<PAGE>
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, 1997 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated Under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: (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 27, 1998, there were 42,971,330 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 27, 1998, was
approximately $1,039,000,000 (based upon non-affiliated holdings of
20,273,887 shares and a market price of $51.25 per share).
Documents Incorporated by Reference:
Proxy Statement for the 1998 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 Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
<PAGE>
PROVIDENT FINANCIAL GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 3
ITEM 3. LEGAL PROCEEDINGS 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 5
ITEM 6. SELECTED FINANCIAL DATA 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 67
ITEM 11. EXECUTIVE COMPENSATION 67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 67
SIGNATURES 70
<PAGE>
PART I
ITEM 1. BUSINESS
Provident Financial Group, Inc.
Provident Financial is a Cincinnati-based commercial banking and
financial services company with banks in Ohio, northern Kentucky and
southwestern Florida. In recent years, Provident Financial expanded
its operations to provide financial services on a national scale. At
December 31, 1997, Provident Financial had total assets of $7.1
billion, managed loans and leases of $6.6 billion, deposits of $4.7
billion and shareholders' equity of $637 million.
Effective June 2, 1997, Provident Financial's name was changed from
Provident Bancorp, Inc. to better reflect the new products and
services being offered.
Provident Financial was incorporated in 1980; it became a public
company later that year when American Financial Corporation
distributed Provident Financial Common Stock to its shareholders. At
December 31, 1997, Carl H. Lindner, members of his immediate family
and trusts for their benefit, owned 44% of the common stock of
American Financial Group (successor to American Financial
Corporation). This group, along with Carl H. Lindner's siblings and
their families and entities controlled by them, or established for
their benefit, owned 55% of Provident Financial's Common Stock.
Provident Financial's executive offices are located at One East Fourth
Street, Cincinnati, Ohio 45202 and its telephone number is (513) 579-
2000.
Provident Financial has expanded its national presence and lines of
business in recent years through internal growth and acquisitions. In
September of 1997, Provident Financial acquired Florida Gulfcoast
Bancorp, Inc., the parent of Enterprise National Bank. Enterprise
operated three branches in Sarasota County, Florida with assets of
$166 million. In February of 1997, South Hillsborough Community Bank
was purchased. South Hillsborough had three offices located in
Hillsborough County, Florida with assets of $38 million. Information
Leasing Corporation, an equipment leasing company, and Procurement
Alternatives Corporation, Information Leasing's affiliated lease
servicing company, were acquired in December, 1996. Information
Leasing and Procurement Alternatives had over $110 million in assets
at the time of purchase.
Provident Financial conducts its banking operations through The
Provident Bank (in Ohio), The Provident Bank of Kentucky and Provident
Bank of Florida. (The Provident Bank of Kentucky will be merged into
The Provident Bank on March 23, 1998.) See ITEM 7 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Introduction and Lines of Business" for further details
as to additional operations and the types of financial products and
services offered by Provident Financial.
At December 31, 1997, Provident Financial and its subsidiaries
employed approximately 2,450 employees equating to approximately 2,300
full-time-equivalent employees.
1
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Competition
The financial services business is highly competitive. The
subsidiaries of Provident Financial 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
Provident Financial 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. The BHCA
requires Federal Reserve approval on acquisitions of control of more
than 5% of the voting stock or substantially all of the assets of any
bank or bank holding company. The BHCA authorizes interstate bank
acquisitions anywhere in the country and allows interstate branching
by acquisition and consolidation in those states that have not opted
out. Ohio, Kentucky and Florida did not request out of interstate
branching.
Additionally, Provident Financial 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
Provident Financial's subsidiary banks may pay dividends or otherwise
supply funds to Provident Financial. 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 R included in "Notes to Consolidated Financial Statements".
Various requirements and restrictions under federal and state laws
regulate the operations of Provident Financial'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.
2
<PAGE>
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.
Provident Financial's subsidiary banks are "well capitalized" and are
not prohibited by FDICIA from accepting brokered deposits or offering
interest rates on deposits higher than the prevailing rate in their
markets. As of December 31, 1997, Provident Financial's subsidiary
banks had brokered deposits (as defined) of $585.8 million.
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
Provident Financial and its subsidiaries cannot be predicted.
Provident Securities and Investment Company, a Provident Bank
subsidiary, is licensed as a retail securities broker and is subject
to regulation by the Securities and Exchange Commission ("SEC"), state
securities authorities and the National Association of Securities
Dealers, Inc. Provident Investment Advisors, Inc., a Provident
Financial subsidiary, is a registered investment advisor, subject to
regulation by the SEC and state securities authorities.
ITEM 2. PROPERTIES
Provident Financial 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 American Financial Group. Provident Bank leases approximately
270,000 square feet of additional office space in downtown Cincinnati.
Provident Bank owns five buildings in the Queensgate area of
Cincinnati that contain approximately 200,000 square feet, of which
three buildings are used for offices, data processing and warehouse
facilities and two buildings are leased to other parties. Provident
Bank owns twenty-five of its branch locations and leases forty-one.
Provident Kentucky owns two of its branch locations, leases two from
Provident Financial (Parent) and leases six from non-affiliates.
Provident Florida owns two of its branch locations and leases four.
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.
3
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ITEM 3. LEGAL PROCEEDINGS
In the first quarter of 1998, Provident Financial discovered that it
may have inadvertently failed to file certain banking-related reports
within the timeframe required by applicable Federal regulations. Under
such regulations, depending on the facts and circumstances, Provident
Financial could be assessed penalties. At the date of this report,
management is unable to predict whether penalties will be assessed or
the amount of such penalties. Provident Financial and its subsidiaries
are parties to other routine litigation incidental to their business.
