6 9.04 498 40.6 8.15 370 31.9 8.62
Lease Financing 406 48.7 12.00 289 28.6 9.92 318 34.8 10.97
Consumer Lending:
Installment 515 58.0 11.25 590 59.9 10.17 708 69.1 9.76
Residential 388 43.1 11.13 898 77.9 8.68 752 60.2 8.00
Lease Financing 641 62.3 9.72 626 51.6 8.24 507 38.2 7.54
------- ----- ------ ----- ------ -----
Total Loans/Leases 7,563 738.9 9.77 7,017 616.1 8.78 6,391 579.0 9.06
Investment Securities 3,217 227.8 7.08 1,755 110.0 6.26 1,602 106.0 6.62
Federal Funds Sold and
Reverse Repurchase
Agreements 23 1.5 6.51 24 1.3 5.46 49 2.7 5.57
Other Short-Term
Investments 30 2.8 9.28 62 3.3 5.35 68 6.5 5.51
------- ----- ------ ----- ------ -----
Total Earning Assets 10,833 971.0 8.96% 8,858 730.7 8.25% 8,110 694.2 8.56%
Cash and Noninterest
Bearing Deposits 241 244 197
Other Assets 1,071 768 455
------- ------ ------
Total Assets $12,145 $9,870 $8,762
======= ====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Deposits:
Demand Deposits $ 370 9.9 2.68% $371 7.3 1.98% $354 7.9 2.24%
Savings Deposits 1,379 68.5 4.97 1,335 51.7 3.88 1,160 46.0 3.97
Time Deposits 4,838 301.9 6.24 3,923 209.7 5.35 3,524 199.1 5.65
------- ----- ------ ----- ------ -----
Total Deposits 6,587 380.3 5.77 5,629 268.7 4.78 5,038 253.0 5.02
Short-Term Debt:
Federal Funds
Purchased and
Repurchase Agreements 1,161 71.1 6.13 981 49.5 5.04 1,068 57.9 5.42
Commercial Paper 203 12.3 6.04 210 10.2 4.87 233 13.0 5.59
Short-Term
Notes Payable 47 3.4 7.12 1 .1 4.83 2 .1 5.60
------- ----- ------ ----- ------ -----
Total Short-Term Debt 1,411 86.8 6.15 1,192 59.8 5.01 1,303 71.0 5.45
Long-Term Debt 1,500 95.8 6.39 924 52.4 5.67 823 50.2 6.11
Junior Subordinated
Debentures 235 20.0 8.53 161 13.2 8.20 99 8.7 8.76
------- ----- ------ ----- ------ -----
Total Interest Bearing
Liabilities 9,733 582.9 5.99% 7,906 394.1 4.99% 7,263 382.9 5.27%
Noninterest Bearing
Deposits 1,215 869 551
Other Liabilities 247 272 162
Shareholders' Equity 950 823 786
------- ----- ------ ----- ------ -----
Total Liabilities and
Shareholders' Equity $12,145 $9,870 $8,762
======= ====== ======
Net Interest Income $388.1 $336.6 $311.3
====== ====== ======
Net Interest Margin 3.58% 3.80% 3.84%
==== ==== ====
Net Interest Spread 2.97% 3.26% 3.29%
==== ==== ====
13
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the changes in net interest income on a tax
equivalent basis resulting from changes in volume and changes in rates.
Changes not solely due to volume or rate have been allocated
proportionately.
Year Ended December 31,
-----------------------------------------------
2000 Changes from 1999 Changes from
1999 Due to 1998 Due to
---------------------- ----------------------
(In Thousands) Volume Rate Volume Rate
- ---------------------------------------------------------------------------------
Interest Earned On:
Loans and Leases:
Corporate Lending:
Commercial $ 70,922 $ 28,883 $ 35,498 $ (17,463)
Mortgage 4,384 3,521 (1,763) (3,527)
Construction 16,113 4,802 10,526 (1,818)
Lease Financing 13,238 6,844 (3,019) (3,163)
Consumer Lending:
Installment (7,978) 6,030 (11,924) 2,768
Residential (52,682) 17,895 12,363 5,361
Lease Financing 1,261 9,448 9,593 3,812
--------- --------- --------- ---------
Net Loans and Leases 45,258 77,423 51,274 (14,030)
Investment Securities 101,865 15,940 9,794 (5,872)
Federal Funds Sold (49) 240 (1,399) (53)
Short-Term Investments (2,170) 1,697 (578) (2,593)
--------- --------- --------- ---------
Total 144,904 95,300 59,091 (22,548)
--------- --------- --------- ---------
Interest Paid On:
Demand Deposits (7) 2,594 354 (966)
Savings Deposits 1,764 15,014 6,785 (1,079)
Time Deposits 53,677 38,498 21,730 (11,130)
--------- --------- --------- ---------
Total Deposits 55,434 56,106 28,869 (13,175)
Short-Term Debt:
Federal Funds Purchased 10,003 11,681 (4,576) (3,829)
Commercial Paper (314) 2,398 (1,220) (1,590)
Short-Term Notes Payable 3,252 48 (3) (11)
--------- --------- --------- ---------
Total Short-Term Debt 12,941 14,127 (5,799) (5,430)
Long-Term Debt 36,089 7,396 5,903 (3,790)
Junior Subordinated Debentures 6,278 555 5,125 (587)
--------- --------- --------- ---------
Total 110,742 78,184 34,098 (22,982)
--------- --------- --------- ---------
Net Interest Income $ 34,162 $ 17,116 $ 24,993 $ 434
========= ========= ========= =========
Noninterest Income
The following table details the components of noninterest income and
their change since 1998:
Percentage
Increase (Decrease)
-------------------
(Dollars in Thousands) 2000 1999 1998 '00/'99 '99/'98
- --------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 35,138 $ 32,724 $ 28,369 7% 15%
Loan Servicing Fees 51,706 29,362 6,064 76 384
Other Service Charges and Fees 53,205 41,316 38,108 29 8
Operating Lease Income 42,269 40,902 37,481 3 9
Warrant Gains 7,500 9,147 15,354 (18) (40)
Security Gains 155 71 13,044 118 (100)
Other 19,290 20,273 23,103 (5) (12)
-------- -------- --------
Noninterest Income Before Gain on
Sale of Loans and Leases 209,263 173,795 161,523 20 8
Gain on Sale of Loans and Leases:
Non-Cash 34,447 83,055 41,070 (59) 102
Cash 10,452 15,814 22,899 (34) (31)
-------- -------- --------
Total Noninterest Income $254,162 $272,664 $225,492 (7)% 21%
======== ======== ========
14
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest income before gain on sale of loans and leases increased
$35.5 million (20%) during 2000 and $12.3 million (8%) during 1999.
Explanations for significant changes in noninterest income by category
follow:
o Service Charges on Deposit Accounts: Service charges on deposit
accounts increased in both 2000 and 1999 as a result of pricing and
volume increases on corporate and personal deposit accounts combined
with higher ATM fees from the increased number of ATMs. Since
December 31, 1998, an additional 145 ATMs have been placed into
service bringing the total number of Provident ATMs to 482.
o Loan Servicing Fees: The increased revenue in 2000 was primarily
from increases in the residential mortgage and auto leasing areas.
During 1999, the increased revenue was primarily from increases in
the residential mortgage, warehouse lending and auto leasing areas.
o Other Service Charges and Fees: Credit card fees and fee income from
Red Capital Group, a financing and loan servicer for multi-family
and health-care facilities that was purchased in September, were the
primary reasons for the increase in 2000. Credit card fees were the
primary reason for the increase in revenue in 1999.
o Operating Lease Income: The increase in operating lease revenue in
2000 and 1999 is due primarily to the growth of Provident Commercial
Group, a national lessor of large equipment.
o Warrant Gains: Provident's Commercial Banking business line from
time to time acquires equity warrants as a part of the lending fee
structure established with customers. Warrant gains decreased $1.6
million in 2000 and $6.2 million in 1999.
o Other: The largest components of revenue within other income have
been from realized gains on the sale of equipment lease residuals
($3.8 million, $9.2 million and $8.9 million in 2000, 1999 and 1998,
respectively) and realized gains on investments in partnerships
($6.0 million in 2000 and $1.7 million in 1998).
o Gain on Sales of Loans and Leases: Gain on sale of loans and leases
decreased $54.0 million in 2000 after increasing $34.9 million in
1999. The decrease in 2000 was due to the third quarter decision to
change the structure of securitizations resulting in the elimination
of gain-on-sale accounting. Securitizations after this date have
been structured in order to account for the transactions as secured
financings.
15
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table provides detail of the gain on sales recognized
during the past three years.
(In Thousands) 2000 1999 1998
------------------------------------------------------------------------------
Non-Cash Gains -- Loan and Lease Sales:
Nonconforming Residential Loan Securitizations $30,291 $73,304 $36,337
Prime Consumer Home Equity Securitizations 4,156 5,758 4,733
Credit Card Loan Securitizations - 3,993 -
------- ------- -------
34,447 83,055 41,070
------- ------- -------
Cash Gains -- Loan and Lease Sales:
Equipment Lease Securitizations 9,083 13,164 13,429
Conforming Residential Whole Loan Sales 729 1,911 5,077
Credit Card Whole Loan Sales - - 3,420
Nonconforming Residential Whole Loan Sales - 174 290
Other Loan Sales 640 565 683
------- ------- -------
10,452 15,814 22,899
------- ------- -------
$44,899 $98,869 $63,969
======= ======= =======
A detailed discussion of the various securitizations of loans and
leases is provided under the "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset
Securitization Activity" and Note 15 included in "Notes to
Consolidated Financial Statements".
Noninterest Expense
The following table details the components of noninterest expense and
their change since 1998:
Percentage
Increase (Decrease)
-------------------
(Dollars in Thousands) 2000 1999 1998 '00/'99 '99/'98
- ------------------------------------------------------------------------------------------
Salaries, Wages and Benefits $172,903 $153,397 $131,779 13% 16%
Charges and Fees 23,280 15,679 14,896 49 5
Occupancy 20,631 18,951 18,468 9 3
Depreciation on Operating
Lease Equipment 26,636 23,076 21,662 15 7
Equipment Expense 26,045 24,614 21,820 6 13
Professional Fees 21,735 20,163 19,737 8 2
Other 62,379 66,910 66,949 (7) (0)
-------- -------- --------
Noninterest Expense Before
Significant and Unusual Items 353,609 322,790 295,311 10 9
Merger and Restructuring Charges 39,300 4,200 22,005 836 (81)
-------- -------- --------
$392,909 $326,990 $317,316 20% 3%
======== ======== ========
Noninterest expense before significant and unusual items increased
$30.8 million (10%) and $27.5 million (9%) during 2000 and 1999,
respectively. Components of noninterest expense, along with an
explanation as to their fluctuations, follow:
o Salaries, Wages and Benefits: Compensation increased in 2000 due
primarily to increased staffing expense of newly acquired businesses
(Red Capital Group and Capstone Realty) within the Commercial
Banking business line. The increase in compensation expense for 1999
was in the Mortgage Banking business line as well as the Commercial
Banking business line.
16
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Charges and Fees: Increased amortization expense of goodwill and
mortgage servicing rights, associated with the acquisitions and/or
loan servicing of OHSL Financial Corp., Capstone Realty Advisors and
Red Capital Group, was the primary reason for the increase in
charges and fees in 2000. Higher credit card processing fees were
the primary reason for the increase in 1999.
o Occupancy: An increase in rent expense, reflecting the geographic
expansion of Commercial Banking during 2000 and Mortgage Banking
during 1999, resulted in higher occupancy expense.
o Depreciation on Operating Lease Equipment: The growth of Provident
Commercial Group was the primary reason for the increase in
depreciation on operating lease equipment.
o Equipment Expense: Equipment expense increased due to higher
depreciation expense combined with higher repair and maintenance
expenses related to technology investments, branches and ATMs for
both 2000 and 1999.
o Professional Fees: The increase in professional fees in 2000 was a
result of higher legal fees, primarily associated with the
origination and collection of loans, and other miscellaneous
professional fees.
o Other: Decreases in data processing expense and other miscellaneous
expenses were the primary reasons for the decrease in other
noninterest expense in 2000.
o Merger and Restructuring Charges: In connection with Provident's
acquisition of Fidelity Financial of Ohio, Inc., direct-merger
related and other post-merger business line restructuring charges of
$39.3 million were recorded during the first quarter of 2000. This
expense included estimates of cash outlays totaling $12.6 million
and non-cash write-downs of assets totaling $26.7 million. The cash
outlays included severance costs, contract termination charges and
professional fees. The non-cash expenses were from the write-down of
fixed assets, primarily from the closing and consolidation of
branches, and other balance sheet restructurings, primarily from the
sale and write-down of acquired residential loans and investment
securities. Additional detail of this expense is provided under Note
16 of the "Notes to Consolidated Financial Statements".
Merger and restructuring charges of $4.2 million were recorded during
1999. These charges related to Fidelity Financial and their
acquisition of Glenway Financial Corporation during the first
quarter of 1999.
17
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident's efficiency ratio (operating expenses as a percentage of net
revenue) had deteriorated from 1996 to 1998. As a result, Provident
took two courses of action. First, a reengineering project was
initiated during the second half of 1998. Second, an analysis of
current and future profitability of various business units was
performed. As a result of this analysis, it was determined that the
prospects for future revenue growth did not justify the continued
operating losses by the MeritValu and Free Market Partners units.
Accordingly, these business units were discontinued during the
fourth quarter of 1998. In connection with these two initiatives,
Provident recorded a restructuring charge of $22 million during the
fourth quarter of 1998. This charge was composed of employee
termination benefits, fixed asset write-offs, professional fees and
exit costs.
FINANCIAL CONDITION ANALYSIS
Short-Term Investments and Investment Securities
As of December 31, 2000 and 1999, federal funds sold and reverse
repurchase agreements outstanding were $83.0 million and $84.0 million.
The amount of federal funds sold changes daily as cash is managed to
meet reserve requirements and customer needs. After funds have been
allocated to meet lending and investment demands, any remainder is
placed in overnight federal funds.
As of December 31, 2000 and 1999, Provident held $41.9 million and $0,
respectively, in trading account securities. Provident trades
investment securities with the intention of recognizing short-term
profits. These securities were carried at fair value with realized and
unrealized gains and losses reported in other noninterest income.
Provident classified $206.2 million and $0 of loans as held for sale at
December 31, 2000 and 1999, respectively. These loans consist of
multi-family loans which are insured by either the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal Housing Association ("FHA"). FNMA
and FHLMC insured loans are subject to a purchase commitment from FNMA
or FHLMC. FHA loans are insured by the Department of Housing and Urban
Development. These loans are generally outstanding for sixty days or
less. Activities related to both the loans held for sale and the
trading account securities are part of the operations of Red Capital
Group.
Investment securities held for sale represented 30% of average earning
assets during 2000, and 20% during both 1999 and 1998. Funds obtained
from deposit growth, debt borrowings, and proceeds from the sale of
loans were deployed into investment securities with higher credit
quality, increased liquidity and an improved interest rate risk profile
during 2000.
18
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The amortized cost and market value of investment securities available
for sale at the dates indicated are summarized in the following table:
Amortized Cost at December 31,
------------------------------------
(In Thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 326,721 $ 240,991 $ 159,741
State and Political Subdivisions 3,317 1,897 2,014
Mortgage-Backed Securities 1,938,546 1,470,270 1,125,574
Asset-Backed Securities 44,257 104,700 247,311
Other Securities 728,363 369,920 77,301
---------- ---------- ----------
Total Securities $3,041,204 $2,187,778 $1,611,941
========== ========== ==========
Market Value at December 31,
------------------------------------
(In Thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 325,457 $ 233,148 $ 158,342
State and Political Subdivisions 3,301 1,880 1,995
Mortgage-Backed Securities 1,915,602 1,408,567 1,115,435
Asset-Backed Securities 42,061 99,753 245,855
Other Securities 727,200 367,689 76,456
---------- ---------- ----------
Total Securities $3,013,621 $2,111,037 $1,598,083
========== ========== ==========
The following table shows the December 31, 2000 maturities and weighted
average yields for investment securities. Yields on equity securities
that comprise the fixed rate, due after 10 years classification of
other securities have been omitted from the table. A 35% tax rate was
used in computing the tax equivalent yield adjustment. The yields shown
are calculated based on original cost and effective yields weighted for
the scheduled maturity of each security. Mortgage-backed and
asset-backed securities are assigned to maturity categories based on
their estimated average lives.
