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, 1999 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 29, 2000, there were 48,702,871 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 29, 2000, was
approximately $736,000,000 (based upon non-affiliated holdings of
26,178,235 shares and a market price of $28.125 per share).
Documents Incorporated by Reference:
Proxy Statement for the 2000 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 ........................................... 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........... 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................... 77
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .... 77
ITEM 11. EXECUTIVE COMPENSATION ................................ 77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................ 77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........ 77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ........................................... 77
SIGNATURES ......................................................... 80
FORWARD LOOKING STATEMENTS
Provident Financial Group, Inc. publishes forward looking statements
relating to such matters as anticipated financial performance, business
prospects, new banking and financial service products and similar
matters. In particular, statements made within "Performance Summary",
"Business Initiatives", "Credit Risk Management" and "Asset
Securitization Activity" discussions included within Management's
Discussion and Analysis of Financial Condition and Results of
Operations have forward looking statements. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward
looking statements. Provident notes that a variety of factors could
cause its actual results and experiences to differ materially from the
anticipated results or other expectations expressed in its forward
looking statements. These risks and uncertainties include, without
limitation, 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 realize on
securitizations; significant cost, delay in, or inability to execute
strategic initiatives design to grow revenues and/or manage expenses;
the ability to achieve the cost reductions anticipated from the
Performance Optimization Project; 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. 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 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, 1999, Provident had total assets of $9.7 billion, loans
and leases of $6.3 billion, deposits of $6.6 billion and shareholders'
equity of $826 million. Provident manages an additional $5.9 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 acquisitions of OHSL Financial Corp. in December 1999, and
Fidelity Financial of Ohio, Inc. in February 2000, (financial
institutions located in Cincinnati, Ohio); the formation of Provident
Capital Funding headquartered in Atlanta and the purchase of Capstone
Realty Advisors, LLC based in Cleveland (businesses specializing in the
origination and servicing of commercial real estate loans); the opening
of corporate lending offices in Indianapolis, Chicago and Baltimore;
and the planned expansion of five financial centers in Florida.
Provident conducts its banking operations through The Provident Bank
and Provident Bank of Florida. 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 15 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, 1999, Provident and its subsidiaries employed 2,692
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 ("BHCA"). Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve. The BHCA requires Federal Reserve
approval on 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 BHCA 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 BHCA 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
BHCA 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
Provident's subsidiary banks 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 19 included in "Notes
to Consolidated Financial Statements".
Federal and state laws regulate the operations of Provident's banking
affiliates, 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 affiliates 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 ("GLBA"), became law on
November 12, 1999. GLBA 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
"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. GLBA permits certain non-banking
financial activities to be conducted in an operating subsidiary of a
bank. In addition, GLBA imposes new privacy disclosure and "opt out"
requirements on virtually all regulated financial services
organizations.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") 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.
2
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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.
Provident Securities and Investment Company, a Provident Bank
subsidiary, is licensed as a retail securities broker and is subject to
regulation by the Securities and Exchange Commission ("SEC"), state
securities authorities and the National Association of Securities
Dealers, Inc. ("NASD"). Provident Insurance Agency, a subsidiary of
Provident Securities and Investment, 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 SEC 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 thirty-one of
its branch locations and leases thirty-six. Provident Bank of Florida
owns three of its branch locations and leases five. For information
concerning rental obligations, see Note 6 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.
1999 1998
----------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
High Close $43.31 $45.88 $44.38 $41.94 $44.00 $50.50 $56.00 $53.00
Low Close 33.63 36.13 35.56 35.31 27.06 38.25 45.63 45.00
Period End Close 35.88 36.56 43.75 38.38 37.75 40.00 45.63 52.75
Cash Dividends .22 .22 .22 .22 .20 .20 .20 .20
At February 29, 2000, there were 5,921 holders of record of Provident's
Common Stock.
In 1999 and 1998 Provident paid dividends on its Common Stock of $37.4
million and $34.5 million and on its Preferred Stock of $.9 million and
$.8 million, respectively. 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
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 19 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 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Earnings:
Total Interest Income 14% $ 674 $ 634 $ 572 $ 520 $ 462
Total Interest Expense 17 (362) (347) (309) (280) (260)
------- ------- ------- ------- -------
Net Interest Income 11 312 287 263 240 202
Provision for Loan and Lease Losses 32 (48) (31) (45) (47) (14)
Noninterest Income 48 270 223 173 101 62
Noninterest Expense 21 (308) (302) (226) (175) (143)
------- ------- ------- ------- -------
Income Before Income Taxes 21 226 177 165 119 107
Applicable Income Taxes 22 (80) (62) (58) (41) (35)
------- ------- ------- ------- -------
Net Income (1) 21 $ 146 $ 115 $ 107 $ 78 $ 72
======= ======= ======= ======= =======
Per Common Share Data:
Basic Earnings (1) 17% $ 3.40 $ 2.66 $ 2.59 $ 1.96 $ 1.98
Diluted Earnings (1) 19 3.29 2.56 2.45 1.87 1.75
Dividends Paid 16 .88 .80 .72 .54 .47
Book Value 15 18.57 16.29 14.69 12.54 10.78
Balances at December 31:
Total Investment Securities 24% $ 2,019 $ 1,514 $ 1,382 $ 1,028 $ 960
Total Loans and Leases 9 6,324 5,624 5,052 5,311 4,896
Reserve for Loan and Lease Losses 12 91 76 72 67 60
Total Assets 12 9,723 8,135 7,107 6,824 6,205
Noninterest Bearing Deposits 21 1,175 670 605 554 524
Interest Bearing Deposits 9 5,464 4,657 4,091 4,042 3,655
Long-Term Debt and Junior
Subordinated Debentures 22 1,056 1,033 787 950 820
Total Shareholders' Equity 18 826 704 626 514 433
Off Balance Sheet Managed Assets - 5,938 3,220 1,533 257 -
Other Statistical Information:
Return on Average Assets (1) 1.62% 1.45% 1.56% 1.23% 1.29%
Return on Average Equity (1) 20.19 16.61 19.13 17.03 18.37
Dividend Payout Ratio 26.13 30.72 28.15 28.12 26.17
Capital Ratios at December 31:
Total Equity to Total Assets 8.49% 8.65% 8.81% 7.53% 6.97%
Tier 1 Leverage Ratio 10.84 9.00 9.94 8.97 7.13
Tier 1 Capital to Risk-Weighted Assets 9.58 8.55 9.67 9.19 7.52
Total Risk-Based Capital to
Risk-Weighted Assets 11.60 11.15 13.11 13.00 11.77
Loan Quality Ratios at December 31:
Reserve for Loan and Lease Losses to
Total Loans and Leases 1.44% 1.35% 1.42% 1.26% 1.23%
Reserve for Loan and Lease Losses to
Nonperforming Loans 164.84 178.30 153.82 304.51 142.57
Nonperforming Loans to Total Loans
and Leases 0.87 0.76 0.93 0.41 0.86
Net Charge-Offs to Average Total
Loans and Leases 0.54 0.48 0.77 0.84 0.13
(1) Selected Financial Data on Operating Income follows (excludes Special Charges and
Exit Costs (1998) and One-Time Deposit Insurance Charges (1996):
Net Income 21% $ 146 $ 129 $ 107 $ 83 $ 72
Basic Earnings 17 3.40 2.99 2.59 2.09 1.98
Diluted Earnings 19 3.29 2.88 2.45 1.99 1.75
Return on Average Assets 1.62% 1.63% 1.56% 1.31% 1.29%
Return on Average Equity 20.19 18.67 19.13 18.18 18.37
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. (Parent) is a holding company for two
FDIC member banks, The Provident Bank and Provident Bank of Florida.
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 1999 Year Ending 1998 Year Ending 1997
(Dollars in Millions ---------------------------------------------------------------------------------------
Except Per Share Data) Amount $ Chg % Chg Amount $ Chg % Chg Amount $ Chg % Chg
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 312 $ 25 9% $ 287 $ 24 9% $ 263 $ 23 10%
Noninterest Income 270 47 21 223 50 29 173 72 71
Total Revenue 582 72 14 510 74 17 436 95 28
Provision for Loan
and Lease Losses 48 17 55 31 (14) (31) 45 (2) (4)
Noninterest Expense (1) 308 6 2 302 76 34 226 51 29
Net Income (1) 146 31 27 115 8 7 107 29 37
Total Loans and Leases 6,324 700 12 5,624 572 11 5,052 (259) (5)
Total Assets 9,723 1,588 20 8,135 1,028 14 7,107 283 4
Total Off Balance Sheet
Managed Assets 5,938 2,718 84 3,220 1,687 110 1,533 1,276 496
Total Deposits 6,639 1,312 25 5,327 631 13 4,696 100 2
Long-Term Debt and Junior
Subordinated Debentures 1,056 23 2 1,033 246 31 787 (163) (17)
Stockholders' Equity 826 122 17 704 78 12 626 112 22
Per Common Share:
Book Value 18.57 2.28 14 16.29 1.60 11 14.69 2.15 17
Diluted Earnings (1) 3.29 0.73 29 2.56 0.11 4 2.45 0.58 31
Ratio Analysis:
Net Interest Margin 3.86% 3.93% 4.03%
Return on Average Equity (1) 20.19% 16.61% 19.13%
Return on Average Assets (1) 1.62% 1.45% 1.56%
Average Equity to
Average Assets 8.00% 8.73% 8.14%
Dividend Payout to
Net Earnings 26.13% 30.72% 28.15%
(1) Financial Data based on Operating Income follows (excludes Special Charges and Exit Costs in 1998):
Noninterest Expense $ 308 $ 28 10 $ 280 $ 54 24 $ 226 $ 59 35
Net Income 146 17 13 129 22 21 107 24 29
Diluted Earnings 3.29 0.41 14 2.88 0.43 18 2.45 0.46 23
Return on Average Equity 20.19% 18.67% 19.13%
Return on Average Assets 1.62% 1.63% 1.56%
Efficiency Ratio 52.90% 56.42% 53.06%
6
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident reported net income of $146.4 million, $115.0 million and
$107.4 million for 1999, 1998 and 1997, respectively. On an operating
income basis (excludes unusual and significant after-tax charges of
$14.3 million), net income for 1998 was $129.3 million. Operating
earnings per diluted share increased 14% during 1999 to $3.29, compared
to $2.88 for 1998 and $2.45 for 1997. On an operating income basis,
return on average equity was 20.19%, 18.67% and 19.13% and return on
average assets was 1.62%, 1.63% and 1.56% for the three years ended
1999, 1998 and 1997, respectively.
Strong revenue growth contributed to the higher net income in 1999 and
1998. Revenue (net interest income plus noninterest income) increased
14% during 1999 over 1998 and 17% during 1998 over 1997. Noninterest
income outpaced net interest income in its rate of growth during this
three-year time period as a result of Provident's emphasis on fee
revenue. Fee revenue grew primarily from increased service charges on
deposit accounts and in other service charges and fees that consisted
primarily of loan servicing fees. Additionally, gains recognized on the
securitization and sale of loans and leases and rental income on
operating leases contributed to the growth in noninterest revenues. The
growth in net interest income was a result of the growth in the loan
and lease portfolio which was funded primarily by deposit growth.
Provident's efficiency ratio, on an operating basis, improved to 52.90%
for 1999 compared to 56.42% and 53.06% in 1998 and 1997, respectively.
During 1998, management took specific steps to slow the increase of
expenses. First, those business units where the prospect for future
revenue growth did not justify current operating losses were
terminated. Second, a reengineering project, referred to as the
Performance Optimization Project, was initiated with areas being
identified for potential productivity improvement. The termination of
the business units and the reengineering project resulted in a $22.0
million charge during 1998 covering employee termination benefits,
business line exit costs, equipment disposition and professional fees.
Total assets at December 31, 1999, 1998 and 1997 were $9.7 billion,
$8.1 billion and $7.1 billion, respectively. Asset quality ratios
remained consistent with those of prior years. The ratio of
nonperforming assets to total assets was .61%, .56% and .83% as of
December 31, 1999, 1998 and 1997, respectively. Provident increased the
ratio of reserve for loan and lease losses to total loans and leases to
1.44% as of December 31, 1999, compared to 1.35% and 1.42% at December
31, 1998 and 1997, respectively.
Provident sells a significant portion of the loans and leases it
originates while retaining the servicing rights. As a result, managed
assets, which represent total assets plus loans and leases serviced for
others, totaled $15.7 billion, $11.4 billion and $8.6 billion as of
December 31, 1999, 1998 and 1997, respectively.
Total deposits for 1999, 1998 and 1997 were $6.6 billion, $5.3 billion
and $4.7 billion. Average core deposits grew 12% from 1998 to 1999 with
significant contribution coming from the Florida franchise. Non-core
deposits grew as a result of higher brokered certificates of deposit
and noninterest bearing deposits of securitization trusts.
7
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Shareholders' equity has increased $122 million and $78 million during
1999 and 1998, respectively. The growth in equity has been the result
of income exceeding dividends paid, the exercise of stock options and
shares of stock issued in connection with acquisitions.
BUSINESS INITIATIVES
The financial services industry is highly competitive. To compete
effectively, management is focusing on its core strategy and the
application of steady and basic business processes. Provident's plan is
to increase revenue by increasing sales of its existing products and
services in its current markets, introducing its products and services
in new markets, and adding new products and services. Examples of how
this strategy is being applied include:
o Acquisition of Financial Institutions: To increase market share in
the greater Cincinnati metropolitan area, Provident acquired OHSL
Financial Corp. and Fidelity Financial of Ohio. The acquisition of
OHSL, which was consummated during the fourth quarter of 1999, added
$191 million in deposits while the acquisition of Fidelity, which
was completed during the first quarter of 2000, increased deposits
by $556 million.
o Expansion of Commercial Real Estate Lending: Provident Capital
Funding, with headquarters in Atlanta, was established during the
first quarter of 1999 as a national originator and seller of
commercial real estate loans to loan syndicators. The assets of
Capstone Realty Advisors, LLC were purchased in the third quarter of
1999. Capstone Realty Advisors is a Cleveland-based commercial
mortgage loan originator ($400 million annually) and servicer ($1.3
billion). As the loans originated by Provident Capital Funding and
Capstone are sold to third parties with servicing retained, these
business units will provide additional loan servicing revenue to
Provident without the accompanying credit risk of the real estate
loans.
o Expansion of Financial Centers in Florida: During the fourth quarter
of 1999, Provident announced the planned opening of five financial
centers in Manatee County, Florida. These financial centers, which
are scheduled to open by June 2000, represent a significant
expansion in southwestern Florida, as Provident currently operates
five financial centers in Sarasota County and three financial
centers in South Hillsborough County.
o New Corporate Banking Offices: Commercial Banking expanded during
1998 and 1999 by opening offices in Indianapolis, San Francisco,
Chicago and Baltimore. In addition, a greater emphasis has been
placed on commercial lending for the West Coast of Florida. These
locations are expected to contribute to the continuing growth of the
commercial lending business.
