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, 1995 No. 1-8019
PROVIDENT BANCORP, INC.
Incorporated Under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: (513) 579-2000
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, 1996, there were 17,553,633 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 29, 1996, was
approximately $318,400,000 (based upon non-affiliated holdings of
6,351,852 shares and a market price of $50.125 per share).
Documents Incorporated by Reference:
Proxy Statement for the 1996 Annual Meeting of Shareholders
(portions which are incorporated by reference into Part III hereof).
Please address all correspondence to:
John R. Farrenkopf
Vice President and Chief Financial Officer
Provident Bancorp, inc.
One East Fourth Street
Cincinnati, Ohio 45202
PROVIDENT BANCORP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 6
ITEM 6. SELECTED FINANCIAL DATA 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 58
ITEM 11. EXECUTIVE COMPENSATION 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 58
SIGNATURES 61
PART I
ITEM 1. BUSINESS
Provident Bancorp, Inc.
Provident Bancorp, Inc. ("Bancorp") is a Cincinnati-based bank holding
company formed in 1980, which operates throughout Ohio, northern
Kentucky and southeastern Indiana. At December 31, 1995, Bancorp had
total assets of $6.2 billion and total shareholders' equity of $433
million. Its lead bank, chartered in 1902, is The Provident Bank
("Provident"), a full-service commercial bank that operates primarily
in the greater Cincinnati area.
Bancorp has expanded its business in recent years through
acquisitions. In September 1995, Bancorp purchased Mathematical
Investment Management, Inc., a mutual fund advisor, with $60 million
in managed funds. In December 1993, Bancorp acquired Heritage Savings
Bank ("Heritage"), an Ohio-chartered savings bank, located in the
greater Cincinnati area, with total assets of $54 million. Heritage's
deposits and branches were subsequently sold in August 1995. In 1992,
Bancorp acquired, through conversion merger transactions, four mutual
savings and loan associations ("Mutuals"), with combined total assets
of $340 million. Two were located in Cincinnati while the other two
were located in northern Kentucky. In 1991, Bancorp increased its
market share in the Cincinnati area and entered the greater Dayton,
Ohio market through the acquisition of Hunter Savings Association
("Hunter"), a Cincinnati-based savings association with $900 million
in assets. Hunter was indirectly owned by American Financial Group
("AFG"), formerly known as American Financial Corporation. AFG and
Bancorp are controlled by Carl H. Lindner and various members of his
family and certain entities controlled by and/or established for the
benefit of such family members. Hunter was merged with Provident upon
its acquisition. In 1990, Bancorp acquired its other banking
subsidiary, The Provident Bank of Kentucky ("Provident Kentucky")
through its acquisition of Northern Kentucky Trustcorp, Inc. ("NKTI").
Bancorp's banking subsidiaries have 71 branch offices: 56 in the
greater Cincinnati area (which includes 9 in northern Kentucky), 12 in
the greater Dayton area, 1 branch in Columbus, Ohio and 2 branches in
Cleveland, Ohio. Bancorp's executive offices are located at One East
Fourth Street, Cincinnati, Ohio 45202 and its telephone number is
(513) 579-2000.
Bancorp offers a full range of financial services to its commercial
and consumer customers. Focusing on customers in the local markets,
served by its branch network, allows management to better monitor and
control risk, target and develop new relationships, and expand
existing relationships by providing additional services. During 1994
and continuing through the present, Bancorp also attracted new deposit
customers located outside of its local market area to supplement its
in-market retail deposit activity.
At December 31, 1995, approximately 63% of Bancorp's total loan
portfolio was represented by commercial loans and 37% by consumer
loans. Bancorp does not have a material exposure to foreign, energy or
agricultural loans. At December 31, 1995, Bancorp maintained $60.2
million in reserves for loan losses. Such reserves equaled 143% of its
nonperforming loans and 1.23% of its total loan portfolio at that
date.
Approximately 9.9% of Bancorp's total loan portfolio at December 31,
1995, consisted of residential first mortgage loans, compared to
approximately 4% prior to 1991. Bancorp intends to continue its
traditional emphasis on commercial and consumer loans and,
accordingly, expects that over time the percentage of its assets
invested in residential mortgage loans will continue to decrease
toward levels existing prior to its acquisition of Heritage, the
Mutuals and Hunter.
Commercial Banking. Central to Bancorp's long-term strategy is the
concept of relationship banking with commercial customers that
emphasizes attracting new small and middle market customers and cross-
selling additional services to established customers. These services
include cash management, loan, letter of credit, trade financing and
corporate trust activities. Bancorp implements this strategy by
attracting and retaining experienced banking officers and rewarding
them for originating loans and cross-selling additional services. In
addition, Bancorp's Corporate Finance Group specializes in the
origination of regional and national corporate loan transactions that
are consistent with the overall relationship lending strategy of
Bancorp. Bancorp originates these transactions directly, or
participates in transactions with other financial institutions. At
December 31, 1995, the Corporate Finance Group's loan portfolio was
$420 million. Bancorp and Provident Commercial Group, Inc.
("Commercial Group"), Provident's equipment finance group, originate
equipment collateralized loans and equipment leases to corporate
customers on a national basis. These transactions are sourced both
directly and through intermediaries. At December 31, 1995, Bancorp's
commercial lease and loan portfolio was approximately $285 million.
Consumer Banking. Bancorp offers a full range of financial services
to its consumer banking customers. The goal is to establish a full
banking relationship with each customer. This is accomplished through
Bancorp's variety of relationship accounts, deposit accounts providing
pricing incentives and various levels of services and benefits
depending on the needs of and balances maintained by the customer.
These deposit accounts allow Bancorp to more effectively offer
additional banking services such as credit cards, consumer and
mortgage loans, home equity loans, auto loans and leases, retirement
accounts and investment accounts. During 1994, Commercial Group
initiated an automobile leasing program directed primarily at
consumers. At December 31, 1995, the consumer automobile lease
portfolio was approximately $334 million.
Other Operations. Bancorp provides a variety of financial services,
including a full range of trust, custodial, asset management,
securities brokerage and mutual fund administration to its customers.
At December 31, 1995, Bancorp and its subsidiaries employed
approximately 1,800 employees. This is comparable to approximately
1,700 full-time-equivalent employees.
The Provident Bank
Provident, an Ohio banking corporation, had $5.9 billion in assets and
approximately $4.1 billion in deposits at December 31, 1995. Ranked by
total assets, Provident is currently the third largest bank based in
Cincinnati. Provident is a member of the Federal Reserve System
("Federal Reserve") and its deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC").
The Provident Bank of Kentucky
Bancorp entered the northern Kentucky sector of the greater Cincinnati
market in 1990 with the acquisition of Provident Kentucky. Provident
Kentucky is a Kentucky chartered state bank with total assets of
approximately $244 million and total deposits of $194 million at
December 31, 1995. Provident Kentucky is a member of the Federal
Reserve and its deposits are insured by the FDIC. Provident Kentucky
has nine offices in Kentucky, five in Campbell County, two in Kenton
County and two in Boone County.
Competition
The banking business is highly competitive. The banking subsidiaries
of Bancorp compete actively with national and state banks, savings and
loan associations, securities dealers, mortgage bankers, finance
companies and other financial service entities.
Supervision and Regulation
Bancorp 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 examinations by the Federal Reserve. Bancorp is prohibited by the
BHCA from acquiring direct or indirect control of more than 5% of the
outstanding shares of any class of voting stock, or substantially all
of the assets of any bank or merging or consolidating with another
bank holding company, without prior approval of the Federal Reserve.
The BHCA, as amended, authorizes interstate bank acquisitions anywhere
in the country, effective September 29, 1995 and interstate branching
by acquisition and consolidation, effective June 1, 1997 in those
states that have not opted out by that date. As of December 31, 1995,
Ohio, Kentucky and Indiana have not opted out of interstate branching.
Additionally, Bancorp is prohibited by the BHCA from engaging in
nonbanking activities, unless such activities are determined by the
Federal Reserve to be 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
Bancorp's subsidiary banks may pay dividends or otherwise supply funds
to Bancorp. 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 O included
in "Notes to Consolidated Financial Statements".
Various requirements and restrictions under federal and state laws
regulate the operations of Bancorp'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 or state banking authorities
and the FDIC.
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.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") covers a wide range of banking regulatory issues including:
(i) the recapitalization of the Bank Insurance Fund; (ii) deposit
insurance reform, including requiring the FDIC to establish a risk-
based premium assessment system; (iii) substantial new examination,
audit and reporting requirements on insured depository institutions
and (iv) a number of other regulatory and supervisory matters. FDICIA
requires federal bank regulatory authorities to take "prompt
corrective action" with respect to bank organizations that do not meet
minimum capital requirements. "Undercapitalized" bank organizations
are subject to growth limitations and are required to submit a capital
restoration plan. Additionally, under FDICIA, a bank holding company
is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined
in the statute).
Under FDICIA, a bank organization that is not "well capitalized" is
generally prohibited from accepting brokered deposits and offering
interest rates on deposits higher than the prevailing rate in its
market. Bancorp's subsidiary banks are not prohibited from accepting
brokered deposits or offering interest rates on deposits higher than
the prevailing rate in their markets. As of December 31, 1995,
Bancorp's subsidiary banks had brokered deposits (as defined) of
$752.3 million compared to $693.6 million as of December 31, 1994.
The monetary policies of regulatory authorities, including the Federal
Reserve, 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 earnings of
Bancorp and its subsidiaries cannot be predicted.
Provident Securities and Investment Company, a Provident 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.
Provident Investment Advisors, Inc., a Bancorp subsidiary, is a
registered investment advisor, subject to regulation by the SEC and
state securities authorities.
ITEM 2. PROPERTIES
Bancorp and certain of its subsidiaries lease their executive offices
at One East Fourth Street, Cincinnati, Ohio and additional space at
Three East Fourth Street, Cincinnati, Ohio under leases expiring in
2010 from a trust, for the benefit of a subsidiary of AFG. Provident
also leases approximately 5,000 square feet of office space from Great
American Insurance Company, a subsidiary of AFG. In addition,
Provident rents approximately 81,000 square feet of office space in
downtown Cincinnati. Provident owns five buildings in the Queensgate
area of Cincinnati that contain approximately 192,000 square feet of
which three buildings are used for offices, data processing and
warehouse facilities and two buildings are leased to other parties.
Provident owns twenty-five of its branch locations and leases thirty-
seven. Bancorp owns a 3,000 square foot building in which Provident
Kentucky's main office is located in Alexandria, Kentucky. Bancorp
also owns the 9,000 square foot building in Cold Spring, Kentucky in
which one of Provident Kentucky's branches is located. In addition to
the two branches leased from Bancorp, Provident Kentucky owns two of
its branch locations and leases five. For information concerning
rental obligations see Note F included in "Notes to Consolidated
Financial Statements" that are included in this report in Part II,
Item 8.
ITEM 3. LEGAL PROCEEDINGS
Bancorp 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 Bancorp or its
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the NASDAQ National Market under the
symbol "PRBK". The following table sets forth the high and low bid
prices per share of Common Stock on the NASDAQ National Market for the
periods shown. These bids represent quotations between dealers and do
not include retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.
Cash
High Low Dividends
1994
1st Quarter $34 3/4 $27 3/4 $.220
2nd Quarter 32 1/4 30 1/4 .220
3rd Quarter 35 1/2 31 1/2 .250
4th Quarter 34 1/2 28 1/2 .250
1995
1st Quarter $34 1/2 $30 3/4 $.250
2nd Quarter 35 30 3/4 .250
3rd Quarter 41 3/4 34 1/4 .275
4th Quarter 47 3/4 40 1/4 .275
At February 29, 1996, there were approximately 4,000 holders of record
of Bancorp's Common Stock.
In 1995 and 1994 Bancorp paid dividends on its Common Stock of $16.4
million and $14.7 million and on its Preferred Stock of $2.4 million
and $3.0 million, respectively. Bancorp has indicated its intention to
pay annual dividends of approximately 30% of recurring net earnings.
Recurring net earnings is defined as net earnings excluding the net
after-tax effect of certain amounts related to acquisitions, security
gains or losses and changes in accounting principles. It is expected
that in the next several years, Bancorp'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 Bancorp is contained under ITEM 7 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity" and Note O included in "Notes to Consolidated
Financial Statements".
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for Bancorp and
subsidiaries for the five years ended December 31, 1995. The summary
should be read in conjunction with the Financial Statements and Notes
to Consolidated Financial Statements included under Item 8 "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA".
Year Ended December 31,
1995 1994 1993 1992 1991
(In Thousands)
Total Interest Income $462,396 $345,829 $286,839 $287,622 $337,571
Net Interest Income 202,649 181,958 162,836 145,260 131,325
Provision for Possible
Loan Losses 14,000 12,000 12,000 14,663 17,714
Earnings Before Cumulative
Effect of Changes in
Accounting Principles 71,860 57,666 51,272 45,764 19,955
Net Earnings 71,860 57,666 51,272 43,618 19,955
Total Loans 4,896,076 4,204,538 3,389,888 2,900,761 2,802,571
Total Assets 6,205,351 5,411,491 4,698,433 3,979,888 3,867,854
Total Deposits 4,178,551 4,068,649 3,231,627 3,130,054 3,203,723
Long-Term Debt 820,083 383,433 275,527 38,643 50,966
Total Shareholders' Equity 432,537 359,351 335,892 296,465 216,144
Additional financial data and a discussion of major variances in
financial operations between the current reporting period and the
previous two periods is included in Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is presented in conjunction with and should be read
with the audited consolidated financial statements. Average balances
reported are based on daily calculations.
GENERAL
1995
Bancorp reported net earnings for 1995 of $71.9 million, an increase
of $14.2 million (25%) over 1994 net earnings. Net interest income
increased $20.7 million (11%) while the provision for loan losses
increased $2.0 million (17%). Other income increased $20.5 million
(56%) primarily due to increases in gains from the sales of loans,
mortgage loan servicing rights and Heritage's deposits and branches.
Other expense increased $19.5 million (16%) because of increases in
compensation and other.
Average net loans increased by $723.5 million (20%) in 1995 compared
to 1994. This increase consisted principally of growth in commercial
and financial loans of $379.9 million (23%),consumer lease financing
of $191.5 million (331%) and instalment loans of $83.1 million (10%).
Asset quality was not as strong during 1995 as during 1994. The ratio
of nonperforming assets to total assets was .77% and .20% as of
December 31, 1995 and 1994, respectively. This compares to .76% for
the average of the past five years. Net loan charge-offs as a
percentage of average net loans was .13% in 1995 in contrast to .02%
for 1994. For the past five years, the average has been .36%. The
lower ratios experienced in 1995 and 1994 resulted primarily from the
recovery of approximately $12 million, which was recognized equally
during 1995 and 1994, relating to one borrower which had been charged
off in 1991.
1994
Bancorp reported net earnings for 1994 of $57.7 million, which
represented an increase of $6.4 million (12%) over 1993 net earnings.
Net interest income increased $19.1 million (12%) while the provision
for loan losses was unchanged. Other income decreased $2.2 million
(6%) primarily due to the decline in gain on sale of loans. Other
expenses increased $8.7 million (8%) primarily due to the increase in
salary expense.