The results of the above matters are not expected to be material to
Provident Financial's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter.
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the NASDAQ Stock Market under the symbol
"PFGI". The following table sets forth, for the periods indicated, the
high and low daily closing sales prices as reported on NASDAQ and the
quarterly dividends paid by Provident Financial.
<TABLE>
<CAPTION>
1997 1996
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Close $52.50 $52.25 $47.00 $39.38 $38.00 $29.25 $25.33 $23.33
Low Close 43.25 43.13 33.50 33.50 28.83 22.67 22.11 20.67
Period End Close 48.50 47.31 42.75 35.25 34.00 29.25 23.50 22.44
Cash Dividends .20 .20 .16 .16 .14 .14 .14 .12
</TABLE>
At February 28, 1998, there were approximately 4,200 holders of record
of Provident Financial's Common Stock.
In 1997 and 1996 Provident Financial paid dividends on its Common
Stock of $29.7 million and $21.4 million and on its Preferred Stock of
$.7 million and $.5 million, respectively. Provident Financial has
indicated its intention to pay annual dividends of approximately 30%
of recurring net earnings. It is expected that in the next several
years, Provident Financial's revenues will consist principally of
dividends paid to it by its subsidiaries and interest generated from
lending and investing activities. A discussion of limitations and
restrictions on the payment of dividends by subsidiaries to Provident
Financial is contained under ITEM 7 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity"
and Note R included in "Notes to Consolidated Financial Statements".
5
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Five Year
Annual Compound For Year Ended December 31,
Growth Rate 1997 1996 1995 1994 1993 1992
(Dollars In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Total Interest Income 14.7% $571,212 $520,325 $462,396 $345,829 $286,839 $287,622
Total Interest Expense 16.8 309,212 280,257 259,747 163,871 124,003 142,362
Net Interest Income 12.5 262,000 240,068 202,649 181,958 162,836 145,260
Provision for Loan and Lease Losses 25.0 44,750 47,000 14,000 12,000 12,000 14,663
Net Interest Income After Provision
for Loan and Lease Losses 10.7 217,250 193,068 188,649 169,958 150,836 130,597
Noninterest Income 30.2 185,358 106,137 61,837 38,468 41,461 49,478
Noninterest Expense 16.0 225,978 175,162 143,320 120,889 112,980 107,776
Earnings Before Income Taxes
and Effect of Changes in
Accounting Principles 19.6 176,630 124,043 107,166 87,537 79,317 72,299
Applicable Income Taxes 18.2 61,328 42,843 35,306 29,871 28,045 26,535
Effect of Changes in
Accounting Principles (100.0) - - - - - (2,146)
Net Earnings 21.5 $115,302 $81,200 $71,860 $57,666 $51,272 $43,618
Per Common Share Data:
Basic Earnings (1) 19.0% $2.79 $2.04 $1.98 $1.56 $1.39
Diluted Earnings (1) 20.2 2.63 1.94 1.75 1.40 1.26
Dividends Paid 19.1 .72 .54 .47 .42 .36 $.30
Basic Book Value 15.0 14.95 12.62 10.78 9.16 8.62 7.42
Diluted Book Value 14.1 14.23 12.11 10.48 8.75 8.32 7.36
Balances at December 31:
Total Investment Securities 20.2% $1,371,507 $1,032,907 $959,904 $685,920 $701,505 $547,251
Total Loans and Leases 11.7 5,051,842 5,311,448 4,896,076 4,204,538 3,389,888 2,900,761
Total Managed Loans and Leases 17.8 6,584,528 5,568,709 4,896,076 4,204,538 3,389,888 2,900,761
Reserve for Loan and Lease Losses 15.4 71,980 66,693 60,235 51,979 40,542 35,144
Total Assets 12.3 7,123,659 6,829,088 6,205,351 5,411,491 4,698,433 3,979,888
Noninterest Bearing Deposits 7.2 605,166 554,262 523,631 452,458 422,689 427,776
Interest Bearing Deposits 8.6 4,091,132 4,042,218 3,654,920 3,616,191 2,808,938 2,702,278
Total Deposits 8.5 4,696,298 4,596,480 4,178,551 4,068,649 3,231,627 3,130,054
Long-Term Liabilities 82.7 786,974 949,913 820,083 383,433 275,527 38,643
Total Shareholders' Equity 16.5 637,261 516,805 432,537 359,351 335,892 296,465
Other Statistical Information:
Return on Average Assets 1.67% 1.28% 1.29% 1.24% 1.30% 1.20%
Return on Average Equity 20.32 17.67 18.37 16.64 16.33 17.05
Dividend Payout Ratio 26.23 27.06 26.17 30.62 30.60 29.08
Capital Ratios at December 31:
Total Equity to Total Assets 8.95% 7.57% 6.97% 6.64% 7.15% 7.45%
Tier 1 Leverage Ratio 10.13 9.02 7.13 7.21 7.88 7.87
Tier 1 Capital to Risk-Weighted Assets 9.81 9.23 7.52 7.86 8.89 9.20
Tier 2 Capital to Risk-Weighted Assets 3.44 3.82 4.25 4.99 3.35 1.51
Total Risk-Based Capital to
Risk-Weighted Assets 13.25 13.05 11.77 12.85 12.24 10.71
Loan Quality Ratios at December 31:
Reserve for Loan and Lease Losses
to Total Loans and Leases 1.42% 1.26% 1.23% 1.24% 1.20% 1.21%
Reserve for Loan and Lease Losses
to Nonperforming Loans 153.82 304.51 142.57 714.29 222.97 138.44
Nonperforming Loans to Total
Loans and Leases 0.93 0.41 0.86 0.17 0.54 0.88
<FN>
(1) Earnings per share amounts prior to 1997 have been restated as required to comply with SFAS No. 128, "Earnings
Per Share". Historical earnings per share for the year ended December 31, 1992 are not presented above because
they are not meaningful due to the conversion merger transactions with four mutual savings and loan associations
in 1992. The annual compound growth rate provided represents a four year growth rate rather than five years.