8
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o National Nonconforming Mortgage Operations: During 1999, over $2.3
billion of nonconforming mortgage loans were sold with servicing
retained. During 2000, direct and third party servicing of
nonconforming mortgage loans by the Mortgage Banking business line
will continue to represent a major business opportunity.
o Internet Efforts: Provident continues to develop and expand upon its
internet banking services, leveraging off of the successful launch
of its Retail Online Banking site. Emphasis during 2000 will center
on creating an appropriate internet presence for all divisions of
Provident, along with increasing its marketing efforts to achieve a
deeper penetration of its customer base. Provident also participates
with a number of large internet financial services consolidators and
seeks to further increase the number of these relationships. Lastly,
Provident is exploring internal processing opportunities presented
by the internet to improve operational efficiencies.
o Loan Securitizations and Sales with Retained Servicing: Management
remains committed to moving assets off-balance sheet as strong
lending efforts, from both internal and third-party sources,
continue to generate assets more rapidly than deposits can be
generated. Provident securitizes and sells nonconforming residential
loans, auto leases, equipment leases, home equity loans, mortgage
warehouse lines, and credit card balances, while retaining the
servicing of the assets. Additionally, noninterest revenues are
enhanced from the recognition of fees received on the servicing of
these off-balance sheet assets.
o Increased Focus on the ATM Network: In October 1998, an agreement
was completed to deploy ATMs in Wal-Mart and Sam's Club stores in
Ohio and Kentucky. In January 1999, an agreement was signed with
United Dairy Farmers, a Cincinnati based operator of convenience
stores, to provide an additional 79 ATMs. Through this agreement,
Provident will become the exclusive provider of ATM services for
United Dairy Farmers. With these agreements, Provident's ATM network
has grown to 446 locations, including 202 at United Dairy Farmers
and 139 at Wal-Mart and Sam's Club stores.
o Improved Efficiency: Provident has taken multiple steps to improve
its operating efficiencies including the elimination or reduction of
products and services for which the prospect for profit was not
satisfactory. Programs terminated include the MeritValu program,
Free Market Partners, the national conforming mortgage division and
overlapping branches. In addition, a consulting firm was employed to
assist Provident in identifying process reengineering opportunities
in order to reduce costs, increase fee income and re-deploy
resources to grow revenues. The review, referred to as the
Performance Optimization Project, was completed in December 1998,
with implementation substantially completed during 1999.
9
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 income by major lines of business
for the past three years:
Percentage
Increase (Decrease)
-------------------
(Dollars in Millions) 1999 1998 1997 1999/98 1998/97
- -------------------------------------------------------------------------------
Commercial Banking $ 74.1 $ 85.3 $ 71.2 (13)% 20%
Retail Banking 32.3 17.4 15.8 86 10
Mortgage Banking 39.0 14.6 15.5 167 (6)
Corporate Center 1.0 12.0 4.9 (92) 145
Special Charges and Exit Costs - (14.3) - - -
------ ------ ------
$146.4 $115.0 $107.4 27% 7%
====== ====== ======
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 cash flow-matched funds
transfer pricing methodology that isolates the business units from
fluctuations in interest rates, and provides management with the
ability to measure customer, product or business unit 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 the size and composition of its loan/lease
portfolio. The difference between the actual provision and its
allocation to the business lines is charged/credited to "Corporate
Center".
o Costs Allocation: 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, interest and gain/loss
on the sale of investment securities, and any nonrecurring business
revenues and expenses.
o Prior Period Numbers: Prior period numbers have been restated to
conform with the current business line reporting structure and
current methodology of allocating revenue and expense between
business lines.
10
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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; Information Leasing Corporation, a
national small to mid-ticket equipment leasing company; and
Provident Commercial Group, a national lessor of large equipment.
Commercial Banking is the company's largest line of business
contributing approximately 50% of the Bank's net income. Average
loan balances increased 15% and total revenues were up 4% in 1999.
However, net income for 1999 declined 13% compared to 1998. The drop
in earnings was attributable to a decline in warrant gains, higher
provision expense and rising operating expenses attributable to the
start-up of several new businesses. Net income climbed 20% from 1997
to 1998. Increases in net interest income, resulting from loan
growth, and noninterest income, attributable to an equipment lease
securitization, warrant gains and equipment gains, were primarily
responsible for the increase.
Start-up costs were incurred for the formation of Provident Capital
Funding and the purchase of Capstone Realty Advisors, LLC assets.
Provident Capital Funding and Capstone provide Provident with a
national platform to generate fee income from originating, selling
and servicing commercial real estate loans. Start-up costs were also
incurred from opening corporate lending offices in Indianapolis,
Chicago and Baltimore.
Growth in average assets for 1999 as compared to 1998 was 15%, an
improvement over the 4% growth from 1997 to 1998. Year-end loan
balances increased 26% from 1998 to 1999. The positive impact of
this loan growth on the net interest margin was partially offset by
interest spread compression in late 1998 and early 1999. Margin
pressures moderated during the later months of 1999.
11
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Retail Banking provides consumer lending, deposit accounts, trust,
brokerage and investment products and services to its customers.
This business line includes both the Consumer Lending and Consumer
Banking business units. Net income grew by $14.9 million (86%) in
1999 as compared to $1.6 million (10%) in 1998. The acceleration of
profit growth was driven by a variety of factors. Auto lease
production grew significantly as Provident expanded the number of
auto dealerships that distribute Provident lease financing products
to their customers. Auto lease managed assets increased $656 million
(61%) in 1999 as compared to $295 million (38%) in 1998. In
addition, as a result of enhanced credit scoring and risk-adjusted
pricing systems implemented by Retail Banking, direct and indirect
instalment loans and leases experienced a significant improvement in
net charge-offs. Total period end managed loans and leases for
Retail Banking were $3.2 billion, $2.3 billion and $1.8 billion for
1999, 1998 and 1997, respectively.
Retail Banking also benefited from higher levels of deposits during
the current year. Average core deposits for 1999 grew by 12%
compared to 2% in 1998, with significant contribution coming from
the Florida franchise where average core deposits grew by 58% in
1999 as compared to 11% in 1998. To further capitalize on the
Florida deposit growth, Provident announced plans to open five
additional financial centers in Florida during 2000. Also in 2000,
Provident will continue to enhance its distribution of products and
services via on-line banking, ATM machines and a call center.
Noninterest income increased $15.3 million (21%) in 1999 compared to
$20.1 million (39%) in 1998. During 1999, credit card balances of
$230 million were securitized, generating a gain of $4.0 million.
Growth in managed credit card assets was $73 million and $97 million
in 1999 and 1998, respectively. Also during 1999, auto lease
operating income increased $6 million as a result of higher managed
lease receivables. Additional factors that contributed to higher net
income in 1999 include higher fees in the areas of loan servicing,
brokerage, fund management and trust. Factors which contributed to
the growth in noninterest income during 1998 were increases in
operating auto lease income, service charges on deposit accounts and
end-of-term auto lease fees.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Net income for 1999
was $39.0 million, an increase of $24.4 million as compared to 1998.
The increase in net income was primarily the result of strong
nonconforming loan production in 1999.
12
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Industry consolidation allowed Provident to expand its volume during
1999. During 1999, Mortgage Banking securitized and sold
nonconforming loans totaling $2.3 billion resulting in the
recognition of a $73.3 million gain, a gain to loans sold ratio of
3.1%. In 1998, $1.1 billion of loans were securitized and sold
resulting in a $36.3 million gain, a gain to loans sold ratio of
3.4%. The lower gain to loans sold ratio from 1998 to 1999 was
primarily due to lower spreads between mortgage yields and cost of
funds. In 1997, loans securitized and sold were $844 million and the
gain was $36.9 million, a gain to loans sold ratio of 4.4%. The
change in profitability from 1997 to 1998 was due primarily to more
conservative performance assumptions being used in the gain on sale
calculations.
Total revenue for 1999 was $122.2 million, as compared to $73.0
million in 1998 and $53.6 million in 1997. 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 unit.
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 1999, 1998 and 1997, net interest income on a taxable
equivalent basis was $312.1 million, $286.9 million and $263.0 million,
respectively, which represented 54%, 56% and 60% of net revenues (net
interest income plus noninterest income). The downward trend of this
ratio is due primarily to the high volume of loan and lease
originations and subsequent sales, while retaining the servicing. This
activity has resulted in raising noninterest income, in the areas of
loan servicing fees and 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 3.86%, 3.93%
and 4.03% for 1999, 1998 and 1997, respectively. The slight decrease in
the margin during 1999 was the result of changes in volumes and rates
of earning assets and their corresponding funding sources. During 1999,
the balance sheet was proactively adjusted to decrease Provident's
overall sensitivity to changes in market rates.
13
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,
------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------
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 and Leases:
Corporate Lending:
Commercial $3,567 $311.0 8.72% $3,173 $293.1 9.24% $2,581 $239.9 9.29%
Mortgage 421 36.6 8.70 446 41.7 9.35 496 46.6 9.40
Construction 485 39.6 8.15 359 30.9 8.62 292 25.7 8.81
Lease Financing 289 28.6 9.92 318 34.8 10.97 267 29.7 11.12
Consumer Lending:
Instalment 560 57.4 10.24 677 66.4 9.80 814 80.7 9.93
Residential 389 40.9 10.51 226 20.8 9.19 268 21.9 8.14
Lease Financing 626 51.6 8.24 507 38.2 7.54 616 47.8 7.76
------ ------ ------ ------ ------ ------
Total Loans and Leases 6,337 565.7 8.93 5,706 525.9 9.22 5,334 492.3 9.23
Investment Securities 1,662 104.4 6.28 1,511 100.2 6.63 1,173 79.0 6.74
Trading Account Securities 62 3.3 5.35 68 6.5 5.51 - - -
Federal Funds Sold and
Reverse Repurchase
Agreements 17 .8 4.87 25 1.3 5.41 15 .9 5.71
------ ------ ------ ------ ------ ------
Total Earning Assets 8,078 674.2 8.35% 7,310 633.9 8.67% 6,522 572.2 8.77%
Cash and Noninterest
Bearing Deposits 239 193 156
Other Assets 744 427 218
------ ------ ------
Total Assets $9,061 $7,930 $6,896
====== ====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits:
Demand Deposits $282 5.2 1.85% $264 5.6 2.13% $246 5.5 2.22%
Savings Deposits 1,265 50.4 3.98 1,091 44.5 4.08 630 22.2 3.52
Time Deposits 3,483 186.6 5.36 3,047 172.1 5.65 3,378 193.8 5.74
------ ------ ------ ------ ------ ------
Total Deposits 5,030 242.2 4.81 4,402 222.2 5.05 4,254 221.5 5.21
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements 981 49.5 5.04 1,068 57.9 5.42 494 26.4 5.34
Commercial Paper 210 10.2 4.87 233 13.0 5.59 157 9.2 5.86
Short-Term Notes Payable 1 .1 4.83 2 .1 5.60 2 .1 5.23
------ ------ ------ ------ ------ ------
Total Short-Term Debt 1,192 59.8 5.01 1,303 71.0 5.45 653 35.7 5.46
Long-Term Debt 828 47.0 5.67 738 45.1 6.12 687 43.4 6.32
Junior Subordinated
Debentures 161 13.2 8.20 99 8.7 8.76 99 8.6 8.77
------ ------ ------ ------ ------ ------
Total Interest Bearing
Liabilities 7,211 362.2 5.02% 6,542 347.0 5.31% 5,693 309.2 5.43%
Noninterest Bearing Deposits 860 545 451
Other Liabilities 265 151 191
Shareholders' Equity 725 692 561
------ ------ ------
Total Liabilities and
Shareholders' Equity $9,061 $7,930 $6,896
====== ------ ====== ------ ====== ------
Net Interest Income $312.0 $286.9 $263.0
====== ====== ======
Net Interest Margin 3.86% 3.93% 4.03%
===== ===== =====
Net Interest Spread 3.33% 3.36% 3.34%
===== ===== =====
14
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,
------------------------------------------
1999 Changes from 1998 Changes from
1998 Due to 1997 Due to
------------------------------------------
(In Thousands) Volume Rate Volume Rate
- -----------------------------------------------------------------------------
Interest Earned On:
Loans and Leases:
Corporate Lending:
Commercial $ 35,024 $(17,110) $ 54,677 $(1,476)
Mortgage (2,310) (2,842) (4,628) (222)
Construction 10,365 (1,750) 5,796 (567)
Lease Financing (3,019) (3,163) 5,536 (418)
Consumer Lending:
Instalment (11,904) 2,875 (13,354) (981)
Residential 16,702 3,352 (3,663) 2,619
Lease Financing 9,593 3,812 (8,289) (1,352)
-------- -------- -------- -------
Net Loans and Leases 54,451 (14,826) 36,075 (2,397)
Investment Securities 9,688 (5,538) 22,455 (1,223)
Trading Account (578) (2,593) 6,463 -
Federal Funds Sold (385) (123) 525 (49)
-------- -------- -------- -------
Total 63,176 (23,080) 65,518 (3,669)
-------- -------- -------- -------
Interest Paid On:
Demand Deposits 366 (785) 392 (230)
Savings Deposits 6,928 (1,089) 18,373 3,958
Time Deposits 23,722 (9,284) (18,787) (2,849)
-------- -------- -------- -------
Total Deposits 31,016 (11,158) (22) 879
Short-Term Debt:
Federal Funds Purchased (4,580) (3,828) 31,121 384
Commercial Paper (1,220) (1,590) 4,253 (443)
Short-Term Notes Payable (3) (11) (3) 6
-------- -------- -------- -------
Total Short-Term Debt (5,803) (5,429) 35,371 (53)
Long-Term Debt 5,241 (3,430) 3,128 (1,448)
Junior Subordinated Debentures 5,125 (587) 5 (5)
-------- -------- -------- -------
Total 35,579 (20,604) 38,482 (627)
-------- -------- -------- -------
Net Interest Income $ 27,597 $ (2,476) $ 27,036 $(3,042)
======== ======== ======== =======
15
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Income
The following table details the components of noninterest income and
their change since 1997:
Percentage
Increase (Decrease)
-------------------
(Dollars in Thousands) 1999 1998 1997 1999/98 1998/97
- --------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 31,589 $ 27,242 $ 24,752 16% 10%
Other Service Charges and Fees 70,029 43,873 29,080 60 51
Operating Lease Income 40,902 37,481 26,207 9 43
Warrant Gains 9,147 15,354 12,782 (40) 20
Gain on Sales of Loans and Leases 98,860 63,733 54,318 55 17
Security Gains 71 12,940 9,713 (100) 33
Other 19,880 22,364 15,806 (11) 42
-------- -------- --------
$270,478 $222,987 $172,658 21% 29%
======== ======== ========
Noninterest income has grown significantly over the past two years.
Noninterest income increased $47.5 million (21%) during 1999 and $50.3
million (29%) during 1998. Explanations for the growth in noninterest
income by category follow:
o Service Charges on Deposit Accounts: Service charges on deposit
accounts increased during 1999 as a result of pricing and volume
increases on corporate and personal demand deposit accounts and
increased ATM fees from the increased number of ATMs. Since December
31, 1998, approximately 100 ATMs have been placed in service
bringing the total deployment to 446. In 1998, service charges on
deposit accounts increased as a result of increased fees received on
corporate deposit accounts, and ATM usage.
o Other Service Charges and Fees: The increased revenue is due to a
significant increase in loan servicing fees, primarily from the
residential mortgage, warehouse lending and auto leasing areas
during 1999 and the residential mortgage area in 1998.
o Operating Lease Income: The increase in operating lease revenue
during 1999 is due primarily to the growth of Provident Commercial
Group, a national lessor of large equipment, which recorded an
additional $5.9 million in operating lease revenue during 1999
compared to 1998. The increase in operating lease revenue in 1998
was the result of the securitization of automobiles and the
expansion of Provident Commercial Group. The securitization of
automobiles involves the sale and leaseback of automobiles with
investors. As these automobiles are subleased to third-party
consumers, lease revenue from the consumers, net of lease expense to
the investors of the automobiles, is recognized as operating lease
income. The expansion of Provident Commercial Group resulted in an
increase in operating lease revenue of $4.1 million during 1998 as
compared to 1997.
