SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 1998 No. 1-8019
P R O V I D E N T F I N A N C I A L G R O U P , I N C .
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
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 (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
stock, without par value, outstanding at July 31, 1998 is 43,232,212.
Please address all correspondence to:
John R. Farrenkopf
Vice President and Chief Financial Officer
Provident Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
- 1 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
Cash and Noninterest Bearing Deposits $225,541 $274,521
Federal Funds Sold and Reverse Repurchase Agreements 34,000 1,720
Trading Account Securities 59,794 -
Investment Securities Available for Sale
(amortized cost - $1,522,877 and $1,371,303) 1,520,276 1,371,507
Loans and Leases (Net of Unearned Income):
Commercial Lending:
Commercial and Financial 3,166,849 2,733,556
Mortgage 445,120 469,505
Construction 362,140 305,150
Lease Financing 358,983 340,302
Consumer Lending:
Instalment 639,728 624,340
Residential - Held for Sale 99,505 136,183
Lease Financing 515,681 442,806
Total Loans and Leases 5,588,006 5,051,842
Reserve for Loan and Lease Losses (75,472) (71,980)
Net Loans and Leases 5,512,534 4,979,862
Premises and Equipment 202,496 183,854
Other Assets 303,101 312,195
$7,857,742 $7,123,659
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $573,458 $605,166
Interest Bearing 4,208,391 4,091,132
Total Deposits 4,781,849 4,696,298
Short-Term Debt 1,435,657 806,125
Long-Term Debt 668,101 688,157
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 98,848 98,817
Accrued Interest and Other Liabilities 170,864 197,001
Total Liabilities 7,155,319 6,486,398
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized,
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 43,226,937 and 42,325,882 Issued 12,744 12,482
Capital Surplus 218,541 196,617
Retained Earnings 465,829 417,360
Reserve for Retirement of Capital Securities - 3,667
Unrealized Gains (Losses) on Marketable Securities
(net of deferred income taxes) (1,691) 135
Total Shareholders' Equity 702,423 637,261
$7,857,742 $7,123,659
- 2 -
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest Income:
Interest and Fees on Loans and Leases $127,346 $121,839 $250,488 $241,540
Interest on Investment Securities:
Taxable 26,374 19,901 49,023 37,215
Exempt From Federal Income Taxes 35 72 143 127
26,409 19,973 49,166 37,342
Other Interest Income 944 424 1,831 640
Total Interest Income 154,699 142,236 301,485 279,522
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 12,429 5,461 23,227 10,250
Time Deposits 42,811 50,635 86,699 97,679
Total Interest on Deposits 55,240 56,096 109,926 107,929
Interest on Short-Term Debt 18,306 8,084 31,192 15,735
Interest on Long-Term Debt 10,761 10,344 21,533 22,447
Interest on Junior Subordinated Debentures 2,165 2,165 4,331 4,331
Total Interest Expense 86,472 76,689 166,982 150,442
Net Interest Income 68,227 65,547 134,503 129,080
Provision for Loan and Lease Losses 5,000 15,000 10,000 26,000
Net Interest Income After Provision
for Loan and Lease Losses 63,227 50,547 124,503 103,080
Noninterest Income:
Service Charges on Deposit Accounts 6,789 6,329 13,201 11,907
Other Service Charges and Fees 13,843 10,373 28,801 19,606
Operating Lease Income 9,405 6,405 18,459 11,999
Gain on Sales of Loans and Leases 21,023 18,800 34,549 33,708
Security Gains 2,024 1,030 5,716 3,253
Other 3,747 3,857 5,810 6,865
Total Noninterest Income 56,831 46,794 106,536 87,338
Noninterest Expense:
Compensation:
Salaries 26,722 19,728 50,123 38,457
Benefits 3,661 3,035 8,309 6,474
Profit Sharing 1,186 1,608 2,474 3,167
Depreciation on Operating Lease Equipment 5,242 4,409 10,524 8,161
Occupancy 4,104 2,700 7,911 5,346
Equipment Expense 4,783 3,618 9,014 6,885
Professional Fees 4,341 3,681 8,314 6,729
Charges and Fees 3,607 3,002 6,001 6,435
Marketing 3,017 1,841 5,324 3,883
Other 14,241 10,239 27,541 19,346
Total Noninterest Expense 70,904 53,861 135,535 104,883
Earnings Before Income Taxes 49,154 43,480 95,504 85,535
Applicable Income Taxes 17,154 15,280 33,104 30,028
Net Earnings $32,000 $28,200 $62,400 $55,507
Net Earnings Per Common Share:
Basic $.74 $.69 $1.45 $1.36
Diluted .71 .65 1.39 1.28
Average Basic Shares 43,018 40,799 42,817 40,704
Average Diluted Shares 45,165 43,392 44,995 43,293
- 3 -
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands)
Reserve for Unrealized
Retirement Gains (Losses)
Preferred Common Capital Retained of Capital on Marketable Comprehensive