</TABLE>
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the audited
consolidated financial statements. Average balances reported are based
on daily calculations.
From time to time, Provident Financial Group, Inc. publishes forward-
looking statements relating to such matters as anticipated financial
performance, business prospects, new banking and financial service
products and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, Provident Financial
notes that a variety of factors could cause its actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. These risks
and uncertainties include, without limitation, changes in interest
rates, developments in the economies served by Provident Financial,
changes in anticipated credit quality trends and changes in
accounting, tax or regulatory practices or requirements. Forward-
looking statements speak only as of the date made. Provident
undertakes no obligations to update any forward-looking statements to
reflect events or circumstances arising after the date on which they
are made.
In particular, statements made within "Performance Review", "Provision
for Loan and Lease Losses" and "Credit Risk Management" discussions
included within MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS have forward looking statements.
Actual results could vary materially because of a number of factors
including a deterioration in general economic conditions which could
adversely affect borrowers. In addition, borrowers could suffer
unanticipated losses without regard to general economic conditions.
The result of these and other factors could cause a difference from
expectations of the level of defaults and a change in the risk
characteristics of the loan and lease portfolio and a change in the
provision for loan and lease losses.
INTRODUCTION
Provident Financial Group, Inc. (Parent), formerly known as Provident
Bancorp, Inc., is a holding company for three banks, The Provident
Bank (in Ohio), The Provident Bank of Kentucky and Provident Bank of
Florida. The Provident Bank of Kentucky will be merged into The
Provident Bank on March 23, 1998.
Additional operations include Provident Consumer Financial Services, a
national mortgage loan operation; Information Leasing Corporation, a
national full service small-ticket equipment leasing company;
Provident Commercial Group, a national equipment lease and finance
subsidiary; Provident Capital Corporation, a national provider of
middle market structured finance products; Value Systems, a national
customer acquisition, research and development division; and Provident
Securities and Investment Company, a full service registered
broker/dealer.
7
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Business Initiatives
The financial services industry is highly competitive. To effectively
compete in this market, management has changed the way it views
banking and does business. These changes involve the leveraging of
existing customer relationships, providing new ways of developing
customer relationships and adding value to its products that include
the following:
Utilize Technology to Improve Targeting and Pricing of Products and
Services -- A data warehouse was developed to allow Provident
Financial to look at the financial, demographic and behavioral
profile of each customer. This information has permitted Provident
Financial to differentiate customers in terms of service levels,
product offerings, delivery channel usage and incentives offered.
Emphasize Loan Origination and Servicing -- Management believes
profitability can be enhanced by focusing on customer relationships,
in particular the origination and servicing of loans. Provident
Financial securitizes and/or sells nonconforming residential loans
originated within its regional and national systems, while retaining
the servicing of the loans. The proceeds from these loan
securitizations/sales permit Provident Financial to originate a
higher volume of loans than would normally be possible for a bank
its size.
Develop Niche National Businesses -- Provident Financial has
developed national networks for many of its products and services as
a means of reaching new customers and diversifying its geographic
base. Products and services offered on a nationwide basis include
conforming and nonconforming residential loans, commercial lending,
commercial leasing and electronic banking services.
Acquire Strategic Businesses -- To broaden its customer base, add
value to its product line, provide a more diverse revenue stream and
lower its cost of funds, Provident Financial has made tactical
business acquisitions. Recent acquisitions include two banks in
Florida (South Hillsborough Community Bank and Florida Gulfcoast
Bancorp, Inc.) and a small ticket equipment leasing company
(Information Leasing Corporation).
Invest in Proprietary Payment System and Electronic Banking Products
-- During 1996, Provident Financial introduced its MeritValu program
which is an online, multiple-merchant frequent shopper rewards
program that supports all methods of payments by the consumer. The
program allows consumers to earn rebates and spend them like cash on
goods and services at participating merchants, while the merchants
benefit from increased sales and customer data information.
Provident Financial also is investing other development efforts,
seeking various ways of adding value to its products and services,
particularly through the use of technology.
8
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Lines of Business
For management reporting purposes, Provident Financial has identified
nine major lines of business. Lines of business that operate on a
regional basis are Commercial Banking, Commercial Mortgage, Retail and
Consumer Lending, while Consumer Financial Services, Capital
Corporation, Equipment Leasing, Information Leasing and Value Systems
operate on a national basis.
The business lines are based on the management structure of Provident
Financial. Financial performance results are determined based on
Provident Financial's management accounting process, which assigns
balance sheet and income statement items to each business line.
Activity-based costing is used to allocate internal expenses for
centrally provided services. Fund transfer pricing is used to allocate
interest expense among the business lines. The following table
presents a summary of net earnings and managed earning assets by
business line for 1997:
TABLE 1: Net Earnings and Managed Earning Assets by Line of Business
<TABLE>
<CAPTION>
Net Provision Non- Non- Managed
Interest for Loan Interest Interest Income Net Earning
Income Losses Income Expense Taxes Earnings Assets
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Regional:
Commercial Banking $60.5 $11.1 $3.8 $22.1 $10.9 $20.2 $1,439.9
Commercial Mortgage 24.2 .8 .3 4.1 6.8 12.8 802.0
Retail 53.8 - 25.8 60.2 6.8 12.6 n.m.