Average net loans in 1994 increased by $617.3 million (20%) over the
prior year. The increase in commercial and financial loans of $289.7
million (21%), combined with a $188.9 million (28%) increase in
instalment loans and a $57.9 million increase in consumer lease
financing, were the primary reasons for the increase in average net
loans. Asset quality improved in 1994, with nonperforming assets
decreasing to .20% of total assets compared to .58% in 1993. Net loan
charge-offs as a percentage of average net loans declined to .02% in
1994 compared to .24% in 1993.
NET INTEREST INCOME
Net interest income equals the difference between interest earned on
loans 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
Bancorp. In 1995, 1994 and 1993, net interest income on a taxable
equivalent basis was $203.1 million, $182.3 million and $163.3
million, respectively, which represented approximately 78%, 83% and
81%, respectively, of the net revenues (net interest income plus other
income) of Bancorp.
Net interest margin represents net interest income as a percentage of
total interest earning assets. For 1995, the net interest margin, on a
fully taxable equivalent basis, was 3.86%, compared to 4.14% in 1994
and 4.41% in 1993. The decrease in net interest margin from 1994 to
1995 reflects the average rate paid on interest bearing liabilities,
which increased 132 basis points, more than offsetting the increase on
interest earning assets, which increased 93 basis points. The increase
in the overall cost of interest bearing liabilities was primarily due
to an increase in the average balance of time deposits along with
higher interest rates paid on time deposits. The increase on interest
earning assets was principally due to an increase in the average
balance of commercial and financial loans along with higher rates
received on commercial and financial loans and instalment loans.
Bancorp enters into interest rate swap transactions to manage the
impact of interest rate moves and interest rate risk. During 1995,
interest rate swaps decreased the net interest margin by 11 basis
points.
The decline in the net interest margin from 1993 to 1994 reflects the
increase in the average rate paid on interest bearing liabilities,
which increased 41 basis points, more than offsetting the increase of
12 basis points in the average rate earned on interest earning assets.
Increases in the amount of time deposits and long-term debt was the
primary reason for the increase in Bancorp's overall cost of interest
bearing liabilities. Increases in the amount of commercial and
financial and instalment loans combined with repricing of commercial
and financial loans were the primary reasons for the increase in the
average rate earned on interest earning assets. As interest rates
increased during 1994, interest bearing liabilities reacted more
quickly than interest earning assets, causing the net interest margin
to decrease. During 1994, interest rate swaps increased the net
interest margin by 14 basis points.
Table 1 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%.
TABLE 1: Net Interest Income, Average Balances and Rates
Year Ended December 31,
1995 1994 1993
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(Dollars in Millions)
ASSETS
Interest Earning Assets:
Loans (Net Of Unearned Income):
Commercial Lending:
Commercial and Financial $2,031.9 $202.1 9.95% $1,652.0 $142.8 8.64% $1,362.2 $103.2 7.57%
Mortgage 428.7 39.2 9.15 400.1 34.7 8.68 357.7 36.5 10.20
Construction 207.3 19.5 9.40 154.8 12.6 8.13 148.1 11.0 7.41
Lease Financing 103.1 7.8 7.54 88.0 6.9 7.81 66.8 5.5 8.31
Consumer Lending:
Instalment 945.6 86.0 9.10 862.5 68.6 7.95 673.7 55.7 8.27
Residential 487.9 39.2 8.03 504.1 39.8 7.89 487.4 40.0 8.21
Lease Financing 249.4 17.8 7.15 57.9 5.1 8.81 - - -
Total Loans 4,453.9 411.6 9.24 3,719.4 310.5 8.35 3,095.9 251.9 8.14
Reserve For Loan Losses (56.6) (45.6) (39.4)
Net Loans 4,397.3 411.6 9.36 3,673.8 310.5 8.45 3,056.5 251.9 8.24
Investment Securities:
Taxable 835.2 49.6 5.94 681.0 33.4 4.91 582.0 33.3 5.72
Tax-Exempt 10.3 .6 5.79 4.3 .2 4.71 .1 - 9.59
Total Investment Securities 845.5 50.2 5.94 685.3 33.6 4.90 582.1 33.3 5.72
Federal Funds Sold and Reverse
Repurchase Agreements 18.2 1.0 5.75 42.9 2.1 4.87 66.9 2.1 3.07
Total Earning Assets 5,261.0 462.8 8.80% 4,402.0 346.2 7.87% 3,705.5 287.3 7.75%
Cash and Noninterest
Bearing Deposits 146.1 145.2 127.9
Other Assets 168.6 116.3 120.6
Total Assets $5,575.7 $4,663.5 $3,954.0
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits:
Demand Deposits $255.4 5.3 2.08% $267.4 5.8 2.17% $250.5 5.7 2.29%
Savings Deposits 645.7 20.2 3.13 755.1 19.6 2.60 823.0 22.5 2.74
Time Deposits 2,702.5 166.9 6.17 2,026.9 98.8 4.87 1,574.8 73.6 4.67
Total Deposits 3,603.6 192.4 5.34 3,049.4 124.2 4.07 2,648.3 101.8 3.85
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements 489.9 28.6 5.85 328.8 13.7 4.16 389.2 12.0 3.09
Commercial Paper 141.5 8.4 5.93 116.6 5.4 4.59 89.7 3.2 3.54
Short-Term Notes Payable 1.5 .1 5.57 1.5 .1 3.84 2.4 .1 2.76
Total Short-Term Debt 632.9 37.1 5.86 446.9 19.2 4.27 481.3 15.3 3.17
Long-Term Debt 457.8 30.2 6.60 399.7 20.5 5.14 131.8 6.9 5.23
Total Interest Bearing
Liabilities 4,694.3 259.7 5.53% 3,896.0 163.9 4.21% 3,261.4 124.0 3.80%
Non-Interest Bearing Deposits 391.9 353.1 315.4
Other Liabilities 98.4 67.8 63.2
Shareholders' Equity 391.1 346.6 314.0
Total Liabilities and
Shareholders' Equity $5,575.7 $4,663.5 $3,954.0
Net Interest Income $203.1 $182.3 $163.3
Net Interest Margin 3.86% 4.14% 4.41%
Net Interest Spread 3.27% 3.66% 3.95%
Interest free funds (interest earning assets less interest bearing
liabilities) increased $60.7 million (12%) in 1995 and increased $61.9
million (14%) in 1994. Such funds, consisting primarily of demand
deposits and shareholders' equity, supported 11% of total interest
earning assets in 1995, 11% in 1994 and 12% in 1993. In preparing the
net interest margin table, nonaccrual loan balances are included in
the average balances for loans. Loan fees are included in loan income
as follows: 1995 - $18.2 million, 1994 - $15.4 million and 1993 -
$16.5 million.
Table 2 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.
TABLE 2: Net Interest Income Changes Due to Volume and Rates
Year Ended December 31,
1995 Changes from 1994 Changes from
1994 Due to 1993 Due to
Volume Rate Volume Rate
(In Thousands)
Interest Earned On:
Loans:
Commercial Lending:
Commercial and Financial $35,834 $23,462 $23,805 $15,854
Mortgage 2,560 1,934 4,037 (5,770)
Construction 4,724 2,167 510 1,103
Lease Financing 1,146 (245) 1,672 (344)
Consumer Lending:
Instalment 6,989 10,430 15,097 (2,227)
Residential (1,293) 664 1,348 (1,588)
Lease Financing 13,857 (1,132) 5,097 -
Net Loans 63,817 37,280 51,566 7,028
Investment Securities:
Taxable 8,393 7,829 5,224 (5,092)
Tax-Exempt 341 56 199 (11)
Federal Funds Sold (1,370) 324 (901) 937
Total 71,181 45,489 56,088 2,862
Interest Paid On:
Demand Deposits (255) (240) 376 (304)
Savings Deposits (3,083) 3,666 (1,801) (1,098)
Time Deposits 37,815 30,258 21,918 3,311
Total Deposits 34,477 33,684 20,493 1,909
Short-Term Debt:
Federal Funds Purchased 8,188 6,779 (2,067) 3,705
Commercial Paper 1,284 1,751 1,091 1,087
Short-Term Notes Payable - 25 (32) 21
Total Short-Term Debt 9,472 8,555 (1,008) 4,813
Long-Term Debt 3,275 6,413 13,777 (116)
Total 47,224 48,652 33,262 6,606
Net Interest Income $23,957 $(3,163) $22,826 $(3,744)
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $14.0 million, $12.0
million, and $12.0 million in 1995, 1994 and 1993, respectively. The
increase of $2.0 million (17%) in 1995 over 1994 is due to increases
in total loans of $691.5 million (16%) and nonperfoming loans of $35.0
million. The provision for loan losses did not change from 1993 to
1994 despite an increase in total loans of $814.7 million (24%) due to
the small amount of net charge-offs reducing the reserve for loan
losses and the small number of nonperforming assets in 1994. The ratio
of the loan loss reserve as a percentage of total loans has remained
consistent. The ratio was 1.23% at year end 1995 compared to 1.24% at
year end 1994 and 1.20% at year end 1993.
OTHER INCOME
Table 3 details the components of other income and their change since
1993:
TABLE 3: Other Income
Percentage
Increase (Decrease)
1995 1994 1993 1995/94 1994/93
(In Thousands)
Service Charges on Deposit Accounts $17,114 $14,891 $14,076 14.9 % 5.8 %
Other Service Charges and Fees 20,800 15,308 13,586 35.9 12.7
Gain on Sales of Loans 6,584 1,584 6,224 315.7 (74.6)
Security Gains (Losses) (86) - 934 (100.0) (100.0)
Other 12,537 4,682 3,800 167.8 23.2
$56,949 $36,465 $38,620 56.2 % (5.6)%
Other income increased $20.5 million (56%) in 1995 compared to 1994.
Service charges on deposit accounts increased due to higher rates on
corporate deposit accounts, nonsufficient funds, and ATM fees. Other
service charges and fees increased primarily due to a gain on the sale
of mortgage loan servicing rights. The sale of equipment leases was
the principal reason for the increase in gain on sale of loans. Other
increased chiefly due to a gain from the sale of Heritage's deposits
and branches.
Other income decreased $2.2 million (6%) in 1994 primarily due to the
decreases in gain on sale of loans and security gains. Service charges
on deposit accounts increased primarily due to increased service
charge income on corporate accounts and items returned due to
insufficient funds. Other service charges and fees increased primarily
due to increased credit card fee income. The decrease in gain on sale
of loans was primarily due to a decrease in the amount of loans sold
combined with the increase in interest rates in the residential
mortgage markets. The increase in other was primarily due to an
increase in miscellaneous income, more than offsetting the decline in
trading account income.
OTHER EXPENSES
Table 4 details the components of other expenses and their change
since 1993:
TABLE 4: Other Expenses
Percentage
Increase (Decrease)
1995 1994 1993 1995/94 1994/93
(In Thousands)
Salaries and Employee Benefits $69,810 $62,074 $57,669 12.5 % 7.6 %
Occupancy 8,931 7,724 6,818 15.6 13.3
Professional Services 7,335 5,733 5,117 27.9 12.0
Deposit Insurance 6,168 6,525 6,890 (5.5) (5.3)
Equipment Expense 9,242 7,996 7,793 15.6 2.6
Charges and Fees 7,329 5,213 4,943 40.6 5.5
Franchise Taxes 4,038 4,295 4,008 (6.0) 7.2
Other 25,579 19,326 16,901 32.4 14.3
$138,432 $118,886 $110,139 16.4 % 7.9 %
Other expenses increased $19.5 million (16%) for 1995 compared to
1994. Compensation increased as a result of merit and promotion
increases, expenses related to the sale of Heritage's branches, and
increased personnel in lending, telebanking and electronic delivery
systems. Occupancy expense increased primarily due to increased rent
expense from additional supermarket branches, ATMs and space for
telebanking. Increased professional fees resulted from the Heritage
transaction. The increase in equipment expense was primarily due to
increased depreciation expense relating to Bancorp's data processing
operations. Charges and fees increased due to costs associated with
obtaining credit card applications. Increases in marketing, recruiting
and insurance expense were the primary reasons for the increase in
other.
Other expenses increased $8.7 million (8%) for 1994 compared to 1993.
Salaries increased as a result of merit and promotion increases,
increases in incentives and increased personnel in the retail banking
area. Occupancy expense increased primarily due to increased rent
expense caused by an increase in the number of branch offices.
Professional services increased due to an increase in management
consulting fees. Increases in marketing expense and data processing
expenses were the primary reasons for the increase in other.
INCOME TAXES
The effective tax rates for 1995, 1994 and 1993 were approximately
32.9%, 34.1% and 35.4%, respectively. The decrease in the effective
rate for 1995 reflects the reversal of tax-exempt negative goodwill
associated with the sale of Heritage's deposits and branches and the
increase in the level of tax-exempt interest income.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
Bancorp adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures", on January 1, 1995.
Bancorp considers a nonperforming loan, except consumer loans, to be
an impaired loan where it is probable that all amounts due will not be
collected according to the contractual terms of the loan agreement.
Bancorp 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. The adoption of SFAS No. 114 and 118 had no material impact
on Bancorp's financial condition or results of operations.
During 1994, Bancorp changed its method of accounting for: (a)
postemployment benefits, as prescribed in SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" and (b) securities, as
prescribed in SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".
On January 1, 1994, Bancorp adopted SFAS No. 112, which requires
employers to recognize any obligation to provide postemployment
benefits (salary continuation, severance benefits, outplacement
services, etc.) by accruing the estimated liability through a charge
to expense. The effect of this change in accounting principle had no
material impact on Bancorp's consolidated financial position or
results of operations.
In addition, as of January 1, 1994, Bancorp adopted SFAS No. 115 which
addresses accounting and reporting for (1) investments in equity
securities that have readily determinable fair values and (2) all
investments in debt securities. It requires that these securities be
classified in three categories as follows: Held to Maturity, Trading
and Available for Sale. The only change in accounting treatment for
these three categories is in regard to the Available for Sale
securities where, under SFAS No. 115, these securities would be
reported at their fair value, with unrealized holding gains and losses
reported as a separate component of shareholders' equity.
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS
Average federal funds sold and reverse repurchase agreements decreased
$24.7 million during 1995 and $24.0 million during 1994, as funds were
shifted to asset categories with higher yields. 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 requirements, the remainder is placed in
overnight federal funds.