Stock Stock Surplus Earnings Securities Securities Income
Balance at January 1, 1997 $7,000 $11,973 $160,586 $326,599 $6,667 $3,980
Net Earnings 55,507 $55,507
Dividends Paid on:
Preferred Stock (316)
Common Stock (13,050)
Allocation for Retirement
of Capital Securities (666) 666
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 82 5,281
Acquisition 55 7,097
Change in Unrealized
Gains (Losses) on
Marketable Securities (2,367) (2,367)
Other 9
Balance at June 30, 1997 $7,000 $12,110 $172,964 $372,083 $3,333 $1,613 $53,140
Balance at January 1, 1998 $7,000 $12,482 $196,617 $417,360 $3,667 $135
Net Earnings 62,400 $62,400
Dividends Paid on:
Preferred Stock (395)
Common Stock (17,203)
Allocation for Retirement
of Capital Securities (333) 333
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 262 21,924
Change in Unrealized
Gains (Losses) on
Marketable Securities (1,826) (1,826)
Balance at June 30, 1998 $7,000 $12,744 $218,541 $465,829 $- ($1,691) $60,574
- 4 -
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended June 30,
1998 1997
Operating Activities:
Net Earnings $62,400 $55,507
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 10,000 26,000
Amortization of Goodwill 869 814
Amortization of Unearned Income and Other (35,722) (36,362)
Depreciation of Premises and Equipment 17,713 13,520
Realized Investment Security Gains (5,716) (3,253)
Proceeds from Sale of Loans Held for Sale 575,951 677,833
Origination of Loans Held for Sale (559,619) (379,470)
Realized Gains on Loans Held for Sale (22,038) (31,427)
Realized Gains on Sale of Other Loans and Leases (12,511) (2,281)
Increase in Trading Account Securities (59,794) -
Increase in Interest Receivable (1,166) (372)
(Increase) Decrease in Other Assets 9,391 (9,663)
Increase in Interest Payable 163 512
Increase (Decrease) in Other Liabilities (22,282) 10,259
Net Cash Provided By (Used In) Operating Activities (42,361) 321,617
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,646,600 795,684
Proceeds from Maturities and Prepayments 442,355 61,567
Purchases (2,191,914) (1,107,893)
Net Increase in Loans and Leases (531,491) (154,121)
Net Increase in Premises and Equipment (36,355) (21,800)
Net Cash and Cash Equivalents Received in Acquisition - 7,410
Net Cash Used In Investing Activities (670,805) (419,153)
Financing Activities:
Net Increase in Deposits 85,551 71,487
Net Increase in Short-Term Debt 629,532 187,772
Principal Payments on Long-Term Debt (38,245) (202,708)
Proceeds From Issuance of Long-Term Debt 15,040 -
Cash Dividends Paid (17,598) (13,366)
Proceeds from Sale of Common Stock 22,186 5,363
Net Increase in Other Equity Items - 9
Net Cash Provided By Financing Activities 696,466 48,557
Decrease in Cash and Cash Equivalents (16,700) (48,979)
Cash and Cash Equivalents at Beginning of Period 276,241 278,747
Cash and Cash Equivalents at End of Period $259,541 $229,768
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $166,044 $149,929
Income Taxes 22,000 15,000
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 932 9,338
Residual Interest Securities Created from the
Sale of Loans 42,384 37,072
Common Stock Issued To Acquire Business - 7,152
- 5 -
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for fair presentation. The
results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
The financial statements presented herein should be read in
conjunction with the financial statements and notes thereto included
in Provident Financial Group, Inc.'s 1997 annual report on Form 10-K
filed with the Securities and Exchange Commission.
Basis of Presentation
The consolidated financial statements include the accounts of
Provident Financial Group, Inc. and its subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions
have been eliminated. Certain reclassifications have been made to
conform to the current year presentation.
The accompanying financial statements have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary to be in conformity with generally
accepted accounting principles.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes standards for the reporting of
comprehensive income and its components. Comprehensive income includes
net income and certain items that are reported directly within a
separate component of stockholders' equity and bypass net income. The
provisions of this SFAS became effective with 1998 interim reporting
and is disclosed within the Consolidated Statements of Changes in
Shareholders' Equity. Implementation of this statement had no impact
on net earnings or shareholders' equity. Prior periods have been
restated to conform to the current presentation.