Consumer Lending 43.2 16.0 19.1 29.4 5.9 11.0 1,638.6
Total Regional 181.7 27.9 49.0 115.8 30.4 56.6 3,880.5
National:
Consumer Financial
Services 11.0 .5 (1) 58.4 25.9 15.1 27.9 1,191.4
Capital Corporation 30.1 6.2 11.0 6.1 10.1 18.7 623.8
Equipment Leasing 5.0 .9 19.6 14.7 3.2 5.8 460.7
Information Leasing 8.6 1.6 10.8 12.9 1.7 3.2 193.1
Value Systems - - - 9.1 (3.1) (6.0) n.m.
Total National 54.7 9.2 99.8 68.7 27.0 49.6 2,469.0
Other 25.6 7.7 36.6 41.5 3.9 9.1 1,690.8
$262.0 $44.8 $185.4 $226.0 $61.3 $115.3 $8,040.3
<FN>
(1) An additional $29.3 million of off-balance sheet provision for credit losses
pertaining to managed earning assets was established during 1997. See Note C
included in "Notes to Consolidated Financial Statements" for further details.
(n.m. -- not meaningful)
</TABLE>
A description of the lines of business follows:
Commercial Banking Group is comprised of four business units:
Commercial Banking, Business Banking, Corporate Services and
International Services. Commercial Banking provides traditional
commercial lending products and services including working capital,
term and asset-based financing. Business Banking provides specialized
credit products and financial services directed to the needs of small
business and their owners. Corporate Services provides cash management
and group banking products and services to a broad range of
businesses. International Services provides standby and commercial
letters of credit, purchase and sale of foreign exchange as well as
documentary examination and negotiation in foreign trade matters.
9
<PAGE>
Commercial Mortgage provides a complete line of loans and services to
support the commercial real estate market. Products and services
include: land acquisition and development loans; construction loans
for residential and commercial developments; and long-term loans for
multi-family projects, retail shopping centers, office buildings,
warehouses, golf course developments, light industrial and
distribution loans.
Retail sells and services consumer and small business deposits, loans
and investment products. The physical distribution includes a network
of fifty-three traditional branches, twenty-three in-store branches
and approximately two hundred ATM's in the Cincinnati, Dayton,
Columbus, Cleveland and northern Kentucky markets. Initiatives include
deposit product improvements, the introduction of a new indexed
savings account, development and implementation of a comprehensive
distribution plan and the introduction of a new logo, branch signage
and merchandising. The new "Personal Banker" and "Simple Truth About
Banking" concepts were introduced to the market in 1997 and will
provide the foundation for future marketing strategies.
Consumer Lending provides instalment, home equity and credit card
lending, consumer auto leasing, and other lending services to
individuals. These services are provided through third party financing
arrangements, direct origination programs and retail branch offices.
Consumer Lending distributes credit products to customers in Provident
Financial's core banking markets and through regional direct marketing
programs in six states primarily in the midwestern United States.
Consumer Financial Services was formed in 1995 to originate conforming
and nonconforming residential loans to consumers as well as warehouse
loans to mortgage originators and brokers. In addition, Consumer
Financial Services developed an in-house mortgage servicing operation
during 1997. An electronic platform has been developed to permit
Consumer Financial Services to enter into mortgage transactions on a
national basis. Consumer Financial Services is licensed to operate in
all 50 states.
Generally, loans originated by Consumer Financial Services are sold
through securitization or whole loan sales. Sale of residential loans
resulted in the recognition of approximately $56 million in gains
during 1997.
Capital Corporation is a national provider of capital to support
middle market leveraged financing transactions. Capital Corporation
consists of three business units: Structured Finance, Provident
Business Credit and Provident Leveraged Capital Partners. Structured
Finance is an "event lender" of senior debt to support leveraged
financings including management buyouts, recapitalizations,
acquisitions and business expansion. Provident Business Credit is a
national provider of asset-based financing. Provident Leveraged
Capital Partners provides mezzanine financing to companies with
transactions ranging in size from $2 million to $7 million.
10
<PAGE>
Equipment Leasing provides lease and loan financing to commercial and
industrial customers nationwide for the acquisition of equipment.
Transactions include term loans, finance leases, operating leases and
other specialized credit facilities. Asset types include corporate and
commercial aircraft, transportation equipment, including trucks,
tractors and freight containers, construction and mining equipment,
manufacturing and distribution equipment. Transactions are originated
generally through direct calling and typically involve equipment
costing more than $2 million.
Information Leasing is a full service equipment leasing company that
focuses on establishing strategic relationships with high volume,
quality equipment vendors and customers. Information Leasing generates
its business through contractual vendor programs, master lease
agreements, informal vendor relationships, acquiring transactions from
other leasing concerns, and from additional equipment acquisition by
existing customers. Lease transactions and vendor relationships are
established throughout the United States by its twenty plus sales
representatives located in all regions of the country.
Value Systems describes Provident Financial's investments in
innovative product concepts that offer potential as part of its
overall strategy to develop customer relationships. The initial
investment in Value Systems is the MeritValu Services Group which
introduced the MeritValu Rewards Card in 1996 for the greater
Cincinnati area. The MeritValu Rewards Card is a multiple merchant,
neutrally branded frequent shopper program designed to promote
customer loyalty and build alliances with regional and national
retailers. In addition, Value Systems invests in opportunities to add
products and services to electronic cards and develop point of sale
terminals that offer improved convenience and banking flexibility to
customers. Value Systems also includes investments in innovative
marketing concepts that focus on value-added benefits to financial
products through Provident Financial services as well as third party
providers.
Other includes the results of other lines of business including
Treasury, Trust, Brokerage Services and Florida banking activities,
along with the management of interest rate risk and the net effect of
transfer pricing. Also included are any unallocated managed earning
assets and income and expense of administrative and support functions
that were not allocated to any of the other lines of business.