16
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Warrant Gains: Provident's Corporate Banking business line from time
to time acquires equity warrants as a part of the lending fee
structure established with customers. Warrant gains decreased $6.2
million in 1999 after increasing $2.6 million in 1998.
o Gain on Sales of Loans and Leases: Provident securitizes and/or
sells a portion of its assets with servicing generally retained. The
following table provides detail of the gain on sales recognized
during the past three years.
(In Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Cash Gains -- Loan and Lease Sales:
Equipment Lease Securitizations $13,164 $13,429 $ -
Conforming Residential Whole Loan Sales 1,911 5,077 6,335
Credit Card Whole Loan Sales - 3,420 -
Nonconforming Residential Whole Loan Sales 174 290 495
Other Loan Sales 556 447 156
------- ------- -------
15,805 22,663 6,986
------- ------- -------
Non-Cash Gains -- Loan and Lease Sales:
Nonconforming Residential Loan Securitizations 73,304 36,337 36,886
Prime Consumer Home Equity Securitizations 5,758 4,733 10,446
Credit Card Loan Securitizations 3,993 - -
------- ------- -------
83,055 41,070 47,332
------- ------- -------
$98,860 $63,733 $54,318
======= ======= =======
A detailed discussion of the various securitizations and sales of
loans and leases is provided under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report.
o Other: The largest components of revenue within other income have
been equipment lease residual sales ($9.2 million, $8.9 million and
$1.8 million in 1999, 1998 and 1997, respectively) and realized
gains on investments in partnerships ($1.7 million in 1998 and 2.9
million in 1997).
17
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Expense
The following table details the components of noninterest expense and
their change since 1997:
Percentage
Increase (Decrease)
-------------------
(Dollars in Thousands) 1999 1998 1997 1999/98 1998/97
- ----------------------------------------------------------------------------------------
Salaries, Wages and Benefits $145,948 $124,639 $101,454 17% 23%
Depreciation on Operating
Lease Equipment 23,076 21,662 17,667 7 23
Occupancy 17,506 16,951 12,744 3 33
Professional Fees 19,262 18,276 14,912 5 23
Equipment Expense 23,482 20,771 15,208 13 37
Charges and Fees 15,144 14,317 12,652 6 13
Other 63,737 63,785 51,341 - 24
-------- -------- --------
Noninterest Expense Before
Significant and Unusual Items 308,155 280,401 225,978 10 24
Special Charges and Exit Costs - 22,005 - - -
-------- -------- --------
$308,155 $302,406 $225,978 2% 34%
======== ======== ========
Noninterest expense before significant and unusual items increased
$27.8 million (10%) and $54.4 million (24%) during 1999 and 1998,
respectively. Components of noninterest expense, along with an
explanation as to their fluctuations, follow:
o Salaries, Wages and Benefits: Compensation increased in 1999 and
1998 due primarily to increased staffing in the Mortgage Banking and
Corporate Banking business lines combined with increases in
performance based incentives and benefit plan expenses.
o Depreciation on Operating Lease Equipment: Increases in leased
equipment by Provident Commercial Group during 1999 and 1998 is the
primary reason for the increase in depreciation expense.
o Occupancy: An increase in rent expense, primarily in the areas of
Mortgage Banking during 1999 and Retail Banking during 1998,
resulted in higher occupancy expense.
o Professional Fees: The increase in professional fees was a result of
higher legal and temporary employment services in 1999, and higher
management consulting, legal and temporary employment services in
1998.
o Equipment Expense: Equipment expense increased due to higher
depreciation expense related to technology areas, branches and ATMs
in 1999. The purchase and subsequent depreciation of computer and
data processing equipment was the primary reason for the increase in
1998.
o Charges and Fees: Charges and fees have increased due to higher
credit card processing fees in 1999 and higher loan origination
costs in 1998.
18
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Other: Larger fluctuations within other noninterest expense in 1998
include Year 2000 compliance, marketing and communications
expenditures.
o Special Charges and Exit Costs: Provident's efficiency ratio
(operating expenses as a percentage of net revenue) deteriorated
from 48.84% in 1996 to 56.42% in 1998. As a result, Provident took
two courses of action. First, the Performance Optimization Project
was initiated during the second half of 1998. This project permitted
Provident to perform operations more efficiently. As part of the
project, Provident associates developed over 1,000 specific actions
to increase productivity. These actions were substantially
implemented by the end of 1999. Second, an analysis of current and
future profitability of various business units was performed. As a
result of this analysis, a determination was made 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 formally discontinued during the fourth
quarter of 1998. In connection with these two initiatives, Provident
recorded a special charge of $22 million during the fourth quarter
of 1998. This charge was composed of employee termination benefits,
fixed asset write-offs, exit costs for the MeritValu and Free Market
Partners units, and professional fees incurred in completing the
reengineering project.
FINANCIAL CONDITION ANALYSIS
Short-Term Investments and Investment Securities
As of December 31, 1999 and 1998, federal funds sold and reverse
repurchase agreements outstanding were $82.0 million and $60.0 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, 1999 and 1998, Provident held $0 and $50.3 million,
respectively, in trading account securities. During 1998, Provident
began trading 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. This activity was discontinued in 1999.
19
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment securities represented 21% of average earning assets in both
1999 and 1998, and 18% in 1997. 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) 1999 1998 1997
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 226,576 $ 152,737 $ 17,251
State and Political Subdivisions 1,822 1,939 10,200
Mortgage-Backed Securities 1,402,677 1,057,902 1,044,304
Asset-Backed Securities 104,700 247,311 252,142
Other Securities 358,708 68,119 57,606
---------- ---------- ----------
Total Securities $2,094,483 $1,528,008 $1,381,503
========== ========== ==========
Market Value at December 31,
------------------------------------
(In Thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 218,733 $ 151,338 $ 17,401
State and Political Subdivisions 1,805 1,920 10,396
Mortgage-Backed Securities 1,342,624 1,047,769 1,043,811
Asset-Backed Securities 99,753 245,855 252,009
Other Securities 356,477 67,271 58,090
---------- ---------- ----------
Total Securities $2,019,392 $1,514,153 $1,381,707
========== ========== ==========
As of December 31, 1999, the aggregate book value of a single security
exceeded ten percent of shareholders' equity. This security, Norwest
Asset Securities Corporation, is an investment in securitized
residential mortgage pools. The book value and market value of the
security was $107.3 million and $99.9 million, respectively.
20
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the December 31, 1999 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 $ 10,044 5.50% $ 21,744 6.02%
Due after 1 through 5 years 194,788 5.45 - -
Due after 5 through 10 years - - - -
Due after 10 years - - - -
---------- ---- -------- ----
Total $ 204,832 5.45% $ 21,744 6.02%
========== ==== ======== ====
State and Political Subdivisions:
Due in one year or less $ - -% $ - -%
Due after 1 through 5 years - - - -
Due after 5 through 10 years - - - -
Due after 10 years 1,822 9.09 - -
---------- ---- -------- ----
Total $ 1,822 9.09% $ - -%
========== ==== ======== ====
Mortgage-Backed Securities:
Due in one year or less $ 154,671 9.98% $ - -%
Due after 1 through 5 years 692,896 7.27 35,279 6.79
Due after 5 through 10 years 500,576 5.81 - -
Due after 10 years 3,340 7.12 15,915 7.12
---------- ---- -------- ----
Total $1,351,483 7.49% $ 51,194 6.86%
========== ==== ======== ====
Asset-Backed Securities:
Due in one year or less $ 1,165 6.18% $ - -%
Due after 1 through 5 years 26,716 7.17 28,801 5.91
Due after 5 through 10 years 48,018 4.78 - -
Due after 10 years - - - -
---------- ---- -------- ----
Total $ 75,899 6.35% $ 28,801 5.91%
========== ==== ======== ====
Other Securities:
Due in one year or less $ - -% $282,492 6.02%
Due after 1 through 5 years - - 300 7.21
Due after 5 through 10 years 250 7.35 - -
Due after 10 years 75,666 - - -
---------- ---- -------- ----
Total $ 75,916 7.35% $282,792 6.38%
========== ==== ======== ====
21
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, 1999 and 1998, total on-balance sheet loans and
leases were $6.3 billion and $5.6 billion, respectively. Provident has
an additional $5.9 billion and $3.2 billion of off-balance sheet loans
and leases as of year-end 1999 and 1998, respectively. For more
information concerning these 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) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
Dollar:
Corporate Lending:
Commercial $3,979.8 $3,270.7 $2,733.5 $2,404.9 $2,250.6
Mortgage 474.5 436.1 469.5 475.9 448.9
Construction 547.9 437.6 305.2 283.7 266.4
Lease Financing 391.5 243.7 340.3 239.1 128.7
Consumer Lending:
Instalment 444.7 621.4 624.3 924.5 1,000.9
Residential 123.8 190.7 136.2 391.6 466.4
Lease Financing 361.9 423.3 442.8 591.7 334.2
-------- -------- -------- -------- --------
Total Loans and Leases $6,324.1 $5,623.5 $5,051.8 $5,311.4 $4,896.1
======== ======== ======== ======== ========
Percentage:
Corporate Lending:
Commercial 62.9% 58.1% 54.1% 45.3% 46.1%
Mortgage 7.5 7.8 9.3 9.0 9.2
Construction 8.7 7.8 6.0 5.3 5.4
Lease Financing 6.2 4.3 6.7 4.5 2.6
Consumer Lending:
Instalment 7.0 11.1 12.4 17.4 20.4
Residential 2.0 3.4 2.7 7.4 9.5
Lease Financing 5.7 7.5 8.8 11.1 6.8
-------- -------- -------- -------- --------
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
22
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, 1999, including loan amounts
which interest is not being accrued on:
Amount on
(Dollars in Millions) Amount Percentage Nonaccrual
- ---------------------------------------------------------------------
Manufacturing $ 847.5 21.3% $17.3
Service Industries 805.9 20.3 15.8
Real Estate Operators / Investment 375.4 9.4 .1
Finance & Insurance 339.4 8.5 .8
Retail Trade 319.7 8.0 2.0
Transportation / Utilities 297.4 7.5 .7
Wholesale Trade 259.8 6.5 1.8
Automobile Dealers 156.0 3.9 -
Construction 152.8 3.9 1.5
Other 425.9 10.7 3.5
-------- ----- -----
$3,979.8 100.0% $43.5
======== ===== =====
The following table shows the composition of commercial mortgage and
construction loans by property type at December 31, 1999:
Commercial Commercial Amount on
(Dollars in Millions) Mortgage Construction Total Percentage Nonaccrual
- -------------------------------------------------------------------------------------
Office / Warehouse $108.6 $115.5 $ 224.1 21.9% $ -
Shopping / Retail 101.1 97.0 198.1 19.4 .3
Residential Development 35.2 147.2 182.4 17.8 -
Apartments 69.8 71.7 141.5 13.8 -
Land 26.1 27.5 53.6 5.2 -
Hotel / Motel / Restaurants 13.7 16.7 30.4 3.0 -
Auto Sales & Service 22.6 3.5 26.1 2.6 -
Industrial Plants 8.9 8.3 17.2 1.7 -
Churches 10.7 2.6 13.3 1.3 -
Healthcare Facilities 8.0 3.5 11.5 1.1 -
Other Commercial Properties 69.8 54.4 124.2 12.2 2.3
------ ------ -------- ----- ----
$474.5 $547.9 $1,022.4 100.0% $2.6
====== ====== ======== ===== ====
Commercial and real estate construction loans outstanding at December
31, 1999 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 $1,255.5 $1,790.4 $ 933.9 $3,979.8
Commercial Construction 166.3 276.0 105.6 547.9
Residential Construction - - 2.5 2.5
-------- -------- -------- --------
Total $1,421.8 $2,066.4 $1,042.0 $4,530.2
======== ======== ======== ========
Loans Due After One Year:
At predetermined interest rates $ 858.4
At floating interest rates $2,250.0
23
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 instalment loan
category by loan type at December 31, 1999:
(Dollars in Millions) Amount Percentage
--------------------------------------------
Indirect Instalment $266.0 59.8%
Home Equity 83.2 18.7
Direct Instalment 53.1 11.9
Credit Card 21.2 4.8
Other Consumer Loans 21.2 4.8
------ -----
$444.7 100.0%
====== =====
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 within the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report. 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
inherent loan and lease losses. 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 and
recoveries on loans and leases previously charged off are added to the
reserve.
24
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows selected information relating to Provident's
reserve for loan and lease losses:
December 31,
-----------------------------------------------
(In Thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Reserve for Loan and Lease
Losses at Beginning of Period $75,907 $71,980 $66,693 $60,235 $51,979
Provision Charged to Expense 48,162 31,200 44,750 47,000 14,000
Acquired Reserves 1,263 - 1,814 1,373 -
Loans and Leases Charged Off:
Corporate Lending:
Commercial 25,145 14,391 17,286 17,236 5,096
Mortgage 247 - 1,505 1,945 94
Construction - - - - -
Lease Financing 6,736 5,173 1,367 - -
Consumer Lending:
Instalment 10,109 12,856 24,065 24,342 8,232
Residential 754 841 1,141 199 127
Lease Financing 4,244 3,855 6,009 3,087 647
------- ------- ------- ------- -------
Total Charge-Offs 47,235 37,116 51,373 46,809 14,196
------- ------- ------- ------- -------
Recoveries:
Corporate Lending:
Commercial 2,742 834 1,055 619 6,238
Mortgage 42 1,344 915 333 121
Construction - - - - -
Lease Financing 3,102 226 306 14 -
Consumer Lending:
Instalment 4,516 5,901 5,766 3,490 1,994
Residential 241 190 145 36 13
Lease Financing 2,113 1,348 1,909 402 86
------- ------- ------- ------- -------
Total Recoveries 12,756 9,843 10,096 4,894 8,452
------- ------- ------- ------- -------
Net Loans and Leases
Charged Off 34,479 27,273 41,277 41,915 5,744
------- ------- ------- ------- -------
Reserve for Loan and Lease
Losses at End of Period $90,853 $75,907 $71,980 $66,693 $60,235
======= ======= ======= ======= =======
On a percentage basis, the following table provides annual net
charge-offs to average total loans and leases by category:
December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
Corporate Lending:
Commercial .63% .43% .63% .73% (.06)%
Mortgage .05 (.30) .12 .35 (.01)
Construction - - - - -
Lease Financing 1.26 1.56 .40 (.01) -
Consumer Lending:
Instalment 1.00 1.03 2.25 2.14 .66
Residential .13 .29 .37 .04 .02
Lease Financing .34 .49 .67 .59 .22
---- ---- ---- ---- ----
Net Charge-Offs to Average
Total Loans and Leases .54% .48% .77% .84% .13%
==== ==== ==== ==== ====
25
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 1997 and
1999 follows:
o Commercial: Net charge-offs to average loans were .63% for both 1999
and 1997 and .43% for 1998. Due to the size of many of the
commercial loans, a few large charge-offs can result in a
significant year-to-year fluctuation in the total charge-offs of
this loan type. There were seven charge-offs greater than one
million dollars in 1999 compared to three in both 1998 and 1997.