Guaranteed Preferred Beneficial Interests in Company's Junior
Subordinated Debentures
In 1996, Provident Financial established Provident Capital Trust I.
Provident Capital issued $100 million of preferred Capital Securities
to the public and $3.1 million of common to Provident Financial.
Proceeds from the issuance of the capital securities were invested in
Provident Financial's 8.60% Junior Subordinated Debentures, due 2026.
Taken together, Provident Financial's obligations under the Guarantee,
the Declaration, the Indenture and the Debentures provide a full and
unconditional guarantee of the Capital Securities. The sole assets
(excluding interest receivable on the Debentures, prepaid expenses and
receivables) of Provident Capital are the Debentures.
- 6 -
Provident Auto Leasing Company
In January 1997, Provident Financial formed Provident Auto Leasing
Company, a Delaware business trust, as a subsidiary of Provident
Commercial Group, Inc. Provident Auto was created to avoid the
administrative difficulty and expense associated with retitling leased
vehicles in connection with the financing or transfer of beneficial
ownership of automobile and light duty trucks subject to leases.
Provident Auto is a separate legal entity from Provident Commercial
and each maintains separate books and records with respect to its
assets and liabilities. As of June 30, 1998 Provident Auto had total
assets of $176.2 million. These assets are not available to creditors
of Provident Commercial to secure any indebtedness of Provident
Commercial, or otherwise to satisfy the claims of such creditors
against Provident Commercial.
Stock Options
Options to purchase 360,050 shares of Provident Financial Common Stock
were granted during the first six months of 1998. The options have
exercise prices ranging from $44.12 to $54.47.
Off-Balance Sheet Financial Agreements
In the normal course of business, Provident Financial uses various
financial instruments with off-balance sheet risk to manage its
interest rate risk and to meet the financing needs of its customers.
At June 30, 1998, these off-balance sheet instruments consisted of
standby letters of credit of $143.4 million, commitments to extend
credit of $2.2 billion and interest rate swaps with a notional amount
of $1.6 billion.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Summary
Provident Financial's net earnings for the second quarter of 1998 were
$32.0 million compared to $28.2 million for the second quarter of
1997. Net interest income increased by $2.7 million, or 4%, over the
comparable period in 1997. The provision for loan and lease losses was
$5.0 million, a decrease of $10.0 million from the second quarter in
1997. Noninterest income increased $10.0 million, or 21%, primarily in
the other service charges and fees and operating lease income
categories. Noninterest expense increased $17.0 million, or 32%,
primarily as a result of the continued expansion of Provident Consumer
Financial Services and Information Leasing Corporation, and data
processing expense associated with Year 2000 compliance.
- 7 -
For the first six months of 1998, Provident Financial's net earnings
were $62.4 million, an increase of $6.9 million, or 12%, over the same
period during 1997. Interest income increased by $22.0 million, which
more than offset the $16.5 million increase in interest expense. The
provision for loan and lease losses decreased $16.0 million from the
same period during 1997. Noninterest income increased $19.2 million,
or 22%, while noninterest expense increased $30.7 million, or 29%. The
explanations for the increase in noninterest income and expense are
the same as those noted in the above quarterly comparisons paragraph.
The following ratios compare Provident Financial's annualized returns
on average assets and average equity for the first six months of 1998
to the year 1997:
Six Months Ended Year Ended
June 30, 1998(1) December 31, 1997
Net Earnings to Average Assets 1.65% 1.67%
Net Earnings to Average Shareholders' Equity 18.64% 20.32%
<FN>
(1) Net earnings for the six months ended June 30, 1998 have been annualized.
The ratio of noninterest expense to tax equivalent revenue
("efficiency ratio") was 57.6% for the first six months of 1998
compared to 49.2% for the first six months of 1997. For purposes of
calculating the efficiency ratio, noninterest expense excludes non-
recurring expenses. Tax equivalent revenue includes tax equivalent net
interest income and noninterest income but excludes non-recurring
income and security gains or losses.
The efficiency ratio has deteriorated over the past twelve months. As
a result, Management will be taking initiatives to reduce operating
expenses. Free Markets Partner, a database marketing division of
Provident Bank, will be downsized and integrated into the Bank's
retail division. The MeritValu program will be refocused,
concentrating its efforts in the greater Cincinnati market and
developing alternative products for its technology. The national
conforming mortgage division is changing its focus to Provident
Financial's regional markets only, as revenues are not supporting
expenses being incurred. Nine supermarket branches which overlapped
traditional branches will be closed. In addition, a consulting firm
has been employed to reduce costs, increase fee income, otherwise
enhance earnings through such means as improved float management,
liquidity, compensation balances and working capital, and to redeploy
resources to enhance revenues.