11
<PAGE>
Performance Review
The following table summarizes three-year financial data for Provident
Financial, along with calculated variances from the prior year:
TABLE 2: Three-Year Variance Schedule
<TABLE>
<CAPTION>
Year Ending 1997 Year Ending 1996 Year Ending 1995
Amount $ Chg % Chg Amount $ Chg % Chg Amount $ Chg % Chg
(Dollars in Millions Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $262 $22 9% $240 $37 18% $203 $21 11%
Noninterest Income 185 79 75 106 44 72 62 24 61
Total Revenue 447 101 29 346 81 31 265 45 20
Provision for Loan
and Lease Losses 45 (2) (5) 47 33 236 14 2 17
Noninterest Expense 226 51 29 175 32 22 143 22 19
Net Earnings 115 34 42 81 9 13 72 14 25
Total Loans and Leases 5,052 (259) (5) 5,311 415 8 4,896 691 16
Total Assets 7,124 295 4 6,829 624 10 6,205 794 15
Total Deposits 4,696 100 2 4,596 417 10 4,179 110 3
Long-Term Liabilities 787 (163) (17) 950 130 16 820 437 114
Stockholders' Equity 637 120 23 517 84 19 433 74 20
Per Common Share:
Diluted Book Value 14.23 2.12 18 12.11 1.63 16 10.48 1.73 20
Diluted Earnings 2.63 0.69 36 1.94 0.19 11 1.75 0.35 25
</TABLE>
Provident Financial reported net earnings of $115.3 million for 1997
compared to $81.2 million for 1996 and $71.9 million for 1995.
Earnings per diluted share increased 36% during 1997 to $2.63,
compared to $1.94 for 1996 and $1.75 for 1995. Contributing to the
increased earnings for 1997 and 1996 were higher revenues in both net
interest income and noninterest income. Noninterest income outpaced
net interest income in its rate of growth during this three-year time
period as a result of Provident Financial's emphasis on fee revenue,
primarily in the securitization and sale of nonconforming residential
loans. The growth in net interest income was a result of improved
interest margins and growth in the loan and lease portfolio.
Expenses for Provident Financial have also increased during this three-
year time period. The provision for loan and lease losses increased
significantly during 1996, but leveled off in 1997. The increase in
the provision was a result of a higher level of charge-offs,
principally in commercial, auto and credit card lending, than
experienced in prior years. Noninterest expense has increased over the
three years primarily as a result of the implementation of business
initiatives discussed earlier such as the national expansion of
Consumer Financial Services and the development of the Value Systems
program.
Total assets for 1997, 1996 and 1995 were $7.1 billion, $6.8 billion
and $6.2 billion, respectively. The growth in total assets has slowed
over the three-year time period as a result of the sale of loans and
leased vehicles. However, as Provident Financial has retained the
servicing of the sold loans and leases, managed loans and leases have
increased $1.0 billion and $.7 billion during 1997 and 1996,
respectively. Asset quality ratios returned to 1995 levels after
improving during 1996. The ratio of nonperforming assets to total
assets were .83%, .42% and .77% as of December 31, 1997, 1996 and
1995, respectively. The ratio of reserve for loan and lease losses to
total loans and leases improved to 1.42% at December 31, 1997 compared
to 1.26% and 1.23% at December 31, 1996 and 1995, respectively.
12
<PAGE>
Provident Financial's reliance on long-term liabilities (long-term
debt plus junior subordinated debentures) has fluctuated over the past
three years based on funding needs. Provident Financial has reduced
its dependence on long-term liabilities by securitizing nonconforming
residential loans, the sale and leaseback of vehicles under lease and
the sale of seasoned residential loans.
Shareholders' equity has grown steadily during the past three years at
a 19% to 23% growth rate per year. This growth has come primarily from
retained earnings of Provident Financial, exercise of stock options
and shares of stock distributed in connection with acquisitions. Due
to the growth of shareholders' equity exceeding that of total assets
and the issuance of junior subordinated debentures which qualify as
Tier 1 capital, equity to asset and risk-based capital ratios have
improved over the three-year time period.
The overall performance of Provident Financial has improved over the
past three years as supported by various performance measurement
ratios. These ratios include the net interest margin (net interest
income to total interest earning assets), the efficiency ratio
(noninterest expense to tax equivalent revenue, excluding non-
recurring items and security gains/losses), return on assets (net
earnings to average total assets) and return on equity (net earnings
to average total equity). The following table provides a comparison of
these and other performance ratios:
TABLE 3: Selected Performance Ratios
1997 1996 1995
Net Interest Margin 4.02% 3.96% 3.82%
Efficiency Ratio 51.59 48.22 56.07
Return on Average Assets 1.67 1.28 1.29
Return on Average Equity 20.32 17.67 18.37
Average Equity to Average Assets 8.22 7.57 6.97
Common Dividend Payout to Net Earnings 25.62 26.40 22.78
Preferred Dividend Payout to Net Earnings .62 .66 3.39
DETAILED EARNINGS ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on
loans, leases and investments and interest incurred on deposits and
other borrowed funds. Net interest income is affected by changes in
both interest rates and the amounts of interest earning assets and
interest bearing liabilities outstanding.
Net interest margin represents net interest income as a percentage of
total interest earning assets. The net interest margin, on a fully
taxable equivalent basis, was 4.02%, 3.96% and 3.82% for 1997, 1996
and 1995, respectively. The improvement in net interest margin over
the three years is primarily due to the following:
13
<PAGE>
Composition of Interest Earning Assets -- The commercial lending
portfolio has grown at a faster pace than the consumer lending
portfolio due to the sale of residential and home equity loans,
along with the sale of leased vehicles. As the commercial lending
portfolio has a higher average yield than other earning assets,
growth in this type of asset will increase the net interest margin.