Fixed Rate Floating Rate
--------------------- ------------------------
Weighted
Weighted Average
Average Yield On
Amortized Yield To Amortized Current
(Dollars in Thousands) Cost Maturity Cost Coupon Rates
- -----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency
Debentures:
Due in one year or less $ 182,925 6.71% $ 743 6.37%
Due after 1 through 5 years 143,053 5.51 - -
---------- ---- --------- ----
Total $ 325,978 6.18% $ 743 6.37%
========== ==== ========= ====
State and Political Subdivisions:
Due after 10 years $ 3,317 8.42% $ - -%
========== ==== ========= ====
Mortgage-Backed Securities:
Due in one year or less $ 62,912 7.64% $ - -%
Due after 1 through 5 years 1,187,003 8.47 77,024 6.95
Due after 5 through 10 years 523,029 5.88 13,862 7.94
Due after 10 years 74,716 7.36 - -
---------- ---- --------- ----
Total $1,847,660 7.66% $ 90,886 7.10%
========== ==== ========= ====
Asset-Backed Securities:
Due after 1 through 5 years $ 44,257 4.77% $ - -%
========== ==== ========= ====
Other Securities:
Due in one year or less $ - -% $ 300,614 6.43%
Due after 1 through 5 years 14,048 8.00 106,201 5.19
Due after 5 through 10 years 250 6.75 190,886 6.02
Due after 10 years 116,364 - - -
---------- ---- --------- ----
Total $ 130,662 7.98% $ 597,701 6.08%
========== ==== ========= ====
19
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and Leases
As of December 31, 2000 and 1999, total on-balance sheet loans and
leases were $9.1 billion and $7.0 billion, respectively. Provident had
an additional $5.8 billion and $5.9 billion of off-balance sheet loans
and leases as of year-end 2000 and 1999, respectively. Due to the
decision to structure and account for future securitizations as secured
financings rather than loan sales, on-balance sheet loans and leases
are expected to increase, while off-balance sheet loans and leases are
expected to decline. For more information concerning off-balance sheet
loans and leases, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset Securitization
Activity". Provident does not have a material exposure to foreign,
energy or agricultural loans. The following table shows on-balance
sheet loans and leases outstanding at period end by type of loan:
December 31,
----------------------------------------------------------
(Dollars in Millions) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
Dollar:
Corporate Lending:
Commercial $ 4,580.2 $ 3,990.9 $ 3,277.9 $ 2,737.1 $ 2,404.9
Mortgage 632.8 576.6 546.5 582.2 563.6
Construction 801.2 559.8 450.6 314.4 293.3
Lease Financing 607.5 391.5 243.7 340.3 239.1
Consumer Lending:
Installment 580.1 476.5 650.1 656.8 954.8
Residential 835.5 653.7 710.3 674.6 891.4
Lease Financing 1,039.6 361.9 423.4 442.8 591.8
---------- ---------- ---------- ---------- ----------
Total Loans and Leases $ 9,076.9 $ 7,010.9 $ 6,302.5 $ 5,748.2 $ 5,938.9
========== ========== ========== ========== ==========
Percentage:
Corporate Lending:
Commercial 50.4% 56.9% 52.0% 47.6% 40.5%
Mortgage 7.0 8.2 8.7 10.1 9.5
Construction 8.8 8.0 7.1 5.5 4.9
Lease Financing 6.7 5.6 3.9 5.9 4.0
Consumer Lending:
Installment 6.4 6.8 10.3 11.4 16.1
Residential 9.2 9.3 11.3 11.8 15.0
Lease Financing 11.5 5.2 6.7 7.7 10.0
---------- ---------- ---------- ---------- ----------
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
20
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the composition of the commercial loan
category by industry type at December 31, 2000, including loan amounts
which interest is not being accrued on:
Amount on
(Dollars in Millions) Amount Percentage Nonaccrual
- -----------------------------------------------------------------------
Manufacturing $ 869.6 19.0% $ 8.0
Service Industries 793.1 17.3 50.9
Real Estate Operators / Investment 424.5 9.3 .1
Retail Trade 386.9 8.4 .7
Wholesale Trade 359.3 7.8 1.9
Finance and Insurance 342.1 7.5 .1
Transportation / Utilities 335.2 7.3 1.4
Construction 212.1 4.6 .9
Automobile Dealers 145.4 3.2 -
Other 712.0 15.6 10.4
-------- ----- -----
$4,580.2 100.0% $74.4
======== ===== =====
At December 31, 2000, Provident had approximately $719 million of
commercial loans that are shared national credit loans. Shared national
credit loans are loans that have a principal balance of at least $20
million and involve at least three participating banks. In an on-going
effort to diversify its portfolio, the shared national credit loans
that Provident participates in are distributed across nine industry
types, with the largest industry concentration accounting for
approximately 26% of its total shared national credit loans. The
average outstanding balance of a shared national credit loan was $6.7
million. Credit quality for the shared national credit loans was not
substantially different than the rest of the commercial loan portfolio.
The following table shows the composition of commercial mortgage and
construction loans by property type at December 31, 2000:
Commercial Commercial Amount on
(Dollars in Millions) Mortgage Construction Total Percentage Nonaccrual
- -----------------------------------------------------------------------------------------
Residential Development $ 118.6 $ 215.1 $333.7 23.3% $ .3
Office / Warehouse 111.1 132.1 243.2 17.0 .2
Apartments 97.2 119.5 216.7 15.1 -
Shopping / Retail 92.1 137.4 229.5 16.0 .4
Land 38.5 41.5 80.0 5.5 -
Healthcare Facilities 34.9 12.2 47.1 3.3 -
Hotel / Motel / Restaurants 18.2 47.8 66.0 4.6 -
Industrial Plants 15.4 15.9 31.3 2.2 -
Auto Sales and Service 11.6 .9 12.5 0.9 -
Churches 9.3 2.9 12.2 0.8 -
Other Commercial Properties 85.9 75.9 161.8 11.3 .8
------- ------- -------- ----- -----
$ 632.8 $ 801.2 $1,434.0 100.0% $ 1.7
======= ======= ======== ===== =====
21
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Commercial and real estate construction loans outstanding at December
31, 2000 are shown in the following table by maturity, based on
remaining scheduled repayments of principal:
After 1
Within but Through After
(In Millions) 1 Year 5 Years 5 Years Total
- -------------------------------------------------------------------------------
Commercial $1,557.8 $2,200.1 $822.3 $4,580.2
Commercial Construction 250.8 399.3 151.1 801.2
Residential Construction - - 2.4 2.4
-------- -------- ------ --------
Total $1,808.6 $2,599.4 $975.8 $5,383.8
======== ======== ====== ========
Loans Due After One Year:
At predetermined interest rates $790.8
At floating interest rates 2,784.4
The following table shows the composition of the installment loan
category by loan type at December 31, 2000:
(Dollars in Millions) Amount Percentage
- -----------------------------------------------------------------------
Home Equity $238.2 41.0%
Indirect Installment 210.0 36.2
Direct Installment 67.8 11.7
Credit Card 39.2 6.8
Other Consumer Loans 24.9 4.3
------ -----
$580.1 100.0%
====== =====
Credit Risk Management
Provident provides for credit loss reserves for both its on and
off-balance sheet lending portfolios. Discussion and analysis of the
reserves as well as the overall credit quality of the off-balance sheet
lending portfolio is provided in Note 15 of the "Notes to Consolidated
Financial Statements". The following paragraphs provide information
concerning its on-balance sheet credit portfolio.
Provident maintains a reserve for loan and lease losses in order to
absorb losses in its on-balance sheet portfolio. The reserve is
maintained at a level which management considers adequate to absorb
loan and lease losses given the conditions at the time. The reserve is
increased by the provision for loan and lease losses. Loans and leases
deemed uncollectible are charged off and deducted from the reserve
while recoveries on loans and leases previously charged off are added
back to the reserve.
During the fourth quarter of 2000, general economic conditions weakened
and Provident began to see signs of deterioration in the portion of the
commercial loan portfolio with lower credit ratings. As a result of the
change in asset quality indicators and the uncertain economic
environment, the ratio of loan and lease losses to total loans and
leases was increased to 1.70%. Unfavorable business conditions required
Provident to place three large loans, totaling approximately $52
million, on nonaccrual status late in the fourth quarter of 2000. In
conjunction with the changes in asset quality indicators in the fourth
quarter and the uncertain economic environment, several large
22
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
commercial loan charge-offs were recorded in the fourth quarter of
2000.
The following table shows selected information relating to Provident's
reserve for loan and lease losses:
December 31,
----------------------------------------------------
(In Thousands) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
Reserve for Loan and Lease
Losses at Beginning of Period $ 94,045 $78,867 $74,615 $68,961 $61,671
Provision Charged to Expense 131,281 48,417 31,597 45,119 47,298
Acquired Reserves 2,377 1,263 - 1,814 2,013
Loans and Leases Charged Off:
Corporate Lending:
Commercial 63,497 25,145 14,403 17,286 17,236
Mortgage 96 247 3 1,505 2,022
Construction - - - - -
Lease Financing 2,892 6,736 5,173 1,367 -
Consumer Lending:
Installment 7,535 10,159 12,856 24,065 24,342
Residential 8,022 759 900 1,175 228
Lease Financing 5,136 4,244 3,855 6,009 3,087
-------- ------- ------- ------- -------
Total Charge-Offs 87,178 47,290 37,190 51,407 46,915
-------- ------- ------- ------- -------
Recoveries:
Corporate Lending:
Commercial 3,406 2,742 836 1,055 619
Mortgage 20 42 1,344 915 333
Construction - - - - -
Lease Financing 1,290 3,102 226 306 14
Consumer Lending:
Installment 5,282 4,523 5,901 5,766 3,490
Residential 127 266 190 177 36
Lease Financing 3,650 2,113 1,348 1,909 402
-------- ------- ------- ------- -------
Total Recoveries 13,775 12,788 9,845 10,128 4,894
-------- ------- ------- ------- -------
Net Loans and Leases
Charged Off 73,403 34,502 27,345 41,279 42,021
-------- ------- ------- ------- -------
Reserve for Loan and Lease
Losses at End of Period $154,300 $94,045 $78,867 $74,615 $68,961
======== ======= ======= ======= =======
On a percentage basis, the following table provides annual net
charge-offs to average total loans and leases by category:
December 31,
-------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------
Corporate Lending:
Commercial 1.38% .63% .43% .63% .73%
Mortgage .01 .04 (.24) .10 .32
Construction - - - - -
Lease Financing .39 1.26 1.56 .40 (.01)
Consumer Lending:
Installment .44 .96 .98 2.17 2.10
Residential 2.04 (1) .05 .09 .13 .02
Lease Financing .23 .34 .49 .67 .59
--- --- --- --- ---
Net Charge-Offs to Average
Total Loans and Leases .97% .49% .43% .69% .77%
=== === === === ===
(1) The net charge-off percentage for residential loans would be 1.22%
for 2000 if charge-offs resulting from the implementation of the
FFIEC Uniform Retail Credit Classification and Account Management
Policy had been excluded.
23
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Explanation as to significant changes in charge-offs between 1998 and
2000 follows:
o Commercial: Net charge-offs to average loans were 1.38%, .63% and
.43% for 2000, 1999 and 1998, respectively. Due to the size of many
of the commercial loans, a change in the number of large charge-offs
can result in a significant fluctuation in the total charge-offs of
this loan type. There were sixteen charge-offs greater than one
million dollars in 2000 compared to seven in 1999 and three in 1998.
The increase in large charge-offs in 2000 was primarily due to the
decline in asset quality indicators combined with the uncertain
economic environment. Generally, Provident obtains collateral on its
larger commercial loans, which reduces its credit exposure.
o Commercial Lease Financings: Net charge-offs to average leases were
.39%, 1.26% and 1.56% for 2000, 1999 and 1998, respectively. The
decrease in the charge-off percentage from 1999 to 2000 was
primarily due to a decrease in net charge-offs from Information
Leasing Corporation, Provident's small to mid-ticket equipment
leasing company. The decrease in the charge-off percentage from 1998
to 1999 was due to a decrease in the net charge-offs from Provident
Commercial Group, Provident's large ticket equipment leasing
company.
o Installment: Net charge-offs to average loans were .44%, .96% and
.98% for 2000, 1999 and 1998, respectively. The decrease in the
charge-offs for 2000 as compared to 1999 was a result of lower
charge-offs in home equity and credit card loans. The reduction in
home equity charge-offs was due to continued focus on credit quality
standards on the origination of these loans and improved technology
of collection systems.
o Residential: Net charge-offs to average loans were 2.04%, .05%, and
.09% for 2000, 1999 and 1998, respectively. The increase in
charge-offs for 2000 was due primarily to a one-time charge-off of
$3.2 million related to a new regulatory consumer lending policy
that became effective on December 31, 2000. The net charge-off ratio
excluding this one-time charge-off was 1.22%, which now includes
activity that has historically been shown off-balance sheet.
o Consumer Lease Financings: Net charge-offs to average leases were
.23%, .34% and .49% for 2000, 1999 and 1998, respectively. The
decrease in charge-offs of auto leases reflects the implementation
of risk-based pricing origination standards within this lending
product. In addition, Provident acquires insurance coverage for its
auto lease residuals to reduce the level of losses on the sale of
autos at the termination of their lease agreements.
24
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the dollar amount of the reserve for loan and
lease losses, using management's estimate, by principal loan and lease
category. While amounts are allocated to various portfolio categories,
the total reserve, less the portion attributable to reserves as
prescribed under provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan",
is available to absorb losses from any loan or lease category.
December 31,
----------------------------------------------------
(In Thousands) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------
Corporate Lending:
Commercial $ 99,917 $ 70,722 $ 50,919 $ 41,227 $ 32,641
Mortgage 7,691 4,440 5,154 5,897 5,944
Construction 5,215 2,095 3,377 3,413 3,297
Lease Financing 12,437 4,152 3,730 5,815 3,159
-------- -------- -------- -------- --------
125,260 81,409 63,180 56,352 45,041
Consumer Lending:
Installment 8,431 7,881 10,448 11,696 11,651
Residential 13,911 1,685 2,507 2,288 4,256
Lease Financing 6,698 3,070 2,732 4,279 8,013
-------- -------- -------- -------- --------
29,040 12,636 15,687 18,263 23,920
-------- -------- -------- -------- --------
$154,300 $ 94,045 $ 78,867 $ 74,615 $ 68,961
======== ======== ======== ======== ========
The following table presents a summary of various indicators of credit
quality:
December 31,
--------------------------------------------------------
(Dollars In Thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual Loans:
Corporate Lending:
Commercial $ 74,401 $ 43,452 $ 34,544 $ 37,800 $ 14,164
Mortgage 1,712 3,003 933 335 309
Construction - 216 - 27 71
Lease Financing 6,503 1,309 4,002 4,798 3,973
-------- -------- -------- -------- --------
82,616 47,980 39,479 42,960 18,517
Consumer Lending:
Installment - 48 38 - -
Residential 13,404 7,640 5,504 4,482 3,897
Lease Financing - - - - -
-------- -------- -------- -------- --------
13,404 7,688 5,542 4,482 3,897
-------- -------- -------- -------- --------
Total Nonaccrual Loans 96,020 55,668 45,021 47,442 22,414
Other Real Estate and
Equipment Owned 8,805 3,870 2,767 12,440 6,997
-------- -------- -------- -------- --------
Total Nonperforming Assets $104,825 $ 59,538 $ 47,788 $ 59,882 $ 29,411
======== ======== ======== ======== ========
Loans 90 Days Past Due -
Still Accruing $ 28,780 $ 15,769 $ 10,661 $ 9,985 $ 19,482
Loan and Lease Loss Reserve as
a Percent of:
Total Loans and Leases 1.70% 1.34% 1.25% 1.30% 1.16%
Nonaccrual Loans 160.70 168.94 175.18 157.28 307.67
Nonperforming Assets 147.20 157.96 165.04 124.60 234.47
Nonaccrual Loans as a Percent
of Total Loans and Leases 1.06 .79 .71 .83 .38
Nonperforming Assets as a
Percent of:
Total Loans, Leases and Other
Real Estate and Equipment 1.15 .85 .76 1.04 .49
Total Assets .76 .56 .53 .75 .39
25
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and leases are generally placed on nonaccrual status when the
payment of principal and/or interest is past due 90 days or more.
However, installment loans and consumer leases are not placed on
nonaccrual status because they are charged off in the month the loans
and leases reach 120 days past due. In addition, loans that are well
secured and in the process of collection are not placed on nonaccrual
status. When a loan is placed on nonaccrual status, any interest income
previously recognized that has not been received is reversed. Future
interest income is recorded only when a payment is received and
collection of principal is considered reasonably assured.
Although loans and leases may be classified as nonaccrual, many
continue to pay interest irregularly or at less than the original
contractual rates. The gross amount of interest income recognized
during 2000 with respect to these loans and leases was $1.2 million
compared to $9.6 million that would have been recognized had the loans
and leases remained current in accordance with their original terms.
Nonaccrual loans increased $40.4 million during 2000. The increase was
composed of $121.4 million of additions to nonaccrual loans, $13.2
million of payments on nonaccrual loans, $61.5 million of nonaccrual
loans charged off and $6.3 million transferred to other real estate.
Other real estate increased $4.9 million during 2000. Activity in other
real estate included $12.5 million of additions from foreclosed
properties, $4.7 million of charge-offs on property in other real
estate and $2.9 million of sales and payments on properties.
Nonaccrual loans increased $10.6 million during 1999. The increase was
composed of $60.3 million of additions to nonaccrual loans, $20.8
million of payments on nonaccrual loans, $26.7 million of nonaccrual
loans charged-off and $2.2 million transferred to other real estate.
Management's determination of the adequacy of the reserve is based on
an assessment of the losses given the conditions at the time. This
assessment consists of certain loans and leases being evaluated on an
individual basis, as well as all loans and leases being categorized
based on common credit risk attributes and being evaluated as a group.
Provident's Credit Administration Group is responsible for the
establishment and oversight of Provident's credit risk policies. The
credit risk policies address underwriting standards, internal lending
limits and methodologies for the monitoring of credit risk within the
various loan and lease portfolios. Loans and leases are primarily
monitored by closely following changes and trends in assigned risk
ratings. Credit scoring models are used for consumer and small business
loans and leases, while larger commercial, commercial mortgage and
commercial construction loans are assigned individual risk ratings.
These ratings are assigned based upon individual credit analysis and
are reported to management on a regular basis. Portfolio Audit, part of
Provident's Internal Audit Department, independently reviews risk
ratings to ensure that credit rating assignments are accurate and
substantiated by thorough analysis. Their findings are reported to
senior management.