Nonperforming assets as of June 30, 1998 were $70.4 million, an
increase of $11.2 million compared to December 31, 1997. The ratio of
nonperforming assets to total loans, leases and other real estate
owned was 1.26% at June 30, 1998, compared to 1.17% at December 31,
1997.
- 8 -
Net Interest Income
See Table 1 for net interest income on a tax equivalent basis and
Table 2 for consolidated average balances, average rates and net
interest margin.
Net interest income on a tax equivalent basis increased approximately
$5.4 million for the first six months of 1998 over the comparable
period in 1997. This increase resulted from a $9.1 million increase
due to changes in volume more than offsetting the $3.7 million
decrease which was caused by changes in rates. Volume changes are
caused by changes in the average balances of interest earning assets
and interest bearing liabilities. The net interest margin was 3.89%
for the first six months of 1998 as compared to 4.05% for the
comparable period in 1997. This decrease reflects the increase in the
average rate paid on interest bearing liabilities of 4 basis points
and the decrease in the average rate received on interest earning
assets of 6 basis points. The increase in Provident Financial's
overall rate on interest bearing liabilities was due primarily to the
increase in the rate paid on Premium Index savings deposits. The
decrease in the average rate received on interest earning assets was
due primarily to holding a higher level of investment securities which
receive a lower average interest rate than most other earning assets.
Interest rate swaps increased the net interest margin by 12 basis
points and 22 basis points during the first six months of 1998 and
1997, respectively.
In preparing the net interest margin tables, nonaccrual loan balances
are included in the average balances for loans and leases. Fees
included in interest and fees on loans and leases are as follows:
second quarter 1998 - $4.2 million, second quarter 1997 - $3.9
million, year-to-date 1998 - $8.4 million, and year-to-date 1997 -
$8.2 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $5.0 million and $15.0
million during the second quarter of 1998 and 1997, respectively, and
$10.0 million and $26.0 million during the first six months of 1998
and 1997, respectively. The decrease in the provision was primarily
the result of lower net charge-offs incurred during the first six
months of 1998 as compared to the first six months of 1997.
- 9 -
Noninterest Income
Second Quarter 1998 Compared to Second Quarter 1997
Noninterest income increased $10.0 million during the second quarter
of 1998 compared to the same quarter in 1997. Service charges on
deposit accounts increased primarily as a result of increased fees
received on demand deposit accounts and ATM usage. The increase in
other service charges and fees were from gains and fees related to
commercial lending, mortgage loan servicing and brokerage operations.
The growth in operating lease income is the result of the expansion of
Provident Commercial and Information Leasing lines of business, and
the excess rental income received over that paid on leased vehicles
which were sold and subsequently leased back. Gain on sales of loans
and leases increased primarily as a result of the sale of equipment
which was being leased by Provident Commercial. Security gains were
recognized primarily from the sale of mortgage-backed securities.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
Noninterest income increased $19.2 million during the first six months
of 1998 compared to the same period in 1997. Service charges on
deposit accounts, other service charges and fees, operating lease
income and security gains increased for the same reasons given in the
quarterly comparison. The decrease in other income was due to the
receipt of additional consideration in 1997 relating to a restructured
loan.
Since the third quarter of 1996, it has been Provident Financial's
policy to sell its closed-end nonconforming residential loans
originated by Provident Consumer. The recognition of gains on the sale
of these loans have made a notable contribution to the financial
performance over this time period. The following is a summary of
selected operational data for Provident Consumer for the past five
quarters (in millions):
Quarter Ended
June 1998 Mar. 1998 Dec. 1997 Sept. 1997 June 1997
Loan Originations $226.2 $193.4 $266.2 $230.3 $213.6
Loan Sales 239.2 207.8 255.2 233.2 233.2
Gain on Sale of Loans 10.8 8.0 10.2 13.8 15.5
Interest and Fees on Loans 5.3 7.0 6.7 5.6 5.2
- 10 -
Included in "Investment Securities Available for Sale" are residual
interest securities representing the present value of net cash flows
due Provident Financial from loan securitizations and sales.