Investment securities represented approximately 16% of average earning
assets in 1995, 1994 and 1993. The amortized cost and market value of
investment securities at the dates indicated are summarized in Table
5:
TABLE 5: Investment Securities
Amortized Cost at December 31,
1995 1994 1993
(In Thousands)
Held to Maturity:
U.S. Treasuries and U.S. Government
Agencies and Corporations $- $842 $746
State and Political Subdivisions - - 10
Other Bonds - 995 1,000
Other Securities - 29,862 17,724
Total Held to Maturity - 31,699 19,480
Available for Sale:
U.S. Treasuries and U.S. Government
Agencies and Corporations 821,347 642,516 654,380
Other Bonds 60,746 179 1,115
Other Securities 73,901 36,615 26,530
Total Available for Sale 955,994 679,310 682,025
Total Securities $955,994 $711,009 $701,505
Market Value at December 31,
1995 1994 1993
(In Thousands)
Held to Maturity:
U.S. Treasuries and U.S. Government
Agencies and Corporations $- $842 $746
State and Political Subdivisions - - 10
Other Bonds - 995 1,000
Other Securities - 29,862 17,724
Total Held to Maturity - 31,699 19,480
Available for Sale:
U.S. Treasuries and U.S. Government
Agencies and Corporations 825,175 620,365 655,857
Other Bonds 60,638 176 1,118
Other Securities 74,091 33,680 26,777
Total Available for Sale 959,904 654,221 683,752
Total Securities $959,904 $685,920 $703,232
Effective January 1, 1994, Bancorp adopted SFAS No. 115. Securities
classified as held to maturity are those securities that Bancorp has
the intent and ability to hold to maturity, subject to continued
credit worthiness of the issuer. Debt securities classified as
available for sale are intended to be held for indefinite periods of
time and include those securities that Bancorp may employ as part of
its asset/liability management strategy, or that may be sold in
response to changes in interest rates, prepayments, regulatory capital
requirements or similar factors.
During the last 45 days of 1995, the Financial Accounting Standards
Board, in conjunction with the adoption of a new implementation guide,
allowed companies to transfer securities which had been previously
classified as held to maturity to available for sale without forcing
the company to revalue all securities in its held to maturity
category. During this time period, Bancorp reclassified all of its
held to maturity securities to available for sale. Amortized cost of
$247.4 million was transferred which resulted in an unrealized gain of
$375,000.
Table 6 shows the December 31, 1995, maturities and weighted average
yields for investments in debt securities. 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 securities
are assigned to maturity categories based on their estimated average
lives.
TABLE 6: Investments in Debt Securities Yields and Maturities
Fixed Rate Floating Rate
Weighted
Weighted Average
Average Yield On
Amortized Yield To Amortized Current
Cost Maturity Cost Coupon Rates
(In Thousands)
U.S. Treasuries and U.S.
Government Agencies and
Corporations:
Due in one year or less $258,803 5.95% $30,539 6.42%
Due after 1 through 5 years 99,268 7.32 379,218 6.39
Due after 5 through 10 years 23,865 7.04 28,485 6.59
Due after 10 years - - 1,169 7.19
Total $381,936 6.37% $439,411 6.41%
Other Bonds:
Due in one year or less $- -% $- -%
Due after 1 through 5 years 1 11.37 60,695 6.05
Due after 5 through 10 years - - 50 7.50
Due after 10 years - - - -
Total $1 11.37% $60,745 6.05%
Bancorp executes interest rate swaps to convert floating rate
investment securities to a fixed rate. At December 31, 1995, Bancorp
had $410 million in fixed receive swaps of which $60 million are
callable by the counterparty. The interest rate swaps did not
materially change the average weighted yield on the securities.
LOANS
Average net loans were approximately 84% and 83% of total average
earning assets in 1995 and 1994, respectively. Average net loans
increased $723.5 million (20%) in 1995 over 1994. Increases in
commercial and financial loans of $379.9 million (23%), consumer lease
financing of $191.5 million (331%) and instalment loans of $83.1
million (10%) were the primary reasons for the increase in loans. The
increase in average loan balances is a result of a continuing emphasis
on lending activity. Bancorp did not offer consumer lease financing
prior to 1994. Bancorp does not have a material exposure to foreign
loans, energy loans or agricultural loans. Table 7 shows loans
outstanding at period end by type of loan:
TABLE 7: Loan Portfolio Composition
December 31,
1995 1994 1993 1992 1991
$ % $ % $ % $ % $ %
(Dollars in Millions)
Commercial Lending:
Commercial and Financial 2,251 46.5 1,878 45.2 1,487 44.4 1,219 42.5 1,138 41.1
Mortgage 449 9.3 420 10.1 398 11.9 263 9.2 224 8.1
Construction 266 5.5 172 4.2 140 4.2 130 4.5 143 5.1
Lease Financing 129 2.7 110 2.6 101 3.0 63 2.2 51 1.8
Consumer Lending:
Instalment 1,001 20.7 931 22.4 764 22.8 597 20.9 459 16.6
Residential 466 9.6 508 12.2 500 14.9 629 21.9 788 28.4
Lease Financing 334 6.9 186 4.5 - - - - - -
Total Loans 4,896 4,205 3,390 2,901 2,803
Reserve for Loan Losses (60) (1.2) (52) (1.2) (41) (1.2) (35) (1.2) (31) (1.1)
4,836 100.0 4,153 100.0 3,349 100.0 2,866 100.0 2,772 100.0
Table 8 shows the composition of the commercial and financial loan
category by industry type at December 31, 1995:
TABLE 8: Commercial and Financial Loans
Amount on
Type Amount % Nonaccrual
(Dollars in Millions)
Construction $84.9 4 $1.5
Manufacturing 489.8 22 6.7
Transportation / Utilities 138.1 6 5.7
Wholesale Trade 214.3 9 1.2
Retail Trade 251.8 11 7.3
Finance & Insurance 108.1 5 .1
Real Estate Operators / Investment 290.7 13 .7
Service Industries 319.0 14 .9
Automobile Dealers 101.8 5 -
Other (1) 252.0 11 2.1
$2,250.5 100 $26.2
<FN>
(1) Includes various kinds of loans, such as small business loans and loans with
balances under $100,000.
Table 9 shows the composition of commercial mortgage and construction
loans by loan and property type at December 31, 1995:
TABLE 9: Commercial Mortgage and Construction Loans
Owner Operator Investor Developer Owner Occupied Amount on
Type Mortgage Const. Mortgage Const. Mortgage Const. Total Nonaccrual
(In Millions)
Apartments $- $- $69.1 $28.6 $3.6 $- $101.3 $-
Office / Warehouse - - 80.0 37.0 31.2 2.6 150.8 .6
Residential Development - - 7.4 94.8 14.2 12.4 128.8 .1
Shopping Centers - - 97.5 42.2 14.0 - 153.7 -
Land - - 15.7 16.5 0.4 - 32.6 -
Industrial Plants - - 7.6 0.1 4.1 5.1 16.9 -
Hotel / Motel / Restaurant 23.9 - 1.0 - - - 24.9 -
Healthcare Facilities 4.3 - 0.3 - - - 4.6 -
Auto Sales & Service - - 11.0 4.6 7.7 - 23.3 -
Churches - - 3.4 0.6 8.9 - 12.9 -
Mobile Home Parks - - 5.5 5.3 - - 10.8 -
Other Commercial Properties - - 28.3 16.6 9.8 - 54.7 6.1
$28.2 $- $326.8 $246.3 $93.9 $20.1 $715.3 $6.8
At December 31, 1995 and 1994, the amount of first mortgage
residential loans that were considered available for sale was
immaterial.
Loans outstanding at December 31, 1995, are presented in Table 10 by
maturity, based on remaining scheduled repayments of principal:
TABLE 10: Loan Maturities
After 1
Within but Through After
1 Year 5 Years 5 Years Total
(In Thousands)
Commercial and Financial $1,122,019 $789,047 $339,476 $2,250,542
Commercial Construction 44,444 2,060 219,850 266,354
Residential Construction 390 425 6,187 7,002
Total $1,166,853 $791,532 $565,513 $2,523,898
Loans Due After One Year:
At predetermined interest rates $397,628
At floating interest rates 959,417
CREDIT RISK MANAGEMENT
Bancorp maintains a reserve for loan losses to absorb potential losses
in its portfolio. Management's determination of the adequacy of the
reserve is based on reviews of specific loans, loan loss experience,
general economic conditions and other pertinent factors. If, as a
result of charge-offs or increases in the risk characteristics of the
loan portfolio, the reserve is below the level considered by
management to be adequate to absorb possible future loan losses, the
provision for loan losses is increased. Loans deemed uncollectible are
charged off and deducted from the reserve and recoveries on loans
previously charged off are added to the reserve.
Table 11 shows selected information relating to Bancorp's loans and
reserves for loan losses:
TABLE 11: Reserve For Loan Losses
December 31,
1995 1994 1993 1992 1991
(Dollars in Thousands)
Daily Average Net Loans
Outstanding $4,397,275 $3,673,803 $3,056,470 $2,790,168 $2,684,117
Reserve for Loan Losses
at Beginning of Period $51,979 $40,542 $35,144 $30,821 $28,138
Provision Charged to Expense 14,000 12,000 12,000 14,663 17,714
Acquired Reserves - - 737 - -
Other - - - 238 -
Loans Charged Off:
Commercial Lending:
Commercial and Financial 5,096 2,979 3,535 3,414 13,491
Mortgage 94 904 752 4,284 1,212
Construction - - - - -
Lease Financing - - - - -
Consumer Lending:
Instalment 8,232 5,564 4,549 4,226 3,616
Residential 127 125 102 560 308
Lease Financing 647 - - - -
Total Charge-Offs 14,196 9,572 8,938 12,484 18,627
Recoveries:
Commercial Lending:
Commercial and Financial 6,238 6,614 44 373 816
Mortgage 121 552 165 70 463
Construction - - - - -
Lease Financing - - - - 724
Consumer Lending:
Instalment 1,994 1,806 1,345 1,430 1,214
Residential 13 37 45 33 379
Lease Financing 86 - - - -
Total Recoveries 8,452 9,009 1,599 1,906 3,596
Net Loans Charged Off 5,744 563 7,339 10,578 15,031
Reserve for Loan Losses
at End of Period $60,235 $51,979 $40,542 $35,144 $30,821
Net Charge-Offs to
Average Net Loans .13% .02% .24% .38% .56%
Net charge-offs over the years have varied since loans are written off
against the reserve when they are determined to be uncollectible. The
increase in net charge-offs in 1995 is primarily due to increases in
charge-offs of $2.7 million and $2.1 million in instalment and
commercial and financial loans, respectively. The decrease in net
charge-offs in 1994 is primarily due to a $6.6 million increase in
commercial and financial loan recoveries. The high level of recoveries
in 1995 and 1994 resulted from recoveries of $5.8 million and $5.9
million, respectively, of a commercial loan that was charged off in
1991.
In 1993, Provident and a commercial customer entered into an agreement
in which Provident granted certain concessions on its loans and agreed
not to exercise certain rights available to it under the loan
documents. In return, the customer issued to Provident 346,718 shares
of its common stock, representing 5% of its issued and outstanding
common stock, and 74,659 shares of Series B non-voting convertible
preferred stock that is convertible into 746,590 shares of its common
stock. Although these shares were not registered under the Securities
Act of 1933, Provident could require the registration by the customer.
In 1995, Provident and the commercial customer amended the agreement
whereby certain loan maturity dates were extended and additional funds
were made available for future borrowing. In consideration, the
customer removed certain restrictions from the selling of these shares
and issued a stock warrant for the purchase of an additional 200,000
shares of common stock at the quoted market price as of the date the
warrant was issued. As of the end of 1995, Provident had sold 225,000
shares of the common stock resulting in $3.5 million in proceeds of
which $3.1 million were recorded as loan loss recoveries and $392,000
as interest income. The unsold common and preferred stock, along with
the stock warrant is recorded at a nominal amount.
Table 12 shows the dollar amount of the reserve for loan losses using
management's estimate by principal loan category:
TABLE 12: Allocation of Reserve For Loan Losses
December 31,
1995 1994 1993 1992 1991
(In Thousands)
Commercial Lending:
Commercial and Financial $26,280 $22,031 $17,379 $15,575 $12,207
Mortgage 3,774 3,493 2,993 2,279 4,109
Construction 4,824 3,886 3,522 3,915 3,129
Lease Financing 1,543 1,355 889 783 506
36,421 30,765 24,783 22,552 19,951
Consumer Lending:
Instalment 18,683 17,821 14,664 11,180 8,444
Residential 958 1,071 1,095 1,412 2,426
Lease Financing 4,173 2,322 - - -
23,814 21,214 15,759 12,592 10,870
$60,235 $51,979 $40,542 $35,144 $30,821
Management considers the present allowance to be appropriate and
adequate to cover losses inherent in the loan portfolio based on the
current economic environment. However, future economic changes cannot
be predicted at this time. Deterioration in economic conditions could
result in an increase in the risk characteristics of the loan
portfolio and an increase in the provision for possible loan losses.
Table 13 presents a summary of various indicators of credit quality:
TABLE 13: Credit Quality
December 31,
1995 1994 1993 1992 1991
$ % $ % $ % $ % $ %
(Dollars In Thousands)
Nonperforming Assets
Nonaccrual Loans (1):
Commercial Lending:
Commercial & Financial 26,190 54.7 2,973 28.0 10,740 39.7 11,289 27.7 6,933 19.0
Mortgage 6,716 14.0 1,869 17.6 3,861 14.3 6,459 15.9 1,605 4.4
Construction 78 .2 78 .7 554 2.0 454 1.1 - -
Lease Financing 2,605 5.4 - - - - - - - -
35,589 74.3 4,920 46.3 15,155 56.0 18,202 44.7 8,538 23.4
Consumer Lending:
Instalment 230 .5 - - 276 1.0 782 1.9 414 1.1
Residential 1,678 3.5 1,396 13.2 2,344 8.7 6,277 15.4 6,958 19.0
Lease Financing - - - - - - - - - -
1,908 4.0 1,396 13.2 2,620 9.7 7,059 17.3 7,372 20.1
Total Nonaccrual Loans 37,497 78.3 6,316 59.5 17,775 65.7 25,261 62.0 15,910 43.5
Renegotiated Loans (2) 4,753 9.9 961 9.1 408 1.5 125 .3 280 .8
Total Nonperforming
Loans 42,250 88.2 7,277 68.6 18,183 67.2 25,386 62.3 16,190 44.3
Other Real Estate and
Equipment Owned:
Commercial 3,714 7.8 714 6.8 3,679 13.6 9,175 22.5 11,723 32.1
Closed Bank Branches 189 .4 311 2.9 348 1.3 1,111 2.7 3,439 9.4
Residential 468 1.0 350 3.3 2,140 7.9 2,151 5.3 2,856 7.8
Multifamily 594 1.2 1,094 10.3 676 2.5 786 2.0 1,441 3.9
Land 663 1.4 857 8.1 2,019 7.5 2,113 5.2 903 2.5
5,628 11.8 3,326 31.4 8,862 32.8 15,336 37.7 20,362 55.7
Nonperforming Assets 47,878 100.0 10,603 100.0 27,045 100.0 40,722 100.0 36,552 100.0
Loans 90 Days Past Due -
Still Accruing 26,578 4,673 2,715 1,476 1,163
Loan Loss Reserve as a
Percent of:
Total Loans 1.23 1.24 1.20 1.21 1.10
Nonperforming Loans 142.57 714.29 222.97 138.44 190.37
Nonperforming Assets 125.81 490.23 149.91 86.30 84.32
Nonperforming Loans as a
Percent of Total Loans .86 .17 .54 .88 .58
Nonperforming Assets as a
Percent of:
Total Loans and Other
Real Estate & Equipment .98 .25 .80 1.40 1.29
Total Assets .77 .20 .58 1.02 .95
<FN>
(1) Bancorp generally stops accruing interest on loans when the payment of principal and/or interest is past due 90 days or more.