26
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and leases that have been placed on nonaccrual status are further
evaluated for potential losses based upon review and discussion among
lending officers, credit, loan review, portfolio audit and collection
associates, and senior management. Factors that are considered include
the market value of collateral or real estate associated with a
specific loan or lease, cash flows generated by the borrower,
third-party guarantees, the general economic climate and any specific
industry trends that may affect an individual loan or lease. Total
nonaccrual loans at December 31, 2000 were $96.0 million. In addition,
$99.0 million of performing loans were being closely monitored due to
possible credit problems.
The adequacy of the reserve for loan and lease losses is monitored on a
continual basis and is based upon management's evaluation of numerous
factors. These factors include the quality of the current loan
portfolio, the trend in the loan portfolio's risk ratings, current
economic conditions, loan concentrations, evaluation of specific loss
estimates for all significant problem loans, payment histories,
collateral valuations, historical charge-off and recovery experience,
estimates of charge-offs for the upcoming year and other pertinent
information.
Additional loan loss estimates associated with securitized asset sales
are provided for separately from the reserve for loan and lease losses.
For more information on credit exposures on securitized asset sales,
see Note 15 of the "Notes to Consolidated Financial Statements".
Noninterest Earning Assets
Leased equipment increased $44 million, or 26%, during 2000. The
addition of four operating leases was primarily responsible for the
increase.
Other assets increased $60 million, or 12%, during 2000 as a result of
an increase in mortgage servicing assets. The value of mortgage
servicing rights are capitalized when loans are sold with servicing
retained or when loan servicing is purchased. The value of these
capitalized servicing rights is amortized over the period of estimated
net servicing revenue, with the carrying value of these rights being
periodically reviewed for impairment. As of December 31, 2000, mortgage
servicing assets totaled $76.6 million, consisting of $29.0 million
from securitization and sale activity, $28.2 million from Red Capital
Group operations and $19.4 million from Capstone Realty Advisors
operations.
Deposits
Deposits increased $1.6 billion (22%) and $1.3 billion (21%) during
2000 and 1999, respectively. The increase in deposits in 2000 was
primarily attributable to the growth in certificates of deposit, while
the increase in 1999 was primarily due to the growth in certificates of
deposit and noninterest bearing deposits. Provident has experienced
strong deposit growth as average core deposits have grown by 14% during
2000, with significant contribution from its internet deposit-gathering
27
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
initiatives, a new index checking account product and deposit growth at
the Florida banking centers. For 2000 and 1999, average total interest
bearing deposits represented 68% and 71%, respectively, of average
interest bearing liabilities. Provident does not have a material amount
of foreign deposits. The following table presents a summary of period
end deposit balances:
December 31,
------------------------
(In Millions) 2000 1999 1998
- --------------------------------------------------------------------------------
Noninterest Bearing Deposits of Securitization Trusts $ 496 $ 426 $ 132
Other Noninterest Bearing Deposits 797 759 547
Interest Bearing Demand Deposits 464 397 385
Savings Deposits 1,458 1,351 1,378
Certificates of Deposit Less than $100,000 2,239 1,952 1,673
Certificates of Deposit of $100,000 or More 3,375 2,345 1,841
------ ------ ------
$8,829 $7,230 $5,956
====== ====== ======
At December 31, 2000, maturities on certificates of deposit of $100,000
or more were as follows (in millions):
3 months or less $ 248
Over 3 through 6 months 224
Over 6 through 12 months 430
Over 12 months 2,473
------
Total $3,375
======
Included in certificates of deposit of $100,000 or more at December 31,
2000, 1999 and 1998 were brokered deposits of $2.2 billion, $1.6
billion and $1.1 billion, respectively.
Provident issues brokered certificates of deposit with embedded call
options combined with interest rate swaps with matching call dates as
part of its certificate of deposit program. Provident has the right to
redeem the certificates of deposit on specific dates prior to their
stated maturity while the interest rate swaps are callable at the
option of the swap counterparty. The terms and conditions of the call
options embedded in the interest rate swaps match those of the
certificates of deposit, offsetting any option risk exposure to
Provident. At December 31, 2000, Provident had $1.9 billion of brokered
callable certificates of deposit.
Borrowed Funds
Borrowed funds are an important component of total funds necessary to
support earning assets. In 2000, short-term debt decreased $339 million
(35%) and average long-term debt increased $1.8 billion (192%).
Decreases in federal funds purchased and repurchase agreements were the
primary reasons for the decrease in average short-term debt. In the
third quarter of 2000, the decision was made to change the structure of
securitizations resulting in the elimination of gain-on-sale
accounting. Securitizations consummated since that time have been
structured to account for the transactions as secured financings.
Approximately $1.6 billion of long-term debt has been issued in 2000 as
part of these secured financings. Also during 2000, Federal Home Loan
Bank ("FHLB") advances have increased $455 million. Partially
28
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
offsetting these increases in long-term debt was a $200 million
reduction in medium-term notes.
During the fourth quarter of 2000, Provident established Provident
Capital Trust III. Capital Trust III issued capital securities of
$112.5 million of preferred stock to the public and $3.5 million of
common stock to Provident. Proceeds from the issuance of the capital
securities were invested in Provident's 10.25% junior subordinated
debentures due 2030.
During the second quarter of 1999, Provident established Provident
Capital Trust II. Capital Trust II issued Capital Securities of $125
million of preferred stock to the public and $3.9 million of common
stock to Provident. Proceeds from the issuance of the capital
securities were invested in Provident's 8.75% junior subordinated
debentures, due 2029.
ASSET SECURITIZATION ACTIVITY
From 1996 through the second quarter of 2000, the structure of many of
Provident's securitizations resulted in the transactions being treated
as sales. As such, gains or losses were recognized, loans and leases
were removed from the balance sheet and residual assets, representing
the present value of future cash flows, were recorded. While the
performance of Provident's residual assets have generally been better
than or consistent with their initial estimates, other companies
utilizing securitization structures requiring gain-on-sale accounting
have experienced problems and consequently, the market penalized all
companies using gain-on-sale accounting. Although gain-on-sale
accounting is in compliance with Generally Accepted Accounting
Principles, the investment community clearly signaled its
dissatisfaction with this accounting method and management believed
this sentiment had become a structural impediment to Provident's stock
appreciation. Additionally, newly proposed regulatory guidelines
regarding securitization activity discourage the use of gain-on-sale
accounting by limiting the amount of residual assets that can be
included as part of regulatory capital.
As a result of these factors, Provident announced during the third
quarter of 2000 that it would change the structure of future
securitizations to secured financings thereby eliminating the use of
gain-on-sale accounting. The switch to a secured financing structure
does not affect the total profit Provident will recognize over the life
of the asset, but rather impacts the timing of income recognition.
Secured financing transactions cause reported earnings from securitized
assets to be lower in the initial periods, resulting from the absence
of gains on loan and lease sales, and higher in later periods, as
interest is earned on the assets. As a result, moving away from
transaction structures that use gain-on-sale accounting caused
Provident's earnings to be lower in 2000 and will also lower 2001
earnings.
29
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Securitization activity under the gain-on-sale accounting structure has
had a significant impact on Provident's financial condition and results
of operations. The following discusses this impact on the Consolidated
Statements of Income and Consolidated Balance Sheets.
Impact on Consolidated Statements of Income: Based on the asset type,
terms and structure of the securitization transaction, a gain may be
recognized immediately upon the sale of the assets and/or income is
recognized throughout the life of the securitization. The following
table provides a summary of principal sold and gains recognized for the
various types of securitization structures during the past three years:
2000 1999 1998
--------------------- --------------------- ---------------------
(In Thousands) Principal Gain Principal Gain Principal Gain
- ------------------------------------------------------------------------------------------------------
Structured as Sales:
Non-Cash Gains:
Nonconforming Residential $1,030,000 $30,291 $2,330,047 $73,304 $1,060,000 $36,337
Prime Home Equity 158,598 4,156 169,999 5,758 183,150 4,733
Credit Card - - 230,000 3,993 - -
---------- ------- ---------- ------- ---------- -------
1,188,598 34,447 2,730,046 83,055 1,243,150 41,070
Cash Gains:
Equipment Leases 223,705 9,083 223,764 13,164 211,276 13,429
Non-Recognition of Gains:
Automobile Leases - n/a 858,815 n/a 351,185 n/a
Warehouse Lending - n/a 251,200 n/a 400,000 n/a
---------- ------- ---------- ------- ---------- -------
- n/a 1,110,015 n/a 751,185 n/a
---------- ------- ---------- ------- ---------- -------
Total Sales $1,412,303 $43,530 $4,063,825 $96,219 $2,205,611 $54,499
========== ======= ========== ======= ========== =======
Structured as
Secured Financings:
Nonconforming Residential $532,341 n/a $ - n/a $ - n/a
Prime Home Equity 170,052 n/a - n/a - n/a
Equipment Leases 128,101 n/a - n/a - n/a
Automobile Leases 451,732 n/a - n/a - n/a
---------- ------- ---------- ------- ---------- -------
Total Secured Financings $1,282,226 n/a $ - n/a $ - n/a
========== ======= ========== ======= ========== =======
The securitization and sale of nonconforming residential, prime home
equity and credit card loans have resulted in the recognition of
non-cash gains. Gains recognized under this structure are referred to
as non-cash gains as Provident receives cash equal to the amount of
loans sold. The gains or losses are determined based on a present value
calculation of future cash flows of the underlying loans, net of
interest payments to security holders, loan loss and prepayment
assumptions and normal servicing revenue. These net cash flows, which
are represented by retained interests on securitized assets ("RISAs"),
are included in investment securities.
Cash gains have been recognized from the securitization and sale of
equipment leases. Under the structure of these securitizations,
Provident sells the lease payments under the lease contract but retains
ownership of the underlying equipment. The cash received from these
sales exceeds the present value of the lease payments and generates the
cash gain.
The securitization and sale of automobile leases do not result in the
recognition of gains. Under the structure of the sale of the automobile
leases, Provident sells the ownership of the automobiles and leases the
vehicles back from the investor in a sale-leaseback arrangement. Lease
payments paid by Provident to the investor may be more or less than
that received by Provident from the consumer. The difference in the
30
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
lease payments, net of credit losses and servicing fees, is recognized
as net operating lease income or expense over the life of the
securitization. For the years ended December 31, 2000, 1999 and 1998,
net operating lease income recognized on these automobile lease
securitizations was $3.8 million, $8.4 million and $7.8 million,
respectively. Sales of mortgage warehouse lines do not result in
up-front gains due to the very short-term nature of the underlying
assets sold.
Underlying assumptions used in the initial determination of future cash
flows on the loan and lease portfolios accounted for as sales follow:
Weighted Average of All Securitizations
----------------------------------------------------
Nonconforming Prime Equipment Auto
Residential Home Equity Leasing Leasing
----------------------------------------------------
Assumptions Used:
Prepayment Speed(1):
Initial Rate 12.36% 10.00% n/a n/a
Peak Rate 32.84% 30.00% n/a n/a
Calculated Weighted Average
Life of the Loan Portfolios 2.6 Years 2.1 Years n/a n/a
Estimated Credit Losses(2):
Annual Basis 1.09% 0.20% 1.00% 0.50%
Percentage of Original Balance 2.94% 0.42% 1.97% n/a
Discount Rate 11.88% 10.63% 9.29% n/a
(1)Provident applies an annual prepayment model that adjusts the
monthly speeds to account for declining loan balances. Nonconforming
residential loans typically experience higher prepayment speeds
compared to conforming loans. For nonconforming residential loans,
Provident uses a prepayment curve that applies a 10% prepayment rate
to new loans (higher for seasoned loans) and ramps up to 35% after
12 months. Provident continues to use the 35% prepayment rate for
the remainder of the portfolio life.
(2)Provident applies a cumulative static pool approach to credit
losses. Higher prepayment speeds and shorter average lives do not
alter the cumulative credit loss assumption. As a result, higher
prepayment speeds increase the annualized losses.
Gain-on-sale accounting requires management to make assumptions
regarding prepayment speeds and credit losses for the securitized loan
and lease pools. The performance of the pools are extensively
monitored, and adjustments to these assumptions will be made if
necessary.
Provident retains the servicing of the loans and leases it securitizes
and sells. As a result, a significant level of assets is serviced by
Provident, which do not appear on its balance sheet. These off-balance
sheet assets were primarily responsible for the generation of $51.7
million, $29.4 million and $6.1 million in loan servicing fees during
2000, 1999 and 1998, respectively.
31
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impact on Consolidated Balance Sheets: The impact from the
securitization and sale of various loans and leases can be seen in
several areas of Provident's balance sheet. The most significant area
has been the removal of loans and leases that Provident continues to
service. The following table provides a summary of these off-balance
sheet managed assets:
December 31,
------------------------------------
(In Thousands) 2000 1999 1998
- ----------------------------------------------------------------
Nonconforming Residential $3,625,033 $3,393,179 $1,670,359
Auto Leases 1,134,844 1,366,598 648,928
Prime Home Equity 471,873 398,882 313,445
Equipment Leases 359,457 298,161 187,654
Credit Card 165,000 230,000 -
Warehouse - 251,200 400,000
---------- ---------- ----------
$5,756,207 $5,938,020 $3,220,386
========== ========== ==========
Nonconforming residential loans, originated or acquired by the Mortgage
Banking business line, have been securitized on a regular basis since
1996. Major characteristics of these nonconforming loans include: 54%
with an "A" credit grade and 32% with a "B" credit grade; 69% with full
documentation; 68% have prepayment penalties; 96% are secured by first
mortgages; 92% are owner occupied; and, on average, have a 78%
loan-to-value ratio.
A summary of nonconforming residential loans originated by year and
loans outstanding as of year-end is provided below by loan type for the
past three years:
December 31,
------------------------------------
(In Thousands) 2000 1999 1998
- ----------------------------------------------------------------------------
Loan Originations:
Fixed Rate, Fully Amortizing $ 669,797 $ 876,015 $ 337,846
Fixed Rate, 15-Year Balloon Payments 350,476 546,679 176,838
---------- ---------- ----------
Total Fixed Rate Loans 1,020,273 1,422,694 514,684
Adjustable Rate, 3/27 Loans 436,467 807,388 446,839
Adjustable Rate, 2/28 Loans 38,235 87,602 69,544
Other Adjustable Rate Loans 36,263 12,454 29,189
---------- ---------- ----------
Total Adjustable Rate Loans 510,965 907,444 545,572
---------- ---------- ----------
Total Originations $1,531,238 $2,330,138 $1,060,256
========== ========== ==========
Loans Outstanding:
Fixed Rate, Fully Amortizing $1,626,464 $1,199,040 $ 431,384
Fixed Rate, 15-Year Balloon Payments 910,242 728,926 258,012
---------- ---------- ----------
Total Fixed Rate Loans 2,536,706 1,927,966 689,396
Adjustable Rate, 3/27 Loans 1,619,723 1,304,129 722,258
Adjustable Rate, 2/28 Loans 163,780 183,142 139,245
Other Adjustable Rate Loans 86,685 75,512 119,460
---------- ---------- ----------
Total Adjustable Rate Loans 1,870,188 1,562,783 980,963
---------- ---------- ----------
Total Outstanding $4,406,894 $3,490,749 $1,670,359
========== ========== ==========
Information concerning retained interests in securitized assets, such
as its components, sensitivity to key economic assumptions and its cash
flows, as well as details of the credit quality of the off-balance
sheet loans may be found in Note 15 of the "Notes to Consolidated
Financial Statements".
32
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Total stockholders' equity at December 31, 2000 and 1999 was $991
million and $926 million, respectively. The increase in stockholders'
equity during 2000 was primarily the result of net income exceeding
dividends paid for the year and an increase in the market value of
investment securities classified as available for sale.
During 1998, Provident announced that its Board of Directors had
authorized the purchase of up to one million shares (2.3%) of its
common stock. The purchases were to be made from time to time in open
market or in privately negotiated transactions at the discretion of
management. The buy-back plan was cancelled in August 1999. Total
shares purchased under the buy-back program were 801,800 shares. These
shares, along with newly issued shares, were used in the acquisition of
OHSL Financial Corp. in December 1999.
The dividend payout to net income ratio was 64.85%, 27.14% and 30.93%
for 2000, 1999 and 1998, respectively. Provident announced an increase
in its quarterly common dividend rate from $.22 per share to $.24 per
share beginning with the first quarter in 2000. In the first quarter of
1999, Provident increased its quarterly common dividend rate from $.20
per share to $.22 per share.
Capital adequacy ratios are provided in the Selected Financial Data
Table and the Performance Summary Sections of this report.
Provident's capital expenditure program typically includes the purchase
of computer equipment and software, branch additions and enhancements,
ATM additions and office building renovations. Capital expenditures for
2001 are estimated to be approximately $21 million and include the
purchase of data processing hardware and software, branch additions,
renovations and enhancements, facility renovations, and ATMs.
Management believes that currently available funds and funds provided
by normal operations will be sufficient to meet these capital
expenditure requirements.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities,
fund operations and support asset growth. Provident has a number of
sources to provide for liquidity needs. First, liquidity needs can be
met by the liquid assets on its balance sheet such as cash and deposits
with other banks. Additional sources of liquidity include the sale of
investment securities, the secured financing of commercial and consumer
loans and leases and the generation of new deposits. Provident may also
borrow both short-term and long-term funds. Provident has an additional
$1.4 billion available for borrowing under a bank note program as the
program was increased from $1.0 billion to $1.5 billion in July 1999.
Approximately $142.1 million of long-term debt is due to be repaid
during 2001.