Higher Interest Yields -- Average interest rates received on
commercial lease financing and instalment loans have increased more
than average rates paid on interest bearing liabilities over the
three year period. The acquisition of Information Leasing's leasing
portfolio was a primary contributor to the increased rate received
in the commercial lease financing portfolio.
Interest Rate Swaps -- Provident Financial enters into interest
rate swap transactions to hedge against the impact of changes in
interest rates. Interest rate swaps increased the net interest
margin by 17 basis points and 23 basis points during 1997 and 1996,
respectively, and decreased the net interest margin by 10 basis
points during 1995.
Interest Free Funds -- Interest free funds (interest earning assets
less interest bearing liabilities) increased $111.4 million (15%)
in 1997 and $103.1 million (17%) in 1996. Such funds, consisting
primarily of demand deposits and shareholders' equity, supported
13% of total interest earning assets in 1997 and 12% in 1996 and
1995.
Table 4 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%.
14
<PAGE>
TABLE 4: Net Interest Income, Average Balances and Rates
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Loans and Leases:
Commercial Lending:
Commercial and Financial $2,581.0 $239.9 9.29% $2,286.2 $212.0 9.27% $2,031.9 $202.1 9.95%
Mortgage 495.6 46.6 9.40 457.6 41.5 9.07 428.7 39.2 9.15
Construction 291.9 25.7 8.81 242.1 21.5 8.89 207.3 19.5 9.40
Lease Financing 267.1 29.7 11.12 141.5 11.4 8.02 103.1 7.8 7.54
Consumer Lending:
Instalment 813.5 80.7 9.93 972.9 92.4 9.50 945.6 86.0 9.10
Residential 268.5 21.9 8.14 460.3 39.0 8.47 487.9 39.2 8.03
Lease Financing 616.4 47.8 7.76 457.7 34.3 7.49 249.4 17.8 7.15
Total Loans and Leases 5,334.0 492.3 9.23 5,018.3 452.1 9.01 4,453.9 411.6 9.24
Investment Securities:
Taxable 1,173.0 77.9 6.64 1,027.6 67.0 6.52 835.2 49.6 5.94
Tax-Exempt 8.3 .5 6.13 14.3 .9 6.10 10.3 .6 5.79
Total Investment Securities 1,181.3 78.4 6.64 1,041.9 67.9 6.52 845.5 50.2 5.94
Federal Funds Sold and Reverse
Repurchase Agreements 15.3 .9 5.71 17.9 .9 5.25 18.2 1.0 5.75
Total Earning Assets 6,530.6 571.6 8.75% 6,078.1 520.9 8.57% 5,317.6 462.8 8.70%
Cash and Noninterest
Bearing Deposits 155.9 140.8 146.1
Other Assets 218.4 136.3 112.0
Total Assets $6,904.9 $6,355.2 $5,575.7
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest Bearing Liabilities:
Deposits:
Demand Deposits $246.3 5.5 2.22% $253.5 4.9 1.93% $255.4 5.3 2.08%
Savings Deposits 629.9 22.2 3.52 578.1 15.7 2.71 645.7 20.2 3.13
Time Deposits 3,378.2 193.8 5.74 2,989.5 172.3 5.76 2,702.5 166.9 6.17
Total Deposits 4,254.4 221.5 5.21 3,821.1 192.9 5.05 3,603.6 192.4 5.34
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements 493.8 26.4 5.34 610.0 32.2 5.27 489.9 28.6 5.85
Commercial Paper 156.9 9.2 5.86 143.6 7.9 5.49 141.5 8.4 5.93
Short-Term Notes Payable 1.6 .1 5.23 1.7 .1 5.29 1.5 .1 5.57
Total Short-Term Debt 652.3 35.7 5.46 755.3 40.2 5.31 632.9 37.1 5.86
Long-Term Debt 687.3 43.4 6.32 765.8 46.4 6.05 457.8 30.2 6.60
Junior Subordinated Debentures 98.8 8.6 8.77 9.5 .8 8.62 - - -
Total Interest Bearing
Liabilities 5,692.8 309.2 5.43% 5,351.7 280.3 5.24% 4,694.3 259.7 5.53%
Noninterest Bearing Deposits 451.0 398.8 391.9
Other Liabilities 193.8 145.2 98.4
Shareholders' Equity 567.3 459.5 391.1
Total Liabilities and
Shareholders' Equity $6,904.9 $6,355.2 $5,575.7
Net Interest Income $262.4 $240.6 $203.1
Net Interest Margin 4.02% 3.96% 3.82%
Net Interest Spread 3.32% 3.33% 3.17%
</TABLE>
In preparing the net interest margin table, nonaccrual loan balances
are included in the average balances for loans and leases. Loan fees
are included in loan and lease income as follows: 1997 - $18.3
million, 1996 - $17.4 million and 1995 - $18.2 million.
Table 5 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.