(2) Loans renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial
position of the borrower.
Nonperforming assets increased $37.3 million during 1995. Nonaccrual
loans increased $31.2 million during 1995, primarily due to four
commercial and financial loans being placed on nonaccrual status.
Renegotiated loans increased principally due to one commercial and
financial loan being restructured. Other real estate and equipment
owned increased primarily due to property on an operating lease being
reclassified due to the bankruptcy of the lessee. Net losses of
$80,000 were recorded from the sale of other real estate and equipment
during 1995. As of the end of 1995, nonperforming assets as a
percentage of total assets are at a level that is consistent with
historical averages.
Nonperforming assets decreased $16.4 million during 1994. Nonaccrual
loans decreased $11.5 million during 1994, primarily due to the
decrease in nonaccrual commercial and financial loans. Nonaccrual
commercial and financial loans decreased primarily due to two loans
being brought current and removed from nonaccrual status. The decrease
in other real estate owned was due primarily to the sale of commercial
and residential properties. Approximately $7.5 million in sales of
properties held as other real estate owned occurred during 1994, with
approximately $120,000 of net gains recorded with regard to these
property sales.
When a loan is placed on nonaccrual status or is renegotiated, the
recognition of interest income differs from what would have been
recognized had the loan retained its original terms. The gross amount
of interest income recognized during 1995 with respect to these loans
was $540,000 compared to $2,640,000 that would have been recognized
had the loans remained current in accordance with their original
terms.
Of the $37.5 million in nonaccrual loans at December 31, 1995,
management estimates approximately $11.8 million of potential loss.
The loss estimate is based, in part, upon information from Provident's
credit watch and impaired loan lists ("lists"), and loss exposure
reports. The lists are prepared quarterly following detailed
discussions between lending officers, the credit and loan review
departments and senior management. The lists include nonperforming
loans along with loans that were classified by bank examiners. The
lists also include loans where potential borrower problems may raise
concern about the ability of the borrower to comply with the present
loan repayment terms. These loans, while not nonperforming or
necessarily expected to result in losses, are considered in need of
closer monitoring. The loss exposure report is prepared monthly and
updates loan balance information and loss estimates from the previous
lists. The loss exposure report also includes other real estate owned
balances and any possible loss exposure involving other real estate.
Loans 90 days past due still accruing increased $21.9 million during
1995. One customer accounted for $16.9 million of this increase. Loans
from this customer were not placed on nonaccrual due to being well
secured and in the process of collection.
The year-end 1995 lists and loss exposure reports included
approximately $27.9 million of loans that were current, but which due
to the possible credit problems of such borrowers that were known by
management or other factors, were considered to be in need of closer
monitoring. Through an ongoing monitoring process, the value of the
collateral securing these loans is analyzed each quarter to determine
loss potential. A review of pertinent loan information, including
borrower financial statements and collateral appraisals, determined
that loans with an aggregate principal amount of approximately $17.9
million had some loss potential. The loss potential was estimated to
be approximately $4.3 million. In determining this estimate,
collateral values are carefully examined on an ongoing basis.
Management considers the present reserve for loan losses of $60.2
million to be appropriate and adequate to cover the estimated losses
in the loan portfolio.
DEPOSITS
Average total interest bearing deposits increased 18% during 1995 to
$3.6 billion after increasing 15% during 1994 to $3.0 billion.
Increases in brokered deposits and other deposits raised through our
telebanking program were the primary reasons for the increase in
interest bearing deposits. For 1995 and 1994, average total interest
bearing deposits represented 77% and 78%, respectively, of average
interest bearing liabilities. Bancorp has no foreign deposits. Table
14 presents a summary of period end deposit balances:
TABLE 14: Deposits
December 31,
1995 1994 1993
(In Millions)
Noninterest Bearing $524 $452 $423
Interest Bearing Demand Deposits 263 273 287
Savings Deposits 625 712 830
Certificates of Deposit Less than $100,000 1,575 1,530 1,310
Certificates of Deposit of $100,000 or More 1,192 1,102 382
$4,179 $4,069 $3,232
At December 31, 1995, the maturities of deposits of $100,000 or more
are as follows (In Millions):
3 months or less $226
Over 3 through 6 months 191
Over 6 through 12 months 196
Over 12 months 579
Total $1,192
Included in Certificates of Deposit ("CD's") of $100,000 or more at
December 31, 1995, 1994 and 1993 are brokered deposits of $752
million, $694 million and $55 million, respectively.
In 1995, Bancorp began issuing brokered CD's with embedded call
options combined with interest rate swaps with matching call dates as
part of its CD program. Bancorp has the right to redeem the CD's on
specific dates prior to their stated maturity while the interest rate
swaps are callable at the option of the swap counterparty, rather than
Bancorp. The terms and conditions of the call options embedded in the
interest rate swaps match those of the CD's, offsetting any option
risk exposure to Bancorp. At December 31, 1995, Bancorp had $221
million of callable CD's.
BORROWED FUNDS
Borrowed funds are an important source of funds to support earning
assets. In 1995, average short-term debt increased $186.0 million
(42%), while average long-term debt increased $58.1 million (15%). The
increased use of federal funds purchased and repurchase agreements was
the primary reason for the increase in average short-term debt in
1995. The increase in long-term debt is attributable to borrowings on
Medium-Term Bank Notes of $312.5 million and advances from the Federal
Home Loan Bank ("FHLB") of $150 million. The medium-term borrowings
have stated fixed rates, however, they have been converted to variable
one-month London Interbank Offered Rate ("LIBOR") funds through the
use of interest rate swaps. The FHLB advances have a variable rate
based on the one-month LIBOR rate. The proceeds from the additional
debt became part of Provident's general funds for use in its business.
In 1994, average short-term debt decreased $34.4 million (7%), while
average long-term debt increased $267.9 million (203%). The decrease
in average balance for federal funds purchased and repurchase
agreements, which more than offset the increase in commercial paper,
was the primary reason for the decrease in average short-term debt in
1994. The issuance of subordinated notes and borrowings from the
Federal Home Loan Bank were the primary reasons for the increase in
average long-term debt in 1994. In January, 1994, Provident issued
$100 million of 6.375% subordinated notes due in 2004. The proceeds
from this debt issue became part of Provident's general funds.
CAPITAL RESOURCES
Bank holding companies are required to comply with the Federal Reserve
risk-based capital guidelines. At the end of 1995, the required
minimum ratio of total risk-based capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby
letters of credit) was 8%. At least half of the total capital is
required to be Tier 1 capital. In addition to risk-based capital
guidelines, the Federal Reserve requires a bank holding company to
comply with a so-called "Tier 1 Leverage Ratio", under which the bank
holding company must maintain a minimum level of Tier 1 capital to
average total consolidated assets of at least 3%. All but the
strongest companies and companies contemplating significant growth or
expansion are expected to maintain a ratio of at least 1% to 2% above
the stated minimum.
TABLE 15: Capital Adequacy
1995 1994 1993
Net Earnings to Average Assets 1.29% 1.24% 1.30%
Net Earnings to Average Total Equity 18.37 16.64 16.33
Average Total Equity to Average Assets 7.02 7.43 7.94
Common Dividend Payout to Net Earnings 22.78 25.47 24.69
Preferred Dividend Payout to Net Earnings 3.39 5.15 5.91
Tier 1 Leverage Ratio 7.13 7.21 7.88
Tier 1 Capital to Risk-Weighted Assets 7.52 7.86 8.89
Tier 2 Capital to Risk-Weighted Assets 4.25 4.99 3.35
Total Risk-Based Capital to Risk-Weighted Assets 11.77 12.85 12.24
Pursuant to the terms of its Series B Preferred Stock ("B Preferred"),
Bancorp elected in the fourth quarter of 1994 to change the dividend
rate to a rate equivalent to that paid on its Common Stock. Based on
the actual common stock dividend rate, annual dividends paid on the
Preferred Stock decreased by approximately $534,000 in 1995. In the
third quarter of 1994 and 1995, Bancorp announced an increase in the
quarterly common dividend from $.22 to $.25 per share and from $.25 to
$.275 per share, respectively. In the third quarter of 1995, Bancorp
exchanged all of the shares of its B Preferred for an identical number
of shares of its Series C Convertible Preferred Stock ("C Preferred").
In the fourth quarter of 1995, Bancorp exchanged all of the shares of
its C Preferred for an identical number of shares of its Series D
Convertible Preferred Stock ("D Preferred"). The terms of the D
Preferred are substantially identical to the B Preferred and C
Preferred except that the terms of the D Preferred permit AFG, its
subsidiaries or affiliates to convert the D Preferred into Bancorp
common stock regardless of their percentage of ownership of Bancorp's
voting equity securities. In December 1995, 301,146 shares of D
Preferred were converted into 1,882,162 shares of Common Stock. As of
December 31, 1995, 70,272 shares of D Preferred remains outstanding
which is convertible into 439,200 shares of Common Stock.
Bancorp's capital expenditure program in recent years has included
renovations to Bancorp's main office, improvements to the data
processing center and additions to Provident's branch banking network.
Capital expenditures for 1996 are estimated to be approximately $16
million and include improvements for Provident and Provident Kentucky
in data processing capabilities and improvement of the branch banking
network, with emphasis being placed on enhancing the branches located
in local supermarkets and placement of additional ATMs. Bancorp also
intends to expand and improve its telephone banking operations.
Management believes that currently available funds and funds provided
by normal operations will be sufficient to meet capital requirements.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and
deposit withdrawal requirements of customers as well as to satisfy
liabilities, fund operations and support asset growth. Bancorp 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 due from banks. Another source for providing
liquidity is the generation of new deposits. Total deposits increased
by 3% during 1995 to $4.2 billion. Bancorp may borrow both short-term
and long-term funds. Bancorp obtained $462.2 million in long-term
borrowings during 1995 and has an additional $137.5 million available
for borrowing under a medium-term bank note program. Approximately
$55.1 million of long-term debt is due to be repaid during 1996.
Additional sources of liquidity include the sale of investment
securities classified as available for sale and the sale of commercial
and consumer loans.
Although no significant capital expenditures are expected for Bancorp
on a parent-only basis during 1995, Bancorp still has liquidity needs.
Bancorp's primary liquidity need will be the payment of dividends to
its preferred and common shareholders. The major source of liquidity
for Bancorp is dividends paid to it by its subsidiaries. Bancorp
received dividends of $23 million in 1995, $26 million in 1994 and
$45.3 million in 1993 from its subsidiaries. The maximum amount
available for dividends that may be paid in 1996 to its parent by
Provident without approval is approximately $71.9 million, plus 1996
net earnings. Dividends of approximately $3.1 million plus 1996 net
earnings may be paid in 1996 by Provident Kentucky. Management
believes that amounts available from the banking subsidiaries will be
sufficient to meet Bancorp's liquidity requirements in 1996. Under the
Federal Deposit Insurance Corp. Improvement Act of 1991 ("FDICIA"), an
insured depository institution, such as Bancorp'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 Bancorp is presented in Note O,
included in "Notes to Consolidated Financial Statements".
Additional sources of liquidity to the parent include loan payments
and sales of investment securities. At December 31, 1995, Bancorp had
$130 million and $30 million in lines of credit with unaffiliated
banks to support commercial paper borrowings of $145 million and other
general obligations, respectively. As of January 18, 1996, these lines
had not been used.
OFF-BALANCE SHEET FINANCIAL AGREEMENTS
Bancorp employs derivatives, such as interest rate swaps, interest
rate caps, financial futures and forward contracts primarily to manage
the interest rate risk inherent in Bancorp's core businesses.
Bancorp uses interest rate swaps as its primary off-balance sheet
financial instrument. At December 31, 1995, approximately $1.8 billion
in interest rate swaps held by Bancorp essentially convert a fixed
rate of interest into a shorter repricing frequency. Approximately
$1.36 billion are receive fixed pay variable swaps used to convert the
interest rate sensitivity of long-term fixed rate deposit and debt
liabilities to a floating interest rate based on LIBOR. Bancorp also
employs $410 million of this type of swap in association with floating
rate collateralized mortgage obligations ("CMO's") and asset backed
securities to create a synthetic fixed rate investment portfolio with
a reduced prepayment risk profile.
Interest rate swaps in which Bancorp 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 long-term
fixed rate commercial and residential real estate mortgage loans.
Bancorp had $33 million of pay fixed receive variable rate swaps at
December 31, 1995.
Bancorp manages the credit risk in these transactions through its
counterparty credit policy, which limits transacting business only
with counterparties classified as investment grade by the rating
agencies of Moody's and Standard & Poor's. Bancorp has in place in
certain cases, but does not require, 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, 1995, Bancorp pledged investment securities with a
carrying value of $21.4 million as collateral to two of its
counterparties to cover the mark-to-market. As a second credit risk
measure, Bancorp utilizes bilateral netting of interest payments. The
frequency and timing of the interest payments are matched between
counterparties, thereby reducing the credit exposure.
Generally, interest rate swaps are not amortizing in nature. At
December 31, 1995, there were no past due amounts on any interest rate
swap. Bancorp has never experienced a credit loss related to an off-
balance sheet position, and does not reserve for credit losses on
these transactions.
The following table shows the composition of interest rate swap
agreements as of December 31, 1995:
TABLE 16: Interest Rate Swap Agreement Maturities
1996 1997 1998 1999 Thereafter Total
(Dollars in Millions)
Pay fixed receive variable
Notional Amount $- $12 $- $2 $19 $33
Average Receive Rate - 5.94% - 5.94% 8.29% 7.28%
Average Pay Rate - 6.59% - 7.86% 7.87% 7.39%
Pay variable receive fixed
Notional Amount $294 $433 $24 $261 $757 $1,769
Average Receive Rate 5.04% 6.29% 5.72% 6.92% 6.33% 6.19%
Average Pay Rate 5.83% 5.81% 5.89% 5.84% 5.86% 5.84%
Totals
Notional Amount $294 $445 $24 $263 $776 $1,802
Average Receive Rate 5.04% 6.28% 5.72% 6.91% 6.38% 6.21%
Average Pay Rate 5.83% 5.83% 5.89% 5.86% 5.92% 5.87%
The changes in interest rate swap agreements for the years ended
December 31 were as follows:
1995 1994
(In Millions)
Beginning Notional Amount $1,556 $1,227
New Contracts 1,004 894
Matured Contracts (758) (565)
Ending Notional Amount $1,802 $1,556
Bancorp uses financial futures contracts and forward contracts to
manage interest rate risk in a manner similar to interest rate swap
agreements. At December 31, 1995, Bancorp had no outstanding positions
in financial futures contracts or forward contracts.
Bancorp maintains a portfolio of interest rate caps sold to corporate
customers at their request to manage the interest rate risk associated
with their borrowings. Bancorp offsets the interest rate risk of
customer cap transactions by purchasing an offsetting position in
interest rate caps of matching terms. Bancorp executes these
transactions as a customer convenience and does not consider itself to
be a dealer in these financial instruments. At December 31, 1995,
Bancorp's positions in matched customer interest rate caps was $57.5
million in notional principal amount.