Components of the residual interest securities and the underlying
assumptions follow (dollars in thousands):
Closed-End Closed-End Opened-End
Nonconforming Conforming Conforming
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $223,412 $5,067 $9,661
Less:
Off-Balance Sheet Allowance for Loan Losses (40,652) (595) (504)
Servicing Costs and Insurance Premiums (26,455) (885) (1,333)
Discount to Present Value (36,827) (479) (1,058)
Carrying Value of Residual Interest Securities $119,478 $3,108 $6,766
Assumptions Used (Weighted Average)
Prepayment Speed (initial) 9.00% 15.00% n/a
Prepayment Speed (ramps up to) 28.00 15.00 n/a
Repayment Rate (overall) n/a n/a 40.00%
Provision for Loan Losses (annual basis) 1.06 0.30 0.15
Provision for Loan Losses (% of original balance) 3.48 0.79 0.30
Discount Rate 11.55 9.36 9.23
The structure for securitizing nonconforming residential loans was
changed for 1998. Prior to 1998 securitizations, the allowance for
loan loss would be funded from future cash flows of the underlying
loans, net of interest payments to the security holders. Beginning in
1998, an allowance for loan losses is being funded at the beginning of
each securitization, separately from the cash flows of the loan
payments. As of June 30, 1998 the allowance on the 1998
securitizations was $9.6 million.
Noninterest Expense
Second Quarter 1998 Compared to Second Quarter 1997
Noninterest expense increased $17.0 million during the second quarter
of 1998 when compared to 1997. Compensation expense increased
primarily as a result of the expansion of Provident Consumer and the
acquisition of the Florida banks. The larger volume of operating
leases originated by Provident Commercial and Information Leasing has
resulted in the higher depreciation expense of operating lease
equipment. Occupancy expense increased primarily in the Provident
Consumer and retail distribution areas. Equipment expense increased
primarily due to the purchase of data processing and voice
communications equipment. Professional fees have increased primarily
in the areas of commercial and consumer lending. Charges and fees
increased as a result of credit card origination expenses. Marketing
costs increased primarily from advertising of Retail, Provident
Consumer and Value Systems products and services. Higher data
processing expense related to Year 2000 compliance was the primary
reason for the increase in other expense.
- 11 -
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
Noninterest expense increased $30.7 million during the first six
months of 1998 compared to the same period in 1997. All expenses
except for charges and fees increased for the same reasons as given in
the quarterly comparison. Charges and fees decreased as a result of
foreclosed property costs incurred during 1997 exceeding the credit
card origination expenses incurred during 1998.
Financial Condition
Short-Term Investments and Investment Securities
Federal funds sold and reverse repurchase agreements increased $32.3
million since December 31, 1997. 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, any remainder is placed in overnight federal
funds.
Beginning in 1998, Provident Financial began purchasing securities
with the intention of recognizing short-term profits. These securities
are carried at fair value with realized and unrealized gains and
losses reported in other noninterest income. As of June 30, 1998
Provident Financial held $59.8 million in trading account securities.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. This category of securities increased $148.8 million during 1998
as more funds were invested in this manner.
Loans and Leases
Total loans and leases increased $536.2 million during 1998.
Commercial loan growth of $433.3 million was the primary reason for
the increase in total loans and leases. Residential loans decreased
$36.7 million due primarily to sales exceeding originations of
nonconforming residential loans by $27.4 million.
- 12 -
The following table shows the composition of the commercial and
financial loan category by industry type at June 30, 1998 (dollars in
millions):
Amount on
Type Amount % Nonaccrual
Manufacturing $638.3 20 $14.5
Service Industries 560.6 18 2.7
Real Estate Operators/Investment 340.6 11 1.2
Wholesale Trade 244.2 8 3.4
Retail Trade 239.1 7 1.8
Residential Warehouse Lending 221.7 7 -
Transportation/Utilities 179.7 6 14.2
Finance & Insurance 162.4 5 .9
Construction 128.8 4 .5
Automobile Dealers 102.4 3 -
Other(1) 349.0 11 3.2
Total $3,166.8 100 $42.4
(1) Includes various kinds of loans, such as small business loans
and loans with balances under $100,000.
The composition of the commercial mortgage and construction loan
categories by property type at June 30, 1998 is shown in the following
table (dollars in millions):
Amount on
Type Amount % Nonaccrual
Shopping/Retail $183.4 23 $.3
Office/Warehouse 171.6 21 -
Apartments 141.1 17 -
Residential Development 121.1 15 -
Land 30.4 4 -
Auto Sales and Service 27.5 3 -
Industrial Plants 15.4 2 -
Hotels/Motels 12.8 2 -
Churches 12.3 2 -
Mobile Home Parks 4.1 0 -
Health Facilities 0.8 0 -
Other Commercial Properties 86.8 11 -
Total $807.3 100 $.3
Provident Financial maintains a reserve for loan and lease losses to
absorb potential losses in its portfolio. Management's determination
of the adequacy of the reserve is based on reviews of specific loans
and leases, credit loss experience, general economic conditions and
other pertinent factors. The reserve is maintained at a level which
management considers to be adequate to absorb future loan and lease
losses. Reserve adjustments needed for charge-offs or risk
characteristics in the lending portfolio are made through changes to
the provision for loan and lease losses. Loans and leases deemed
uncollectible are charged off and deducted from the reserve and
recoveries on loans and leases previously charged off are added to the
reserve.