15
<PAGE>
TABLE 5: Net Interest Income Changes Due to Volume and Rates
<TABLE>
<CAPTION>
Year Ended December 31,
1997 Changes from 1996 Changes from
1996 Due to 1995 Due to
Volume Rate Volume Rate
(In Thousands)
<S> <C> <C> <C> <C>
Interest Earned On:
Loans and Leases:
Commercial Lending:
Commercial and Financial $27,395 $486 $24,184 $(14,295)
Mortgage 3,532 1,522 2,632 (345)
Construction 4,384 (204) 3,138 (1,093)
Lease Financing 12,790 5,561 3,055 522
Consumer Lending:
Instalment (15,676) 4,018 2,523 3,843
Residential (15,670) (1,444) (2,277) 2,088
Lease Financing 12,276 1,298 15,559 884
Net Loans and Leases 29,031 11,237 48,814 (8,396)
Investment Securities:
Taxable 9,638 1,244 12,212 5,175
Tax-Exempt (364) 4 238 33
Federal Funds Sold (148) 79 (14) (90)
Total 38,157 12,564 61,250 (3,278)
Interest Paid On:
Demand Deposits (143) 712 (39) (376)
Savings Deposits 1,502 5,001 (1,990) (2,513)
Time Deposits 22,303 (865) 16,996 (11,536)
Total Deposits 23,662 4,848 14,967 (14,425)
Short-Term Debt:
Federal Funds Purchased (6,200) 394 6,529 (3,008)
Commercial Paper 762 561 123 (634)
Short-Term Notes Payable (6) (1) 11 (4)
Total Short-Term Debt (5,444) 954 6,663 (3,646)
Long-Term Debt (4,907) 1,996 18,837 (2,702)
Junior Subordinated Debentures 7,832 14 816 -
Total 21,143 7,812 41,283 (20,773)
Net Interest Income $17,014 $4,752 $19,967 $17,495
</TABLE>
Provision for Loan and Lease Losses
Charges to provision for loan and lease losses are taken to maintain
an adequate balance in the reserve for such losses based on the level
of credit risk in the lending portfolio. During 1997, 1996 and 1995,
the provision for loan and lease losses was $44.8 million, $47.0
million and $14.0 million, respectively. Factors which caused
fluctuations in the balance of reserve for loan and lease losses or
the level of credit risk during the three years include:
Loan Charge-Offs -- Provision expense would be incurred to replenish
the reduction in the reserve when a loan is charged off. This
assumes the level of credit risk within the lending portfolio is not
affected. Net charge-offs for 1997, 1996 and 1995 were $41.3
million, $41.9 million and $5.7 million, respectively.
Growth in the Lending Portfolio -- The credit risk of the lending
portfolio increases as the size of the lending portfolio increases
assuming no other changes to the lending portfolio. During 1997
16
<PAGE>
total loans and leases decreased 5%, while in 1996 and 1995, total
loans and leases grew 8% and 16%, respectively.
Composition of the Lending Portfolio -- The type and credit grade of
loans affect the overall credit risk of the lending portfolio. The
percentage of consumer lending to total loans and leases was 24%,
36% and 39% in 1997, 1996 and 1995 respectively. The decrease in
this percentage was due to the sale of consumer loans and leased
vehicles during the past two years.
Noninterest Income
Table 6 details the components of noninterest income and their change
since 1995:
TABLE 6: Noninterest Income
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
1997 1996 1995 1997/96 1996/95
(In Thousands)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $24,752 $21,537 $17,114 14.9% 25.8%
Other Service Charges and Fees 37,058 29,328 20,800 26.4 41.0
Operating Lease Income 26,207 10,033 7,024 161.2 42.8
Gain on Sales of Loans and Leases 73,583 30,955 6,584 137.7 370.2
Security Gains (Losses) 9,713 96 (86) n.m. n.m.
Other 14,045 14,188 10,401 (1.0) 36.4
$185,358 $106,137 $61,837 74.6% 71.6%
<FN>
(n.m. -- not meaningful)
</TABLE>
Noninterest income has grown significantly over the past two years.
Noninterest income increased $79.2 million (75%) during 1997 and $44.3
million (72%) during 1996. Explanations for the growth in noninterest
income by category follow:
Service Charges on Deposit Accounts -- Service charges on deposit
accounts have increased for 1997 and 1996 as a result of increased
fees received on corporate and personal demand deposits accounts,
and ATM usage.
Other Service Charges and Fees -- The recognition of gains and fees
related to commercial lending has resulted in higher other service
charges and fee revenue for both 1997 and 1996.
Operating Lease Income -- The growth in operating lease revenue is
the result of three activities. First $342.3 million of automobiles
were sold and leased back during 1997. As these automobiles are
subleased to third-party consumers, lease revenue from the
consumers, net of lease expense to the purchasers of the
automobiles, is recognized as operating lease income. Prior to the
sales-leaseback transactions, the automobiles had been accounted for
as direct finance leases on which interest income was recorded.
Second, Information Leasing was acquired near the end of 1996.
During 1997, Information Leasing recognized operating lease revenue
of $8.8 million. Finally, operating lease revenue for Commercial
Group increased $7.0 million and $3.0 million during 1997 and 1996,
respectively.
17
<PAGE>
Gain on Sales of Loans and Leases -- Beginning in 1996, Provident
Financial has securitized and sold a large portion of their newly
originated residential loans. The larger gains have been from the
sale of nonconforming residential loans ($50.1 million in 1997 and
$24.2 million in 1996), conforming residential loans ($6.2 million
in 1997 and $2.2 million in 1996), closed-end home equity loans
($3.7 million in 1997) and open-ended home equity loans ($6.7
million in 1997).
Gain on sales of real estate loans contributed to 15% and 8% of
Provident Financial's total revenue (net interest income plus
noninterest income) for 1997 and 1996, respectively. These gains are
primarily attributable to the development of the Consumer Financial
Services division in 1995. No assurance can be provided that the
levels of originations and favorable interest rates will continue to
permit the recognition of such gains on sale of loans into future
years.
Security Gains (Losses) -- Provident Financial recognized $9.7
million in gain from the sale of $2.3 billion of investment
securities in 1997. The level of gains from investment security
sales was insignificant during 1996 and 1995. The increased level of
security sales during 1997 was a result of management's decision to
adopt an active management style, to take advantage of interest rate
movements, and to reposition the investment security portfolio for
1998.