Interest rate swaps decreased the net interest margin by 11 basis
points in 1995 and increased the net interest margin by 14 basis
points and 40 basis points for 1994 and 1993, respectively.
INTEREST RATE SENSITIVITY
Recognizing that interest rate risk is inherent in its core business
activities and understanding that fluctuating interest rates may cause
volatility in its net interest income, Bancorp actively engages in the
interest rate risk management process. At December 31, 1995, Bancorp's
interest rate sensitivity position was within established guidelines.
Bancorp develops forecasts and assumptions as to deposit growth and
mix, loan growth and mix, deposit and loan pricing spreads, early
repayment of assets and early redemption of liabilities. The resulting
impact on net interest income is then evaluated, given potential
changes in interest rate risk.
Bancorp actively manages and makes modifications to its balance sheet
through product structuring, product pricing, and promotional
offerings to achieve its targeted interest rate risk management
objectives. If management believes additional modifications to
Bancorp's sensitivities are warranted, off-balance sheet financial
agreements such as interest rate swaps, interest rate caps and futures
contracts are employed. At December 31, 1995, Bancorp had positions in
interest rate swaps and interest rate caps and had no positions in
futures contracts. A summary of the interest rate swap positions may
be found in Note L in the "Notes to Consolidated Financial
Statements".
Bancorp employs several analytical techniques in the assessment of
interest rate risk, including gap analysis, simulation analysis,
duration analysis, and market value of portfolio equity analysis.
Bancorp relies most heavily on simulation analysis as it's primary
analytical technique.
Bancorp simulates net interest income over a variety of interest rate
scenarios including "shock" analysis of +/- 100 basis points and +/-
200 basis points. These shock scenarios assume an instantaneous and
permanent change in the pricing of all interest rate sensitive assets
and liabilities and do not give consideration to any management of the
shock by Bancorp. As a result, these shock scenarios are considered
worst case scenarios through which Bancorp can quantify its maximum
exposures. Bancorp also simulates net interest income through a market
driven forecast using forward yield curves implied by the financial
futures markets. Bancorp develops most of its strategies and tactics
using the forward yield curve as the base interest rate scenario.
Table 17 provides a summary of Bancorp's gap analysis, which measures
the difference between interest sensitive assets and liabilities
repricing in the same time period. For this analysis, cash flow of
assets and liabilities are segregated by their stated or forecasted
repricing intervals. The forecasted repricing includes assumptions of
early loan repayments, specifically in the areas of instalment and
residential mortgage loan receivables. These prepayment assumptions
are based on industry average prepayment rates for these loan
products. Similarly, assumptions are made to the anticipated repricing
and maturity characteristics of liability products with managed
interest rates such as NOW and money market accounts. Adjustments are
then made for the impact of off-balance sheet derivatives. Bancorp
manages its gap through a targeted 12 month cumulative time horizon.
At December 31, 1995, management assessed its gap position as a
liability sensitivity of approximately 11% through the 12 month
cumulative period. A liability sensitivity implies potential margin
compression in a rising rate environment, and potential margin
expansion in a falling rate environment.
TABLE 17: Interest Rate Sensitivity
Repricing Time Periods
Within 4 - 12 1 - 5 Over 5
3 Months Months Years Years Total
(Dollars in Millions)
Interest Earning Assets:
Loans $2,626 $623 $1,347 $300 $4,896
Investments:
Taxable 620 139 103 87 949
Tax-Exempt - - - 11 11
Total Interest Earning Assets 3,246 762 1,450 398 5,856
Interest Bearing Liabilities:
Deposits 667 1,579 1,124 285 3,655
Short-Term Debt 637 - - - 637
Long-Term Debt 268 55 310 187 820
Total Interest Bearing Liabilities 1,572 1,634 1,434 472 5,112
Interest Rate Swaps (1,671) 229 1,044 398 -
Interest Sensitivity Gap $3 $(643) $1,060 $324 $744
Cumulative Interest Sensitivity Gap $(640) $420 $744
Cumulative Gap as a Percent of
Earning Assets (11%) 7% 13%
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from capital intensive
companies that have a significant investment in fixed assets or
inventories. However, inflation does have an important impact in the
banking industry. During periods of inflation, monetary assets lose
value, while monetary liabilities gain value. This results in the need
to increase equity capital at higher than normal rates in order to
maintain an appropriate equity to assets ratio. Inflation can also
have a significant effect on other expenses, which tend to rise during
periods of general inflation. Inflation has not had a material effect
on Bancorp in the recent past.
Bancorp's ability to react to changes in interest rates has a
significant impact on financial results. As discussed previously,
management attempts to increase or decrease interest rate sensitivity
in order to protect against wide interest rate fluctuations.
NEW ACCOUNTING STANDARDS
Bancorp will adopt SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on
January 1, 1996. This statement requires that long-lived assets be
segregated into two categories, those to be held and used and those to
be disposed of. Long-lived assets to be held and used are reviewed for
impairment whenever circumstances indicate that the carrying value 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. In this situation, an impairment loss is recorded in the
amount of the difference between the carrying amount and the fair
value of the asset. Assets to be disposed of that are subject to the
reporting requirements of Accounting Principles Board ("APB") Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" are to be measured at
the lower of carrying amount or net realizable value. Long-lived
assets to be disposed of that are not subject to APB Opinion No. 30
requirements are to be accounted for at the lower of carrying amount
or fair value less cost to sell.
SFAS No. 122, "Accounting for Mortgage Servicing Rights" will also be
adopted by Bancorp on January 1, 1996. Under this statement, when
mortgage loans are originated or purchased by an institution and
subsequently sold or securitized with servicing retained, the cost of
the loan shall be allocated between the loan (without servicing) and
the fair value of the servicing. Prior to this statement, no costs of
the loan were allocated to the servicing. Additionally, the statement
specifies how mortgage servicing rights and excess servicing rights
should be evaluated for impairment.
Management currently believes that neither the adoption of SFAS No.
121 nor SFAS No. 122 will have a material impact on Bancorp's
consolidated financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October, 1995. The statement defines a fair value-based method of
accounting for stock-based employee compensation plans. It encourages
all companies to adopt this method of accounting and measure
compensation cost for stock-based awards, based on their estimated
fair value on the date of grant, and recognize such cost over the
service period. However, it also allows a company to continue to
measure compensation costs for its plans as prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Companies electing
to continue following present accounting rules under APB Opinion No.
25 will be required to provide pro-forma disclosures of what net
earnings and earnings per share would have been had the new fair value
method been used. At this time, management expects to continue its
accounting in accordance with APB Opinion No. 25. The disclosure
requirements of SFAS No. 123 will be adopted as required for financial
statements beginning in 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors 32
Financial Statements:
Provident Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets 33
Consolidated Statements of Earnings 34
Consolidated Statements of Changes in Shareholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) 57
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Provident Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
Provident Bancorp, Inc. and subsidiaries as of December 31, 1995, and
1994, and the related consolidated statements of earnings, changes in
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the management of Provident Bancorp, Inc. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Bancorp, Inc. and subsidiaries at
December 31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note B to the consolidated financial statements,
Provident Bancorp, Inc. changed its method of accounting for certain
investments in debt and equity securities in 1994.
ERNST & YOUNG LLP
Cincinnati, Ohio
January 18, 1996
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
1995 1994
ASSETS
Cash and Noninterest Bearing Deposits $213,594 $172,025
Federal Funds Sold and Reverse Repurchase
Agreements - 252,550
Investment Securities:
Held to Maturity (market value - $-
and $31,699) - 31,699
Available for Sale (amortized cost - $955,994
and $679,310) 959,904 654,221
Loans (Net of Unearned Income):
Commercial Lending:
Commercial and Financial 2,250,542 1,878,351
Mortgage 448,906 420,222
Construction 266,354 172,190
Lease Financing 128,686 109,743
Consumer Lending:
Instalment 1,000,940 930,545
Residential 466,422 507,734
Lease Financing 334,226 185,753
Total Loans 4,896,076 4,204,538
Reserve for Loan Losses (60,235) (51,979)
Net Loans 4,835,841 4,152,559
Premises and Equipment 90,976 64,210
Other Assets 105,036 84,227
$6,205,351 $5,411,491
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $523,631 $452,458
Interest Bearing 3,654,920 3,616,191
Total Deposits 4,178,551 4,068,649
Short-Term Debt 637,240 521,707
Long-Term Debt 820,083 383,433
Accrued Interest and Other Liabilities 136,940 78,351
Total Liabilities 5,772,814 5,052,140
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized:
Series B, 371,418 Issued - 37,000
Series D, 70,272 Issued 7,000 -
Common Stock, No Par Value, $.67 Stated Value:
60,000,000 Shares Authorized, 17,544,411 and
15,639,849 Issued 11,703 10,427
Capital Surplus 137,313 107,264
Retained Earnings 265,017 210,355
Reserve for Retirement of Capital Securities 9,000 10,667
Treasury Stock, 1,126 and 4,487 Shares (38) (134)
Unrealized Gains (Losses) on Marketable Securities
(net of deferred income tax) 2,542 (16,228)
Total Shareholders' Equity 432,537 359,351
$6,205,351 $5,411,491
See notes to consolidated financial statements.
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Data)
Year Ended December 31,
1995 1994 1993
Interest Income:
Interest and Fees On Loans:
Taxable $410,830 $309,629 $250,733
Exempt from Federal Income Taxes 506 574 770
411,336 310,203 251,503
Interest on Investment Securities:
Taxable 49,626 33,404 33,272
Exempt from Federal Income Taxes 389 131 9
50,015 33,535 33,281
Interest on Federal Funds Sold and Reverse
Repurchase Agreements 1,045 2,091 2,055
Total Interest Income 462,396 345,829 286,839
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 25,516 25,428 28,255
Time Deposits 166,881 98,808 73,579
192,397 124,236 101,834
Interest on Short-Term Debt 37,113 19,086 15,281
Interest on Long-Term Debt 30,237 20,549 6,888
Total Interest Expense 259,747 163,871 124,003
Net Interest Income 202,649 181,958 162,836
Provision for Possible Loan Losses (14,000) (12,000) (12,000)
Net Interest Income After Provision for
Possible Loan Losses 188,649 169,958 150,836
Other Income:
Service Charges on Deposit Accounts 17,114 14,891 14,076
Other Service Charges and Fees 20,800 15,308 13,586
Gain on Sales of Loans 6,584 1,584 6,224
Security Gains (Losses) (86) - 934
Other 12,537 4,682 3,800
Total Other Income 56,949 36,465 38,620
Other Expenses:
Compensation:
Salaries 56,773 50,529 46,176
Benefits 9,180 8,324 7,970
Profit Sharing 3,857 3,221 3,523
Occupancy 8,931 7,724 6,818
Professional Services 7,335 5,733 5,117
Deposit Insurance 6,168 6,525 6,890
Equipment Expense 9,242 7,996 7,793
Charges and Fees 7,329 5,213 4,943
Franchise Taxes 4,038 4,295 4,008
Other 25,579 19,326 16,901
Total Other Expenses 138,432 118,886 110,139
Earnings Before Income Taxes 107,166 87,537 79,317
Applicable Income Taxes 35,306 29,871 28,045
Net Earnings $71,860 $57,666 $51,272
Net Earnings Per Common Share:
Primary $4.30 $3.40 $3.09
Fully Diluted 3.89 3.13 2.85
Average Primary Shares 16,156 16,080 15,624
Average Fully Diluted Shares 18,491 18,423 18,001
See notes to consolidated financial statements.
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
Reserve for Unrealized
Retirement Gains (Losses)
Preferred Common Capital Retained of Capital Treasury On Marketable
Stock Stock Surplus Earnings Securities Stock Securities
Balance at January 1, 1993 $41,333 $10,183 $100,101 $137,090 $8,333 $- $(575)
Net Earnings 51,272
Cash Dividends Declared on
Common Stock, $.82 Per Share (12,660)
Cash Dividends Declared on
8% Preferred Stock (3,029)
Allocation for Retirement of
Capital Securities (3,334) 3,334
Exercise of Stock Options 2 71
Shares Issued in Subscription
Offering, Net of Expenses 76 2,574
Adjustment for Increase in
Value of Marketable Securities 430
Conversion of Preferred Stock (9) 9
Redemption of Preferred Stock (4,324) 145 4,179
Adjustment to Value of
Restricted Shares 671
Other 20
Balance at December 31, 1993 37,000 10,406 107,625 169,339 11,667 - (145)
Net Earnings 57,666
Cash Dividends Declared on
Common Stock, $.94 Per Share (14,687)
Cash Dividends Declared on
8% Preferred Stock (2,971)
Allocation for Retirement of
Capital Securities (3,000) 3,000
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 21 717
Adjustment for Decrease in
Value of Marketable Securities (16,083)
Purchase of Treasury Stock (211)
Sale of Treasury Stock 11 77
Adjustment to Value of
Restricted Shares (981)
Other (97) (3)
Balance at December 31, 1994 37,000 10,427 107,264 210,355 10,667 (134) (16,228)
Net Earnings 71,860
Cash Dividends Declared on
Common Stock, $1.05 Per Share (16,372)
Cash Dividends Declared on
Preferred Stock, $6.5625
Per Share (2,437)
Allocation for Retirement of
Capital Securities (2,333) 2,333
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 15 845
Adjustment for Increase in
Value of Marketable Securities 18,770
Purchase of Treasury Stock (6,109)
Sale of Treasury Stock (361) 4,761
Conversion of Preferred Stock
to Common Stock (30,000) 1,261 28,739
Reissuance of Treasury Stock
Pursuant to Acquisition 306 1,444
Adjustment to Value of
Restricted Shares 388
Other 77 (1)
Balance at December 31, 1995 $7,000 $11,703 $137,313 $265,017 $9,000 $(38) $2,542
See notes to consolidated financial statements.