33
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The parent company's primary liquidity needs during 2001 will be the
payment of dividends to its preferred and common shareholders, funds
for activity of the commercial paper operations and interest payments
on long-term debt and junior subordinated debentures. The major source
of liquidity for the parent company is dividends paid to it by its
subsidiaries. Provident received dividends of $37 million, $60 million
and $51 million in 2000, 1999 and 1998, respectively. The maximum
amount available for dividends that may be paid in 2001 to the parent
company by The Provident Bank, Provident's banking subsidiary, without
approval is approximately $128 million, plus 2001 net earnings.
Management believes that dividends available from Provident Bank will
be sufficient to meet the parent company's liquidity requirements in
2001. Under the Federal Deposit Insurance Corp. Improvement Act of
1991, an insured depository institution, such as Provident Bank, would
be prohibited from making capital distributions, including the payment
of dividends, if, after making such distribution, the institution would
become "undercapitalized" (as such term is defined in the statute). A
discussion of restrictions on transfer of funds from subsidiaries to
Provident is presented in Note 21, included in "Notes to Consolidated
Financial Statements".
At December 31, 2000, the parent company had $200 million in general
purpose lines of credit with unaffiliated banks. As of February 28,
2001, these lines had not been used.
34
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The responsibility of monitoring and managing market and liquidity risk
at Provident is assigned to the Asset Liability Committee ("ALCO"). The
Market and Liquidity Risk Unit provides ALCO with the necessary
analyses and reports. The main source of market risk is the risk of
loss in the value of financial instruments that may result from the
changes in interest rates. ALCO is bound to guidelines stated in the
relevant policies approved by the Board of Directors.
In addition, ALCO is responsible for liquidity risk management.
Provident offers a wide variety of retail deposit products to provide a
stable funding source for loan growth. To supplement its retail
deposits, Provident utilizes various sources of wholesale deposits.
Borrowing through the Federal Home Loan Bank and offering short and
medium term deposits to institutional investors are part of this
strategy. Both asset securitizations treated as secured financings and
those treated as sales provide funding for the origination of
additional loans and leases. Through term and commercial paper conduit
markets, Provident has the ability to take advantage of the liquid
asset-backed securities market. In addition, in order to meet any
unexpected changes in asset and liability positions, Provident
maintains a liquid investment portfolio that may be used as a ready
source of funds.
Interest rate risk management guidelines and policies are approved by
the Board of Directors. ALCO is responsible for monitoring and managing
the interest rate risk of both the balance sheet and off-balance sheet
financial instruments. The Market and Liquidity Risk Unit, as an
extension of ALCO, utilizes asset/liability simulation to monitor
interest rate risk. The simulation model measures the impact on net
interest income due to changes in the yield curve, and performs stress
tests on net interest income. The Interest Rate Risk Policy
specifically states the boundaries for the percentage changes in net
interest income. The Board of Directors also approves the limits for
changes in the market value of equity. This is the change in the
difference between the discounted value of assets and the discounted
value of liabilities. The impairment or the improvement is measured as
a percentage of total assets. Again, the Market and Liquidity Risk Unit
monitors this ratio on a monthly basis.
In addition to natural balance sheet hedges, ALCO utilizes off-balance
sheet instruments to manage interest rate risk. Interest rate swaps are
the most widely used tool to manage interest rate risk, but from time
to time, interest rate caps and floors may also be utilized. Provident
has used off-balance sheet tools effectively for a number of years and
has developed the necessary expertise and knowledge to achieve a safe
and sound interest rate risk management process.
35
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
The following table summarizes the change to net interest income, as a
percentage, over the next 12-month period based on an instantaneous and
permanent change in the pricing of all interest rate sensitive assets,
liabilities and off-balance sheet financial instruments. The effects of
these interest rate fluctuations are considered worst case scenarios,
as the analysis does not give consideration to any management of the
new interest rate environment. These tests are performed on a monthly
basis and the results are presented to the Board of Directors.
2000 1999
---------------
100 Basis Points Decrease 1.2% 0.2%
100 Basis Points Increase (1.4) (0.1)
200 Basis Points Decrease 2.5 0.4
200 Basis Points Increase (3.7) (0.5)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors .................. 37
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets .................................... 38
Consolidated Statements of Income .............................. 39
Consolidated Statements of Changes in Shareholders' Equity ..... 40
Consolidated Statements of Cash Flows .......................... 41
Notes to Consolidated Financial Statements ..................... 42
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) ........... 70
36
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Provident Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of
Provident Financial Group, Inc. and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements
are the responsibility of the management of Provident Financial Group,
Inc. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Provident Financial Group, Inc. and subsidiaries at
December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
January 16, 2001
37
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
(Dollars in Thousands) 2000 1999
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 286,051 $ 292,134
Federal Funds Sold and Reverse Repurchase Agreements 82,977 84,009
Trading Account Securities 41,949 -
Loans Held for Sale 206,168 -
Investment Securities Available for Sale
(amortized cost - $3,041,204 and $2,187,778) 3,013,621 2,111,037
Loans and Leases:
Corporate Lending:
Commercial 4,580,215 3,990,923
Mortgage 632,801 576,570
Construction 801,211 559,797
Lease Financing 607,478 391,529
Consumer Lending:
Installment 580,046 476,508
Residential 835,510 653,679
Lease Financing 1,039,645 361,907
------------ ------------
Total Loans and Leases 9,076,906 7,010,913
Reserve for Loan and Lease Losses (154,300) (94,045)
------------ ------------
Net Loans and Leases 8,922,606 6,916,868
Leased Equipment 215,227 171,258
Premises and Equipment 103,919 100,099
Receivables from Securitization Trusts 417,420 355,222
Other Assets 567,447 507,299
------------ ------------
$ 13,857,385 $ 10,537,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,293,396 $ 1,185,245
Interest Bearing 7,535,714 6,044,743
------------ ------------
Total Deposits 8,829,110 7,229,988
Short-Term Debt 639,023 977,835
Long-Term Debt 2,774,493 950,821
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 329,239 220,069
Accrued Interest and Other Liabilities 294,737 232,991
------------ ------------
Total Liabilities 12,866,602 9,611,704
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized:
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 48,814,463 and 48,619,073 Issued 14,469 14,410
Capital Surplus 314,895 308,237
Retained Earnings 672,348 646,472
Accumulated Other Comprehensive Loss (17,929) (49,897)
------------ ------------
Total Shareholders' Equity 990,783 926,222
------------ ------------
$ 13,857,385 $ 10,537,926
============ ============
See notes to consolidated financial statements.
38
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------
(In Thousands, Except Per Share Data) 2000 1999 1998
- -----------------------------------------------------------------------------------
Interest Income:
Interest and Fees On Loans and Leases $ 738,974 $ 616,233 $ 578,867
Interest on Investment Securities 227,701 109,894 105,421
Other Interest Income 4,306 4,588 9,663
--------- --------- ---------
Total Interest Income 970,981 730,715 693,951
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 78,421 59,057 53,917
Time Deposits 301,918 209,743 199,128
--------- --------- ---------
Total Interest on Deposits 380,339 268,800 253,045
Interest on Short-Term Debt 86,797 59,729 70,958
Interest on Long-Term Debt 95,839 52,354 50,237
Interest on Junior Subordinated Debentures 20,033 13,200 8,662
--------- --------- ---------
Total Interest Expense 583,008 394,083 382,902
--------- --------- ---------
Net Interest Income 387,973 336,632 311,049
Provision for Loan and Lease Losses (131,281) (48,417) (31,597)
--------- --------- ---------
Net Interest Income After Provision for
Loan and Lease Losses 256,692 288,215 279,452
Noninterest Income:
Service Charges on Deposit Accounts 35,138 32,724 28,369
Loan Servicing Fees 51,706 29,362 6,064
Other Service Charges and Fees 53,205 41,316 38,108
Operating Lease Income 42,269 40,902 37,481
Gain on Sales of Loans and Leases - Non-Cash 34,447 83,055 41,070
Gain on Sales of Loans and Leases - Cash 10,452 15,814 22,899
Warrant Gains 7,500 9,147 15,354
Security Gains 155 71 13,044
Other 19,290 20,273 23,103
--------- --------- ---------
Total Noninterest Income 254,162 272,664 225,492
Noninterest Expenses:
Salaries, Wages and Benefits 172,903 153,397 131,779
Charges and Fees 23,280 15,679 14,896
Occupancy 20,631 18,951 18,468
Depreciation on Operating Lease Equipment 26,636 23,076 21,662
Equipment Expense 26,045 24,614 21,820
Professional Fees 21,735 20,163 19,737
Merger and Restructuring Charges 39,300 4,200 22,005
Other 62,379 66,910 66,949
--------- --------- ---------
Total Noninterest Expenses 392,909 326,990 317,316
--------- --------- ---------
Income Before Income Taxes 117,945 233,889 187,628
Applicable Income Taxes 44,331 82,940 65,201
--------- --------- ---------
Net Income $ 73,614 $ 150,949 $ 122,427
========= ========= =========
Basic Earnings Per Common Share $ 1.49 $ 3.18 $ 2.57
Diluted Earnings Per Common Share 1.46 3.08 2.48
See notes to consolidated financial statements.
39
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
(In Thousands, Preferred Common Capital Retained Treasury Comprehensive
Except Per Share Data) Stock Stock Surplus Earnings Stock Income/(Loss) Total
-----------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $ 7,000 $13,827 $247,578 $ 450,099 $ - $ 417 $ 718,921
Net Income 122,427 122,427
Change in Unrealized
Gains (Losses) on
Marketable Securities (9,441) (9,441)
---------
Comprehensive Income 112,986
Cash Dividends Declared on:
Common Stock ($.80/share) (37,079) (37,079)
Preferred Stock ($11.25/share) (790) (790)
Principal Payments on Loans/
Amortization of Expense
Related to Employee Stock
Benefit Plans 397 397
Exercise of Stock Options and
Accompanying Tax Benefits 298 25,693 25,991
Purchase of Treasury Stock (21,425) (21,425)
Distribution of Contingent
Shares for Prior Year
Acquisition 25 3,128 3,153
------- ------- -------- --------- ------- -------------- ---------
Balance at December 31, 1998 7,000 14,150 276,796 534,657 (21,425) (9,024) 802,154
Net Income 150,949 150,949
Change in Unrealized
Gains (Losses) on
Marketable Securities (40,873) (40,873)
---------
Comprehensive Income 110,076
Cash Dividends Declared on:
Common Stock ($.88/share) (40,100) (40,100)
Preferred Stock ($12.38/share) (870) (870)
Principal Payments on Loans/
Amortization of Expense
Related to Employee Stock
Benefit Plans 918 57 975
Exercise of Stock Options and
Accompanying Tax Benefits 68 4,619 4,687
Purchase of Treasury Stock (8,645) (8,645)
Acquisition 169 22,191 1,779 30,070 54,209
Distribution of Contingent
Shares for Prior Year
Acquisition 23 3,232 3,255
Deferred Compensation
Tax Adjustment 481 481
------- ------- -------- --------- ------- -------------- ---------
Balance at December 31, 1999 7,000 14,410 308,237 646,472 - (49,897) 926,222
Net Income 73,614 73,614
Change in Unrealized
Gains (Losses) on
Marketable Securities 31,968 31,968
---------
Comprehensive Income 105,582
Cash Dividends Declared on:
Common Stock ($.96/share) (46,789) (46,789)
Preferred Stock ($13.50/share) (949) (949)
Principal Payments on Loans/
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,469 1,469
Exercise of Stock Options and
Accompanying Tax Benefits 59 3,842 3,901
Deferred Compensation
Tax Adjustment 567 567
------- ------- -------- --------- ------- -------------- ---------
Balance at December 31, 2000 $ 7,000 $14,469 $314,895 $ 672,348 $ - $ (17,929) $ 990,783
======= ======= ======== ========= ======= ============== =========
See notes to consolidated financial statements.
40
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
(In Thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 73,614 $ 150,949 $ 122,427
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 131,281 48,417 31,597
Amortization of Goodwill 3,871 2,371 2,489
Other Amortization and Accretion (28,311) (18,925) (10,043)
Depreciation of Leased Equipment
and Premises and Equipment 48,379 44,119 39,678
Tax Benefit Received from Exercise of Stock Options 513 1,613 12,827
Realized Investment Security Gains (155) (71) (13,044)
Proceeds From Sale of Loans Held for Sale 1,049,470 2,483,213 1,384,836
Origination of Loans Held for Sale (1,192,804) (2,460,853) (1,468,591)
Realized Gains on Loans Held for Sale (30,607) (75,389) (41,704)
(Increase) Decrease in Trading Account Securities 32,767 15,737 (15,737)
Increase in Interest Receivable (23,635) (18,460) (10,153)
Increase in Other Assets (2,654) (48,084) (32,465)
Increase (Decrease) in Interest Payable 22,209 (2,640) 3,456
Deferred Income Taxes 24,647 17,935 (825)
Increase (Decrease) in Other Liabilities (25,206) (43,962) 66,534
----------- ----------- -----------
Net Cash Provided by Operating Activities 83,379 95,970 71,282
----------- ----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 2,229,586 427,275 4,101,350
Proceeds from Maturities and Prepayments 485,028 259,415 737,624
Purchases (2,885,170) (814,706) (4,846,791)
Increase in Receivables Due From Securitization Trusts (91,134) (250,326) (104,896)
Net Increase in Loans and Leases (2,580,382) (876,813) (572,237)
Net Increase in Operating Lease Equipment (70,605) (27,327) (76,273)
Net Increase in Premises and Equipment (23,863) (27,140) (23,402)
Acquisitions (129,190) 791 -
----------- ----------- -----------
Net Cash Used in Investing Activities (3,065,730) (1,308,831) (784,625)
----------- ----------- -----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 69,470 294,843 131,623
Net Increase in Deposits 1,459,652 787,862 467,784
Net Increase (Decrease) in Short-Term Debt (436,107) 204,928 (34,718)
Principal Payments on Long-Term Debt (492,459) (232,974) (101,508)
Proceeds from Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 2,416,214 225,435 344,973
Cash Dividends Paid (47,738) (40,970) (37,869)
Purchase of Treasury Stock - (8,645) (21,425)
Proceeds from Exercise of Stock Options 3,388 3,074 13,164
Net Increase in Other Equity Items 2,816 481 -
----------- ----------- -----------
Net Cash Provided by Financing Activities 2,975,236 1,234,034 762,024
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (7,115) 21,173 48,681
Cash and Cash Equivalents at Beginning of Period 376,143 354,970 306,289
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 369,028 $ 376,143 $ 354,970
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 560,801 $ 396,093 $ 379,536
Income Taxes 58,883 47,120 39,901
Non-Cash Activity:
Transfer of Loans and Premises and Equipment
to Other Real Estate 14,365 5,470 3,474
Stock Issued in Purchase-Accounting Acquisitions - 54,209 -
Residual Interest in Securitized Assets
Created from the Sale of Loans 106,098 220,566 137,319
See notes to consolidated financial statements.
41
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - ACCOUNTING POLICIES: The following is a summary of
significant accounting policies:
NATURE OF OPERATIONS: Provident Financial Group, Inc. ("Provident") is
a bank holding company headquartered in Cincinnati, Ohio. Provident
operates bank and other financial service subsidiaries principally in
Ohio, northern Kentucky and southwest Florida. Principal products and
services provided by Provident include commercial lending, lease
financing, cash management, retail lending, deposit accounts, mortgage
banking, brokerage services, investment products and trust services.
BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of Provident and its subsidiaries, all of which are wholly
owned. Certain estimates are required to be made by management in the
preparation of the consolidated financial statements. Actual results
may differ from those estimates. All significant intercompany balances
and transactions have been eliminated. Certain reclassifications have
been made to conform to the current year presentation.
STATEMENTS OF CASH FLOWS: For cash flow purposes, cash equivalents
include amounts due from banks and federal funds sold and reverse
repurchase agreements. Generally, federal funds sold and reverse
repurchase agreements are purchased and sold for one-day periods.
SECURITIES: Securities are classified as available for sale or trading.
Securities classified as available for sale are intended to be held for
indefinite periods of time. These securities are stated at fair value
with unrealized gains and losses (net of taxes) reported as a separate
component of shareholders' equity.
Securities purchased with the intention of selling them in the near
term are classified as trading. These securities are carried at fair
value with unrealized gains and losses included in noninterest income.
The specific identification method is used for determining gains and
losses from securities transactions.
LOANS AND LEASES: Loans are generally stated at the principal amount
outstanding, net of unearned income. Loans that are intended to be sold
within a short period of time are classified as held for sale. Loans
held for sale are reported at the lower of aggregate cost or market
value. Interest on loans is computed on the outstanding principal
balance. The portion of loan fees which exceeds the direct costs to
originate the loan is deferred and recognized as interest income over
the actual lives of the related loans using the interest method. Any
premium or discount applicable to specific loans purchased is amortized
over the remaining lives of such loans using the interest method. Loans
are generally placed on nonaccrual status when the payment of principal
and/or interest is past due 90 days or more. However, installment loans
are not placed on nonaccrual status because they are charged off in the
month the loans reach 120 days past due. In addition, loans that are
well secured and in the process of collection are not placed on
nonaccrual status. When a loan is placed on nonaccrual status, any
interest income previously recognized that has not been received is
reversed. Future interest income is recorded only when a payment is
received and collection of principal is considered reasonably assured.
42
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident generally recognizes income on impaired loans on a cash
basis.