- 13 -
The following table shows the progression of the reserve for loan and
lease losses (in thousands):
1998 1997
Balance at January 1 $71,980 $66,693
Provision for Loan and Lease Losses 10,000 26,000
Acquired Reserves - 334
Loans and Leases Charged Off (12,859) (20,532)
Recoveries 6,351 5,801
Balance at June 30 $75,472 $78,296
Net charge-offs totaled $6.5 million during the first six months of
1998 compared to $14.7 million for the same time period in 1997.
During the first two quarters of 1998, net charge-offs for the
commercial lending portfolio were $.8 million, consisting primarily of
commercial loans and equipment leases. Net charge-offs for the
consumer lending portfolio were $5.7 million consisting principally of
auto loans and leases and credit card lending. As a percentage of
total loans and leases outstanding, the reserve was 1.35% at June 30,
1998 compared to 1.42% at December 31, 1997.
Table 3 shows a comparison of the major components of nonperforming
assets over the past five quarters along with various asset quality
ratios. Nonperforming assets increased $11.2 million during the first
six months of 1998. Nonaccrual loans increased $11.5 million due
primarily to the addition of three commercial loans and one commercial
lease, which was partially offset by the removal of two commercial
loans, one which was brought current and the other being restructured.
Renegotiated loans increased $8.8 million due to the loan formerly on
nonaccrual being restructured. Other real estate decreased $9.1
million due primarily to three commercial properties being sold. At
June 30, 1998, nonperforming assets as a percentage of total loans,
leases and other real estate was 1.26% compared to 1.17% at December
31, 1997.
Short-Term Debt
Short-term debt increased $629.5 million, or 78%, to $1.4 billion
during the first six months of 1998. The increase was due primarily to
the purchase of term and overnight federal funds. The amount of
federal funds purchased changes daily as cash is managed to meet
reserve requirements and customer needs. After funds have been
allocated to meet lending and investment requirements, any shortage is
offset by the purchase of overnight federal funds.
Capital Resources and Adequacy
During the first six months of 1998, shareholders' equity increased
$65.2 million, or 10%, to $702.4 million. The increase in equity was
primarily the result of net income exceeding dividends paid and the
exercise of stock options. Dividends of $17.2 million on common stock
and $395,000 on preferred stock were paid in the first two quarters of
1998.
- 14 -
The following table of ratios is important to the analysis of the
adequacy of capital resources.
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
Average Shareholders' Equity to Average Assets 8.85% 8.22%
Preferred Dividend Payout to Net Earnings .63 .62
Common Dividend Payout to Net Earnings 27.57 25.62
Tier 1 Leverage Ratio 9.98 10.13
Tier 1 Capital to Risk-Weighted Assets 10.31 9.81
Total Risk-Based Capital To Risk-Weighted Assets 13.44 13.25
In August 1998, Provident Financial announced that it would purchase
up to 1 million shares, or approximately 2.3%, of its common stock.
The purchases are to be made from time-to-time in open market or in
privately negotiated transactions at the discretion of management.
Shares purchased pursuant to the buy-back program will be used to fund
various company benefit plans and for other corporate purposes.
Capital expenditures planned by Provident Financial for building
improvements and furniture and equipment in 1998 are currently
estimated to be approximately $25 million. Included in this amount are
projected capital expenditures for the purchase or construction of
computer equipment and software, office building renovations and
branch enhancements. Through June 30, 1998, approximately $17 million
of these expenditures have been made.
Liquidity
Adequate liquidity is necessary to meet the borrowing needs and
deposit withdrawal requirements of customers as well as to satisfy
liabilities, fund operations and support asset growth. Provident
Financial 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, deposits with other banks and federal funds sold.
Another source is the generation of new deposits. Provident Financial
may borrow both short-term and long-term funds. Provident Financial
has an additional $687.5 million available for borrowing under a $1
billion bank notes program. Additional sources of liquidity include
the sale of investment securities and the sale of commercial and
consumer loans and leases.
The major source of liquidity for Provident Financial on a parent-only
basis ("the Parent") is dividends paid to it by its subsidiaries.
Pursuant to Federal Reserve and state banking regulations, the maximum
amount available for dividend distribution to the Parent at June 30,
1998 by its banking subsidiaries was approximately $234.6 million. The
Parent has not received any dividends from its subsidiaries during the
first six months of 1998.