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
1995 1994 1993
Operating Activities:
Net Earnings $71,860 $57,666 $51,272
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 14,000 12,000 12,000
Provision for Depreciation and Amortization 12,649 8,592 9,753
Amortization of Investment Security Premiums (Discounts) (1,474) 694 497
Amortization of Unearned Income (23,257) (11,370) (5,899)
Net Decrease in Trading Securities 125 171 26,455
Proceeds From Sale of Loans Held for Sale 156,309 82,122 310,863
Origination of Loans Held for Sale (152,982) (20,095) (350,738)
Realized Gains on Loans Held for Sale (2,410) (832) (5,406)
Realized Gains on Sale of Loans (4,174) (752) (818)
Realized Investment Security (Gains) Losses 86 - (934)
(Increase) Decrease in Interest Receivable (5,650) (9,679) 312
Increase in Accounts Receivable (8,101) (2,646) (7,096)
Increase in Other Assets (857) (12,462) (2,677)
Increase in Interest Payable 8,795 17,618 1,084
Deferred Income Taxes 28,769 5,428 (631)
Increase (Decrease) in Taxes Payable (5,313) (4,525) 840
Increase in Accounts Payable and Other Liabilities 16,401 3,440 1,540
Other 7,231 10,194 1,667
Net Cash Provided by Operating Activities 112,007 135,564 42,084
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 34,316 116 24,611
Proceeds from Maturities and Prepayments 227,117 174,684 238,131
Purchases (289,376) (172,434) (398,734)
Investment Securities Held to Maturity:
Proceeds from Sales 416 - -
Proceeds from Maturities and Prepayments 28,611 1,615 2,099
Purchases (244,755) (13,801) (5,364)
Net Increase in Loans and Leases (684,222) (877,210) (419,021)
Acquisition of Business (Net of Cash Acquired) (185) - 3,085
Proceeds from Sale of Other Real Estate 2,479 7,393 11,122
Purchases of Premises and Equipment (42,149) (33,631) (9,883)
Proceeds from Sales of Premises and Equipment 2,442 3,735 3,730
Net Cash Used in Investing Activities (965,306) (909,533) (550,224)
Financing Activities:
Net Decrease in Demand and Savings Deposits (26,047) (93,845) (48,818)
Net Increase in Certificates of Deposit 135,949 930,867 102,307
Net Increase (Decrease) in Short-Term Debt 115,533 (268,629) 341,659
Principal Payments on Long-Term Debt (25,637) (109,567) (5,750)
Proceeds from Issuance of Long-Term Debt 462,178 217,367 241,937
Cash Dividends Paid (18,809) (17,658) (15,689)
Repurchase of Common Stock (6,109) (211) -
Proceeds from Sale of Common Stock 5,260 826 2,723
Net Cash Provided by Financing Activities 642,318 659,150 618,369
Increase (Decrease) in Cash and Cash Equivalents (210,981) (114,819) 110,229
Cash and Cash Equivalents at Beginning of Period 424,575 539,394 429,165
Cash and Cash Equivalents at End of Period $213,594 $424,575 $539,394
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $250,952 $146,253 $122,919
Income Taxes 11,000 26,700 26,300
Non-Cash Activity:
Additions to Other Real Estate in Settlement of Loans 706 2,196 2,658
Transfer of Premises and Equipment to Other Real Estate 3,714 223 -
Treasury Stock Reissued to Acquire Business 1,750 - -
Reclassification of Investment Securities from Held to Maturity
to Available for Sale 247,385 - -
See notes to consolidated financial statements.
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION Provident Bancorp, Inc ("Bancorp") was incorporated
in February, 1980 for the purpose of acquiring and holding the common
stock of The Provident Bank ("Provident") owned by American Financial
Group ("AFG"), formerly known as American Financial Corporation. The
acquisition of Provident in October, 1980 was accounted for as a
pooling-of-interests.
Bancorp is Cincinnati-based and operates primarily throughout Ohio,
northern Kentucky and southeastern Indiana. It owns two banking
subsidiaries that provide financial services to it customers.
B. ACCOUNTING POLICIES The following is a summary of significant
accounting policies:
BASIS OF PRESENTATION The consolidated financial statements include
the accounts of Bancorp and its subsidiaries, all of which are wholly
owned. Bancorp's investments in partnerships (included in "Other
Assets") are carried at the lower of cost or net realizable value and
are adjusted for changes in equity. Certain estimates are required to
be made by management in the preparation of the consolidated financial
statements. All significant intercompany balances and transactions
have been eliminated. Certain reclassifications have been made to
conform to the current year presentation.
STATEMENT 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.
INVESTMENT SECURITIES Bancorp adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", effective January 1, 1994.
Securities classified as held to maturity are those securities that
Bancorp has the intent and ability to hold to maturity, subject to
continued credit worthiness of the issuer. Accordingly, these
securities are stated at amortized cost.
Securities classified as available for sale are intended to be held
for indefinite periods of time and include those securities that
Bancorp may employ as part of asset/liability management strategy or
that may be sold in response to changes in interest rates,
prepayments, regulatory capital requirements or similar factors.
Certain interest rate swaps have been entered into that relate to
securities classified as available for sale. These securities and
interest rate swaps are stated at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity, net of taxes.
Securities purchased with the intention of recognizing short-term
profits are placed in the trading account and are carried at market
value. The specific identification method is the method used for
determining gains and losses from securities transactions.
LOANS 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 when 120 days to 150 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. Bancorp generally recognizes income on impaired
loans on a cash basis.
LOAN LOSS RESERVE The reserve for loan losses is maintained to absorb
potential losses in the loan portfolio. Management's determination of
the adequacy of the reserve is based on reviews of specific loans,
loan loss experience, general economic conditions and other pertinent
factors. The reserve is increased by charges to earnings, as
provisions for possible loan losses. Loans deemed uncollectible are
charged off and deducted from the reserve and recoveries on loans
previously charged off are added to the reserve.
Bancorp adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures", effective
January 1, 1995. Bancorp considers a nonperforming loan, except
consumer loans, to be an impaired loan where it is probable that all
amounts due will not be collected according to the contractual terms
of the loan agreement. Bancorp 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. The adoption of this statement had
no material impact on Bancorp's consolidated financial condition or
results of operations.
LOAN SALES Bancorp classifies loans that are intended to be sold
within a short period of time as available for sale. Such loans
available for sale are carried at the lower of aggregate cost or
market value. In 1995, Bancorp sold its rights to service residential
loans for others. Prior to 1995, Bancorp generally retained the right
to service residential loans that it sold. Gains and losses on loan
sales are included in "Other Income". Such gains and losses are
determined by the difference between the sale proceeds and the
carrying value of loans sold. These gains and losses are adjusted,
where appropriate, by the present value of the difference between
estimated future net servicing revenues and normal servicing revenues
and by any other item as provided for in the sales agreement. The
resulting excess servicing fees are deferred and amortized as an
adjustment to service fee income over the estimated life of the
related loans using the interest method.
LEASE OPERATIONS 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 which yields
a level rate of return in relation to Bancorp'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. Income from
leases is included in "Interest and Fees on Loans".
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
depreciation and amortization that are computed principally on the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED Real estate owned is recorded at the lower of
cost or fair value and is included in "Other Assets". Bancorp's policy
is to include in the cost of real estate owned the unpaid balance of
applicable loans, costs of foreclosure, unpaid taxes and subsequent
major repairs. However, in no case is the carrying value of real
estate owned greater than net realizable value. Real estate taxes are
capitalized on real estate held for development. Other costs are
expensed as incurred.
RESERVE FOR RETIREMENT OF CAPITAL SECURITIES The Capital Notes of
Provident included in "Long-Term Debt" are designated as "Capital
Securities" under Ohio law. In accordance with the terms of the Notes,
Provident has classified a portion of its retained earnings as
"Reserve for Retirement of Capital Securities" in amounts designed to
replace the Notes with capital at the time those Notes are repaid.
BENEFIT PLANS On January 1, 1994, Bancorp adopted SFAS No. 112, which
requires employers to recognize any obligation to provide
postemployment benefits (salary continuation, severance benefits,
outplacement services, etc.) by accruing the estimated liability
through a charge to expense. The effect of this change in accounting
principle had no material impact on Bancorp's consolidated financial
position or results of operations.
Bancorp has a Retirement Plan for the benefit of its employees.
Included under this plan is an Employee Stock Ownership Plan ("ESOP"),
an Employee Profit Sharing Plan ("EPSP") and a Personal Investment
Election Plan ("PIE Plan"). Bancorp also maintains a Life and Health
Plan for Retired Employees ("LH Plan"), an Employee Stock Purchase
Plan ("ESPP"), stock option plans and a Deferred Compensation Plan.
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
Bancorp. Bancorp's contributions are discretionary by the directors of
Bancorp. The contributions made by Bancorp are charged against
earnings in the year for which they are declared. Qualified employees
having vested rights in the plan are entitled to benefit payments at
age 60.
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. Bancorp 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
Bancorp is charged against earnings as the employees' contributions
are made. Upon the effective date of participation the employee
becomes 100% vested. Vested benefits will normally be distributed to
the employee or his beneficiary upon death, retirement or termination.
Bancorp'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 Bancorp pays the entire cost,
however, Bancorp'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 Bancorp shall be the responsibility of the retiree.
Bancorp 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
Bancorp'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.
In 1994, shareholders approved increasing the total number of options
available for grant under the 1988 Employee Stock Option Plan to
1,737,500 options. Bancorp's stock option plan authorizes the issuance
of options to purchase common stock to officers and key employees. The
options are to be granted, with exercise prices from 95% to 110% of
market value, at date of grant. Options become exercisable beginning
one year from date of grant generally at the rate of 20% per year.
During 1992, the Advisory Directors' Stock Option Plan and Outside
Directors' Stock Option Plan were approved. These plans authorized the
issuance of 165,000 and 75,000 options, respectively. The terms of
these options are comparable to the terms of the 1988 Stock Option
Plan.
In 1993, shareholders approved the Deferred Compensation Plan ("DCP").
This plan permits participants to defer compensation in a manner that
aligns their interests with those of Bancorp shareholders through the
investment of deferred compensation in Bancorp common stock. The
participants of this plan are selected by the Compensation Committee
of the Board of Directors. The DCP allows participants to postpone the
receipt of from 5% to 50% of compensation until retirement. Amounts
deferred are invested in a Provident Stock Account or a Self-Directed
Account. Bancorp will credit the Provident Stock Account with a
percentage, dependent upon Bancorp's return on equity, of Bancorp's
pre-tax earnings per share for each share of Bancorp Common Stock in
the account during the first four years. Computation of the credit is
made by dividing the pre-tax earnings by the average number of fully
diluted shares outstanding for the year, adjusted by a return on
equity multiplier which results in a credit of from 0% to 200% of the
pre-tax earnings per share, where a 15% return on equity is equal to a
100% multiplier. The calculated credit is charged against earnings by
Bancorp annually. The participant may withdraw or transfer to a Self-
Directed Account his account balance after a specifically stated
period of time. Distributions are also made at the time of termination
of employment and in the event of hardship. In addition to the amounts
deferred by a participant in a Self-Directed Account, Bancorp will
also contribute to the Self-Directed Account the amounts by which
deferral of compensation under the DCP results in a reduction in the
participant's share of contributions under Bancorp's Retirement Plan.
Distributions are permitted prior to termination of employment in the
event of hardship. When the participant retires or otherwise
terminates employment with Bancorp, amounts deferred are distributed.
INCOME TAXES Bancorp 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 Bancorp amounts
determined to be currently payable.
OFF-BALANCE SHEET FINANCIAL AGREEMENTS Bancorp employs derivatives
such as interest rate swaps, interest rate caps, financial futures and
forward contracts to manage the interest sensitivity of certain on-
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-
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 "Other
Liabilities", as applicable. At December 31, 1995, these unamortized
amounts were immaterial. Futures and forwards 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
expensed 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.
EARNINGS PER COMMON SHARE Net earnings per common share are computed
by dividing net earnings, less the dividend requirement on preferred
stock, by the weighted average number of common stock equivalents
outstanding during the year. Fully diluted net earnings per common
share are computed by dividing net earnings by the weighted average
number of common stock equivalents, including the additional common
stock outstanding as a result of the assumed conversion of the Series
B and D Preferred Stock as of the first day of the year for which
earnings per share data is shown.
C. INVESTMENT SECURITIES The amortized cost and estimated market
values of securities at December 31 were as follows:
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands)
Available for Sale:
U.S. Treasuries and U.S.
Government Agencies and
Corporations $191,445 $166 $(150) $191,461
Mortgage-backed Securities 629,902 5,026 (1,214) 633,714
Other Bonds 60,746 25 (133) 60,638
Other Securities 73,901 916 (726) 74,091
Total Available for Sale $955,994 $6,133 $(2,223) $959,904
1994
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands)
Held to Maturity:
U.S. Treasuries and U.S.
Government Agencies and
Corporations $842 $- $- $842
Other Bonds 995 - - 995
Other Securities 29,862 - - 29,862
Total Held to Maturity 31,699 - - 31,699
Available for Sale:
U.S. Treasuries and U.S.
Government Agencies and
Corporations 148,991 - (3,655) 145,336
Mortgage-backed Securities 493,525 128 (18,624) 475,029
Other Bonds 179 - (3) 176
Other Securities 36,615 - (2,935) 33,680
Total Available for Sale 679,310 128 (25,217) 654,221
Total Securities $711,009 $128 $(25,217) $685,920
Investment securities with a carrying value of approximately $562.9
million and $533.3 million at December 31, 1995, and 1994,
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 1995, 1994 and 1993 gross gains of $18,000, $- and $1,028,000 and
gross losses of $104,000, $- and $94,000, respectively, were realized
on the sale of securities Available for Sale. In 1995, FHLB stock,
classified as Held to Maturity, was sold. Bancorp was no longer
required to hold the stock due to the sale of Heritage's deposits. The
stock was sold at its cost basis of $416,000 resulting in no gain or
loss. No other sales of securities classified as Held to Maturity
occurred in 1995, 1994 or 1993.
During December, 1995, Bancorp reallocated securities that had been
identified as Held to Maturity to the classification Available for
Sale. The Financial Accounting Standards Board, in its special report,
A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, which was issued on
November 15, 1995, permitted this one time reallocation. On the date
of transfer, these securities had an amortized cost of $247.4 million
and an unrealized gain of $375,000. The transfer was made to allow for
greater flexibility in the future use of these securities. No other
transfers were made among the security categories of Held to Maturity,
Available for Sale and Trading categories during 1995, 1994 and 1993.
The amortized cost and estimated market value of securities at
December 31, 1995, are shown below 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.
Available for Sale
Amortized Estimated
Cost Market Value
(In Thousands)
Due in one year or less $169,482 $169,447
Due after 1 through 5 years 47,659 47,710
Due after 5 through 10 years 35,050 34,942
Due after 10 years 73,901 74,091
326,092 326,190
Mortgage-backed Securities 629,902 633,714
Total $955,994 $959,904
D. LEASE FINANCING In 1994, Bancorp initiated a consumer automobile
leasing program. Prior to this, the leasing operations consisted
principally of the leasing of various types of aircraft,
transportation containers and locomotives, and miscellaneous
equipment. Except for six aircraft leases and one coal conveyor lease
which were classified as leveraged leases, almost all of the leases
are classified as direct financing leases, with expiration dates over
the next 1 to 8 years. Rentals receivable at December 31, 1995 and
1994 include $12.6 million and $9.1 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 $37.8 million and
$23.9 million in total at December 31, 1995 and 1994, respectively.