Unearned income on direct financing leases is amortized over the terms
of the leases resulting in an approximate level rate of return on the
net investment in the leases. Income from leveraged lease transactions
is recognized using a method that yields a level rate of return in
relation to Provident's net investment in the lease. The investment
includes the sum of the aggregate rentals receivable and the estimated
residual value of leased equipment less unearned income and third party
debt on leveraged leases. Commercial leases are generally placed on
nonaccrual status when payments are past due 90 days or more while
consumer leases are generally charged off in the month the leases reach
120 days past due.
LOAN AND LEASE LOSS RESERVE: The reserve for loan and lease losses is
maintained to absorb losses in the lending portfolio. Management's
determination of the adequacy of the reserve is based on reviews of
specific loans and leases, credit loss experience, general economic
conditions and other pertinent factors. The reserve is increased by
charges to earnings, as provisions for loan and lease losses. Loans and
leases deemed uncollectible are charged off and deducted from the
reserve and recoveries on loans and leases previously charged off are
added back to the reserve.
Provident considers a commercial nonperforming loan to be an impaired
loan when it is probable that all amounts due will not be collected
according to the contractual terms of the loan agreement. Provident
measures the value of an impaired loan based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, if more practical, at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent.
LOAN AND LEASE SECURITIZATIONS: Provident securitizes many of the loans
and leases it originates and purchases. Securitizations provide
Provident with immediate cash flows to fund additional loan and lease
originations and purchases. Prior to June 30, 2000, Provident's
securitizations were generally structured as sales, resulting in the
removal of the loans and leases from the balance sheet and the
recognition of gains or losses on the income statement. Since June 30,
2000, Provident's securitizations have been structured as secured
financings, resulting in additional debt on the balance sheet and no
recognition of gains or losses on the income statement. The switch to a
secured financing structure does not affect the total profit Provident
will recognize over the life of a loan, but rather impacts the timing
of income recognition. Secured financing transactions cause reported
earnings from securitized loans to be lower in the initial periods,
resulting from the absence of gains on loan and lease sales, and higher
in later periods, as interest is earned on the loans. As a result,
moving away from transaction structures that use gain-on-sale
accounting will temporarily cause Provident's earnings to be lower over
the near term.
43
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, when Provident structured its securitization transactions as
sales, it retained (a) future cash flows of the underlying loans, net
of payments due to investors of the securitization trust, servicing
fees and other fees (referred to as Retained Interests in Securitized
Assets or "RISAs"), (b) servicing rights on the loans and leases, and
(c) cash reserve accounts used to absorb credit losses on the loans
securitized. Gain or loss on the sale of the loans depends in portion
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the assets retained
based on their relative fair value at the date of transfer. To obtain
fair values, quoted market prices are used if available. However,
quotes are generally not available for assets retained, so Provident
generally estimates fair value based on the present value of future
expected cash flows estimated using management's best estimates of the
key assumptions, including credit losses, prepayment speeds, forward
yield curves, and discount rates commensurate with the risks involved.
LEASED EQUIPMENT AND PREMISES AND EQUIPMENT: Leased equipment and
premises and equipment are stated at cost less depreciation and
amortization that are computed principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE: Other real estate acquired through partial or total
satisfaction of loans is recorded at the lower of cost or fair value
and is included in other assets of the consolidated balance sheets.
Provident's policy is to include the unpaid balance of applicable loans
in the cost of other real estate. However, in no case is the carrying
value of real estate owned greater than fair value.
MORTGAGE SERVICING RIGHTS: Mortgage servicing rights associated with
loans sold with servicing retained or the purchase of loan servicing,
are capitalized and included in other assets. The value of these
capitalized servicing rights is amortized over the period of estimated
net servicing revenue and recorded as a reduction of servicing income.
The carrying value of these rights is periodically reviewed for
impairment.
GOODWILL: The excess of the purchase price over net identifiable
tangible and intangible assets acquired in a purchase business
combination (goodwill) is included in other assets. Goodwill related to
acquisitions is amortized over varying periods not exceeding 25 years.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based
Compensation" encourages, but does not require, adoption of a fair
value-based accounting method for stock-based employee compensation
plans. Provident elected to continue its accounting in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees", whereby
no compensation expense is recognized for the granting of stock options
when the exercise price of the option equals the market price of the
underlying stock at date of grant.
INCOME TAXES: Provident files a consolidated federal income tax return
that includes all of its subsidiaries. Subsidiaries provide for income
taxes on a separate-return basis and remit to Provident amounts
determined to be currently payable.
44
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS: Provident employs derivatives such as
interest rate swaps, caps and floors, financial futures and forward
contracts to manage the interest sensitivity of certain on and
off-balance sheet assets and liabilities. The net interest income or
expense on interest rate swaps, caps and floors is accrued and
recognized as an adjustment to the interest income or expense of the
associated on and off-balance sheet asset or liability. Realized gains
and losses on interest rate swap, cap and floor transactions used to
manage interest rate risk that are terminated prior to maturity are
deferred and amortized as a yield adjustment over the remaining
original life of the agreement. Deferred gains and losses are recorded
in other assets and accrued interest and other liabilities, as
applicable. Futures and forward contracts are also used to manage
exposure to changes in interest rates. Realized gains and losses on
futures and forward contracts used for risk management are deferred.
These deferred items are either amortized to interest income or expense
over the life of the assets and liabilities they are associated with,
or are recognized as a component of income in the period of disposition
of the assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS: SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No.
137 and SFAS No. 138, becomes effective for fiscal years beginning
after June 15, 2000. This SFAS establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that derivatives be recognized as either assets or liabilities
in the balance sheet and that those instruments be measured at fair
value. The accounting for the gain or loss resulting from the change in
fair value depends on the intended use of the derivative. For a
derivative used to hedge changes in fair value of a recognized asset or
liability, or an unrecognized firm commitment, the gain or loss on the
derivative will be recognized in earnings together with the offsetting
loss or gain on the hedged item. This results in earnings recognition
only to the extent that the hedge is ineffective in achieving
offsetting changes in fair value. For a derivative used to hedge
changes in cash flows associated with forecasted transactions, the gain
or loss on the effective portion of the derivative will be deferred and
reported as accumulated other comprehensive income, a component of
shareholders' equity, until such time the hedged transaction affects
earnings. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
On January 1, 2001, Provident will adopt the provisions of SFAS No. 133
as amended. Generally, Provident uses its derivatives as hedging
instruments. After-tax transition amounts, associated with establishing
the fair values of the derivative instruments and hedged items on the
balance sheet, of $0 and $28.4 million will be recorded as reductions
of net income and accumulated other comprehensive income, respectively.
The transition adjustments will be presented as cumulative effect
adjustments in the 2001 consolidated financial statements.
45
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", was issued in September
2000 and replaces SFAS No. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over
most of SFAS No. 125's provisions without reconsideration. In general,
SFAS No. 140 is effective for transfers of financial assets occurring
after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15,
2000. Management believes that the adoption of this SFAS will not have
a material impact on Provident's financial position or the results of
its operations.
NOTE 2 - INVESTMENT SECURITIES: The amortized cost and estimated market
values of securities available for sale at December 31 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
2000:
U.S. Treasury and Federal Agency
Debentures $ 326,721 $ 350 $ (1,614) $ 325,457
State and Political Subdivisions 3,317 - (16) 3,301
Mortgage-Backed Securities 1,938,546 7,615 (30,559) 1,915,602
Asset-Backed Securities 44,257 - (2,196) 42,061
Other Securities 728,363 10 (1,173) 727,200
----------- ----------- ----------- -----------
$ 3,041,204 $ 7,975 $ (35,558) $ 3,013,621
=========== =========== =========== ===========
1999:
U.S. Treasury and Federal Agency
Debentures $ 240,991 $ - $ (7,843) $ 233,148
State and Political Subdivisions 1,897 - (17) 1,880
Mortgage-Backed Securities 1,470,270 17 (61,720) 1,408,567
Asset-Backed Securities 104,700 1 (4,948) 99,753
Other Securities 369,920 10 (2,241) 367,689
----------- ----------- ----------- -----------
$ 2,187,778 $ 28 $ (76,769) $ 2,111,037
=========== =========== =========== ===========
Investment securities with a carrying value of approximately $1.3
billion and $.8 billion at December 31, 2000 and 1999, respectively,
were pledged as collateral to secure public and trust deposits,
repurchase agreements, Federal Home Loan Bank advances, interest rate
derivatives and for other purposes.
In 2000, 1999 and 1998 gross gains of $4.2 million, $.5 million and
$14.5 million and gross losses of $4.0 million, $.4 million and $1.5,
respectively, were realized on the sale of securities available for
sale.
46
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage-backed and asset-backed securities are shown below based on
their estimated average lives at December 31, 2000. All other
securities are shown by contractual maturity. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
(In Thousands) Cost Market Value
- --------------------------------------------------------
Due in one year or less $ 547,194 $ 547,104
Due after 1 through 5 years 1,571,586 1,572,468
Due after 5 through 10 years 728,027 709,533
Due after 10 years 194,397 184,516
---------- ----------
Total $3,041,204 $3,013,621
========== ==========
NOTE 3 - LEASING: Provident originates leases which are classified as
either finance leases or operating leases, based on the terms of the
lease arrangement. When a lease is classified as a finance lease, the
future lease payments, net of unearned income, and the estimated
residual value of the leased property at the end of the lease term are
recorded as an asset under "Loans and Leases". The amortization of the
unearned income is recorded as interest income. When a lease is
classified as an operating lease, the costs of the leased property, net
of depreciation, is recorded as "Leased Equipment". Rental income is
recorded as noninterest income while the depreciation on the leased
property is recorded as noninterest expense.
Commercial lease financing includes the leasing of transportation,
manufacturing, construction, communication, data processing and office
equipment. The majority of the leases are classified as direct
financing leases, with expiration dates over the next 1 to 10 years.
Rentals receivable at December 31, 2000 and 1999 include $109 million
and $41 million, respectively, for leveraged leases, which is net of
principal and interest on the nonrecourse debt. The residual values on
the leveraged leases that were entered into are estimated to be
approximately $127 million and $82 million in total at December 31,
2000 and 1999, respectively.
Consumer lease financing is the leasing of automobiles. The leases are
classified as direct financing leases, with expiration dates over the
next 1 to 7 years.
The components of the net investment in lease financing at December 31
were as follows:
2000 1999
-------------------------- ----------------------------
(In Thousands) Commercial Consumer Commercial Consumer
- ---------------------------------------------------------------------------------------------
Rentals Receivable $ 581,166 $ 725,038 $ 318,054 $ 183,718
Leases in Process 15,003 3,717 48,798 12,947
Estimated Residual Value of
Leased Assets 180,153 524,635 115,295 234,741
776,322 1,253,390 482,147 431,406
Less: Unearned Income (168,844) (213,745) (90,618) (69,499)
----------- ----------- ----------- -----------
Net Investment in Lease Financing $ 607,478 $ 1,039,645 $ 391,529 $ 361,907
=========== =========== =========== ===========
47
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule by year of future minimum lease payments to
be received for the next five years as of December 31, 2000:
(In Thousands) Commercial Consumer
- -------------------------------------
2001 $150,949 $195,578
2002 137,699 177,375
2003 94,956 158,182
2004 60,394 117,868
2005 38,176 62,026
Thereafter 98,992 14,009
-------- --------
Total $581,166 $725,038
======== ========
Operating leases consist of the leasing of transportation equipment,
manufacturing equipment, data processing and office equipment to
commercial clients. Terms of the leases range from 1 to 10 years. At
the expiration of an operating lease, the leased property is generally
sold or another lease agreement is initiated. Accumulated depreciation
of the operating lease equipment was $67.4 million and $53.2 million as
of December 31, 2000 and 1999, respectively. The future gross minimum
rentals, by year, under noncancelable leases for the rental of leased
equipment are $34.0 million for 2001; $28.0 million for 2002; $22.3
million for 2003; $14.3 million for 2004; $6.6 million for 2005 and
$8.0 million thereafter.
In addition to the leases discussed above, Provident sold vehicles,
which had been classified as finance leases, to institutional investors
under sale-leaseback transactions. Under terms of these transactions,
Provident continues to collect rental payments from its original
lessees. Provident, as lessee in the sale-leaseback transactions, is
accounting for the leaseback of these vehicles as operating leases.
Differences between the rentals received from the original lessees and
the rentals paid to the investors are recorded as noninterest income.
Outstanding leases under these sale-leaseback transactions totaled
$1,135 million and $1,367 million as of December 31, 2000 and 1999,
respectively.
NOTE 4 - RESERVE FOR LOAN AND LEASE LOSSES: The changes in the loan and
lease loss reserve for the years ended December 31 were as follows:
(In Thousands) 2000 1999 1998
- -------------------------------------------------------------------------
Balance at Beginning of Period $ 94,045 $ 78,867 $ 74,615
Provision for Loan and Lease Losses
Charged to Earnings 131,281 48,417 31,597
Acquired Reserves 2,377 1,263 -
Recoveries Credited to the Reserve 13,775 12,788 9,845
--------- --------- ---------
241,478 141,335 116,057
Losses Charged to the Reserve (87,178) (47,290) (37,190)
--------- --------- ---------
Balance at End of Period $ 154,300 $ 94,045 $ 78,867
========= ========= =========
48
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows Provident's investment in impaired loans as
defined under SFAS No. 114 as amended by SFAS No. 118:
(In Thousands) 2000 1999
- -----------------------------------------------------------------------
Impaired Loans Requiring a Valuation Allowance of
$8.1 Million in 2000 and $13.3 Million in 1999 $29,161 $30,469
Impaired Loans Not Requiring a Valuation Allowance - 2,000
------- -------
Total Impaired Loans $29,161 $32,469
======= =======
Average Balance of Impaired Loans for the Year $38,000 $30,990
The valuation allowance recorded on impaired loans is included in the
reserve for loan losses.
Loans and leases on nonaccrual status at December 31, 2000, 1999 and
1998 were $96.0 million, $55.7 million and $45.0 million, respectively.
Loans renegotiated to provide a reduction or deferral of interest or
principal were $0, $1,541,000 and $371,000 at December 31, 2000, 1999
and 1998, respectively.
NOTE 5 - PREMISES AND EQUIPMENT: The following is a summary of premises
and equipment at December 31:
(In Thousands) 2000 1999
- -----------------------------------------------------------
Land $ 11,779 $ 12,290
Buildings 38,772 38,537
Leasehold Improvements 16,827 14,061
Furniture and Fixtures 148,196 137,306
--------- ---------
215,574 202,194
Less Depreciation and Amortization (111,655) (102,095)
--------- ---------
Total $ 103,919 $ 100,099
========= =========
Rent expense for all bank premises and equipment leases was $14.1
million, $12.9 million and $11.6 million in 2000, 1999 and 1998,
respectively. The future gross minimum rentals, by year, under
noncancelable leases for the rental of premises and equipment are $13.2
million in 2001, $11.7 million in 2002, $11.3 million in 2003, $10.0
million in 2004, $8.5 million in 2005 and $30.1 million thereafter.
NOTE 6 - SHORT-TERM DEBT: Short-term debt was as follows:
(Dollars in Thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $ 443,073 $ 774,551 $ 560,712
Commercial Paper 187,090 201,784 245,291
Short Term Notes 8,860 1,500 1,500
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 5.97% 4.35% 4.44%
Commercial Paper 6.02 5.09 4.50
Short Term Notes 6.90 4.52 4.18
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $1,819,778 $1,261,003 $1,627,934
Commercial Paper 209,393 229,058 259,925
Short Term Notes 177,560 1,500 1,500
At December 31, 2000, Provident had $200 million in general purpose
lines of credit with unaffiliated banks. As of January 16, 2001, these
lines had not been used.
49
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT: Long-term debt consisted of the following:
December 31,
Stated Effective Maturity ------------------------
(Dollars in Thousands) Rate(1) Rate(2) Date 2000 1999
- -------------------------------------------------------------------------------------------------
Provident (Parent Company):
Miscellaneous Notes Various Various Various $ 1,245 $ 1,759
Subsidiaries:
$1.5 Billion Bank Notes Program:
Fixed Rate Senior 8.50% 8.53% 2002 99,789 299,861
Fixed Rate Senior 7.17 6.80 2005 12,500 12,500
Notes Payable to
Federal Home Loan Bank:
Fixed Rate 5.57 5.57 2008 9,000 134,000
Fixed/Floating Rate 5.85 5.85 2009 246,336 -
Fixed/Floating Rate 5.98 5.98 2010 420,000 -
Fixed/Floating Rate Various Various Various 62,681 149,415
Subordinated Notes:
Floating Rate Notes 9.67 9.67 2001 24,750 -
Fixed Rate 7.13 7.54 2003 74,975 74,964
Fixed Rate 6.38 7.14 2004 99,802 99,737
Secured Debt Financings:
Fixed Rate (Auto Sale-Leaseback) 5.76 5.76 2004 83,777 96,561
Fixed Rate (Auto Sale-Leaseback) 6.05 6.05 2005 33,328 36,936
Fixed Rate (Auto Sale-Leaseback) 5.35 5.35 2007 32,511 35,109
Floating Rate (Residential/HELOC) 6.98 7.60 2005 981,840 -
Floating Rate (Equipment Leasing) 7.27 7.29 2005 126,915 -
Fixed Rate (Auto Leasing) 5.89 6.13 2007 458,360 -
Miscellaneous Notes Various Various Various 6,684 9,979
----------- ---------
2,773,248 949,062
----------- ---------
Total $ 2,774,493 $ 950,821
=========== =========
(1) Stated rate reflects interest rate on notes as of December 31, 2000.