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
1.26%, 1.56% and .40% for 1999, 1998 and 1997, respectively. 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 lease company. The increase in
the charge-off percentage from 1997 to 1998 was due to increases in
the net charge-offs from both Provident Commercial Group and
Information Leasing Corporation, Provident's small to mid-ticket
equipment leasing company.
o Instalment: Net charge-offs to average loans were 1.00%, 1.03% and
2.25% for 1999, 1998 and 1997, respectively. The decrease in
charge-offs for 1999 as compared to 1998 was a result of lower
charge-offs in indirect auto loans while the reduction in total
charge-offs for 1998 as compared to 1997 was a result of lower
charge-offs in indirect auto loans and in the credit card portfolio.
The reduction of indirect auto loan and credit card charge-offs was
due to higher credit quality standards on the origination of these
loans and improved technology of collection systems.
o Consumer Lease Financings: Net charge-offs to average leases were
.34%, .49% and .67% for 1999, 1998 and 1997, respectively. The
decrease in charge-offs of auto leases reflects the implementation
of risk-based pricing origination standards within this lending
product.
26
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) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------
Corporate Lending:
Commercial $70,600 $50,839 $41,188 $32,640 $32,576
Mortgage 3,170 4,025 5,101 5,361 5,363
Construction 1,970 3,241 3,316 3,196 3,183
Lease Financing 4,152 3,730 5,815 3,159 1,720
------- ------- ------- ------- -------
79,892 61,835 55,420 44,356 42,842
Consumer Lending:
Instalment 7,530 10,132 11,339 11,318 11,324
Residential 361 1,208 942 3,006 1,661
Lease Financing 3,070 2,732 4,279 8,013 4,408
------- ------- ------- ------- -------
10,961 14,072 16,560 22,337 17,393
------- ------- ------- ------- -------
$90,853 $75,907 $71,980 $66,693 $60,235
======= ======= ======= ======= =======
The following table presents a summary of various indicators of credit
quality:
December 31,
---------------------------------------------------
(Dollars In Thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual Loans:
Corporate Lending:
Commercial $43,452 $34,544 $37,800 $14,164 $26,190
Mortgage 2,586 335 335 103 6,716
Construction - - 27 71 78
Lease Financing 1,309 4,002 4,798 3,973 2,605
------- ------- ------- ------- -------
47,347 38,881 42,960 18,311 35,589
Consumer Lending:
Instalment - - - - 230
Residential 6,227 3,692 3,459 2,805 1,678
Lease Financing - - - - -
------- ------- ------- ------- -------
6,227 3,692 3,459 2,805 1,908
------- ------- ------- ------- -------
Total Nonaccrual Loans 53,574 42,573 46,419 21,116 37,497
Renegotiated Loans 1,541 - 377 786 4,753
------- ------- ------- ------- -------
Total Nonperforming Loans 55,115 42,573 46,796 21,902 42,250
------- ------- ------- ------- -------
Other Real Estate and
Equipment Owned: 3,741 2,735 12,396 6,592 5,628
------- ------- ------- ------- -------
Total Nonperforming Assets $58,856 $45,308 $59,192 $28,494 $47,878
======= ======= ======= ======= =======
Loans 90 Days Past Due -
Still Accruing $14,346 $ 9,219 $ 9,811 $18,751 $26,578
Loan and Lease Loss Reserve as
a Percent of:
Total Loans and Leases 1.44% 1.35% 1.42% 1.26% 1.23%
Nonperforming Loans 164.84 178.30 153.82 304.51 142.57
Nonperforming Assets 154.36 167.54 121.60 234.06 125.81
Nonperforming Loans as a Percent
of Total Loans and Leases .87 .76 .93 .41 .86
Nonperforming Assets as a
Percent of:
Total Loans, Leases and Other
Real Estate and Equipment .93 .81 1.17 .54 .98
Total Assets .61 .56 .83 .42 .77
27
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, instalment 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.
Renegotiated loans represent loans that have been restructured to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower.
Although loans and leases may be classified as nonaccrual or
renegotiated, many continue to pay interest irregularly or at less than
the original contractual rates. The gross amount of interest income
recognized during 1999 with respect to these loans and leases was $.8
million compared to $5.4 million that would have been recognized had
the loans and leases remained current in accordance with their original
terms.
Nonaccrual loans increased $11.0 million during 1999. The increase was
composed of $60.3 million of additions to nonaccrual loans, $20.4
million of payments on nonaccrual loans, $26.7 million of nonaccrual
loans charged off and $2.2 million transferred to other real estate
owned. Renegotiated loans increased $1.5 million during 1999 due to the
addition of one loan.
Nonaccrual loans decreased $3.8 million during 1998. Activity during
1998 included $34.1 million of additions to nonaccrual loans, $20.7
million of payments on nonaccrual loans, $15.8 million of nonaccrual
loans charged off and $1.4 million transferred to other real estate
owned. Other real estate decreased $9.7 million during 1998. Activity
in other real estate included $12.6 million of sales and payments on
properties, $3.2 million of additions from foreclosed properties and
$.3 million of charge-offs on properties in other real estate.
Management's determination of the adequacy of the reserve is based on
an assessment of the losses inherent in the lending portfolio. This
assessment consists of an evaluation of loans and leases on an
individual basis, as well as those evaluated as a group.
28
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 for propriety and reports their findings to senior management.
Loans and leases that have been placed on nonaccrual status are further
evaluated for potential losses based upon evaluation 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, 1999 were $53.6 million. In
addition, $47.0 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Securitization Activity".
29
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Receivables from Securitization Trusts and Other Assets
Since March 1998, Provident has provided for credit enhancements to its
securitizations in the form of cash reserve accounts that are funded at
closing. Generally, the cash reserve accounts, referred to as
"Receivables from Securitization Trusts" on the Consolidated Balance
Sheets, are deposited at Provident. Credit losses, with the exception
of credit card loans, are absorbed directly into these receivables from
securitization trusts. The remaining funds not used to cover such
losses are returned to Provident over the term of the securitization.
Receivables from securitization trusts of credit card loans absorb
losses only in the event that the interest spreads are insufficient to
cover such credit losses. Provident estimates the amount of credit
losses based upon loan credit grades, collateral, market conditions and
other pertinent factors. Assumptions used to calculate the estimated
credit losses are provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset Securitization
Activity". Detail of the December 31, 1999 and 1998 receivables from
securitization trusts, net of loss estimates follows:
Receivables Receivables
from Net of
Securitization Loss Loss
(In Thousands) Trusts Estimates(1) Estimates
- -----------------------------------------------------------------------------
1999:
Nonconforming Residential Loans $358,101 $(79,664) $278,437
Prime Home Equity Loans 21,136 (1,312) 19,824
Equipment Leases 35,583 (8,678) 26,905
Credit Card Loans 30,056 - 30,056
-------- -------- --------
$444,876 $(89,654) $355,222
======== ======== ========
1998:
Nonconforming Residential Loans $120,666 $(24,251) $96,415
Prime Home Equity Loans 10,957 (608) 10,349
Equipment Leases 2,196 (4,064) (1,868)
-------- -------- --------
$133,819 $(28,923) $104,896
======== ======== ========
(1) See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset Securitization Activities" for
additional estimates established and an overall analysis of the
credit quality of off-balance sheet loans and leases.
Other assets increased $149.1 million (43%) since December 31, 1998.
The increase is due primarily to increases in servicer advances,
goodwill and other miscellaneous assets.
30
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Deposits
Interest bearing deposits increased $1.3 billion (25%) and $.6 billion
(13%) during 1999 and 1998, respectively. The increase in deposits in
1999 was primarily attributable to the growth in certificates of
deposit and noninterest bearing deposits, while the increase in 1998
was primarily due to the growth in certificates of deposit and savings
deposits. Provident has experienced strong deposit growth as average
core deposits have grown by 12% during 1999, with significant
contribution from Provident Bank of Florida. For 1999 and 1998, average
total interest bearing deposits represented 70% and 67%, 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) 1999 1998 1997
- --------------------------------------------------------------------------------
Noninterest Bearing Deposits of Securitization Trusts $ 426 $ 132 $ -
Other Noninterest Bearing Deposits 749 538 605
Interest Bearing Demand Deposits 311 289 277
Savings Deposits 1,284 1,312 873
Certificates of Deposit Less than $100,000 1,586 1,282 1,652
Certificates of Deposit of $100,000 or More 2,283 1,774 1,289
------ ------ ------
$6,639 $5,327 $4,696
====== ====== ======
At December 31, 1999, maturities on certificates of deposit of $100,000
or more were as follows (in millions):
3 months or less $ 273
Over 3 through 6 months 94
Over 6 through 12 months 182
Over 12 months 1,734
------
Total $2,283
======
Included in certificates of deposit of $100,000 or more at December 31,
1999, 1998 and 1997 were brokered deposits of $1.6 billion, $1.1
billion and $.6 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, 1999, Provident had $1.5 billion of brokered
callable certificates of deposit.
31
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Borrowed Funds
Borrowed funds are an important component of total funds necessary to
support earning assets. In 1999, average short-term debt decreased
$111.0 million (9%) and average long-term debt increased $89.8 million
(12%). The decreases in the average balances of federal funds purchased
and commercial paper were the primary reasons for the decrease in
average short-term debt. The increase in average long-term debt was
primarily the result of increases in Federal Home Loan Bank ("FHLB")
advances that occurred in the latter part of 1998.
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.
Capital Resources
Total stockholders' equity at December 31, 1999 and 1998 was $825.6
million and $703.9 million, respectively. The increase in stockholders'
equity during 1999 was primarily the result of net income exceeding
dividends paid for the year and the acquisition of OHSL Financial Corp.
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 26.13%, 30.72% and 28.15%
for 1999, 1998 and 1997, 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
2000 are estimated to be approximately $33 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.
32
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and the sale of commercial and consumer loans and
leases. Another source for providing liquidity is the generation of new
deposits. Provident may borrow both short-term and long-term funds.
Provident has an additional $1.2 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 $339.8 million of long-term
debt is due to be repaid during 2000.
Provident's primary liquidity needs during 2000 will be the payment of
dividends to its preferred and common shareholders, funds for activity
within commercial paper and interest payments on long-term debt and
Junior Subordinated Debentures. The major source of liquidity for
Provident is dividends paid to it by its subsidiaries. Provident
received dividends of $60 million, $51 million and $0 million in 1999,
1998 and 1997, respectively. The maximum amount available for dividends
that may be paid in 2000 to Provident by its banking subsidiaries
without approval is approximately $161.6 million, plus 2000 net
earnings. Management believes that amounts available from the banking
subsidiaries will be sufficient to meet Provident's liquidity
requirements in 2000. Under the Federal Deposit Insurance Corp.
Improvement Act of 1991 ("FDICIA"), an insured depository institution,
such as Provident's banking subsidiaries, 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 Financial is presented in Note 19, included in "Notes to
Consolidated Financial Statements".
At December 31, 1999, Provident had $200 million in general purpose
lines of credit with unaffiliated banks. As of January 18, 2000, these
lines had not been used. An additional source of liquidity to Provident
is the sale of investment securities.
33
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASSET SECURITIZATION ACTIVITY
Provident securitizes and sells many of the loans and leases it
originates. Loan sales through securitizations provide Provident
immediate cash flows to fund additional loan originations, provide
future cash flows generated by the payment differentials between
interest paid by the borrowers and interest remitted to the investors,
and enhance current operating profits from gain on sale recognition.
The following discusses the impact which asset securitization activity
had on the Consolidated Statements of Income, Consolidated Balance
Sheets and the credit quality of the securitized loans and leases.
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 securitizations sold during the past three years:
1999 1998 1997
-----------------------------------------------------------------
(In Thousands) Principal Gain Principal Gain Principal Gain
- ---------------------------------------------------------------------------------------------------
Non-cash Securitization Gains:
Nonconforming Residential $2,330,047 $73,304 $1,060,000 $36,337 $ 844,120 $36,886
Prime Consumer Home Equity 169,999 5,758 183,150 4,733 244,507 10,446
Credit Card 230,000 3,993 - - - -
--------- ------ --------- ------ --------- ------
2,730,046 83,055 1,243,150 41,070 1,088,627 47,332
Cash Securitization Gains:
Equipment Leases 223,764 13,164 211,276 13,429 - -
Non-recognition of
Securitization Gains:
Automobile Leases 858,815 - 351,185 - 342,255 -
Warehouse Lending 251,200 - 400,000 - - -
--------- ------ --------- ------ --------- ------
1,110,015 - 751,185 - 342,255 -
--------- ------ --------- ------ --------- ------
Total Securitizations $4,063,825 $96,219 $2,205,611 $54,499 $1,430,882 $47,332
========== ======= ========== ======= ========== =======
The securitization and sale of nonconforming residential, prime home
equity and credit card loans have resulted in the recognition of
non-cash gains. Under the structure of these securitizations, Provident
receives cash equal to the amount of loans sold. The methodology used
by Provident to calculate gains on the sale of these securities follow:
1. An amortization schedule is created for the loan portfolio based on
each loan's maturity, rate and balance.
2. The amortization schedule is adjusted using a prepayment speed
curve. The prepayment curve estimates the actual timing of principal
payments by mortgage borrowers.
3. The net spread is calculated on the loan portfolio by taking the
cash inflows (loan portfolio yield and prepayment penalties) and
reducing it by the cash outflows (bond yield paid to investors,
servicing fees and other fees). Prepayments reduce the average life
of the portfolio, which in turn reduces the net spread collected by
Provident.
4. The present value of the net spread is calculated by applying a
discount rate indicative of the risk associated with the
transaction.
34
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o In pre-1998 credit enhancement structures, the net spread is used
to create excess collateral as credit support. In these
transactions, cash flow to Provident is delayed until the target
over-collateralization is met and cash is released. This delay in
cash receipts reduces the present value.
o Beginning with the March 1998 securitization, Provident has
provided credit enhancement in the form of an upfront cash
reserve account. Therefore Provident does not experience delays
in cash receipts. The spread is not subordinated to the losses.
Losses are absorbed directly in the cash reserve account instead
of reducing the net spread. In addition the cash reserve account
is placed in a noninterest bearing checking account at Provident,
whereby no cash outlay is experienced in the funding of the
account.
5. The gain is calculated by taking the present value of the net spread
on a relative fair value basis and reducing it by the present value
of the expected credit losses, underwriting expenses, accounting and
legal fees and deferred expenses paid to originate the loans.
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
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, 1999, 1998 and 1997,
net operating lease revenue recognized on these automobile lease
securitizations was $8.4 million, $7.8 million and $0.4 million. Sales
of mortgage warehouse lines do not result in up-front gains due to the
short-term nature of the underlying assets sold.