The components of the net investment in lease financing at December 31
were as follows:
1995 1994
Commercial Consumer Commercial Consumer
(In Thousands)
Rentals Receivable $102,371 $229,153 $101,412 $133,736
Leases in Process 58 6,773 - 6,119
Estimated Residual Value of
Leased Assets 57,849 158,670 38,306 78,796
160,278 394,596 139,718 218,651
Less: Unearned Income (31,592) (60,370) (29,975) (32,898)
Net Investment in Lease Financing $128,686 $334,226 $109,743 $185,753
The following is a schedule by year of future minimum lease payments
to be received for the next five years as of December 31, 1995:
Commercial Consumer
(In Thousands)
1996 $27,354 $60,192
1997 23,137 63,125
1998 19,200 53,594
1999 11,534 38,382
2000 6,077 13,795
Thereafter 15,069 65
Total $102,371 $229,153
E. RESERVE FOR LOAN LOSSES The changes in the loan loss reserve for
the years ended December 31 were as follows:
1995 1994 1993
(In Thousands)
Balance at Beginning of Period $51,979 $40,542 $35,144
Provision for Possible Loan Losses
Charged to Earnings 14,000 12,000 12,000
Acquired Reserves - - 737
Recoveries Credited to the Reserve 8,452 9,009 1,599
74,431 61,551 49,480
Losses Charged to the Reserve (14,196) (9,572) (8,938)
Balance at End of Period $60,235 $51,979 $40,542
At December 31, 1995 impaired loans totaled $36.8 million. Of that
amount, $33.1 million of impaired loans had related reserves of $12.8
million. An additional $3.7 million of impaired loans were determined
to be carried at or below fair value of the underlying collateral and,
accordingly, had no reserves. The valuation allowance recorded on
impaired loans is included in the reserve for loan losses. During
1995, the average balance of impaired loans was $7.8 million which
resulted in an immaterial amount of related interest income.
Loans on nonaccrual status at December 31, 1995, 1994 and 1993 were
$37.5 million, $6.3 million and $17.8 million, respectively. Loans
renegotiated to provide a reduction or deferral of interest or
principal were $4.8 million, $961,000 and $408,000 at December 31,
1995, 1994 and 1993, respectively.
F. PREMISES AND EQUIPMENT Following is a summary of premises and
equipment at December 31:
1995 1994
(In Thousands)
Land $7,342 $7,518
Buildings 21,068 20,999
Leasehold Improvements 6,136 5,831
Furniture and Fixtures 58,474 49,832
Revenue Equipment 51,885 24,575
144,905 108,755
Less Depreciation and Amortization (53,929) (44,545)
Total $90,976 $64,210
The future gross minimum rentals under noncancelable leases for the
rental of premises and equipment for 1996 and subsequent years are as
follows:
Premises Equipment
(In Thousands)
1996 $4,733 $492
1997 4,764 258
1998 4,671 240
1999 4,373 186
2000 3,983 37
Thereafter 22,047 -
Total $44,571 $1,213
Rent expense for all bank premises and equipment leases was
$5,692,000, $4,329,000 and $3,507,000 in 1995, 1994 and 1993,
respectively.
G. SHORT-TERM DEBT Short-term debt was as follows at December 31:
1995 1994 1993
(Dollars in Thousands)
Year End Balance:
Federal Funds Purchased and Repurchase
Agreements $490,419 $379,391 $671,820
Commercial Paper 145,321 140,816 117,016
U.S. Treasury Demand Notes 1,500 1,500 1,500
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase
Agreements 5.60% 5.54% 3.15%
Commercial Paper 5.60 5.45 3.37
U.S. Treasury Demand Notes 5.15 5.25 2.76
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase
Agreements $717,349 $611,442 $671,820
Commercial Paper 150,503 140,816 117,016
U.S. Treasury Demand Notes 1,500 1,500 5,530
At December 31, 1995, Bancorp had $130 million in lines of credit with
unaffiliated banks to support commercial paper borrowings. As of
January 18, 1996, these lines had not been used.
H. LONG-TERM DEBT Long-term debt consisted of the following at
December 31:
Stated Effective Maturity December 31,
Description Rate (1) Rate (2) Date 1995 1994
(In Thousands)
Bancorp:
LIBOR Based Notes n/a n/a 1995 $- $2,700
Fixed Rate Notes n/a n/a 1995 - 1,193
Other Notes Payable (3) Various Various Various 3,046 4,346
3,046 8,239
Subsidiaries:
Medium-Term Bank Notes:
Fixed Rate Notes 6.13% 6.44% 2000 299,293 -
Fixed Rate Notes 5.00 6.21 1996 49,993 49,979
Fixed Rate Notes (4) 7.17 6.04 2005 12,500 -
LIBOR Based Notes n/a n/a 1995 - 10,000
Notes Payable to Federal
Home Loan Bank:
LIBOR Based Notes 5.94 5.94 2000 150,000 -
LIBOR Based Notes 5.97 5.97 2013 117,195 117,195
Fixed Rate Notes (5) Various Various Various 1,501 1,645
Subordinated Notes:
Fixed Rate Notes 6.38 6.56 2004 99,477 99,413
Fixed Rate Notes 7.13 6.81 2003 74,919 74,908
Fixed Rate Capital Notes 9.00 9.00 1998 12,000 16,000
Other Notes Payable (6) Various Various Various 159 6,054
817,037 375,194
Total $820,083 $383,433
<FN>
(1) Stated rate reflects interest rate on notes as of December 31, 1995.
(2) Effective rate reflects interest rate paid as of December 31, 1995 after adjustments for
notes issued at discount or premium and interest rate swap agreements entered to alter the
note rate.
(3) Interest rates vary from 0% to 9.50% and maturity dates which vary up to 2002.
(4) Provident has an option to call this debt in year 2000. Interest rate swaps of an equal
amount have been matched against this debt and have identical call provisions except that
the swaps are callable by the swap counterparty, not Provident.
(5) Interest rates vary from 8.75% to 9.50% and maturity dates which vary up to 2005.
(6) Interest rates vary from 13.13% to 16.00% and maturity dates which vary up to 1998.
Provident has a $500 million Medium-Term Bank Notes program. These
notes can be issued with either fixed or floating rates, are unsecured
and are unsubordinated general obligations of Provident. These notes
do not qualify as Tier 2 capital and are not insured by the FDIC.
Provident borrowed $312.5 million (less underwriting discount) and $10
million during 1995 and 1994, respectively. At December 31, 1995,
$137.5 million was available under this program.
Of the $312.5 million issued under the Medium-Term Bank Notes program,
Bancorp issued $12.5 million with a callable debt structure. The notes
have a final maturity of 2005, but have a call option exercisable by
Bancorp in 2000. These notes are hedged with an interest rate swap
with a call option, exercisable by the swap counterparty, which
matches that of the notes, which was executed to reduce Bancorp's
overall funding cost and to modify the interest rate sensitivity of
the notes. Under the terms of this transaction, if the swap
counterparty exercises the call option on the interest rate swap in
2000, Bancorp may, at its discretion, exercise its call option to
redeem the notes at the same time, or if the market offers a similarly
attractive funding cost, Bancorp may execute another interest rate
swap to hedge the notes for the remaining five years to maturity.
Because the terms of the call options are matching, any options risk
to Bancorp has been neutralized.
The notes payable to the FHLB are collateralized under a blanket
agreement by investment securities and residential loans receivable
with a book value of $360.2 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 January, 1994 by Provident.
They are subordinated to the claims of depositors and other creditors
of Provident and are not insured by the FDIC. The 7.13% Subordinated
Notes, which also qualify as Tier 2 capital, were issued in March 1993
by Provident. The 9% Fixed Rate Capital Notes are designated as
"Capital Securities" under Ohio law and, in accordance with the terms
of the Notes, Provident classifies a portion of its undivided profits
as "Reserve for Retirement of Capital Securities".
As of December 31, 1995, scheduled principal payments on long-term
debt for the following five years were as follows:
1996 1997 1998 1999 2000
(In Thousands)
Provident Bancorp, Inc. $887 $586 $519 $510 $270
Subsidiaries 54,196 4,754 4,166 130 449,423
I. INCOME TAXES Following is a reconciliation of income taxes at the
statutory rate of 35% as shown in the Consolidated Statements of
Earnings:
1995 1994 1993
(In Thousands)
Earnings Before Income Taxes $107,166 $87,537 $79,317
Income Taxes at Applicable Rate $37,508 $30,638 $27,761
Add (Deduct) Effect Of:
Reversal of Negative Goodwill (1,093) (121) -
Tax-Exempt Interest (764) (281) (301)
Other (345) (365) 585
Total Tax Provision $35,306 $29,871 $28,045
The total tax provision (credit) consists of the following:
Current:
State $74 $51 $40
U.S. 6,463 24,392 28,636
6,537 24,443 28,676
Deferred 28,769 5,428 (631)
Total $35,306 $29,871 $28,045
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 Bancorp's deferred tax liabilities
and assets as of December 31 are as follows:
1995 1994 1993
(In Thousands)
Deferred Tax Liabilities:
Excess Lease and Partnership Income $63,204 $31,453 $18,309
Recapture of Excess Reserve for Bad Debts 4,035 5,993 8,627
Unrealized Gain on Investment Securities 1,692 - -
Other - Net 6,498 6,359 6,817
Total Deferred Tax Liabilities 75,429 43,805 33,753
Deferred Tax Assets:
Provision for Possible Loan Losses 20,456 18,525 12,655
Deferred Compensation 2,053 1,172 314
Loan Fees Deferred for Books Recognized
Currently for Tax 487 1,654 2,969
Postretirement Obligation 1,170 1,153 1,165
Unrealized Loss On Investment Securities 323 8,738 77
Other - Net 4,982 5,481 6,258
Total Deferred Tax Assets 29,471 36,723 23,438
Valuation Allowance for Deferred Tax Assets - - -
Net Deferred Tax Assets 29,471 36,723 23,438
Net Deferred Tax Liabilities $45,958 $7,082 $10,315
At December 31, 1995, approximately $11.5 million of excess bad debt
reserve associated with prior acquisitions of savings and loans
remains to be amortized to taxable income. Approximately $7.9 million
will be added to taxable income in 1996.
J. BENEFIT PLANS In 1995, 1994 and 1993 Bancorp contributed
$3,274,000, $2,825,000, and $3,194,000, respectively, to the ESOP.
Under the three stock option plans, stock options issued to date are
generally exercisable at a rate of 20% per year. The following table
summarizes option activity for the three years ended December 31,
1995:
Option Price Options Available
Per Share Outstanding Exercisable for Grant
At January 1, 1993 $16.33 - $22.67 1,003,238 361,398 464,602
Authorized - - - -
Granted 23.51 - 33.50 220,325 - (220,325)
Became Exercisable 16.33 - 22.67 - 207,026 -
Exercised 16.33 - 17.73 (3,250) (3,250) -
Canceled 17.67 - 17.73 (3,840) (504) 3,840
At December 31, 1993 16.33 - 33.50 1,216,473 564,670 248,117
Authorized - - - 500,000
Granted 28.26 - 33.84 91,000 - (91,000)
Became Exercisable 16.33 - 33.50 - 169,374 -
Exercised 17.67 - 28.03 (31,450) (31,450) -
Canceled 24.94 - 26.13 (4,000) - 4,000
At December 31, 1994 16.33 - 33.84 1,272,023 702,594 661,117
Authorized - - - -
Granted 29.69 - 40.38 260,000 - (260,000)
Became Exercisable 16.33 - 33.84 - 183,982 -
Exercised 17.67 - 30.88 (66,023) (66,023) -
Canceled 17.90 - 30.88 (18,650) (400) 18,650
At December 31, 1995 16.33 - 40.38 1,447,350 820,153 419,767
Under the DCP Bancorp makes an annual contribution to the plan
relating to the earnings credit. In 1995 and 1994, Bancorp expensed
approximately $995,000 and $400,000, respectively.
K. PREFERRED STOCK In 1991, Bancorp issued 371,418 shares of series
B Non-Voting Convertible Preferred Stock ("B Preferred) to AFG as
partial consideration for the acquisition of Hunter Savings
Association. Pursuant to the terms of the B Preferred, Bancorp, during
the fourth quarter of 1994, elected to change the dividend rate from
$8.00 per share to a rate equivalent to that paid on its Common Stock.
In 1995, Bancorp exchanged the B Preferred for an identical number of
Series C Preferred Stock ("C Preferred") and later exchanged the C
Preferred for the same number of Series D Preferred Stock ("D
Preferred"). The terms of the D Preferred are substantially identical
to the B Preferred except that the terms of the D Preferred permit
AFG, its subsidiaries or affiliates to convert the D Preferred into
Bancorp Common Stock regardless of their percentage of ownership of
Bancorp's voting equity securities. In December 1995, 301,146 shares
of the D Preferred were converted into 1,882,162 shares of Common
Stock. As of December 31, 1995, 70,272 shares of D Preferred remain
outstanding. These shares have a stated value and liquidation value of
$100 per share and a conversion ratio of 6.25 shares of Bancorp's
Common Stock for each share of convertible preferred stock.
L. OFF-BALANCE SHEET FINANCIAL AGREEMENTS Bancorp 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 and caps
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 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 Bancorp'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 Bancorp under the terms of the interest rate swap
agreement. Notional principal amounts express the volume of the
transactions, but Bancorp's potential exposure to credit risk is
limited only to the flow of interest payments. Bancorp manages its
credit risk in these transactions through counterparty credit
policies. At December 31, 1995, Bancorp had bilateral collateral
agreements in place with certain of its counterparties, against which
Bancorp has pledged investment securities with a carrying value of
$21.4 million as collateral.
Summary information with respect to the interest rate swap portfolio
used to manage Bancorp's interest rate sensitivity follows:
December 31, 1995 December 31,
Weighted Average 1994
Notional Unrealized Unrealized Receive Pay Life Notional
Amount Gross Gains Gross Losses Rate Rate (Years) Amount
(Dollars in Millions)
Pay Variable Receive Fixed $1,769 $36.4 $(1.8) 6.19% 5.84% 4.41 $1,524
Pay Fixed Receive Variable 33 .3 (.6) 7.28 7.39 5.56 32
$1,802 $36.7 $(2.4) $1,556
The expected notional maturities of Bancorp's interest rate swap
portfolio at December 31, 1995 are as follows:
After 1 After 3
1 Year Through 3 Through 5 After 5
or Less Years Years Years
(In Millions)
Pay Variable Receive Fixed $294 $457 $609 $409
Pay Fixed Receive Variable - 12 10 11
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. Bancorp evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by Bancorp upon extension of
credit is based on management's credit evaluation of the counter-
party. 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.
Bancorp's commitments to extend credit which are not reflected in the
balance sheet at December 31 are as follows:
1995 1994
(In Millions)
Commitments to Extend Credit $1,641 $1,262
Standby Letters of Credit 94 107
M. TRANSACTIONS WITH AFFILIATES AFG and Bancorp are controlled by
Carl H. Lindner and various members of his family. Mr. Lindner and his
family and trusts for the benefit of his family own approximately 46%
of the Common Stock of Bancorp. In addition, subsidiaries of AFG own
approximately 14% of the Common Stock of Bancorp and 100% of Bancorp's
Series D Convertible Preferred Stock. Bancorp leases its home office
space and other office space from a trust, for the benefit of a
subsidiary of AFG. During 1995, the lease agreements were rewritten
and extended to the year 2010, with Bancorp receiving $1.2 million
which represented the net present value of the difference between
payments of the old and current lease agreements. Bancorp is
amortizing the amount received against rent expense until September
1997, which was the expiration of the old lease agreements. Bancorp
also leased one of its branch locations and seventy ATM locations from
principal shareholders and their affiliates. Rentals paid to AFG and
affiliates for the years ended December 31, 1995, 1994 and 1993
amounted to $1,397,000, $1,233,000 and $1,133,000, respectively.
Rentals of $306,000 were paid to principal shareholders and their
affiliates during 1995 for branch and ATM locations.