- 15 -
At June 30, 1998, the Parent had $219.2 million of short-term
commercial paper outstanding. A portion of commercial paper proceeds
was used to fund investment securities and short-term loans.
Contractual lines of credit totaling $175 million have been obtained
by the Parent to support its commercial paper borrowings. Also, the
Parent has $40 million in general purpose lines of credit. These lines
had not been used at June 30, 1998. The Parent had approximately
$126.0 million in cash, interest earning deposits and federal funds
sold at June 30, 1998.
- 16 -
Provident Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements Of Earnings
(unaudited)
(In Thousands)
Table 1.
Quarter Ended Six Months Ended
June June June June
1998 1997 1998 1997
Total Interest Income $154,699 $142,236 $301,485 $279,522
Taxable Equivalent Adjustment 59 86 158 164
Taxable Equivalent Interest Income 154,758 142,322 301,643 279,686
Total Interest Expense 86,472 76,689 166,982 150,442
Net Interest Income 68,286 65,633 134,661 129,244
Provision for Loan and Lease Losses 5,000 15,000 10,000 26,000
Taxable Equivalent Net Interest Income After
Provision for Loan and Lease Losses 63,286 50,633 124,661 103,244
Noninterest Income 56,831 46,794 106,536 87,338
Noninterest Expense 70,904 53,861 135,535 104,883
Taxable Equivalent Earnings Before Income Taxes 49,213 43,566 95,662 85,699
Applicable Income Taxes 17,154 15,280 33,104 30,028
Taxable Equivalent Adjustment 59 86 158 164
Net Earnings $32,000 $28,200 $62,400 $55,507
Net Earnings Applicable to Common Stock $31,802 $28,042 $62,004 $55,191
- 17 -
Provident Financial Group, Inc. and Subsidiaries
Consolidated Average Balances, Rates and Yields
On a Fully Taxable Equivalent Basis
(unaudited)
(Dollars In Millions)
Table 2.
Quarter Ended Six Months Ended
Jun. 30,1998 Jun. 30,1997 Jun. 30,1998 Jun. 30,1997
Average Avg Average Avg Average Avg Average Avg
Balance Rate Balance Rate Balance Rate Balance Rate
Assets:
Loans and Leases (Net of Unearned Income):
Commercial Lending:
Commercial and Financial $3,049 9.37% $2,479 9.47% $2,949 9.32% $2,437 9.34%
Mortgage 443 9.08 511 9.18 447 9.20 500 9.22
Construction 333 8.92 286 8.89 322 8.91 283 8.79
Lease Financing 352 11.64 248 11.22 348 11.69 245 11.15
Consumer Lending:
Instalment 625 9.62 877 9.86 625 10.12 893 9.76
Residential 212 7.59 204 9.09 220 8.99 314 8.33
Lease Financing 486 7.87 647 7.57 470 7.87 631 7.63
Total Loans and Leases 5,500 9.29 5,252 9.31 5,381 9.39 5,303 9.19
Investment Securities:
Taxable 1,621 6.53 1,176 6.79 1,527 6.47 1,101 6.82
Tax-Exempt 3 8.63 7 6.36 6 7.27 7 5.36
Total Investment Securities 1,624 6.53 1,183 6.78 1,533 6.48 1,108 6.81
Trading Account Securities 58 5.55 - - 47 5.53 - -
Federal Funds Sold and Reverse
Repurchase Agreements 11 5.61 22 7.78 20 5.51 21 5.79
Total Earning Assets 7,193 8.63 6,457 8.84 6,981 8.71 6,432 8.77
Cash and Noninterest Bearing Deposits 188 106 187 138
Other Assets 380 193 398 202
Total Assets $7,761 $6,756 $7,566 $6,772
Liabilities and Shareholders' Equity:
Deposits:
Demand Deposits $268 2.20 $263 2.18 $269 2.18 $241 2.25
Savings Deposits 1,023 4.29 535 3.02 970 4.22 529 2.88
Time Deposits 3,011 5.70 3,505 5.79 3,055 5.72 3,448 5.71
Total Deposits 4,302 5.15 4,303 5.23 4,294 5.16 4,218 5.16
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,090 5.56 427 5.41 906 5.50 435 5.31
Commercial Paper 221 5.77 156 5.91 226 5.76 149 5.72
Short-Term Notes Payable 2 5.35 1 5.09 2 6.05 1 5.52
Total Short-Term Debt 1,313 5.59 584 5.55 1,134 5.55 585 5.42
Long-Term Debt 676 6.39 665 6.24 678 6.40 722 6.27
Junior Subordinated Debentures 99 8.79 99 8.79 99 8.84 99 8.84
Total Interest Bearing Liabilities 6,390 5.43 5,651 5.44 6,205 5.43 5,624 5.39
Noninterest Bearing Deposits 534 396 531 443
Other Liabilities 152 157 160 166
Shareholders' Equity 685 552 670 539
Total Liabilities and Shareholders' Equity $7,761 $6,756 $7,566 $6,772
Net Interest Spread 3.20% 3.40% 3.28% 3.38%
Net Interest Margin 3.81% 4.08% 3.89% 4.05%
- 18 -
Provident Financial Group, Inc. and Subsidiaries
Consolidated Quarterly Nonperforming Assets
(unaudited)
(Dollars In Thousands)
Table 3.