(2) Effective rate reflects interest rate paid as of December 31, 2000 after adjustments for
notes issued at discount or premium, capitalized fees associated with the issuance of the
debt and interest rate swap agreements entered to alter the payment characteristics.
Under Provident Bank's amended $1.5 Billion Bank Notes program, notes
can be issued with either fixed or floating rates. The Bank Notes
program was increased from $1.0 billion to $1.5 billion in July 1999.
The notes are not secured nor does the FDIC insure them. At December
31, 2000, $1.4 billion was available under this program.
The notes payable to the Federal Home Loan Bank are collateralized by
investment securities and residential loans with a book value of $1.1
billion. They are subordinated to the claims of depositors and other
creditors of Provident and are not insured by the FDIC.
At December 31, 2000, $200 million of subordinated notes were
outstanding. Subordinated notes qualify as Tier 2 capital for
regulatory capital calculations. These notes are subordinated to the
claims of depositors and other creditors of Provident and are not
insured by the FDIC.
Provident borrowed $223 million through on-balance sheet sale-leaseback
transactions with various investors. Auto leases within the consumer
lease financing portfolio secure the borrowings. The debt calls for
principal payments throughout the life of the borrowings. As of
December 31, 2000, $150 million remains outstanding.
50
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the third quarter of 2000, Provident decided to change the structure
of its securitizations resulting in the elimination of gain-on-sale
accounting. Future securitizations of loans and leases will be
structured to account for the transactions as secured financings.
Approximately $1.6 billion of long-term debt has been issued in 2000 as
part of these secured financings. Included in the secured debt
financings are $982 million collateralized by residential and home
equity loans, $127 million collateralized by small to mid-ticket
equipment leases and $458 million collateralized by auto leases.
As of December 31, 2000, scheduled principal payments on long-term debt
for the following five years were as follows:
(In Thousands) 2001 2002 2003 2004 2005
- -----------------------------------------------------------------------------------
Provident (Parent Company) $ 443 $ 309 $ 322 $ 172 $ -
Subsidiaries 141,702 194,856 160,417 205,400 1,064,990
NOTE 8 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES: Wholly-owned subsidiary trusts of Provident
have issued $337.5 million of preferred securities and, in turn,
purchased $337.5 million of newly-authorized Provident junior
subordinated debentures. The debentures provide interest and principal
payments to fund the trusts' obligations. Provident fully and
unconditionally guarantees the preferred securities. The preferred
securities qualify as Tier 1 capital for bank regulatory purposes. The
sole assets of the trusts are the debentures. The junior subordinated
debentures consisted of the following at December 31:
December 31,
Stated Effective Maturity -------------------
(Dollars in Thousands) Rate Rate(1) Date 2000 1999
- -------------------------------------------------------------------------------
November 1996 Issuance 8.60% 8.67% 12/01/26 $ 99,004 $ 98,941
June 1999 Issuance 8.75% 8.14% 06/30/29 121,259 121,128
November 2000 Issuance 10.25% 9.03% 12/31/30 108,976 -
-------- --------
Total $329,239 $220,069
======== ========
(1) Effective rate reflects interest rate paid as of December 31, 2000 after
adjustments for notes issued at discount or premium, capitalized fees
associated with the issuance of the debt and interest rate swap agreements
entered to alter the payment characteristics.
NOTE 9 - INCOME TAXES: The composition of income tax expense follows:
(In Thousands) 2000 1999 1998
- -----------------------------------------------
Current:
Federal $ 18,035 $ 63,034 $ 65,274
State 1,649 1,971 752
-------- -------- --------
19,684 65,005 66,026
Deferred 24,647 17,935 (825)
-------- -------- --------
Total $ 44,331 $ 82,940 $ 65,201
======== ======== ========
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting
and taxable income. None of these differences were material.
51
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of Provident's deferred tax
liabilities and assets as of December 31 are as follows:
(In Thousands) 2000 1999 1998
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Excess Lease and Partnership Income $154,426 $137,916 $119,315
Securitizations 38,515 15,410 -
Deferred Loan Costs 19,085 11,094 6,462
Other - Net 14,348 14,071 10,381
-------- -------- --------
Total Deferred Tax Liabilities 226,374 178,491 136,158
-------- -------- --------
Deferred Tax Assets:
Provision for Loan and Lease Losses 60,754 39,989 32,766
Unrealized Loss on Investment Securities 9,654 26,843 4,850
Deferred Compensation 7,803 6,596 5,141
Securitizations - - 5,988
Other - Net 12,027 10,763 9,755
-------- -------- --------
Total Deferred Tax Assets 90,238 84,191 58,500
-------- -------- --------
Net Deferred Tax Liabilities $136,136 $ 94,300 $ 77,658
======== ======== ========
NOTE 10 - MERGERS AND ACQUISITIONS: In September 2000, Provident
purchased Bank One Corporation's Housing and Health Care Capital
business, including the operations and substantially all of the assets
of Banc One Capital Funding Corporation, a wholly-owned subsidiary of
Bank One. The business, which was renamed Red Capital Group, engages in
the financing and loan servicing of multi-family and health-care
facilities. Provident paid $129 million for the net assets with $11
million of goodwill being recorded which is being amortized over a 15
year period. As the acquisition was recorded under the purchase
accounting method, the assets acquired and liabilities assumed were
recorded at estimated fair value and the accounts and operations of Red
Capital Group have been included in the consolidated financial
statements from the date of acquisition only.
In February 2000, Provident acquired Fidelity Financial of Ohio, Inc.,
a holding company for Centennial Bank. Centennial operated fifteen
banking centers in the greater Cincinnati metropolitan area and held
deposits of $588 million. Provident issued 4.6 million shares of its
common stock for the acquisition. The merger was accounted for as a
pooling-of-interests. Accordingly, the assets acquired and liabilities
assumed were recorded at historical value. The consolidated financial
statements and other financial information for periods prior to the
merger date include the accounts and operations of Fidelity Financial.
In December 1999, Provident purchased OHSL Financial Corp., the parent
of Oak Hills Savings and Loan Company, F.A., for approximately 1.4
million shares of Provident Common Stock having an aggregate value of
$54 million. Oak Hills, which had six branches located in Cincinnati,
was merged with The Provident Bank. The acquisition was accounted for
as a purchase transaction with $30 million of goodwill being recorded.
The goodwill is being amortized over a 20 year period.
52
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - BENEFIT PLANS: Provident has a Retirement Plan for the
benefit of its employees. Included under this plan is an Employee Stock
Ownership Plan ("ESOP") and a Personal Investment Election Plan ("PIE
Plan"). Provident also maintains a Life and Health Plan for Retired
Employees ("LH Plan"), a Deferred Compensation Plan ("DCP") and stock
option plans.
The ESOP covers all employees who are qualified as to age and length of
service. It is a trusteed plan with the entire cost borne by Provident.
All fund assets are allocated to the participants. Provident's
contributions are discretionary by the directors of Provident.
Provident paid approximately $5.9 million, $8.8 million and $7.3
million for 2000, 1999 and 1998, respectively.
The PIE Plan, a tax deferred retirement plan, covers all employees who
are qualified as to age and length of service. Employees who wish to
participate in the PIE Plan may contribute from 1% to 10% of their
pre-tax salaries (to a maximum prescribed by the Internal Revenue
Service) to the plan as voluntary contributions. Provident will make a
matching contribution equal to 25% of the pre-tax voluntary
contributions made by the employees on the first 8% of their pre-tax
salaries during the plan year. The contribution made by Provident is
charged against earnings as the employees' contributions are made.
Provident incurred expense of $1.4 million, $1.2 million and $1.0
million for this retirement plan for 2000, 1999 and 1998, respectively.
Provident's LH Plan provides medical coverage as well as life insurance
benefits to eligible retirees. Provident pays the entire cost for
retirees retiring prior to 1993, however, Provident's responsibility
for the payment of premiums is limited to a maximum of two times the
monthly premium costs as of the effective date of the LH Plan. Monthly
premiums exceeding the maximum amount payable by Provident shall be the
responsibility of the retiree. Provident may amend or terminate the LH
Plan at any time, without the consent of the retirees. Retirees
retiring after 1992 are responsible for the entire cost of the LH
premiums.
The DCP permits participants, selected by the Compensation Committee of
the Board of Directors, to defer compensation in a manner that aligns
their interests with those of Provident shareholders through the
investment of deferred compensation in Provident Common Stock. The DCP
allows participants to postpone the receipt of 5% to 50% of
compensation until retirement. Amounts deferred are invested in a
Provident Bank Stock Account or a Self-Directed Account. Provident will
credit the Provident Bank Stock Account with an amount dependent upon
Provident's pre-tax earnings per share, for each share of Provident
Common Stock in the account. The calculated credit is charged against
earnings by Provident annually. Under the DCP, Provident paid
approximately $0, $1.7 million and $1.2 million for 2000, 1999 and
1998, respectively.
53
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident has Employee Stock Option Plans, an Advisory Directors' Stock
Option Plan and an Outside Directors' Stock Option Plan. During the
first quarter of 2000, Provident established an Employee Stock Option
Plan for the benefit of all Provident associates not participating in
other stock option plans. The other stock option plans are for the
benefit of its key employees and directors. The Employee Stock Option
Plans made 9.2 million options available for grant. The options are to
be granted, with exercise prices at the approximate market value, as of
the date of grant. Options become exercisable beginning one year from
date of grant generally at the rate of 20% per year. The Advisory
Directors' Stock Option Plan and Outside Directors' Stock Option Plan
authorized the issuance of 427,500 and 168,750 options, respectively.
The terms of these options are comparable to the terms of the Employee
Stock Option Plans.
The following table summarizes option activity for the three years
ended December 31, 2000:
2000 1999 1998
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number of Exercise Number of Exercise Number of
Price Options Price Options Price Options
- ----------------------------------------------------------------------------------------------
Outstanding at
Beginning of Year $30.00 4,205,113 $27.52 3,747,888 $20.38 4,351,399
Acquired - - 9.16 12,616 - -
Granted 27.29 2,079,600 37.78 761,285 46.81 875,509
Exercised 17.27 (196,130) 14.46 (219,682) 13.46 (1,099,689)
Canceled 35.30 (608,218) 27.37 (96,994) 30.97 (379,331)
------ --------- ------ --------- ------ ---------
Outstanding at
End of Year $28.84 5,480,365 $30.00 4,205,113 $27.52 3,747,888
====== ========= ====== ========= ====== =========
At December 31, 2000, 1999 and 1998, there were 2,396,315, 2,159,150
and 1,830,112 options exercisable, respectively, having a weighted
average option price per share of $24.26, $22.04 and $17.94,
respectively. The following table summarizes information about stock
options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- --------------------------------------------------------------------------------------
$ 7.95 - $12.00 568,147 1.6 $ 9.00 568,147 $ 9.00
$12.01 - $18.00 549,672 4.1 14.58 549,672 14.58
$18.01 - $27.00 1,601,104 8.0 25.57 440,361 23.78
$27.01 - $40.00 1,768,577 8.3 32.97 372,021 35.76
$40.01 - $54.47 992,865 7.1 46.01 466,114 45.56
54
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 2000, 1999 and 1998
was estimated at the date of grant using a Black-Scholes option pricing
model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Provident's stock options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, management believes that the
Black-Scholes model may not necessarily provide a reliable single
measure of the fair value of its stock options.
The following weighted-average assumptions were used in the option
pricing model for 2000, 1999 and 1998 respectively: risk-free interest
rates of 6.13%, 5.36% and 5.46%; dividend yields of 3.00%, 3.50% and
3.00%; volatility factors of the expected market price of Provident's
Common Stock of 26.9%, 24.4% and 23.4% and an expected life of the
option of 7 years for each year. Based on these assumptions, the
weighted-average fair value of options granted in 2000, 1999 and 1998
was $8.78, $9.17 and $12.05, respectively.
No compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the
fair values at grant dates as discussed above, Provident's net income
and earnings per share would have been as follows:
Year Ended December 31,
-----------------------------
(In Thousands, Except Per Share Data) 2000 1999 1998
- -----------------------------------------------------------------------
Pro-forma Net Income $67,049 $146,142 $119,350
Pro-forma Earnings Per Share:
Basic 1.36 3.08 2.51
Diluted 1.33 2.98 2.42
NOTE 12 - PREFERRED STOCK: In 1991, Provident issued 371,418 shares of
Non-Voting Convertible Preferred Stock to American Financial Group as
partial consideration for the acquisition of Hunter Savings
Association. During 1995, 301,146 shares of the Preferred Stock were
converted into 4,234,865 shares of Common Stock. As of December 31,
2000 and 1999, 70,272 shares of Preferred Stock remain outstanding.
These shares have a stated value and liquidation value of $100 per
share and a conversion ratio of 14.0625 shares of Provident's Common
Stock for each share of Convertible Preferred Stock.
55
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EARNINGS PER SHARE: The following table sets forth the
computation of basic and diluted earnings per share:
Year Ended December 31,
-----------------------------------
(In Thousands Except Per Share Data) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Basic:
Net Income $ 73,614 $ 150,949 $ 122,427
Less Preferred Stock Dividends (949) (870) (790)
--------- --------- ---------
Income Available to Common Shareholders 72,665 150,079 121,637
Weighted-Average Common Shares Outstanding 48,744 47,187 47,288
--------- --------- ---------
Basic Earnings Per Share $ 1.49 $ 3.18 $ 2.57
========= ========= =========
Diluted:
Net Income $ 73,614 $ 150,949 $ 122,427
Weighted-Average Common Shares Outstanding 48,744 47,187 47,288
Assumed Conversion of:
Convertible Preferred Stock 988 988 988
Dilutive Stock Options (Treasury Stock Method) 608 843 1,090
--------- --------- ---------
Dilutive Potential Common Shares 50,340 49,018 49,366
--------- --------- ---------
Diluted Earnings Per Share $ 1.46 $ 3.08 $ 2.48
========= ========= =========
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS: Provident and its banking
subsidiary, The Provident Bank, are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on Provident's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Provident and
Provident Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Provident and Provident Bank to maintain minimum
ratios of 4.00% for Tier 1 capital to average assets, 4.00% for Tier 1
capital to risk-weighted assets, and 8.00% for total risk-based capital
to risk-weighted assets. As of December 31, 2000, Provident and
Provident Bank meet all capital requirements to which it is subject.
As of December 31, 2000, Provident and Provident Bank's capital ratios
were categorized as well capitalized for regulatory purposes. To be
categorized as well capitalized, Provident and Provident Bank must
maintain minimum ratios of 5.00% for Tier 1 capital to average assets,
6.00% for Tier 1 capital to risk-weighted assets, and 10.00% for total
risk-based capital to risk-weighted assets. There have been no
subsequent conditions or events which management believes have changed
the institutions' status.
56
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents Provident and Provident Bank's regulatory
capital information at December 31:
2000 1999
------------------- -------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------
Tier 1 Capital (to Average Assets):
Provident (Consolidated) $1,242,389 9.56% $1,112,059 10.87%
The Provident Bank 983,031 7.64 901,962 9.40
Tier 1 Capital (to Risk-Weighted Assets):
Provident (Consolidated) 1,242,389 9.18 1,112,059 9.97
The Provident Bank 983,031 7.32 901,962 8.42
Total Risk-Based Capital
(to Risk-Weighted Assets):
Provident (Consolidated) 1,502,512 11.10 1,330,872 11.93
The Provident Bank 1,491,476 11.10 1,219,127 11.38
NOTE 15 - ASSET SECURITIZATION SALES: During 2000, 1999 and 1998,
Provident sold $1.4 billion, $3.0 billion and $1.5 billion,
respectively, of loans and leases in securitization transactions. A
summary of gains recognized on securitizations structured as sales
follows:
(In Thousands) 2000 1999 1998
- ---------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential Loans $30,291 $73,304 $36,337
Prime Home Equity Loans 4,156 5,758 4,733
Credit Card Loans - 3,993 -
------- ------- -------
34,447 83,055 41,070
Cash Gains - Equipment Leases 9,083 13,164 13,429
------- ------- -------
Total Gains $43,530 $96,219 $54,499
======= ======= =======
For securitizations structured as sales, Provident retained servicing
responsibilities and subordinated interests. Provident receives annual
servicing fees approximating 0.50% (for nonconforming residential and
prime home equity loans) and 0.75% (for equipment leases) of the
outstanding balance. Provident also possesses the rights to future cash
flows arising after the investors of the securitization trusts have
received the return for which they contracted, referred to as retained
interests in securitized assets ("RISAs"). RISAs are subordinate to
investors of the securitization trust with its value subject to
prepayment and interest rate risks on the transferred assets.
Components of the RISAs, which are included within investment
securities on the balance sheet, follow:
December 31, 2000 December 31, 1999
--------------------------- ---------------------------
Nonconforming Prime Nonconforming Prime
(In Thousands) Residential Home Equity Residential Home Equity
- -----------------------------------------------------------------------------------------------
Estimated Cash Flows of Underlying
Loans, Net of Payments to
Certificate Holders $ 402,122 $ 29,117 $ 497,560 $ 32,270
Less:
Estimated Credit Loss (1) (6,045) (275) (19,904) (711)
Servicing and Insurance Expense (46,650) (4,026) (54,918) (4,569)
Discount to Present Value (47,324) (1,892) (66,538) (3,235)
--------- --------- --------- ---------
Carrying Value of RISA $ 302,103 $ 22,924 $ 356,200 $ 23,755
========= ========= ========= =========
(1) Only the pre-1998 securitizations provide for estimated credit losses within the cash
flows of the RISAs. Credit losses for securitizations beginning in 1998 have been
provided for in the cash reserve accounts discussed below. The carrying value on
nonconforming residential RISAs, net of all loss estimates, is $201.9 million.