In the fourth quarter of 1992, Bancorp began to offer shares of The
Riverfront Funds, Inc. ("Riverfront"), a proprietary family of mutual
funds, to customers. Riverfront is a registered investment company
with five portfolios, each having a different investment objective.
Provident manages the portfolios and performs other related services,
such as shareholder services and acting as transfer agent and
custodian. Riverfront is offered to customers of Provident, including
personal trust, employee benefit, agency and custodial clients, as
well as individual investors. At December 31, 1995, Riverfront had
total assets of $316.5 million. Approximately $34.9 million of the
amount was held by Bancorp and $136.9 million was held by Provident's
trust department. During 1995, 1994 and 1993, Bancorp recorded
approximately $1,020,000, $500,000 and $180,000 of income,
respectively, from management fees of Riverfront. Bancorp also
absorbed approximately $73,000, $103,000 and $304,000 of expense
associated with managing the portfolios during 1995, 1994 and 1993,
respectively.
Bancorp has had certain transactions with various executive officers,
directors and principal holders of equity securities of Bancorp and
its subsidiaries and entities in which these individuals are principal
owners. Various loans and auto leases have been made as well as the
sale of commercial paper and repurchase agreements to these persons.
Such loans to these persons aggregated approximately $28.8 million and
$27.2 million at December 31, 1995, and 1994, respectively. None of
these loans were held by the parent company. During 1995, new loans
aggregating $18.0 million were made to such parties and loans
aggregating $16.4 million were repaid. All of the loans were made at
market interest rates and, in the opinion of management, all amounts
are fully collectible. At December 31, 1995, and 1994, Bancorp's
commercial paper amounting to $6.0 million and $3.7 million,
respectively, was held by these persons. Additionally, repurchase
agreements in the amount of $6.5 million and $6.6 million had been
sold to these persons at December 31, 1995, and 1994, respectively.
All of these transactions were at market interest rates.
N. 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 Bancorp'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 Bancorp. What is
presented below is a point-in-time valuation which 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.
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $213,594 $213,594 $424,575 $424,575
Trading Account Assets (Included in
Other Assets) - - 125 125
Investment Securities 959,904 959,904 685,920 685,920
Loans (Excluding Lease Financing) 4,433,164 4,450,213 3,909,042 3,840,641
Less: Reserve for Loan Losses (54,519) - (48,302) -
Net Loans 4,378,645 4,450,213 3,860,740 3,840,641
Financial Liabilities:
Deposits 4,178,551 4,180,884 4,068,649 4,034,098
Short-Term Debt 637,240 637,240 521,707 521,707
Long-Term Debt (Excluding Lease
Financing Debt) 819,924 822,617 377,379 352,685
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit - - - -
Standby Letters of Credit 42 42 24 24
Interest Rate Swaps:
Asset Based:
Loans - (350) - 139
Liability Based:
Deposits - 25,490 - (22,952)
Long-Term Debt - 6,283 - (27,929)
The following methods and assumptions were used by Bancorp 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.
Investment securities (including mortgage-backed securities):
Fair values for 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.
Trading account assets: Fair values for Bancorp's trading
account assets, which also are the amounts recognized in the
balance sheet, 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.
Loans receivable: 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 (e.g., commercial real estate, commercial and
financial loans, construction loans, and other business
loans) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans, with
similar terms to borrowers of similar credit quality.
Off-balance sheet financial instruments: The amounts shown
under carrying value represent fees receivable arising from
the related unrecognized financial instruments. Fair values
for Bancorp's lending commitments and standby letters of
credit are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing.
Fair value for interest rate swaps is based upon current
market quotes.
Deposit liabilities: The fair values disclosed for demand
deposits (e.g., interest and noninterest checking, passbook
savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the
reporting date (i.e., 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: The fair values of Bancorp's long-term
borrowings that are traded in the markets are calculated
using their market prices. The fair values of Bancorp's other
long-term borrowings (other than deposits) are estimated
using discounted cash flow analyses, based on Bancorp's
current incremental borrowing rates for similar types of
borrowing arrangements.
O. ADDITIONAL INFORMATION
RESTRICTIONS ON CASH AND NONINTEREST BEARING DEPOSITS Federal Reserve
Board regulations require that Provident and Provident Kentucky
maintain certain minimum reserve balances. The average amount of those
reserve balances for the year ended December 31, 1995, was
approximately $49.6 million.
INVESTMENT IN PARTNERSHIPS Bancorp's share of partnerships was
carried at approximately $12.6 million and $11.0 million at December
31, 1995, and 1994, respectively, which includes equity in net
earnings (losses) of $601,000, $(344,000) and $106,000 in the years
1995, 1994 and 1993, respectively.
OTHER REAL ESTATE OWNED At December 31, 1995, and 1994, the carrying
value of other real estate and equipment owned was $5.6 million and
$3.3 million, respectively.
PARENT COMPANY FINANCIAL INFORMATION Parent Company only condensed
financial information for Provident Bancorp, Inc. is as follows:
BALANCE SHEETS (PARENT ONLY)
(In Thousands)
December 31,
1995 1994
ASSETS
Cash and Cash Equivalents $149,031 $124,570
Investment Securities:
Held to Maturity - 843
Available for Sale 12,208 10,248
Loans (net of reserve for loan losses of $1,295 and $1,293) 19,642 30,630
Investment in Subsidiaries:
Banking 392,757 325,129
Non-Banking 2,135 212
Premises and Equipment 1,677 1,795
Accounts Receivable from Banking Subsidiaries - 5,121
Other Assets 19,598 10,965
$597,048 $509,513
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable to Banking Subsidiaries $14,027 $-
Accounts Payable and Accrued Expenses 2,117 1,107
Commercial Paper 145,321 140,816
Long-Term Debt 3,046 8,239
Total Liabilities 164,511 150,162
Shareholders' Equity 432,537 359,351
$597,048 $509,513
STATEMENTS OF EARNINGS (PARENT ONLY)
(In Thousands)
Year Ended December 31,
1995 1994 1993
Income:
Dividends from Banking Subsidiaries $23,000 $26,000 $45,250
Interest Income from Banking Subsidiaries 6,358 2,917 952
Other Interest Income 2,373 2,824 3,205
Other 811 (203) 231
32,542 31,538 49,638
Expenses:
Interest Expense 8,686 5,990 4,144
Salaries and Employee Benefits 410 463 1,001
General and Administrative 3,212 2,403 2,122
12,308 8,856 7,267
Earnings Before Taxes and Equity in Undistributed
Net Earnings of Subsidiaries 20,234 22,682 42,371
Applicable Income Tax Credits 1,774 1,191 1,331
Earnings Before Equity in Undistributed Net Earnings
of Subsidiaries 22,008 23,873 43,702
Equity in Undistributed Net Earnings of Subsidiaries 49,852 33,793 7,570
Net Earnings $71,860 $57,666 $51,272
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(In Thousands)
Year Ended December 31,
1995 1994 1993
Operating Activities:
Net Earnings $71,860 $57,666 $51,272
Adjustment to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Provision for Depreciation and Amortization 406 360 354
Net Earnings from Subsidiaries (72,852) (59,793) (52,820)
Cash Dividends Received From Subsidiaries 23,000 26,000 45,250
Increase in Interest Receivable (27) (19) (32)
(Increase) Decrease in Accounts Receivable/
Other Assets 1,837 2,653 (5,053)
Increase (Decrease) in Interest Payable 80 357 (23)
Deferred Income Taxes (1,092) 752 18
Decrease in Taxes Payable (4,362) (1,365) (281)
Increase (Decrease) in Accounts Payable/
Other Liabilities 14,709 (8,706) 4,588
Other 415 (1,015) (2,387)
Net Cash Provided by Operating Activities 33,974 16,890 40,886
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales - 25 -
Proceeds from Maturities and Prepayments - - 3
Purchases (31) (10,000) (314)
Investment Securities Held to Maturity:
Proceeds from Sales - - -
Proceeds from Maturities and Prepayments 1,700 1,600 1,500
Purchases (1,652) (1,663) (1,477)
(Increase) Decrease in Loans 10,989 32,861 (8,353)
Purchase of Subsidiary (Net of Cash Acquired) (185) - 3,085
Proceeds from Sale of Premises and Equipment 70 90 -
Purchases of Premises and Equipment (57) (118) (58)
Net Cash Provided by (Used in)
Investing Activities 10,834 22,795 (5,614)
Financing Activities:
Net Increase in Short-Term Borrowings 4,505 23,800 23,230
Principal Payments on Long-Term Debt (5,598) (5,345) (5,539)
Proceeds from Issuance of Long-Term Debt 404 2,221 957
Proceeds from Sale of Common Stock 5,260 826 2,723
Purchase of Treasury Stock (6,109) (211) -
Cash Dividends Paid (18,809) (17,658) (15,689)
Contribution to Subsidiaries - - (6,824)
Net Cash Provided by (Used in) Financing
Activities (20,347) 3,633 (1,142)
Increase in Cash and Cash Equivalents 24,461 43,318 34,130
Cash and Cash Equivalents at Beginning of Year 124,570 81,252 47,122
Cash and Cash Equivalents at End of Year $149,031 $124,570 $81,252
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 1996 by Provident to its parent
without approval is approximately $71.9 million, plus 1996 net
earnings. Dividends of approximately $3.1 million plus 1996 net
earnings may be paid in 1996 by Provident Kentucky to its parent.
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 $43.8 million
to any single affiliate, and $89.3 million to all affiliates combined
of which $28.1 million was loaned at December 31, 1995.
SUPPLEMENTARY DATA
Quarterly Consolidated Results of Operations - (Unaudited)
The following are quarterly consolidated results of operations for the
two years ended December 31, 1995.
Three Months Ended
March 31 June 30 September 30 December 31
(Dollars in Thousands, Except Per Share Data)
1995
Interest Income $105,964 $114,144 $118,058 $124,230
Net Interest Income 46,116 49,064 51,626 55,843
Provision for Possible Loan Losses 2,000 3,000 4,000 5,000
Security Gains (Losses) - - (92) 6
Earnings Before Income Taxes 22,569 25,047 30,000 29,550
Net Earnings 15,000 16,475 21,010 19,375
Net Earnings Per Common Share .90 .99 1.26 1.14
Net Earnings Per Fully Diluted
Common Share .82 .90 1.13 1.04
1994
Interest Income $75,626 $81,882 $88,937 $99,384
Net Interest Income 43,142 45,342 46,553 46,921
Provision for Possible Loan Losses 3,000 3,000 3,000 3,000
Security Gains - - - -
Earnings Before Income Taxes 20,816 21,682 22,543 22,496
Net Earnings 13,703 14,326 14,725 14,912
Net Earnings Per Common Share .81 .85 .87 .88
Net Earnings Per Fully Diluted
Common Share .75 .78 .80 .81
Quarterly earnings per share numbers do not add to the year-to-date
amount due to rounding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
The following items are incorporated by reference to Bancorp's
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after the close of Bancorp's fiscal
year ending December 31, 1995:
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 REPORT ON FORM 8-K
(a) 1. See Index to Financial Statements on page 31 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 Incorporation by reference
to Form 10-Q, Quarterly
Report of Provident Bancorp,
Inc. for the quarter ended
September 30, 1995.
3.2 Amendment to Articles of Filed herewith.
Incorporation relating to
the Series D, Non-Voting
Convertible Preferred Stock
3.3 Amended Code of Regulations Incorporated by reference to
Annex I to Provident Bancorp,
Inc.'s Proxy Statement for
the 1994 Annual Meeting of
Shareholders.
Number Exhibit Description Filing Status
4.1 Instruments defining the Bancorp has no outstanding
rights of security holders issue of indebtedness
exceeding 10% of the assets
of Bancorp 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 Filed herewith.
relating to Series D,
Non-Voting Convertible
Preferred Stock
10.1 Restated Agreement and Plan Incorporated by reference to
of Reorganization, as Form S-2 (File No. 33-44641).
amended through May 8, 1992,
between Provident Bancorp,
Inc. and Merit Savings
Association
10.2 Restated Agreement and Plan Incorporated by reference to
of Reorganization, as Form S-2 (File No. 33-44641).
amended through May 11,
1992, between Provident
Bancorp, Inc. and Peoples
Federal Savings Association
of Bellevue
10.3 Third Restated Agreement Incorporated by reference to
and Plan of Reorganization, Form S-2 (File No. 33-44641).
as amended through April
30, 1992, between Provident
Bancorp, Inc. and Suburban
Federal Savings and Loan
Association of Covington
10.4 Agreement and Plan of Incorporated by reference to
Reorganization between Form S-3 (File No. 33-69666).
Provident Bancorp, Inc.
and Heritage Savings Bank
10.5 Second Restated Agreement Incorporated by reference to
and Plan of Reorganization, Form S-2 (File No. 33-44641).
as amended through May 6,
1992, between Provident
Bancorp, Inc. and Thrift
Savings and Loan Company
Number Exhibit Description Filing Status
Management Compensatory
Agreements
10.6 Provident Bancorp, Inc. Incorporated by reference to
1990 Employee Stock Post-Effective Amendment No.
Purchase Plan 1 to Form S-8 (File No.
33-34904).
10.7 Provident Bancorp, Inc. Incorporated by reference to
Retirement Plan (As amended) Form S-8 (File No. 33-90792).
10.8 Provident Bancorp, Inc. Incorporated by reference to
1988 Stock Option Plan (As Form S-8 (File No. 33-34906),
amended) Form S-8 (File No. 33-43102)
and Form S-8 (File No.
33-84094).
10.9 Provident Bancorp, Inc. Incorporated by reference to
1992 Advisory Directors' Form 8-K filed October 22,
Stock Option Plan (As 1992, and Form S-8 (File No.
amended) 33-62707).
10.10 Provident Bancorp, Inc. Incorporated by reference to
1992 Outside Directors' Form S-8 (File No. 33-51230).
Stock Option Plan
10.11 Provident Bancorp, Inc. Incorporated by reference to
Restricted Stock Plan Form S-2 (File No. 33-44641).
10.12 Provident Bancorp, Inc. Incorporated by reference to
Deferred Compensation Plan Form S-8 (File No. 33-61576)
and Form 8-K filed March 28,
1995.
21 Subsidiaries of Provident Filed herewith.
Bancorp, Inc.
23 Consent of Independent Filed herewith.
Auditors
27 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by Bancorp during the fourth
quarter of 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, Provident Bancorp, Inc. has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Provident Bancorp, Inc.
/s/Allen L. Davis
Allen L. Davis
President
March 25, 1996
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 Bancorp, Inc. and in the capacities and on the
dates indicated.
Signature Capacity Date
/s/Allen L. Davis Director and President March 25, 1996
Allen L. Davis (Principal Executive Officer)
/s/Philip R. Myers Director March 25, 1996
Philip R. Myers
/s/Sidney A. Peerless Director March 25, 1996
Sidney A. Peerless
/s/Joseph A. Pedoto Director March 25, 1996
Joseph A. Pedoto
/s/John R. Farrenkopf Vice President and March 25, 1996
John R. Farrenkopf Chief Financial and Accounting
Officer (Principal Financial
Officer and Principal
Accounting Officer)