35
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Underlying assumptions used in the determination of future cash flows
on the loan and lease portfolios follow:
1999
Securitizations Weighted Average of All Securitizations
------------------------------------------------------------------------
Nonconforming Nonconforming Prime Credit Equipment Auto
Residential Residential Home Equity Cards Leasing Leasing
- ------------------------------------------------------------------------------------------------
Assumptions Used:
Prepayment Speed (1):
Initial Rate 13.41% 12.04% 10.00% n/a n/a n/a
Peak Rate 35.00% 32.30% 30.00% n/a n/a n/a
Calculated Weighted
Average Life of the
Loan Portfolios 2.4 Years 2.7 Years 2.1 Years n/a n/a n/a
Estimated Credit
Losses (2):
Annual Basis 1.10% 1.08% 0.19% 5.40% 1.00% 0.50%
Percentage of
Original Balance 2.70% 2.97% 0.41% 2.25% 1.96% 2.22%
Discount Rate 12.00% 11.85% 10.27% 12.00% 9.94% n/a
<FN>
(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.
</FN>
Gain on sale accounting requires management to make assumptions
regarding prepayment speeds and credit losses for the securitized loan
and lease pools. In general, Provident's securitized pools have
performed better than the initial estimates. Therefore management
believes these estimates to be conservative. The performance of the
pools are extensively monitored, and adjustments to these assumptions
will be made if necessary.
No assurance can be given that the level of loan originations and
acquisitions will continue to permit the recognition of such gains on
sales of loans in the future. The percentage gains may also be affected
by changing conditions in the asset-backed markets upon which Provident
has no control.
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 $29.2
million, $5.9 million and $1.8 million in loan servicing fees during
1999, 1998 and 1997, respectively.
36
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nonconforming residential loans, originated or acquired by the Mortgage
Banking business line, have been securitized and sold on a quarterly
basis since 1996. Major characteristics of these nonconforming loans
include: 55% with an "A" credit grade and 30% with a "B" credit grade;
68% with full documentation; 68% have prepayment penalties; 96% are
secured by first mortgages; 91% are owner occupied; and, on average,
have a 79% 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) 1999 1998 1997
- --------------------------------------------------------------------------
Originations for the Year Ending:
Fixed Rate, Fully Amortizing $ 868,363 $ 337,846 $141,305
Fixed Rate, 15-Year Balloon Payments 556,768 176,838 101,518
---------- ---------- --------
Total Fixed Rate Loans 1,425,131 514,684 242,823
Adjustable, Six-Month LIBOR 9,760 28,871 143,512
Adjustable Rate, 3/27 Loans 804,387 446,839 351,125
Adjustable Rate, 2/28 Loans 89,224 69,544 98,437
Adjustable Rate, 5/25 Loans 1,636 318 8,433
---------- ---------- --------
Total Adjustable Rate Loans 905,007 545,572 601,507
---------- ---------- --------
Total Originations $2,330,138 $1,060,256 $844,330
========== ========== ========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,164,437 $ 431,384 $154,918
Fixed Rate, 15-Year Balloon Payments 708,246 258,012 130,983
---------- ---------- --------
Total Fixed Rate Loans 1,872,683 689,396 285,901
Adjustable, Six-Month LIBOR 66,187 110,680 166,899
Adjustable Rate, 3/27 Loans 1,280,093 722,258 415,707
Adjustable Rate, 2/28 Loans 168,016 139,245 98,794
Adjustable Rate, 5/25 Loans 6,200 8,780 11,702
---------- ---------- --------
Total Adjustable Rate Loans 1,520,496 980,963 693,102
---------- ---------- --------
Total Outstanding $3,393,179 $1,670,359 $979,003
========== ========== ========
The following table estimates the differences in the recognition of net
income for the Mortgage Banking business line over the past three years
based on having securitized its loan portfolio as reported (including
gain on sale of loans), and as if the loans had been held in the
portfolio and interest recognized as earned (excluding gain on sale of
loans). The differences, primarily in the areas of net interest income,
gain on sale of loans, servicing fee income and provision expense, are
a matter of timing and not total income to be recorded over the life of
the loans.
37
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year Ended 1999 Year Ended 1998 Year Ended 1997
-------------------------------------------------------------------
As As As As As As
(In Thousands) Reported Earned Reported Earned Reported Earned
- -------------------------------------------------------------------------------------------
Net Interest Income $ 22,462 $107,604 $ 23,767 $ 61,772 $ 7,885 $ 26,734
Loan Loss Provision (4,220) (25,496) (3,462) (14,598) (2,626) (9,894)
-------- -------- -------- -------- -------- --------
18,242 82,108 20,305 47,174 5,259 16,840
Noninterest Income 99,773 17,363 49,199 9,278 45,678 10,858
Noninterest Expense (57,648) (57,648) (46,895) (46,895) (27,158) (27,158)
-------- -------- -------- -------- -------- --------
Income Before Taxes 60,367 41,823 22,609 9,557 23,779 540
Income Taxes (21,371) (14,805) (8,004) (3,383) (8,292) (188)
-------- -------- -------- -------- -------- --------
Net Income $ 38,996 $ 27,018 $ 14,605 $ 6,174 $ 15,487 $ 352
======== ======== ======== ======== ======== ========
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 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) 1999 1998 1997
- ----------------------------------------------------------------
Nonconforming Residential $3,393,179 $1,670,359 $ 979,003
Auto Leases 1,366,598 648,928 219,259
Prime Home Equity 398,882 313,445 334,425
Equipment Leases 298,161 187,654 -
Warehouse 251,200 400,000 -
Credit Card 230,000 - -
---------- ---------- ----------
$5,938,020 $3,220,386 $1,532,687
========== ========== ==========
In connection with the recognition of non-cash gains, the present value
of future cash flows, referred to as retained interest in securitized
assets ("RISA"), are recorded as assets within the investment
securities line item of the consolidated balance sheets. Components of
the RISA as of December 31, 1999 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- -----------------------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans, Net of
Payments to Certificate Holders $497,560 $32,270
Less:
Estimated Credit Loss (1) (19,904) (711)
Servicing and Insurance Expense (54,918) (4,569)
Discount to Present Value (66,538) (3,235)
-------- -------
Carrying Value of Retained Interest in Securitized Assets $356,200 $23,755
======== =======
<FN>
(1) Only the pre-1998 securitizations provide for estimated credit
losses within the cash flows of the RISA. Information on all
estimated credit losses is presented in the "Credit Quality of
Securitized Assets" section of "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset
Securitization Activity" immediately following this table.
</FN>
38
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT QUALITY OF SECURITIZED ASSETS: The following table presents a
summary of various indicators of the credit quality of off-balance
sheet loans and leases as of and for the year ended December 31, 1999:
(Dollars in Nonconforming Prime Home Equipment Auto Credit Warehouse
Thousands) Residential(1) Equity(1) Leases(1) Leases(2) Cards(2) (2)
--------------------------------------------------------------------------------------------------
For the Year Ended:
Average Securitized
Assets $2,361,001 $309,624 $270,384 $ 921,688 $161,667 $318,493
Net Charge-Offs 19,126 593 6,255 3,297 8,653 -
Net Charge-Offs
to Average
Securitized Assets 0.81% 0.19% 2.31% 0.36% 5.35% 0.00%
As of Year-End:
Securitized Assets $3,393,179 $398,882 $298,161 $1,366,598 $230,000 $251,200
Estimated Credit
Losses Provided For 99,567 2,023 12,799 1,136 395 251
Estimated Credit
Losses to Year-End
Securitized Assets 2.93% 0.51% 4.29% 0.08% 0.17% 0.10%
Estimated Credit
Loss Rates:
Annual Basis 1.08% 0.19% 1.00% 0.50% 5.40% n/a
Percentage of
Original Balance 2.97% 0.41% 1.96% 2.22% 2.25% n/a
Delinquency Rates:
30 to 89 Days 2.58% 1.28% 2.60% 0.33% 1.65% 7.18%
90 or More 5.23% 0.17% 1.49% 0.08% 1.25% 3.68%
<FN>
(1) Estimates for credit losses on nonconforming residential loans,
prime home equity loans and equipment leases are determined at
the time of sale. The estimated credit loss balance for pre-1998
securitizations are contained within the RISA. Since the
beginning of 1998, Provident has provided for credit
enhancements to its securitizations in the form of cash reserve
accounts that are funded at closing. Generally, the cash reserve
accounts, referred to as "Receivables from Securitization
Trusts" on the Consolidated Balance Sheets, are deposited at
Provident. Credit losses are absorbed directly against these
receivables from securitization trusts. The remaining funds not
used to cover such losses are returned to Provident over the
term of the securitization. Provident estimates the amount of
credit losses based upon loan credit grades, collateral, market
conditions and other pertinent factors. Detail of the December
31, 1999 and 1998 receivables from securitization trusts is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Receivables from
Securitization Trusts and Other Assets".
(2) Estimates for credit losses on auto leases, credit cards and
warehouse loans are provided for throughout the life of the
securitization. The loss estimates are accrued monthly
increasing the estimate, while the charge-offs of uncollectible
balances reduce the estimate. The loss estimate balance
represents that amount by which actual losses to date have been
less than estimated losses to date. The loss estimate is
included in the Accrued Interest and Other Liabilities line of
the Consolidated Balance Sheets.
</FN>
39
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET RISK MANAGEMENT
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
analysis 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 source for funding 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. Asset securitizations and conduit funding supplement the
on-balance sheet sources. 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 the 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.
40
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 agreements. 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.
1999 1998
---------------------------------------------------
100 Basis Points Decrease 0.2% 2.4%
100 Basis Points Increase (0.1) (2.6)
200 Basis Points Decrease 0.4 4.6
200 Basis Points Increase (0.5) (5.2)
OFF-BALANCE SHEET FINANCIAL AGREEMENTS
Provident employs derivatives, such as interest rate swaps, interest
rate caps, forward contracts and financial futures contracts primarily
to manage the interest rate risk inherent in Provident's core
businesses.
Provident uses interest rate swaps as its primary off-balance sheet
financial instrument. At December 31, 1999, Provident held
approximately $4.5 billion in interest rate swaps that typically
convert a fixed rate obligation into a shorter repricing frequency.
Approximately $2.6 billion are pay variable/receive fixed swaps used to
convert long-term fixed rate deposit and debt liabilities to a floating
interest rate, based on LIBOR.
Interest rate swaps in which Provident pays a fixed rate of interest in
exchange for receiving a floating interest rate of LIBOR or prime rate
are used to manage the interest rate risk associated with
securitizations, long-term fixed rate commercial real estate loans, and
the value of assets to be acquired in pending acquisitions. Provident
had $1.9 billion of pay fixed/receive variable rate swaps at December
31, 1999.
Provident manages the credit risk in these transactions through its
counterparty credit policy, which limits transactions to counterparties
classified as investment grade by the rating agencies of Moody's and
Standard & Poor's. Generally, Provident requires bilateral collateral
agreements as a technique to reduce credit risk. These bilateral
collateral agreements have threshold credit limits above which
investment securities must be pledged as collateral for the
mark-to-market. At December 31, 1999, Provident pledged investment
securities with a carrying value of $139 million as collateral to
counterparties to cover the mark-to-market. As a second credit risk
measure, Provident utilizes bilateral netting of interest payments. The
frequency and timing of the interest payments are matched between
counterparties, thereby minimizing the credit exposure.
41
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At December 31, 1999, there were no past due amounts on any interest
rate swap contracts. Provident has never experienced a credit loss
related to an off-balance sheet financial agreement, and does not
reserve for credit losses on these transactions.
The following table shows the changes in interest rate swap agreements
for the years ending December 31, 1999 and 1998. The notional amount of
interest rate swaps increased during 1999 as a result of acquiring
additional hedges on its securitizations.
(In Millions) 1999 1998
-----------------------------------------------------------
Beginning Notional Amount $1,796 $1,545
New Contracts 3,896 869
Called / Matured / Terminated Contracts (1,220) (618)
------ ------
Ending Notional Amount $4,472 $1,796
====== ======
From time to time, Provident uses forward contracts and financial
futures contracts to manage interest rate risk in a manner similar to
interest rate swap agreements. At December 31, 1999, Provident did not
have a significant exposure of these types of derivatives.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". 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 on the balance sheet and to measure
those instruments at fair value. The accounting of the gain or loss
resulting from the change in fair value depends on the intended use of
the derivative. For a derivative used as a hedging instrument, 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 for only the amount that the hedge is ineffective
in achieving offsetting changes in fair value. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" was issued in
1999. This SFAS delays the provisions of SFAS No. 133 from becoming
effective until January 1, 2001.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that its hedges are highly effective and that the
adoption of this SFAS will not have a material impact on Provident's
financial position or the results of its operations.
42
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
The Year 2000 issue arose because many existing computer programs use
only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results before, during and
after January 1, 2000.
During 1999, Provident completed its preparation for the Year 2000 date
change. Preparation included testing and remediating mainframe
application codes; testing and upgrading PC software applications,
spreadsheets and databases; soliciting Year 2000 compliance information
on its environmental and other embedded systems; monitoring Year 2000
readiness of third party interdependencies, vendors and borrowers; and
developing contingency plans in case of system failures. To date, no
significant Year 2000 compliance problems have been detected. Since
inception, Provident expensed $8.7 million on its Year 2000 compliance,
including $2.3 million during 1999.
Provident will continue to monitor all of its business processes,
including interaction with its customers, vendors and other outside
parties throughout 2000 to address any issues and ensure all processes
continue to function properly.
43
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk Management".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors .................. 45
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets .................................... 46
Consolidated Statements of Income .............................. 47
Consolidated Statements of Changes in Shareholders' Equity ..... 48
Consolidated Statements of Cash Flows .......................... 49
Notes to Consolidated Financial Statements ..................... 50
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) ........... 75
Pro-forma Information of Pending Acquisition (unaudited) ........... 76
44
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,
1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
January 18, 2000
45
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
(Dollars in Thousands) 1999 1998
- ---------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 280,136 $ 267,441
Federal Funds Sold and Reverse Repurchase Agreements 82,000 60,000
Trading Account Securities - 50,333
Investment Securities Available for Sale
(amortized cost - $2,094,483 and $1,528,008) 2,019,392 1,514,153
Loans and Leases:
Corporate Lending:
Commercial 3,979,796 3,270,675
Mortgage 474,456 436,127
Construction 547,930 437,563
Lease Financing 391,529 243,722
Consumer Lending:
Instalment 444,637 621,357
Residential - Held for Sale 123,800 190,707
Lease Financing 361,907 423,354
---------- ----------
Total Loans and Leases 6,324,055 5,623,505
Reserve for Loan and Lease Losses (90,853) (75,907)
---------- ----------
Net Loans and Leases 6,233,202 5,547,598
Leased Equipment 171,258 167,006
Premises and Equipment 87,976 78,621
Receivables from Securitization Trusts 355,222 104,896
Other Assets 494,087 344,939
---------- ----------
$9,723,273 $8,134,987
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $1,174,606 $ 669,840
Interest Bearing 5,463,962 4,657,481
---------- ----------
Total Deposits 6,638,568 5,327,321
Short-Term Debt 975,835 807,503
Long-Term Debt 836,403 934,294
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 220,069 98,879
Accrued Interest and Other Liabilities 226,745 263,136
---------- ----------
Total Liabilities 8,897,620 7,431,133
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, 44,085,929 and 43,345,149 Issued 13,050 12,805
Capital Surplus 254,737 224,745
Retained Earnings 599,675 489,751
Treasury Stock, 0 and 572,700 Shares - (21,425)
Accumulated Other Comprehensive Loss (48,809) (9,022)
---------- ----------
Total Shareholders' Equity 825,653 703,854
---------- ----------
$9,723,273 $8,134,987
========== ==========
See notes to consolidated financial statements.