57
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident has provided for credit enhancements to its securitizations
structured as sales in the form of cash reserve accounts that are
funded at closing. The cash reserve accounts are funded at a
significantly higher balance than the level of estimated credit losses
to improve the credit grade of the securitization and thereby reduce
the rate paid to investors of the securitization trust. Credit losses
are absorbed directly into the cash reserve accounts. The remaining
funds not used to cover such losses are returned to Provident over the
term of the securitization. Provident estimates the amount of all
credit losses based upon loan credit grades, collateral, market
conditions and other pertinent factors. Cash reserve accounts that earn
interest are recorded as investment securities and accounts that do not
earn interest are recorded as receivables from securitization trusts.
Detail of the cash reserve accounts, net of loss estimates, at December
31 were as follows:
Cash Loss Net Cash
(In Thousands) Reserves Estimates Reserves
- --------------------------------------------------------------------------
2000:
Nonconforming Residential Loans (1) $ 467,413 $(100,224) $ 367,189
Equipment Leases 61,972 (12,249) 49,723
Prime Home Equity Loans (1) 29,450 (1,171) 28,279
Credit Card 29,700 - 29,700
--------- --------- ---------
$ 588,535 $(113,644) $ 474,891
========= ========= =========
1999:
Nonconforming Residential Loans $ 358,101 $ (79,664) $ 278,437
Equipment Leases 35,583 (8,678) 26,905
Prime Home Equity Loans 21,136 (1,312) 19,824
Credit Card 30,056 - 30,056
--------- --------- ---------
$ 444,876 $ (89,654) $ 355,222
========= ========= =========
(1)Total loss estimates, including those contained within the RISAs,
are $106.3 million for nonconforming residential loans and $1.4
million for prime home equity loans as of December 31, 2000.
Various economic assumptions are used in the measurement of RISAs and
loss estimates of cash reserve accounts. As of the date of
securitization, the key assumptions used for securitizations completed
during the year indicated are as follows:
Nonconforming Prime Equipment
Residential Home Equity Leasing
--------------------------- --------------------------- ---------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Prepayment Speed:
Initial Rate 13.73% 13.41% 12.88% 10.00% 10.00% 10.00% n/a n/a n/a
Peak Rate 35.00% 35.00% 32.95% 30.00% 30.00% 30.00% n/a n/a n/a
Weighted Average
Life (in years) 2.4 2.4 2.7 2.1 2.1 2.0 n/a n/a n/a
Estimated Credit
Losses:
Annual Basis 1.14% 1.10% 0.99% 0.20% 0.20% 0.20% 1.00% 1.00% 1.00%
Percentage of
Original Balance 2.84% 2.70% 2.70% 0.47% 0.40% 0.36% 2.00% 2.00% 1.92%
Discount Rate 12.00% 12.00% 12.04% 12.00% 12.00% 10.00% 8.00% 8.00% 12.00%
58
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sensitivity table provides the effects of an immediate
10% and 20% adverse change to key economic assumptions on RISAs and
cash reserve accounts as of December 31, 2000:
Nonconforming Prime Equipment
(Dollars in Millions) Residential Home Equity Leasing
- ---------------------------------------------------------------------------------------------
Peak Prepayment Speed Assumption (Annual Rate)(1) 26% CPR 36% CPR n/a
Impact on Fair Value of 10% Adverse Change $ (15.3) $ (1.9) n/a
Impact on Fair Value of 20% Adverse Change $ (30.5) $ (3.1) n/a
Estimated Credit Loss Assumption(1)
(Percentage of Original Balance) 3.00% 0.30% 3.08%
Impact on Fair Value of 10% Adverse Change $ (13.5) $ (0.3) $(1.2)
Impact on Fair Value of 20% Adverse Change $ (26.9) $ (0.5) $(2.5)
RISA Discount Rate(1) 12.00% 10.77% n/a
Impact on Fair Value of 10% Adverse Change $ (7.9) $ (0.2) n/a
Impact on Fair Value of 20% Adverse Change $ (15.5) $ (0.5) n/a
(1) The assumptions used at the time of securitization and the assumptions used in
subsequently measuring the carrying amount / fair value of the RISA and cash reserve
accounts, while not the same, are conservative estimates at different points in time.
These sensitivities are hypothetical and should be used with caution.
The effect of a variation in a particular assumption on the fair value
of the RISA and cash reserve accounts is calculated without changing
any other assumption; in reality, changes in one factor may result in
changes in another, which might magnify or counteract the
sensitivities.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Year Ended December 31
-----------------------------------------
(In Thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------
Proceeds From New Securitizations $ 1,412,303 $ 2,723,810 $ 1,454,426
Cash Flows Received from Interests Retained 130,720 88,490 19,094
Servicing Fees Received 10,464 14,815 21,293
Prepayment and Late Fees Received 13,365 8,345 4,793
Net Servicing Advances (44,246) (28,050) (6,161)
59
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents quantitative information about
delinquencies, net credit losses and components of securitized and
portfolio loans and leases:
2000 1999
---------------------------------------- ----------------------------------------
Nonconforming Prime Home Equipment Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases Residential Equity Leases
- --------------------------------------------------------------------------------------------------------------
Average Assets:
Securitized and Sold $3,665,639 $ 452,213 $ 383,804 $2,361,001 $ 309,624 $ 270,384
Portfolio 345,397 160,187 177,728 349,299 113,967 104,048
---------- ---------- ---------- ---------- ---------- ----------
Total Managed Assets $4,011,036 $ 612,400 $ 561,532 $2,710,300 $ 423,591 $ 374,432
========== ========== ========== ========== ========== ==========
Year-End Assets:
Securitized and Sold $3,625,033 $ 471,873 $ 359,457 $3,393,179 $ 398,882 $ 298,161
Portfolio 781,861 238,162 325,281 97,570 90,793 165,265
---------- ---------- ---------- ---------- ---------- ----------
Total Managed Assets $4,406,894 $ 710,035 $ 684,738 $3,490,749 $ 489,675 $ 463,426
========== ========== ========== ========== ========== ==========
Net Charge-Offs:
Total Managed Assets $ 31,582 $ 1,406 $ 9,096 $ 19,493 $ 1,144 $ 10,128
========== ========== ========== ========== ========== ==========
Net Charge-Offs to
Average Assets:
Total Managed Assets 0.79% 0.23% 1.62% 0.72% 0.27% 2.70%
========== ========== ========== ========== ========== ==========
30 Days or More
Delinquencies to
Year-End Assets:
Total Managed Assets 11.05% 0.49% 4.20% 8.28% 1.28% 3.26%
========== ========== ========== ========== ========== ==========
NOTE 16 - MERGER AND RESTRUCTURING CHARGES: In connection with
Provident's acquisition of Fidelity Financial, direct-merger related
and other post-merger business line restructuring charges of $39.3
million were recorded during the first quarter of 2000. These charges
included non-cash write-downs of assets totaling $26.7 million. A
charge of $5.1 million was taken on the write-down of fixed assets,
primarily from the closing and consolidation of banking centers.
Balance sheet restructuring, consisting primarily of the sale and
write-down of acquired residential loans and investment securities,
accounted for the remaining $21.6 million of these non-cash charges.
The merger and restructuring charges also included cash outlays
totaling $12.6 million. The largest of the cash outlays was for
severance costs totaling $8.6 million. Additionally, contract
termination charges, primarily from lease buyout agreements on rented
facilities, of $2.3 million were expensed. Finally, professional fees
in connection with the acquisition of Fidelity Financial of $1.7
million were incurred. As of December 31, 2000, substantially all cash
outlays had been paid.
NOTE 17 - LINE OF BUSINESS REPORTING: Provident's three major business
lines, referred to as Commercial Banking, Retail Banking and Mortgage
Banking, are based on the products and services offered, and its
management structure. Commercial Banking offers a full range of
commercial lending and financial products and services to corporate
businesses. Retail Banking provides consumer lending, deposit accounts,
trust, brokerage and investment products and services to consumers and
small businesses. Mortgage Banking originates and services conforming
and nonconforming residential loans to consumers and provides
short-term financing to mortgage originators and brokers.
60
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial results are determined based on an assignment of balance
sheet and income statement items to each business line. Equity
allocations are made based on various risk measurements of the business
line. A matched funded transfer pricing process is used to allocate
interest income and expense among the business lines. Provision for
loan and lease losses are charged to business lines based on its level
of net charge-offs and the size of its lending portfolio.
Activity-based costing is used to allocate expenses for centrally
provided services.
Selected financial information is included in the following table for
Provident's three major lines of business for the past three years.
Corporate Center represents income and expenses not allocated to the
major business lines, gain/loss on the sale of investment securities,
and any nonrecurring business revenues and expenses. Prior periods have
been restated to conform with the current business line reporting
structure and current methodology of allocating revenue and expense
between business lines.
(In Millions) 2000 1999 1998
- ------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 291.3 $ 251.5 $ 252.4
Retail Banking 254.2 232.3 191.2
Mortgage Banking 96.4 125.4 79.9
Corporate Center .2 .1 13.0
------- -------- -------
$ 642.1 $ 609.3 $ 536.5
======= ======== =======
Net Income:
Commercial Banking $ 60.8 $ 69.8 $ 92.4
Retail Banking 37.0 44.1 17.3
Mortgage Banking 2.7 39.7 18.5
Corporate Center .1 - 8.5
Merger and Restructuring Charges (27.0) (2.7) (14.3)
------- -------- -------
$ 73.6 $ 150.9 $ 122.4
======= ======== =======
Average Assets:
Commercial Banking $ 5,458 $ 4,553 $ 3,961
Retail Banking 2,397 1,746 1,655
Mortgage Banking 1,248 647 540
Corporate Center 3,042 2,924 2,606
------- ------- -------
$12,145 $ 9,870 $ 8,762
======= ======= =======
NOTE 18 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Provident uses
financial instruments with off-balance sheet risk to manage its
interest rate risk. These financial instruments include interest rate
derivatives such as interest rate swaps, interest rate caps and
interest rate floors along with commitments to extend credit and
standby letters of credit. These instruments may involve credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheet.
Interest Rate Swaps, Caps and Floors: Interest rate swaps are
agreements between two parties to exchange periodic interest payments
that are calculated on a notional principal amount. Provident enters
into swaps to synthetically alter the repricing characteristics of
specific assets, liabilities and off-balance sheet loan
securitizations. As only interest payments are exchanged, cash
requirements and credit risk are significantly less than the notional
amounts.
61
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest rate caps protect against the impact of rising interest rates
on interest-bearing financial instruments. When interest rates go above
a cap's strike rate, the cap provides for receipt of payments based on
its notional amount. Interest rate floors work similarly to interest
rate caps, however, floors protect interest earning assets against the
impact of falling interest rates.
Interest rate derivative instruments have a credit risk component based
on the ability of a counterparty to meet the obligations to Provident
under the terms of the instruments. Notional principal amounts express
the volume of the transactions, but Provident's potential exposure to
credit risk is limited only to the market value of the instruments.
Provident manages its credit risk in these instruments through
counterparty credit policies. At December 31, 2000, Provident had
bilateral collateral agreements in place with its counterparties,
against which Provident has pledged investment securities with a
carrying value of $108 million as collateral. There were no past due
amounts on any instruments as of December 31, 2000. Provident has never
experienced a credit loss related to these instruments.
As noted earlier, the interest rate derivatives are hedged against
specific financial instruments. A summary of the notional amount of the
interest rate derivatives, as segregated by its related hedge, at
December 31 follows:
Interest Rate Swaps
------------------- Interest Rate Caps Interest
Receive Pay ------------------- Rate
(In Millions) Fixed Fixed Purchased Sold Floors
- ---------------------------------------------------------------------------------------------
At December 31, 2000:
Off-Balance Sheet Securitizations $338 $1,966 $ 2,167 $2,167 $ -
Certificates of Deposit 2,412 - - - -
Long-Term / Subordinated Debt 748 797 696 696 -
Premium Index Deposits - 195 - - -
Loans / Securities - 47 - - 2,000
For Customers' Purposes - - 48 - -
------ ------ ------- ------ ------
Totals $3,498 $3,005 $ 2,911 $2,863 $2,000
====== ====== ======= ====== ======
At December 31, 1999:
Off-Balance Sheet Securitizations $ - $1,378 $ 1,531 $1,531 $ -
Certificates of Deposit 1,903 - - - -
Long-Term / Subordinated Debt 709 - - - -
Loans / Securities - 482 - - -
For Customers' Purposes - - 30 - -
------ ------ ------- ------ ------
Totals $2,612 $1,860 $ 1,561 $1,531 $ -
====== ====== ======= ====== ======
62
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information with respect to the interest rate derivatives used
to manage Provident's interest rate sensitivity at December 31, 2000
follows:
Interest Rate Swaps
------------------- Interest Rate Caps Interest
Receive Pay ------------------- Rate
(In Millions) Fixed Fixed Purchased Sold Floors
- -----------------------------------------------------------------------------------
Notional Amount $ 3,498 $ 3,005 $ 2,911 $ 2,863 $ 2,000
Unrealized Gross Gains 26 1 29 - 13
Unrealized Gross Losses (45) (46) - (32) -
Weighted Average:
Receive Rate 6.33% 6.63% n/a n/a n/a
Pay Rate 6.23% 6.69% n/a n/a n/a
Strike Rate n/a n/a 8.99% 8.99% 6.00%;5.25%
Life (in years) 12.0 7.2 13.9 14.1 5.0
(1) Provident has purchased and sold an interest rate floor with matching notional
amounts and terms except for the strike prices. In the fourth quarter of 2000,
Provident entered into a series of interest rate floor agreements to manage
the interest rate risk associated with its off-balance sheet mortgage loan
securitization activities. The agreements have a purchase strike rate of
6.00% and a sale strike rate of 5.25%.
The expected notional maturities of Provident's interest rate
derivative portfolio at December 31, 2000 are as follows:
Interest Rate Swaps
------------------- Interest Rate Caps Interest
Receive Pay ------------------- Rate
(In Millions) Fixed Fixed Purchased Sold Floors Total
- -----------------------------------------------------------------------------------------
Less than 1 Year $ 75 $ 637 $ - $ - $ - $ 712
From 1 to 5 Years 736 321 48 - 2,000 3,105
From 5 to 10 Years 398 1,216 - - - 1,614
From 10 to 15 Years 1,337 831 2,515 2,515 - 7,198
More than 15 Years 952 - 348 348 - 1,648
------- ------- ------- ------ ------ -------
Total $ 3,498 $ 3,005 $ 2,911 $2,863 $2,000 $14,277
======= ======= ======= ====== ====== =======
Credit Risk Transfer Transaction: During the fourth quarter of 2000,
Provident entered a Credit Risk Transfer Transaction with a
counterparty. Under this transaction, Provident transferred 98% of the
credit risk on a $1.8 billion auto lease portfolio, while retaining a
2% first-loss position. As a result of this transaction, Provident was
able to lower its credit concentration in auto leasing while reducing
its regulatory capital requirements.
Credit Commitments and Standby Letters of Credit: Since many of the
commitments to extend credit are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. Provident evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by Provident upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties.
63
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby letters of credit are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral is obtained based on
management's credit assessment of the customer.
Provident's commitments to extend credit which are not reflected in the
balance sheet at December 31 are as follows:
(In Millions) 2000 1999
- --------------------------------------------------
Commitments to Extend Credit $2,519 $2,068
Standby Letters of Credit 213 131
NOTE 19 - TRANSACTIONS WITH AFFILIATES: At December 31, 2000, Carl H.
Lindner, members of his immediate family and trusts for their benefit,
owned 45% of American Financial Group's Common Stock. This group, along
with Carl H. Lindner's siblings and their families and entities
controlled by them, or established for their benefit, owned 49% of
Provident's Common Stock. Provident leases its home office space and
other office space from a trust, for the benefit of a subsidiary of
American Financial Group. Rentals charged by American Financial Group
and affiliates for the years ended December 31, 2000, 1999 and 1998
amounted to $3.0 million, $2.5 million and $2.3 million, respectively.
Provident has had certain transactions with various executive officers,
directors and principal holders of equity securities of Provident and
its subsidiaries and entities in which these individuals are principal
owners. Various loans and leases have been made as well as the sale of
commercial paper and repurchase agreements to these persons. Such loans
and leases to these persons aggregated approximately $42.5 million and
$61.0 million at December 31, 2000 and 1999, respectively. During 2000,
new loans and leases aggregating $14.2 million were made to such
parties and loans and leases aggregating $32.7 million were repaid. All
of the loans and leases were made at market interest rates and, in the
opinion of management, all amounts are fully collectible. At December
31, 2000 and 1999, these persons held Provident's commercial paper
amounting to $16.7 million and $20.0 million, respectively.
Additionally, repurchase agreements in the amount of $12.8 million and
$4.8 million had been sold to these persons at December 31, 2000 and
1999, respectively. All of these transactions were at market interest
rates.
64
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS: Carrying values and
estimated fair values for certain financial instruments as of December
31 are shown in the following table. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Because no secondary market
exists for many of Provident's assets and liabilities, the derived fair
values are calculated estimates, and the fair values provided herein do
not necessarily represent the actual values which may be realized in
the disposition of these instruments. The aggregate fair value amounts
presented do not represent the underlying value of Provident. What is
presented below is a point-in-time valuation that is affected, in part,
by unrealized gains and losses resulting from management's
implementation of its program to manage overall interest rate risk. It
is not management's intention to immediately dispose of a significant
portion of its financial instruments. As a result, the following fair
value information should not be interpreted as a forecast of future
earnings and cash flows.