Quarter Ended
June Mar. Dec. Sep. June
1998 1997 1997 1997 1997
Nonaccrual Loans: (1)
Commercial Lending:
Commercial and Financial $42,413 $32,746 $37,800 $28,551 $27,230
Mortgage 335 335 335 553 -
Construction - - 27 87 27
Lease Financing 11,862 7,046 4,798 5,481 7,292
Consumer Lending:
Instalment - - - 14 -
Residential 3,314 3,287 3,459 2,239 2,028
Lease Financing - - - - -
Total Nonaccrual Loans 57,924 43,414 46,419 36,925 36,577
Renegotiated Loans (2) 9,196 9,327 377 257 246
Total Nonperforming Loans 67,120 52,741 46,796 37,182 36,823
Other Real Estate and Equipment Owned:
Commercial 2,247 4,330 11,207 11,088 8,820
Residential 983 1,124 1,079 1,662 3,369
Land 91 92 110 15 68
Total 3,321 5,546 12,396 12,765 12,257
Total Nonperforming Assets $70,441 $58,287 $59,192 $49,947 $49,080
Loans 90 Days Past Due Still Accruing $10,058 $17,109 $9,811 $10,504 $20,460
Total Loans and Leases 5,588,006 5,265,159 5,051,842 5,105,578 5,205,897
Reserve for Loan and Lease Losses 75,472 72,837 71,980 75,242 78,296
Total Assets 7,801,614 7,699,935 7,123,659 7,079,578 6,985,035
Reserve for Loan and Lease Losses as a Percent of:
Nonperforming Loans 112.44% 138.10% 153.82% 202.36% 212.63%
Nonperforming Assets 107.14% 124.96% 121.60% 150.64% 159.53%
Total Loans and Leases 1.35% 1.38% 1.42% 1.47% 1.50%
Nonperforming Loans as a % of Total
Loans and Leases 1.20% 1.00% .93% .73% .71%
Nonperforming Assets as a Percent of:
Total Loans, Leases and Other Real Estate 1.26% 1.11% 1.17% .98% .94%
Total Assets .90% .76% .83% .71% .70%
<FN>
(1) Provident Financial generally stops accruing interest on loans and leases 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.
- 19 -
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Registrant's annual meeting of shareholders was held on May 28, 1998.
Proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934 and the following matters were voted upon and
approved by the shareholders as indicated below.
Votes Votes
For Against Abstentions
Election of the following directors:
(a)Jack M. Cook 39,775,186 25,911 48,966
(b)Allen L. Davis 39,754,702 25,911 69,450
(c)Thomas D. Grote, Jr. 39,777,058 25,911 47,094
(d)Robert L. Hoverson 39,775,589 25,911 48,563
(e)Philip R. Myers 39,777,883 25,911 46,269
(f)Joseph A. Pedoto 39,773,165 25,911 50,987
(g)Sidney A. Peerless 39,765,094 25,911 59,058
(h)Joseph A. Steger 39,722,667 25,911 101,485
Item 5. Other Information
The form of Proxy for Provident Financial's Annual Meeting of
Shareholders grants authority to the designated proxies to vote in
their discretion on any matters that come before the meeting except
for those set forth in Provident Financial's Proxy Statement and
except for matters as to which adequate notice is received. In order
for a notice to be deemed adequate for the 1999 Annual Shareholders'
Meeting, it must be received prior to March 14, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed:
Exhibit 10 - Material Contract
Exhibit 27.1 - Financial Data Schedule for June 30, 1998
Exhibit 27.2 - Restated Financial Data Schedule for
June 30, 1997
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
- 20 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Provident Financial Group, Inc.
Registrant
Date: August 12, 1998 \s\ John R. Farrenkopf
John R. Farrenkopf
Vice President and
Chief Financial Officer
- 21 -