46
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------
(In Thousands, Except Per Share Data) 1999 1998 1997
- ------------------------------------------------------------------------------
Interest Income:
Interest and Fees On Loans and Leases $565,515 $525,827 $492,114
Interest on Investment Securities 104,322 100,122 78,826
Other Interest Income 4,132 7,811 872
-------- -------- --------
Total Interest Income 673,969 633,760 571,812
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 55,583 50,163 27,670
Time Deposits 186,581 172,143 193,779
-------- -------- --------
Total Interest on Deposits 242,164 222,306 221,449
Interest on Short-Term Debt 59,726 70,958 35,640
Interest on Long-Term Debt 46,952 45,141 43,461
Interest on Junior Subordinated Debentures 13,200 8,662 8,662
-------- -------- --------
Total Interest Expense 362,042 347,067 309,212
-------- -------- --------
Net Interest Income 311,927 286,693 262,600
Provision for Loan and Lease Losses (48,162) (31,200) (44,750)
-------- -------- --------
Net Interest Income After Provision for
Loan and Lease Losses 263,765 255,493 217,850
Noninterest Income:
Service Charges on Deposit Accounts 31,589 27,242 24,752
Other Service Charges and Fees 70,029 43,873 29,080
Operating Lease Income 40,902 37,481 26,207
Warrant Gains 9,147 15,354 12,782
Gain on Sales of Loans and Leases 98,860 63,733 54,318
Security Gains 71 12,940 9,713
Other 19,880 22,364 15,806
-------- -------- --------
Total Noninterest Income 270,478 222,987 172,658
Noninterest Expenses:
Salaries, Wages and Benefits 145,948 124,639 101,454
Depreciation on Operating Lease Equipment 23,076 21,662 17,667
Occupancy 17,506 16,951 12,744
Professional Fees 19,262 18,276 14,912
Equipment Expense 23,482 20,771 15,208
Charges and Fees 15,144 14,317 12,652
Special Charges and Exit Costs - 22,005 -
Other 63,737 63,785 51,341
-------- -------- --------
Total Noninterest Expenses 308,155 302,406 225,978
-------- -------- --------
Income Before Income Taxes 226,088 176,074 164,530
Applicable Income Taxes 79,695 61,122 57,093
-------- -------- --------
Net Income $146,393 $114,952 $107,437
======== ======== ========
Basic Earnings Per Common Share $ 3.40 $ 2.66 $ 2.59
Diluted Earnings Per Common Share 3.29 2.56 2.45
See notes to consolidated financial statements.
47
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, 1997 $7,000 $11,973 $160,586 $330,211 $ - $ 3,980 $513,750
Net Income 107,437 107,437
Change in Unrealized
Gains (Losses) on
Marketable Securities (3,988) (3,988)
--------
Comprehensive Income 103,449
Cash Dividends Declared
on Common Stock,
$.72 Per Share (29,535) (29,535)
Cash Dividends Declared
on Preferred Stock,
$10.13 Per Share (712) (712)
Exercise of Stock Options 223 15,845 16,068
Acquisitions 286 20,105 2,702 143 23,236
Other 81 4 85
------ ------- -------- -------- ------- -------- --------
Balance at December 31, 1997 7,000 12,482 196,617 410,107 - 135 626,341
Net Income 114,952 114,952
Change in Unrealized
Gains (Losses) on
Marketable Securities (9,157) (9,157)
--------
Comprehensive Income 105,795
Cash Dividends Declared
on Common Stock,
$.80 Per Share (34,518) (34,518)
Cash Dividends Declared
on Preferred Stock,
$11.25 Per Share (790) (790)
Exercise of Stock Options 298 25,000 25,298
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 12,805 224,745 489,751 (21,425) (9,022) 703,854
Net Income 146,393 146,393
Change in Unrealized
Gains (Losses) on
Marketable Securities (39,787) (39,787)
--------
Comprehensive Income 106,606
Cash Dividends Declared
on Common Stock,
$.88 Per Share (37,378) (37,378)
Cash Dividends Declared
on Preferred Stock,
$12.38 Per Share (870) (870)
Exercise of Stock Options 53 4,088 4,141
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 $13,050 $254,737 $599,675 $ - $(48,809) $825,653
====== ======= ======== ======== ======= ======== ========
See notes to consolidated financial statements.
48
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
(In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 146,393 $ 114,952 $ 107,437
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 48,162 31,200 44,750
Amortization of Goodwill 1,617 1,688 1,648
Other Amortization and Accretion (20,217) (10,633) (2,042)
Depreciation of Leased Equipment
and Premises and Equipment 43,067 38,626 29,723
Realized Investment Security Gains (71) (12,940) (9,713)
Proceeds From Sale of Loans Held for Sale 2,483,213 1,384,836 1,189,857
Origination of Loans Held for Sale (2,460,853) (1,468,591) (952,060)
Realized Gains on Residential Loans Held for Sale (75,389) (41,704) (43,716)
(Increase) Decrease in Trading Account Securities 15,737 (15,737) -
(Increase) Decrease in Interest Receivable (18,597) (10,056) 607
Increase in Other Assets (48,267) (32,054) (150,000)
Increase (Decrease) in Interest Payable (2,640) 3,456 (275)
Deferred Income Taxes 18,579 (1,199) 18,828
Increase (Decrease) in Other Liabilities (42,398) 67,202 1,699
----------- ----------- -----------
Net Cash Provided by Operating Activities 88,336 49,046 236,743
----------- ----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 427,275 4,098,626 2,288,053
Proceeds from Maturities and Prepayments 238,706 700,914 126,889
Purchases (784,879) (4,809,785) (2,627,773)
Increase in Receivables Due From Securitization Trusts (250,326) (104,896) -
Proceeds from Sale-Leaseback Transactions 858,815 351,185 330,000
Net Increase in Loans and Leases (1,727,750) (940,693) (238,863)
Net Increase in Operating Lease Equipment (27,327) (76,273) (34,918)
Net Increase in Premises and Equipment (26,841) (24,126) (30,305)
Acquisitions 791 - 13,632
----------- ----------- -----------
Net Cash Used in Investing Activities (1,291,536) (805,048) (173,285)
----------- ----------- -----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 294,843 131,623 -
Net Increase (Decrease) in Deposits 825,600 499,400 (78,206)
Net Increase (Decrease) in Short-Term Debt 202,928 (33,218) 206,305
Principal Payments on Long-Term Debt (164,323) (45,700) (214,406)
Proceeds from Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 121,118 286,532 34,440
Cash Dividends Paid (38,248) (35,308) (30,247)
Purchase of Treasury Stock (8,645) (21,425) -
Proceeds from Exercise of Stock Options 4,141 25,298 16,068
Net Increase in Other Equity Items 481 - 82
----------- ----------- -----------
Net Cash Provided by (Used In) Financing Activities 1,237,895 807,202 (65,964)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 34,695 51,200 (2,506)
Cash and Cash Equivalents at Beginning of Period 327,441 276,241 278,747
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 362,136 $ 327,441 $ 276,241
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 364,683 $ 343,611 $ 309,488
Income Taxes 43,495 36,371 27,375
Non-Cash Activity:
Transfer of Loans and Premises and Equipment
to Other Real Estate 5,164 3,213 13,098
Common and Treasury Stock Issued in Acquisitions 54,209 - 20,391
Residual Interest in Securitized Assets
Created from the Sale of Loans 220,566 137,319 106,269
See notes to consolidated financial statements.
49
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - ORGANIZATION AND ACQUISITIONS: Provident is a
Cincinnati-based bank holding company which owns and operates two
banking subsidiaries, The Provident Bank and Provident Bank of Florida.
(The Provident Bank of Kentucky was merged into The Provident Bank on
March 23, 1998.) While Provident banking subsidiaries are located in
Ohio, northern Kentucky and southwest Florida, it provides services to
customers on a national basis.
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
$54.2 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 $29.6 million of goodwill being
recorded. Pro-forma results of operations as though the OHSL
acquisition had occurred at the beginning of the period are not
provided due to the immaterial effects it would have on Provident's
financial statements taken as a whole.
NOTE 2. - ACCOUNTING POLICIES: The following is a summary of
significant accounting policies:
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.
50
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, instalment 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. 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 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.
51
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOAN SECURITIZATIONS: Provident actively sells nonconforming
residential loans, home equity loans, credit cards and leases as
securities to investors. As required by SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", gains or losses for nonconforming residential loans, home
equity loans and credit card securitizations 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 servicing revenue. These net cash flows, which are
represented by a retained interest in securitized assets, are included
in "Investment Securities Available for Sale".
Gains and losses on the securitization of equipment leases are
determined based on the difference between the sale proceeds and the
carrying value of loans sold net of its allocated loan loss reserve.
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. Leased equipment and
premises and equipment are reviewed for impairment whenever
circumstances indicate that the carrying value of the assets may not be
recoverable. An impairment loss is recorded when the sum of the
expected future cash flows is less than the carrying amount 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". 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.
INTANGIBLES: 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.
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.
52
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS: Provident employs derivatives such as
interest rate swaps, interest rate caps, 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 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 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. At December 31, 1999, these
unamortized amounts were immaterial. 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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of
FASB Statement No. 133" 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 derivative instruments not
accounted for as hedges, changes in fair value are required to be
recognized in earnings.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that its hedges are highly effective and that the
adoption of this SFAS will not have a material impact on Provident's
financial position or the results of its operations.
COMPREHENSIVE INCOME: SFAS No. 130, "Reporting Comprehensive Income"
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income includes net income and certain items
that are reported directly within a separate component of stockholders'
equity and bypass net income. The provisions of this SFAS became
effective in 1998 and are disclosed within the Consolidated Statements
of Changes in Shareholders' Equity. Implementation of this statement
had no impact on net income or shareholders' equity.
53
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - 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
- ---------------------------------------------------------------------------------------
1999:
U.S. Treasury and Federal Agency
Debentures $ 226,576 $ - $ (7,843) $ 218,733
State and Political Subdivisions 1,822 - (17) 1,805
Mortgage-Backed Securities 1,402,677 17 (60,070) 1,342,624
Asset-Backed Securities 104,700 1 (4,948) 99,753
Other Securities 358,708 10 (2,241) 356,477
---------- ------ -------- ----------
$2,094,483 $ 28 $(75,119) $2,019,392
========== ====== ======== ==========
1998:
U.S. Treasury and Federal Agency
Debentures $ 152,737 $ 46 $ (1,445) $ 151,338
State and Political Subdivisions 1,939 - (19) 1,920
Mortgage-Backed Securities 1,057,902 869 (11,002) 1,047,769
Asset-Backed Securities 247,311 319 (1,775) 245,855
Other Securities 68,119 29 (877) 67,271
---------- ------ -------- ----------
$1,528,008 $1,263 $(15,118) $1,514,153
========== ====== ======== ==========
Investment securities with a carrying value of approximately $768.7
million and $683.7 million at December 31, 1999 and 1998, respectively,
were pledged as collateral to secure public and trust deposits,
repurchase agreements, Federal Home Loan Bank ("FHLB") advances,
interest rate swap agreements and for other purposes.
In 1999, 1998 and 1997 gross gains of $.5 million, $14.4 million and
$12.5 million and gross losses of $.4 million, $1.5 million and $2.8,
respectively, were realized on the sale of securities available for
sale.
Mortgage-backed and asset-backed securities are shown below based on
their estimated average lives at December 31, 1999. 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 $ 470,116 $ 470,057
Due after 1 through 5 years 978,780 944,740
Due after 5 through 10 years 548,844 510,486
Due after 10 years 96,743 94,109
---------- ----------
Total $2,094,483 $2,019,392
========== ==========
54
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in investment securities are the retained interest in
securitized assets representing the present value of net cash flows due
to Provident from loan securitizations and sales. Components of the
retained interest in securitized assets and the underlying assumptions
follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- -------------------------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans, Net of
Payments to Certificate Holders $ 497,560 $32,270
Less:
Estimated Credit Loss (19,904) (711)
Servicing and Insurance Expense (54,918) (4,569)
Discount to Present Value (66,538) (3,235)
--------- -------
Carrying Value of Retained Interest in Securitized Assets $ 356,200 $23,755
========= =======
1999 Weighted Average of
Securitizations All Securitizations
---------------------------------------------
Nonconforming Nonconforming Prime
Residential Residential Home Equity
- -------------------------------------------------------------------------------
Assumptions Used:
Prepayment Speed:
Initial Rate 13.41% 12.04% 10.00%
Peak Rate 35.00% 32.30% 30.00%
Calculated Weighted Average
Life of the Loan Portfolios 2.4 Years 2.7 Years 2.1 Years
Estimated Credit Losses:
Annual Basis 1.10% 1.08% 0.19%
Percentage of Original Balance 2.70% 2.97% 0.41%
Discount Rate 12.00% 11.85% 10.27%
Estimated credit losses for pre-1998 securitizations are contained
within the RISA. Since the beginning of 1998, Provident has provided
for credit enhancements to its securitizations in the form of cash
reserve accounts that are funded at closing. Credit losses are absorbed
directly against these cash reserves. The remaining funds not used to
cover such losses are returned to Provident over the term of the
securitization. The balances of "Receivables from Securitization
Trusts" on the Consolidated Balance Sheets represent management's
estimate of the cash reserves to be returned to Provident.
NOTE 4 - 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 is
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 leased property, net of
depreciation, is recorded as "Leased Equipment". The rental income is
recorded as noninterest income while the depreciation on the leased
property is recorded as noninterest expense.
55
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Rental receivable at December 31, 1999 and 1998 include $41.4 million
and $20.9 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 $81.6 million and $50.6 million in total at December 31,
1999 and 1998, 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:
1999 1998
---------------------------------------------
(In Thousands) Commercial Consumer Commercial Consumer
- ----------------------------------------------------------------------------------
Rentals Receivable $318,054 $183,718 $172,251 $194,378
Leases in Process 48,798 12,947 37,509 33,804
Estimated Residual Value of
Leased Assets 115,295 234,741 97,982 239,826
-------- -------- -------- --------
482,147 431,406 307,742 468,008
Less: Unearned Income (90,618) (69,499) (64,020) (44,654)
-------- -------- -------- --------
Net Investment in Lease Financing $391,529 $361,907 $243,722 $423,354
======== ======== ======== ========
The following is a schedule by year of future minimum lease payments to
be received for the next five years as of December 31, 1999:
(In Thousands) Commercial Consumer
---------------------------------------
2000 $ 88,772 $ 61,374
2001 58,603 46,180
2002 53,070 34,005
2003 36,985 24,924
2004 26,639 13,530
Thereafter 53,985 3,705
-------- --------
Total $318,054 $183,718
======== ========
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 $53.2 million and $45.6 million as
of December 31, 1999 and 1998, respectively. The future gross minimum
rentals, by year, under noncancelable leases for the rental of leased
equipment are $33.3 million for 2000; $29.5 million for 2001; $25.7
million for 2002; $19.8 million for 2003; $15.2 million for 2004 and
$15.9 million thereafter.