2000 1999
-------------------------- --------------------------
Carrying Fair Carrying Fair
(In Thousands) Value Value Value Value
- ---------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 369,028 $ 369,028 $ 376,143 $ 376,143
Trading Account Securities 41,949 41,949 - -
Loans Held for Sale 206,168 206,168 - -
Investment Securities 3,013,621 3,013,621 2,111,037 2,111,037
Loans and Leases 9,076,906 9,094,744 7,010,913 6,856,898
Less: Reserve for Losses (154,300) - (94,045) -
--------- --------- --------- ---------
Net Loans and Leases 8,922,606 9,094,744 6,916,868 6,856,898
Financial Liabilities:
Deposits 8,829,110 8,772,651 7,229,988 7,052,155
Short-Term Debt 639,023 639,023 977,835 977,835
Long-Term Debt and Junior
Subordinated Debentures 3,103,732 3,132,238 1,170,890 1,131,985
Off-Balance Sheet
Financial Instruments:
Interest Rate Swaps - (63,785) - (136,320)
Interest Rate Caps - (2,523) - 44
Interest Rate Floors - 12,889 - -
The following methods and assumptions were used by Provident in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets'
fair values.
Trading account securities and investment securities: Fair values for
trading account securities and investment securities are based on
quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. Retained interests in securitized assets is
valued using discounted cash flow techniques. Significant
assumptions used in the valuation are presented in Note 15.
65
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and leases: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain residential mortgage
loans and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair values
for other loans and leases are estimated using discounted cash flow
analyses and interest rates currently being offered for loans and
leases with similar terms to borrowers of similar credit quality.
The fair values disclosed for loans held for sale are equal to their
carrying amounts.
Deposits: The fair values disclosed for demand deposits are equal to
their carrying amounts. The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term debt: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term
borrowings approximate their fair values.
Long-term debt and junior subordinated debentures: The fair values of
long-term borrowings that are traded in the markets are equal to
their quoted market prices. The fair values of other long-term
borrowings (other than deposits) are estimated using discounted cash
flow analyses, based on Provident's current incremental borrowing
rates for similar types of borrowing arrangements.
Off-balance sheet financial instruments: Fair value for interest rate
swaps, caps and floors is based upon current market quotes.
NOTE 21 - ADDITIONAL INFORMATION:
LEGAL CONTINGENCIES: Provident is subject to litigation in the ordinary
course of business. Management does not expect such litigation will
have a material adverse effect on Provident's financial position.
RESTRICTIONS ON CASH AND NONINTEREST BEARING DEPOSITS: Federal Reserve
Board regulations require that The Provident Bank maintain certain
minimum reserve balances. The average amount of those reserve balances
for the year ended December 31, 2000, was approximately $63.8 million.
OTHER REAL ESTATE OWNED: At December 31, 2000 and 1999, the carrying
value of other real estate and equipment owned was $8.8 million and
$3.9 million, respectively.
66
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTED ASSETS: Provident formed the subsidiaries listed below to
account for and support the process of transferring, securitizing
and/or selling of vehicle and equipment leases. These subsidiaries are
separate legal entities and each maintains books and records with
respect to its assets and liabilities. The assets of these
subsidiaries, which are included in the consolidated financial
statements, are not available to secure financing or otherwise satisfy
claims of creditors of Provident or any of its other subsidiaries.
The subsidiaries and their total assets as of December 31, 2000 and
1999 follow (in thousands):
December 31,
-------------------
Subsidiary 2000 1999
- -----------------------------------------------------------------------
Provident Auto Rental LLC (2000-1) $381,754 $ -
Provident Auto Leasing Company 376,631 447,388
Provident Lease Receivables Company LLC 233,566 74,768
Provident Auto Rental LLC 1999-1 174,763 180,485
Provident Auto Rental Company LLC 1998-2 34,556 27,745
Provident Auto Rental Company LLC 1998-1 31,291 30,851
Provident Auto Rental LLC (2000-2) 24,236 -
Provident Auto Rental Company, LLC (1999-PRU) - 89,207
The above amounts include items which are eliminated in the
Consolidated Financial Statements.
RESTRICTIONS ON TRANSFER OF FUNDS FROM SUBSIDIARIES TO PARENT: The
transfer of funds by The Provident Bank to the parent as dividends,
loans or advances is subject to various laws and regulations that limit
the amount of such transfers that can be made without regulatory
approval. The maximum amount available for dividend distribution that
may be paid in 2001 by Provident Bank to its parent without approval is
approximately $128.0 million, plus 2001 net income. Pursuant to Federal
Reserve and State regulations, the maximum amount available to be
loaned to affiliates (as defined), including their Parent, by Provident
Bank, was approximately $158.4 million to any single affiliate, and
$316.9 million to all affiliates combined of which $42.7 million was
loaned at December 31, 2000.
67
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL INFORMATION: Parent Company only condensed
financial information for Provident Financial Group, Inc. is as
follows:
BALANCE SHEETS (PARENT ONLY)
December 31,
-----------------------
(In Thousands) 2000 1999
- -------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents $ 94,336 $ 153,530
Investment Securities Available for Sale 299,323 186,147
Investment in Subsidiaries:
Banking 1,062,679 984,690
Non-Banking 11,613 7,755
Premises and Equipment 9 1,437
Accounts Receivable from Banking Subsidiaries - 28,448
Other Assets 103,013 36,694
---------- ----------
$1,570,973 $1,398,701
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable to Banking Subsidiaries $ 28,214 $ -
Other Accounts Payable and Accrued Expenses 23,963 41,908
Commercial Paper 187,090 201,784
Long-Term Debt 1,245 1,759
Junior Subordinated Debentures 339,678 227,028
---------- ----------
Total Liabilities 580,190 472,479
Shareholders' Equity 990,783 926,222
---------- ----------
$1,570,973 $1,398,701
========== ==========
STATEMENTS OF INCOME (PARENT ONLY)
Year Ended December 31,
------------------------------
(In Thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------
Income:
Dividends from Banking Subsidiaries $ 37,000 $ 60,000 $ 51,000
Interest Income from Banking Subsidiaries 13,232 8,869 4,899
Other Interest Income 4,951 5,504 10,097
Noninterest Income 5,712 1,976 1,748
-------- -------- --------
60,895 76,349 67,744
Expenses:
Interest Expense 34,795 24,934 22,088
Noninterest Expense 2,668 3,030 4,684
-------- -------- --------
37,463 27,964 26,772
-------- -------- --------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiaries 23,432 48,385 40,972
Applicable Income Tax Credits 6,624 4,439 4,157
-------- -------- --------
Income Before Equity in Undistributed Net Income
of Subsidiaries 30,056 52,824 45,129
Equity in Undistributed Net Income of Subsidiaries 43,558 98,125 77,298
-------- -------- --------
Net Income $ 73,614 $150,949 $122,427
======== ======== ========
68
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
Year Ended December 31,
-----------------------------------
(In Thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 73,614 $ 150,949 $ 122,427
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Net Income from Subsidiaries (80,558) (158,125) (128,298)
Cash Dividends Received From Subsidiaries 37,000 60,000 51,000
Amortization of Goodwill and Other 805 799 690
Depreciation of Premises and Equipment 7 31 36
Tax Benefit Received from Exercise
of Stock Options 513 1,613 12,827
Realized Investment Security (Gains) Losses 493 (63) 29
(Increase) Decrease in Interest Receivable 39 (1,913) (48)
(Increase) Decrease in Other Assets (41,454) 18,321 (24,472)
Increase (Decrease) in Interest Payable 76 (129) (27)
Increase in Other Liabilities 10,193 4,410 26,823
--------- --------- ---------
Net Cash Provided by Operating Activities 728 75,893 60,987
--------- --------- ---------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 129,648 115,829 10,202
Proceeds from Maturities and Prepayments 87,358 17,996 43,252
Purchases (330,583) (171,683) (34,603)
Net Decrease in Premises and Equipment 1,421 - -
--------- --------- ---------
Net Cash Provided by (Used In) Investing
Activities (112,156) (37,858) 18,851
--------- --------- ---------
Financing Activities:
Net Increase (Decrease) in Short-Term Debt (14,694) (43,507) 43,273
Principal Payments on Long-Term Debt (74,764) (914) (788)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 186,706 124,984 1,492
Cash Dividends Paid (47,738) (40,970) (37,869)
Purchase of Treasury Stock - (8,645) (21,425)
Proceeds from Exercise of Stock Options 3,388 3,074 13,164
Contribution to Subsidiaries (3,480) (112,478) -
Net Increase in Other Equity Items 2,816 481 -
--------- --------- ---------
Net Cash Provided by (Used In) Financing
Activities 52,234 (77,975) (2,153)
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents (59,194) (39,940) 77,685
Cash and Cash Equivalents at Beginning of Year 153,530 193,470 115,785
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 94,336 $ 153,530 $ 193,470
========= ========= =========
69
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTARY DATA
Quarterly Consolidated Results of Operations - (Unaudited)
- ----------------------------------------------------------
The following are quarterly consolidated results of operations for the
two years ended December 31, 2000.
Fourth Third Second First
(In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
2000:
Total Interest Income $ 276,982 $ 238,454 $ 233,616 $ 221,929
Total Interest Expense (171,781) (143,187) (139,313) (128,727)
--------- --------- --------- ---------
Net Interest Income 105,201 95,267 94,303 93,202
Provision for Loan and Lease Losses (69,331) (42,550) (9,700) (9,700)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 35,870 52,717 84,603 83,502
Noninterest Income 62,489 52,452 70,283 68,938
Noninterest Expense (96,831) (88,151) (84,905) (123,022)
--------- --------- --------- ---------
Income Before Income Taxes 1,528 17,018 69,981 29,418
Applicable Income Taxes (528) (6,065) (25,092) (12,646)
--------- --------- --------- ---------
Net Income $ 1,000 $ 10,953 $ 44,889 $ 16,772
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ .02 $ .22 $ .92 $ .34
Diluted .02 .22 .89 .33
Cash Dividends .24 .24 .24 .24
1999:
Total Interest Income $ 196,860 $ 184,887 $ 177,064 $ 171,904
Total Interest Expense (109,163) (100,065) (92,130) (92,725)
--------- --------- --------- ---------
Net Interest Income 87,697 84,822 84,934 79,179
Provision for Loan and Lease Losses (10,807) (16,485) (8,150) (12,975)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 76,890 68,337 76,784 66,204
Noninterest Income 72,047 76,214 59,345 65,058
Noninterest Expense (84,520) (83,978) (78,133) (80,359)
--------- --------- --------- ---------
Income Before Income Taxes 64,417 60,573 57,996 50,903
Applicable Income Taxes (22,803) (21,337) (20,432) (18,368)
--------- --------- --------- ---------
Net Income $ 41,614 $ 39,236 $ 37,564 $ 32,535
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ .87 $ .83 $ .79 $ .69
Diluted .84 .80 .77 .67
Cash Dividends .22 .22 .22 .22
Quarterly earnings per share numbers do not necessarily add to the
year-to-date amounts due to rounding.
70
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
PART III
The following items are incorporated by reference to Provident's
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after the close of Provident's fiscal
year ending December 31, 2000:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. See Index to Financial Statements on page 36 for a list of all
financial statements filed as a part of this report.
2. Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X have been omitted as they are not
required, not applicable or the information required thereby is
set forth in the related financial statements.
3. Exhibits:
Number Exhibit Description Filing Status
------ ------------------- -------------
3.1 Articles of Incorporation Incorporated by reference to
Form 10-Q for quarter ending
June 30, 1997.
3.2 Code of Regulations Incorporated by reference to
Proxy Statement for the 1994
Annual Meeting of
Shareholders.
71
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
4.1 Instruments defining the Provident has no
rights of security outstanding issue of
holders indebtedness exceeding 10%
of the assets of Provident
Financial and Consolidated
Subsidiaries. A copy of the
instruments defining the
rights of security holders
will be furnished to the
Commission upon request.
4.2 Plan of Reorganization Incorporated by reference to
relating to Series D, Form 10-K for 1995.
Non-Voting Convertible
Preferred Stock
10.1 Junior Subordinated Incorporated by reference to
Indenture, dated as of Exhibit 4.1 on Form 8-K dated
November 27, 1996, November 27, 1996.
between Provident and the
Bank of New York, as
Indenture Trustee
10.2 Amended and Restated Incorporated by reference to
Declaration of Trust of Exhibit 4.3 on Form 8-K dated
Provident Capital Trust November 27, 1996.
I, dated as of November
27, 1996
10.3 Form of Guarantee Incorporated by reference to
Agreement entered into registration statement number
by Provident and The 333-20769.
Bank of New York, as
Guarantee Trustee
10.4 Provident 1990 Employee Incorporated by reference to
Stock Purchase Plan(1) Post-Effective Amendment No.
1 to Form S-8 (File No.
33-34904).
10.5 Provident Retirement Plan Incorporated by reference to
(As amended)(1) Form S-8 (File No. 33-90792).
10.6 Provident 1988 Stock Incorporated by reference to
Option Plan (As amended)(1) Form S-8 (File No. 33-34906),
Form S-8 (File No. 33-43102)
and Form S-8 (File No.
33-84094).
72
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
10.7 Provident 1992 Advisory Incorporated by reference to
Directors' Stock Option Form 8-K filed October 22,
Plan (As amended)(1) 1992, and Form S-8 (File No.
33-62707).
10.8 Provident 1992 Outside Incorporated by reference to
Directors' Stock Option Form S-8 (File No. 33-51230).
Plan(1)
10.9 Provident Restricted Incorporated by reference to
Stock Plan(1) Form S-2 (File No. 33-44641).
10.10 Registration of Preferred Incorporated by reference to
Capital Securities, Form S-3 (File No. 333-80231).
Between Provident Capital
Trust II, Provident and
Chase Manhattan Bank
10.11 Agreement and Plan of Incorporated by reference to
Reorganization between Form S-4 (File No. 333-88723).
Provident and Fidelity
Financial of Ohio, Inc.
10.12 Employment agreement Incorporated by reference to
between Provident Financial Form 10-K for 1999.
and Christopher J. Carey(1)
10.13 Registration of Preferred Incorporated by reference to
Capital Securities of Form S-3 as amended by Form
Provident Capital Trust Form S-3/A File No.
III and IV 333-93603).
10.14 Registration of Glenway Incorporated by reference to
Financial Corporation 1990 Form S-8 (File No. 333-96503).
Stock Option and Incentive
Plan, Fidelity Federal
Savings Bank 1992 Stock
Incentive Plan, Fidelity
Financial of Ohio, Inc.
1997 Stock Option Plan,
OHSL Financial Corp. 1992
Stock Option and Incentive
Plan and Provident 2000
Employee Stock Option Plan(1)
10.15 Provident Deferred Filed herewith.
Compensation Plan (As
Amended)(1)
73
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
12.1 Computation of Ratios of Filed herewith.
Earnings to Fixed Charges
12.2 Computation of Ratios of Filed herewith.
Earnings to Combined Fixed
Charges and Preferred
Stock Dividends
21 Subsidiaries of Provident Filed herewith.
23 Consent of Independent Filed herewith.
Auditors
(1) Management Compensatory Agreements
(b) Reports on Form 8-K:
Form 8-K (Item 7) filed on October 30, 2000 disclosing the supplemental
consolidated balance sheets of Provident as of December 31, 1999 and
1998, and the related supplemental consolidated financial statements of
income, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. The supplemented
consolidated financial statements give retroactive effect to the merger
of Provident and Fidelity Financial on February 4, 2000, which has been
accounted for using the pooling of interests method. In addition, a
consent of independent auditors was provided.
Form 8-K (Items 5 and 7) filed on November 8, 2000 stating that
Provident entered into an Underwriting Agreement relating to the sale
of $100,000,000 aggregate liquidation amount of 10 1/4 Trust Preferred
Securities of Provident Capital Trust III.
Form 8-K (Items 5 and 7) filed on November 22, 2000 stating that
Provident entered into an Underwriting Agreement relating to the sale
of $12,500,000 aggregate liquidation amount of 10 1/4 Trust Preferred
Securities of Provident Capital Trust III.
Form 8-K (Item 5) filed on January 30, 2001 reaffirming current
earnings per share expectations for 2001 to fall within the range of
$2.75 - $2.85. In addition, the first quarter of 2001 earnings per
share is being targeted to fall within the range of $.50 - $.55.
74
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, Provident Financial Group, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Provident Financial Group, Inc.
/s/Robert L. Hoverson
---------------------
Robert L. Hoverson President
March 5, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Provident Financial Group, Inc. and in the capacities and on the dates
indicated.
Signature Capacity Date
- ----------------------- ---------------------------- ----------------
/s/Robert L. Hoverson Director and President March 5, 2001
- ----------------------- (Principal Executive Officer)
Robert L. Hoverson
/s/Jack M. Cook Director March 5, 2001
- -----------------------
Jack M. Cook
/s/Thomas D. Grote, Jr. Director March 5, 2001
- -----------------------
Thomas D. Grote, Jr.
/s/Philip R. Myers Director March 5, 2001
- -----------------------
Philip R. Myers
/s/Joseph A. Pedoto Director March 5, 2001
- -----------------------
Joseph A. Pedoto
/s/Sidney A. Peerless Director March 5, 2001
- -----------------------
Sidney A. Peerless
/s/Joseph A. Steger Director March 5, 2001
- -----------------------
Joseph A. Steger
/s/Christopher J. Carey Executive Vice President March 5, 2001
- ----------------------- and Chief Financial Officer
Christopher J. Carey
75