56
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the leases discussed above, Provident sold $858.8
million and $351.2 million of vehicles, which had been classified as
finance leases, to institutional investors under sale-leaseback
transactions during 1999 and 1998, respectively. 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.
NOTE 5 - 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) 1999 1998 1997
- -----------------------------------------------------------------------
Balance at Beginning of Period $75,907 $ 71,980 $ 66,693
Provision for Loan and Lease Losses
Charged to Earnings 48,162 31,200 44,750
Acquired Reserves 1,263 - 1,814
Recoveries Credited to the Reserve 12,756 9,843 10,096
-------- -------- --------
138,088 113,023 123,353
Losses Charged to the Reserve (47,235) (37,116) (51,373)
-------- -------- --------
Balance at End of Period $ 90,853 $ 75,907 $ 71,980
======== ======== ========
The following table shows Provident's investment in impaired loans as
defined under SFAS No. 114 as amended by SFAS No. 118:
(In Thousands) 1999 1998
- -----------------------------------------------------------------------
Impaired Loans Requiring a Valuation Allowance of
$13.3 Million in 1999 and $10.7 Million in 1998 $30,469 $18,921
Impaired Loans Not Requiring a Valuation Allowance 2,000 2,000
------- -------
Total Impaired Loans $32,469 $20,921
======= =======
Average Balance of Impaired Loans for the Year $30,990 $16,787
The valuation allowance recorded on impaired loans is included in the
reserve for loan losses.
Loans and leases on nonaccrual status at December 31, 1999, 1998 and
1997 were $53.6 million, $42.6 million and $46.4 million, respectively.
Loans renegotiated to provide a reduction or deferral of interest or
principal were $1,541,000, $0 and $377,000 at December 31, 1999, 1998
and 1997, respectively.
57
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PREMISES AND EQUIPMENT: The following is a summary of premises
and equipment at December 31:
(In Thousands) 1999 1998
- -----------------------------------------------------------------------
Land $ 9,253 $ 8,990
Buildings 29,637 24,525
Leasehold Improvements 13,601 12,736
Furniture and Fixtures 130,551 114,554
-------- --------
183,042 160,805
Less Depreciation and Amortization (95,066) (82,184)
-------- --------
Total $ 87,976 $ 78,621
======== ========
Rent expense for all bank premises and equipment leases was
$12,680,000, $11,417,000 and $8,519,000 in 1999, 1998 and 1997,
respectively. The future gross minimum rentals, by year, under
noncancelable leases for the rental of premises and equipment are $11.6
million in 2000, $10.6 million in 2001, $9.8 million in 2002, $9.4
million in 2003, $8.2 million in 2004 and $29.6 million thereafter.
NOTE 7 - SHORT-TERM DEBT: Short-term debt was as follows:
(Dollars in Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $ 772,551 $ 560,712 $602,588
Commercial Paper 201,784 245,291 202,018
U.S. Treasury Demand Notes 1,500 1,500 1,519
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 4.35% 4.44% 5.68%
Commercial Paper 5.09 4.50 5.33
U.S. Treasury Demand Notes 4.52 4.18 5.25
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $1,261,003 $1,627,934 $687,374
Commercial Paper 229,058 259,925 202,018
U.S. Treasury Demand Notes 1,500 1,500 2,746
At December 31, 1999, Provident had $200 million in general purpose
lines of credit with unaffiliated banks. As of January 18, 2000, these
lines had not been used.
58
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LONG-TERM DEBT: Long-term debt consisted of the following:
December 31,
Stated Effective Maturity --------------------
(Dollars in Thousands) Rate(1) Rate(2) Date 1999 1998
- -------------------------------------------------------------------------------------------------
Provident Financial Group (Parent):
Miscellaneous Notes Payable Various Various Various $ 1,759 $ 2,617
Subsidiaries:
$1.5 Billion Bank Notes Program:
Fixed Rate Senior Notes 6.13% 6.95% 2000 299,861 299,716
Fixed Rate Senior Notes 7.17 6.19 2005 12,500 12,500
Notes Payable to
Federal Home Loan Bank:
Fixed Rate Notes 5.51 5.51 2008 125,000 125,000
Fixed Rate Notes 5.39 5.39 1999 - 100,000
LIBOR Based Notes 5.23 5.23 1999 - 11,000
Fixed Rate Notes Various Various Various 24,997 2,251
Floating Rate Notes Various Various 2000 19,000 -
Subordinated Notes:
Fixed Rate Notes 6.38 6.52 2004 99,737 99,672
Fixed Rate Notes 7.13 7.09 2003 74,964 74,953
Debt Secured by Auto Leases:
Fixed Rate Notes 5.74 5.72 2004 77,270 87,033
Fixed Rate Notes 5.35 5.35 2006 35,109 45,000
Fixed Rate Notes 5.77 5.77 2005 24,398 26,412
Fixed Rate Notes 5.84 5.83 2004 19,291 21,259
Fixed Rate Notes 6.62 6.62 2005 12,538 13,923
Debt Secured by Equipment Leases:
Fixed Rate Notes Various Various Various 9,979 12,958
-------- --------
834,644 931,677
-------- --------
Total $836,403 $934,294
======== ========
<FN>
(1) Stated rate reflects interest rate on notes as of December 31,
1999.
(2) Effective rate reflects interest rate paid as of December 31, 1999
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.
</FN>
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. Subordinated
notes qualify as Tier 2 capital while senior notes do not. At December
31, 1999, $1.2 billion was available under this program.
The notes payable to the Federal Home Loan Bank are collateralized by
investment securities with a book value of $249.8 million. They are
subordinated to the claims of depositors and other creditors of
Provident and are not insured by the FDIC.
The 6.38% Subordinated Notes, which qualify as Tier 2 capital, were
issued through an underwritten offering in 1994 by Provident Bank. They
are subordinated to the claims of depositors and other creditors of
Provident Bank and are not insured by the FDIC. The 7.13% Subordinated
Notes, which also qualify as Tier 2 capital, were issued in 1993 by
Provident Bank.
59
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident borrowed $222.7 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, 1999, $168.6 million remains outstanding.
As of December 31, 1999, scheduled principal payments on long-term debt
for the following five years were as follows:
(In Thousands) 2000 2001 2002 2003 2004
- -----------------------------------------------------------------------------------
Provident Financial Group, Inc. $ 520 $ 450 $ 309 $ 307 $ 172
Subsidiaries 339,275 25,084 28,666 100,917 49,895
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES: Wholly-owned subsidiary trusts of Provident
have issued $225 million of preferred securities and, in turn,
purchased $225 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 1999 1998
- ---------------------------------------------------------------------------
November 1996 Issuance 8.60% 8.67% 12/01/26 $ 98,941 $98,879
June 1999 Issuance 8.75% 7.45% 06/30/29 121,128 -
-------- -------
Total $220,069 $98,879
======== =======
(1)Effective rate reflects interest rate paid as of December 31, 1999
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 10 - INCOME TAXES: The composition of income tax expense follows:
(In Thousands) 1999 1998 1997
---------------------------------------------
Current:
Federal $59,145 $61,569 $37,890
State 1,971 752 375
------- ------- -------
61,116 62,321 38,265
Deferred 18,579 (1,199) 18,828
------- ------- -------
Total $79,695 $61,122 $57,093
======= ======= =======
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.
60
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) 1999 1998 1997
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Excess Lease and Partnership Income $123,799 $119,315 $115,197
Securitizations 12,908 - -
Deferred Loan Costs 7,926 6,302 1,415
Other - Net 10,395 7,564 14,400
-------- -------- --------
Total Deferred Tax Liabilities 155,028 133,181 131,012
-------- -------- --------
Deferred Tax Assets:
Provision for Loan and Lease Losses 40,004 31,760 28,250
Unrealized Loss on Investment Securities 26,282 4,849 -
Deferred Compensation 5,600 5,141 5,255
Securitizations - 5,988 1,334
Other - Net 9,710 9,157 13,767
-------- -------- --------
Total Deferred Tax Assets 81,596 56,895 48,606
-------- -------- --------
Net Deferred Tax Liabilities $ 73,432 $ 76,286 $ 82,406
======== ======== ========
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"), an Employee Stock Purchase Plan ("ESPP"), 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 incurred expense of $8.6 million, $6.2 million and $6.1
million in 1999, 1998 and 1997, 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 8% 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 during the plan year. The
contribution made by Provident is charged against earnings as the
employees' contributions are made. Provident incurred expense of $1.0
million, $845,000 and $646,000 for this retirement plan for 1999, 1998
and 1997, respectively.
61
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident's LH Plan provides medical coverage as well as life insurance
benefits to eligible retirees. The LH Plan is contributory until the
retiree reaches age 62 after which time Provident pays the entire cost,
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.
The ESPP provides eligible employees with an opportunity to purchase
Provident's Common Stock through payroll deduction in an amount up to
10% of their compensation, at a price equal to eighty-five percent of
the fair market price on either the first or the last business day of
each calendar month, whichever is lower. Provident incurred expense of
$357,000, $266,000 and $219,000 for the ESPP for 1999, 1998 and 1997,
respectively.
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 expensed
approximately $1.2 million, $1.4 million and $2.6 million in 1999, 1998
and 1997, respectively.
Provident has three Employee Stock Option Plans, an Advisory Directors'
Stock Option Plan and an Outside Directors' Stock Option Plan. The
Employee Stock Option Plans made 8.4 million options available for
grant. These plans authorize the issuance of options to purchase Common
Stock for officers and employees. 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.
62
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option activity for the three years
ended December 31, 1999:
Weighted
Average Number of Options
Exercise Options Available
Price Outstanding for Grant
- -----------------------------------------------------------------
At January 1, 1997 $14.28 4,221,164 255,491
Authorized - - 4,000,000
Granted 40.49 840,225 (840,225)
Exercised 8.93 (780,465) -
Canceled 16.91 (113,135) 113,135
--------- ---------
At December 31, 1997 20.50 4,167,789 3,528,401
Granted 47.02 866,125 (866,125)
Exercised 13.51 (1,061,225) -
Canceled 31.04 (375,013) 375,013
--------- ---------
At December 31, 1998 27.86 3,597,676 3,037,289
Acquired 9.16 12,616 -
Granted 38.02 745,875 (745,875)
Exercised 14.22 (177,909) -
Canceled 27.48 (89,425) 89,425
--------- ---------
At December 31, 1999 30.25 4,088,833 2,380,839
========= =========
At December 31, 1999, 1998 and 1997, there were 2,042,870, 1,679,900
and 2,012,954 options exercisable, respectively, having a weighted
average option price per share of $22.09, $17.81 and $11.45,
respectively. The following table summarizes information about stock
options outstanding at December 31, 1999:
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 - $11.19 612,251 2.5 $ 8.91 612,251 $ 8.91
$12.00 - $17.95 587,667 5.0 14.56 510,829 14.46
$21.79 - $33.63 714,865 6.6 25.62 402,595 25.27
$34.32 - $54.47 2,174,050 8.4 42.03 517,195 42.76
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 1999, 1998 and 1997
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.
63
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted-average assumptions were used in the option
pricing model for 1999, 1998 and 1997 respectively: risk-free interest
rates of 5.36%, 5.46% and 6.47%; dividend yields of 3.50%, 3.00% and
3.00%; volatility factors of the expected market price of Provident's
Common Stock of .244, .234 and .232 and an expected life of the option
of 7, 7 and 8 years. Based on these assumptions, the weighted-average
fair value of options granted in 1999, 1998 and 1997 was $9.17, $12.05
and $11.51, 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) 1999 1998 1997
- -----------------------------------------------------------------------
Pro-forma Net Income $141,609 $111,898 $105,393
Pro-forma Earnings Per Share:
Basic 3.29 2.59 2.54
Diluted 3.20 2.50 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,
1999 and 1998, 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.
64
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) 1999 1998 1997
- -------------------------------------------------------------------------------------
Basic:
Net Income $146,393 $114,952 $107,437
Less Preferred Stock Dividends (870) (790) (712)
-------- -------- --------
Income Available to Common Shareholders 145,523 114,162 106,725
Weighted-Average Common Shares Outstanding 42,751 42,913 41,135
-------- -------- --------
Basic Earnings Per Share $ 3.40 $ 2.66 $ 2.59
======== ======== ========
Diluted:
Net Income $146,393 $114,952 $107,437
Weighted-Average Common Shares Outstanding 42,751 42,913 41,135
Assumed Conversion of:
Convertible Preferred Stock 988 988 988
Dilutive Stock Options (Treasury Stock Method) 808 1,029 1,651
-------- -------- --------
Dilutive Potential Common Shares 44,547 44,930 43,774
-------- -------- --------
Diluted Earnings Per Share $ 3.29 $ 2.56 $ 2.45
======== ======== ========
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS: Provident and its banking
subsidiaries 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 its banking
subsidiaries 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 its banking subsidiaries 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, 1999, Provident and
its banking subsidiaries meet all capital requirements to which it is
subject.
65
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, Provident and its banking subsidiaries'
capital ratios were categorized as well capitalized for regulatory
purposes. To be categorized as well capitalized, Provident and its
banking subsidiaries 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.
1999 1998
----------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
Tier 1 Capital (to Average Assets):
Provident (Consolidated) $1,022,146 10.84% $ 776,249 9.00%
The Provident Bank 812,049 9.23 620,544 7.81
Provident Bank of Florida 46,749 9.72 18,254 6.67
Tier 1 Capital (to Risk-Weighted Assets):
Provident (Consolidated) 1,022,146 9.58 776,249 8.55
The Provident Bank 812,049 7.94 620,544 7.29
Provident Bank of Florida 46,749 10.49 18,254 7.25
Total Risk-Based Capital
(to Risk-Weighted Assets):
Provident (Consolidated) 1,237,767 11.60 1,011,790 11.15
The Provident Bank 1,126,022 11.02 855,379 10.06
Provident Bank of Florida 60,749 13.63 29,153 11.58
NOTE 15 - 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.
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 cash flow-matched funds 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 the size and composition of its lending portfolio. Activity-based
costing is used to allocate expenses for centrally provided services.
66
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, interest and gain/loss on the sale of investment
securities, and any nonrecurring business revenues and expenses. Prior
period numbers 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) 1999 1998 1997
- -----------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 246.7 $ 237.3 $ 200.6
Retail Banking 212.6 177.4 155.4
Mortgage Banking 122.2 73.0 53.6
Corporate Center .9 22.0 25.7
-------- -------- --------
$ 582.4 $ 509.7 $ 435.3
======== ======== ========
Net Income:
Commercial Banking $ 74.1 $ 85.3 $ 71.2
Retail Banking 32.3 17.4 15.8
Mortgage Banking 39.0 14.6 15.5
Corporate Center 1.0 12.0 4.9
Special Charges and Exit Costs - (14.3) -
-------- -------- --------
$ 146.4 $ 115.0 $ 107.4
======== ======== ========
Average Assets:
Commercial Banking $4,472.2 $3,877.8 $3,734.9
Retail Banking 1,608.3 1,513.0 1,489.5
Mortgage Banking 646.8 540.3 295.7
Corporate Center 2,333.4 1,998.5 1,376.0
-------- -------- --------
$9,060.7 $7,929.6 $6,896.1
======== ======== ========
NOTE 16 - OFF-BALANCE SHEET FINANCIAL AGREEMENTS: Provident uses
financial instruments with off-balance sheet risk to manage its
interest rate risk and to meet the financing needs of its customers.
These financial instruments include derivatives such as interest rate
swaps, interest rate caps and forward contracts 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: Interest rate swap agreements involve the exchange
of interest payment obligations without the exchange of the underlying
principal amounts. Such interest rate swap transactions, which are a
part of Provident's asset/liability management program, are structured
to modify interest rate risk of specified assets and/or liabilities
resulting from interest rate fluctuations. Interest rate swap
agreements have a credit risk component based on the ability of a
counterparty to meet the obligations to Provident under the terms of
the interest rate swap agreement. 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 swap
transactions. Provident manages its credit risk in these transactions
through counterparty credit policies. At December 31, 1999, Provident
had bilateral collateral agreements in place with its counterparties,
67
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
against which Provident has pledged investment securities with a
carrying value of $139.4 million as collateral.
Summary information with respect to the interest rate swap portfolio
used to manage Provident's interest rate sensitivity follows:
December 31, 1999
------------------------------------------------------------------- December
Weighted Average 31, 1998
Unrealized Unrealized ---------------------------- --------
Notional Gross Gross Receive Pay Life Notional
(Dollars in Millions) Amount Gains Losses Rate Rate (Years) Amount
- -------------------------------------------------------------------------------------------------------------
Pay Variable/Receive Fixed $2,612 $ .2 $(153.2) 6.05% 5.74% 11.34 $1,747
Pay Fixed/Receive Variable 1,860 16.7 - 6.36 6.19 4.40 49
------ ----- ------- ------
$4,472 $16.9 $(153.2) $1,796
====== ===== ======= ======
The expected notional maturities of Provident's interest rate swap
portfolio at December 31, 1999 are as follows:
After 1 After 5 After 10
1 Year Through 5 Through 10 Through 15 After 15
(In Millions) or Less Years Years Years Years
- ------------------------------------------------------------------------------------------
Pay Variable/Receive Fixed $339 $659 $170 $624 $820
Pay Fixed/Receive Variable 839 105 916 - -
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.
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) 1999 1998
------------------------------------------------
Commitments to Extend Credit $2,005 $2,015
Standby Letters of Credit 131 128
68
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - TRANSACTIONS WITH AFFILIATES: At December 31, 1999, Carl H.
Lindner, members of his immediate family and trusts for their benefit,
owned 47% 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 53% 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, 1999, 1998 and 1997
amounted to $2.5 million, $2.3 million and $2.0 million, respectively.
Provident also leased one of its branch locations and approximately 200
ATM locations from principal shareholders and their affiliates. Rentals
of $969,000, $302,000 and $217,000 were charged by principal
shareholders and their affiliates during 1999, 1998 and 1997,
respectively, for ATM and branch locations.
During 1998, a partner of Keating, Muething & Klekamp ("KMK") became
the trustee of a trust for the benefit of the family of Mr. Lindner.
This trust held approximately 5% of Provident's Common Stock. During
1999 and 1998, legal services paid by and on behalf of Provident to KMK
were $2.9 million and $3.2 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 $59.3 million and
$45.9 million at December 31, 1999 and 1998, respectively. During 1999,
new loans and leases aggregating $17.6 million were made to such
parties and loans and leases aggregating $4.2 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, 1999 and 1998, these persons held Provident's commercial paper
amounting to $20.0 million and $19.4 million, respectively.
Additionally, repurchase agreements in the amount of $4.8 million and
$37.8 million had been sold to these persons at December 31, 1999 and
1998, respectively. All of these transactions were at market interest
rates.
69
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - 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.
1999 1998
----------------------------------------------------
Carrying Fair Carrying Fair
(In Thousands) Value Value Value Value
- ------------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 362,136 $ 362,136 $ 327,441 $ 327,441
Trading Account Securities - - 50,333 50,333
Investment Securities 2,019,392 2,019,392 1,514,153 1,514,153
Loans (Excluding Lease Financing) 5,570,619 5,500,810 4,956,429 5,021,042
Less: Reserve for Loan Losses (83,631) - (69,445) -
--------- --------- --------- ---------
Net Loans 5,486,988 5,500,810 4,886,984 5,021,042
Financial Liabilities:
Deposits 6,638,568 6,460,735 5,327,321 5,444,426
Short-Term Debt 975,835 975,835 807,503 807,503
Long-Term Debt (Excluding Lease
Financing Debt) and Junior
Subordinated Debentures 877,887 849,599 826,588 819,325
Off-Balance Sheet
Financial Instruments:
Interest Rate Swaps - (136,320) - 16,126
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.
70
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 interest in
securitized assets is valued using discounted cash flow
techniques. Significant assumptions used in the valuation are
presented in Note 3.
Loans: 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 are estimated
using discounted cash flow analyses and interest rates currently
being offered for loans with similar terms to borrowers of
similar credit quality.
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 is based upon current market quotes.
71
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - 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 and Provident Bank of
Florida maintain certain minimum reserve balances. The average amount
of those reserve balances for the year ended December 31, 1999, was
approximately $58.6 million.
OTHER REAL ESTATE OWNED: At December 31, 1999 and 1998, the carrying
value of other real estate and equipment owned was $3.7 million and
$2.7 million, respectively.
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, 1999 and
1998 follow:
December 31,
-------------------
Subsidiary 1999 1998
- -----------------------------------------------------------------------
Provident Auto Leasing Company $447,388 $469,114
Provident Auto Rental Corp. 1998-1 30,851 46,424
Provident Auto Rental Corp. 1998-2 27,745 -
Provident Auto Rental LLC 1999-1 180,485 -
Provident Auto Rental Company, LLC 1999-PRU 89,207 -
Provident Lease Receivables Corporation 74,768 26,957
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 banking subsidiaries 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 2000 by The Provident Bank and
Provident Bank of Florida to its parent without approval is
approximately $161.6 million, plus 2000 net income. Pursuant to Federal
Reserve and State regulations, the maximum amount available to be
loaned to affiliates (as defined), including their Parent, by the
banking subsidiaries, was approximately $118.7 million to any single
affiliate, and $237.4 million to all affiliates combined of which $26.9
million was loaned at December 31, 1999.
72
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) 1999 1998
- -------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents $ 153,530 $ 193,470
Investment Securities Available for Sale 186,147 148,545
Investment in Subsidiaries:
Banking 884,121 667,459
Non-Banking 7,755 3,710
Premises and Equipment 1,437 1,468
Accounts Receivable from Banking Subsidiaries 28,448 45,616
Other Assets 36,694 31,093
---------- ----------
$1,298,132 $1,091,361
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable and Accrued Expenses $ 41,908 $ 37,627
Commercial Paper 201,784 245,291
Long-Term Debt 1,759 2,617
Junior Subordinated Debentures 227,028 101,972
---------- ----------
Total Liabilities 472,479 387,507
Shareholders' Equity 825,653 703,854
---------- ----------
$1,298,132 $1,091,361
========== ==========
STATEMENTS OF INCOME (PARENT ONLY)
Year Ended December 31,
------------------------------
(In Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
Income:
Dividends from Banking Subsidiaries $ 60,000 $ 51,000 $ -
Interest Income from Banking Subsidiaries 8,869 4,899 5,605
Other Interest Income 5,504 10,097 7,364
Noninterest Income 1,976 1,748 4,157
-------- -------- --------
76,349 67,744 17,126
Expenses:
Interest Expense 24,934 22,088 18,219
Noninterest Expense 3,030 4,684 4,542
-------- -------- --------
27,964 26,772 22,761
-------- -------- --------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiaries 48,385 40,972 (5,635)
Applicable Income Tax Credits 4,439 4,157 2,494
-------- -------- --------
Income Before Equity in Undistributed Net Income
of Subsidiaries 52,824 45,129 (3,141)
Equity in Undistributed Net Income of Subsidiaries 93,569 69,823 110,578
-------- -------- --------
Net Income $146,393 $114,952 $107,437
======== ======== ========
73
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
Year Ended December 31,
-----------------------------------
(In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 146,393 $ 114,952 $ 107,437
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Net Income from Subsidiaries (153,569) (120,823) (110,578)
Cash Dividends Received From Subsidiaries 60,000 51,000 -
Amortization of Goodwill and Other 799 690 396
Depreciation of Premises and Equipment 31 36 54
Realized Investment Security (Gains) Losses (63) 29 (1,068)
Proceeds From Sale of Loans Held for Sale - 1,831 41,123
Origination of Loans Held for Sale - - (41,943)
Realized (Gains) Losses on Loans Held for Sale - 2 (58)
Increase in Interest Receivable (1,913) (48) (396)
(Increase) Decrease in Other Assets 16,145 (28,173) (18,588)
Decrease in Interest Payable (129) (27) (1)
Increase in Other Liabilities 4,410 26,823 7,767
--------- --------- ---------
Net Cash Provided by (Used In) Operating
Activities 72,104 46,292 (15,855)
--------- --------- ---------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 115,829 10,202 11,571
Proceeds from Maturities and Prepayments 17,996 43,252 20,329
Purchases (171,683) (34,603) (187,386)
Net Decrease in Premises and Equipment - - 9
--------- --------- ---------
Net Cash Provided by (Used In) Investing
Activities (37,858) 18,851 (155,477)
--------- --------- ---------
Financing Activities:
Net Increase (Decrease) in Short-Term Debt (43,507) 43,273 62,353
Principal Payments on Long-Term Debt (914) (788) (545)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 124,984 1,492 -
Cash Dividends Paid (38,248) (35,308) (30,247)
Purchase of Treasury Stock (8,645) (21,425) -
Proceeds from Exercise of Stock Options 4,141 25,298 16,068
Contribution to Subsidiaries (112,478) - -
Net Increase in Other Equity Items 481 - 19
--------- --------- ---------
Net Cash Provided by (Used In) Financing
Activities (74,186) 12,542 47,648
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents (39,940) 77,685 (123,684)
Cash and Cash Equivalents at Beginning of Year 193,470 115,785 239,469
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 153,530 $ 193,470 $ 115,785
========= ========= =========
74
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, 1999.
Fourth Third Second First
(In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
1999:
Total Interest Income $ 182,943 $ 170,658 $ 162,893 $ 157,475
Total Interest Expense (100,999) (92,100) (84,232) (84,711)
--------- --------- --------- ---------
Net Interest Income 81,944 78,558 78,661 72,764
Provision for Loan and Lease Losses (10,777) (16,435) (8,050) (12,900)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 71,167 62,123 70,611 59,864
Noninterest Income 71,261 75,733 58,917 64,567
Noninterest Expense (80,807) (80,389) (74,662) (72,297)
--------- --------- --------- ---------
Income Before Income Taxes 61,621 57,467 54,866 52,134
Applicable Income Taxes (21,723) (20,253) (19,340) (18,379)
--------- --------- --------- ---------
Net Income $ 39,898 $ 37,214 $ 35,526 $ 33,755
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ .92 $ .87 $ .83 $ .79
Diluted .89 .84 .80 .76
Cash Dividends .22 .22 .22 .22
1998:
Total Interest Income $ 165,523 $ 165,752 $ 155,299 $ 147,186
Total Interest Expense (88,810) (91,275) (86,472) (80,510)
--------- --------- --------- ---------
Net Interest Income 76,713 74,477 68,827 66,676
Provision for Loan and Lease Losses (11,700) (9,500) (5,000) (5,000)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 65,013 64,977 63,827 61,676
Noninterest Income 59,723 56,728 56,831 49,705
Noninterest Expense (95,916) (70,955) (70,904) (64,631)
--------- --------- --------- ---------
Income Before Income Taxes 28,820 50,750 49,754 46,750
Applicable Income Taxes (9,938) (17,730) (17,364) (16,090)
--------- --------- --------- ---------
Net Income $ 18,882 $ 33,020 $ 32,390 $ 30,660
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ .44 $ .76 $ .75 $ .71
Diluted .42 .73 .72 .68
Cash Dividends .20 .20 .20 .20
Quarterly earnings per share numbers do not add to the year-to-date
amounts due to rounding.
75
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro-forma Information of Acquisition - (Unaudited)
During the first quarter of the year 2000, Provident completed the
proposed acquisition of Fidelity Financial of Ohio, Inc., the parent of
Centennial Bank for approximately 4.6 million shares of Provident
Common Stock, having an aggregate value of $151.7 million at closing.
Centennial Bank, which had fifteen branches in the Cincinnati area, was
merged with The Provident Bank. The acquisition was accounted for as a
pooling-of-interest transaction. Pro-forma results of operations for
the three years ending December 31, 1999 as though the merger of
Fidelity Financial had occurred at January 1, 1997, are presented
below:
Year Ended December 31,
------------------------------
(In Millions Except Per Share Data) 1999 1998 1997
- ----------------------------------------------------------------------
Total Revenue (Net Interest Income
Plus Noninterest Income) $609,296 $536,544 $462,035
Net Income 150,949 122,427 114,715
Basic Earnings Per Share 3.18 2.57 2.51
Diluted Earnings Per Share 3.08 2.48 2.38
76
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, 1999:
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 44 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.
77
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 I, November 27, 1996.
I, dated as of November
27, 1996
10.3 Form of Guarantee Incorporated by reference to
Agreement to be entered registration statement number
Into 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).
78
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 Provident Deferred Incorporated by reference to
Compensation Plan(1) Form S-8 (File No. 33-61576)
and Form 8-K filed March 28,
1995.
10.11 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.
10.12 Agreement and Plan of Incorporated by reference to
Reorganization between Form S-4 (File No. 333-88723).
Provident and Fidelity
Financial of Ohio, Inc.
10.13 Employment agreement Filed herewith.
between Provident Financial
and Christopher J. Carey.(1)
21 Subsidiaries of Provident Filed herewith.
Financial Group, Inc.
23 Consent of Independent Filed herewith.
Auditors
27 Financial Data Schedule Filed herewith.
(1) Management Compensatory Agreements
(b) Reports on Form 8-K:
Date of Report: November 24, 1999
Item 5. Announced that final regulatory approval to consummate the
previously announced acquisition of Fidelity Financial of Ohio, Inc.
was granted on November 17, 1999. Under the terms of the acquisition
agreement, at closing each outstanding common share of Fidelity
Financial will convert into 0.4939 shares of Provident common stock.
79
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 10, 2000
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 10, 2000
- ----------------------- (Principal Executive Officer)
Robert L. Hoverson
/s/Jack M. Cook Director March 10, 2000
- ------------------------
Jack M. Cook
/s/Thomas D. Grote, Jr. Director March 10, 2000
- -----------------------
Thomas D. Grote, Jr.
/s/Philip R. Myers Director March 10, 2000
- -----------------------
Philip R. Myers
/s/Joseph A. Pedoto Director March 10, 2000
- -----------------------
Joseph A. Pedoto
/s/Sidney A. Peerless Director March 10, 2000
- -----------------------
Sidney A. Peerless
/s/Joseph A. Steger Director March 10, 2000
- -----------------------
Joseph A. Steger
/s/Christopher J. Carey Executive Vice President March 10, 2000
- ----------------------- and Chief Financial Officer
Christopher J. Carey
80