Other -- The largest components of revenue within other income have
been the receipt of additional consideration related to a loan that
had been restructured ($4.0 million in 1997 and $10.0 million in
1996), income from investment in partnerships ($2.9 million in
1997), and a gain on the sale of Heritage Savings Bank's deposits
and branches ($7.1 million in 1995).
Noninterest Expense
Table 7 details the components of noninterest expense and their change
since 1995:
TABLE 7: Noninterest Expense
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
1997 1996 1995 1997/96 1996/95
(In Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $101,454 $79,830 $69,810 27.1% 14.4%
Depreciation on Operating
Lease Equipment 17,667 7,221 4,888 144.7 47.7
Occupancy 12,744 9,673 8,931 31.7 8.3
Professional Services 14,912 11,463 7,335 30.1 56.3
Deposit Insurance 1,279 10,824 6,168 (88.2) 75.5
Equipment Expense 15,208 11,348 9,242 34.0 22.8
Charges and Fees 12,652 8,583 7,329 47.4 17.1
Marketing 7,890 5,103 4,283 54.6 19.1
Other 42,172 31,117 25,334 35.5 22.8
$225,978 $175,162 $143,320 29.0% 22.2%
</TABLE>
18
<PAGE>
Noninterest expense increased $50.8 million (29%) and $31.8 million
(22%) during 1997 and 1996, respectively. Components of noninterest
expense, along with an explanation as to their fluctuations, follow:
Salaries and Employee Benefits -- The increase in compensation for
1997 was primarily due to the expansion of Consumer Financial
Services and the acquisition of Information Leasing. In 1996, the
areas of commercial and consumer lending, securities brokerage and
information delivery were primarily responsible for the increase of
this category.
Depreciation on Operating Lease Equipment -- The acquisition of
Information Leasing near the end of 1996 and the increased volume of
operating lease agreements entered into by Commercial Group has
resulted in the increase in depreciation on operating lease
equipment.
Occupancy -- Increases in rent expense, primarily in the areas of
Consumer Financial Services and retail distribution, building
maintenance and utilities resulted in higher occupancy expense for
1997.
Professional Services -- In 1997, professional services increased as
a result of additional expenses incurred from management consulting
fees in the areas of Information Leasing, Value Systems, information
delivery and consumer lending. The increase for 1996 was from
consulting fees for customer profitability analysis, residential
loan subservicing and legal fees.
Deposit Insurance -- The fluctuation of deposit insurance expense is
the result of a one-time Savings Association Insurance Fund
assessment of $8.2 million during 1996 to recapitalize the fund. In
addition, the insurance premium rate on deposits has decreased
significantly since the recapitalization of the Fund.
Equipment Expense -- Equipment expense has increased primarily as a
result of the purchase and subsequent depreciation of computer and
telebanking equipment for both 1997 and 1996.
Charges and Fees -- Charges and fees have increased in 1997 as a
result of charge-offs on other real estate. The increase in 1996 was
primarily from loan origination expense and credit card processing.
Marketing -- Promotional advertisement, primarily for retail banking
and Value Systems has resulted in the increase in marketing expense
during 1997 and 1996.
Other -- Larger fluctuations within other noninterest expense from
1996 to 1997 were management recruitment and Year 2000 computer
compliance and from 1995 to 1996 were franchise taxes and data
processing expense.
19
<PAGE>
Income Taxes
The effective tax rates for 1997, 1996 and 1995 were 34.7%, 34.5% and
32.9%, respectively. The lower 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.
FINANCIAL CONDITION ANALYSIS
Investment Securities
Investment securities represented approximately 18% of average earning
assets in 1997, compared to 17% in 1996 and 16% in 1995. The amortized
cost and market value of investment securities available for sale at
the dates indicated are summarized in Table 8:
TABLE 8: Investment Securities
Amortized Cost at December 31,
1997 1996 1995
(In Thousands)
U.S. Treasury and Federal Agency Debentures $17,251 $83,307 $191,445
State and Political Subdivisions 10,200 5,270 -
Mortgage-Backed Securities 1,034,104 659,144 629,902
Asset-Backed Securities 252,142 200,071 60,000
Other Securities 57,606 78,992 74,647
Total Securities $1,371,303 $1,026,784 $955,994
Market Value at December 31,
1997 1996 1995
(In Thousands)
U.S. Treasury and Federal Agency Debentures $17,401 $83,741 $191,460
State and Political Subdivisions 10,396 5,270 -
Mortgage-Backed Securities 1,033,611 663,025 633,714
Asset-Backed Securities 252,009 200,160 59,892
Other Securities 58,090 80,711 74,838
Total Securities $1,371,507 $1,032,907 $959,904
As of December 31, 1997, the aggregate book value of two investment
securities exceeded ten percent of shareholders' equity. These
securities, Norwest Asset Securities Corporation and Mortgage Index
Amortizing Trust, are securitized residential mortgage pools. The book
value of Norwest Asset and Mortgage Index was $89.4 million and $75.0
million, respectively, and the market value was $90.0 million and
$75.0 million, respectively.
Table 9 shows the December 31, 1997, maturities and weighted average
yields for investment securities. Yields on equity securities which
comprise the fixed rate, due after 10 years classification of other
securities have been omitted from the table. A 35% tax rate was used
in computing the tax equivalent yield adjustment. The yields shown are
calculated based on original cost and effective yields weighted for
the scheduled maturity of each security. Mortgage-backed and asset-
backed securities are assigned to maturity categories based on their
estimated average lives.
20
<PAGE>
TABLE 9: Investment Securities Yields and Maturities
Fixed Rate Floating Rate
Weighted
Weighted Average
Average Yield On
Amortized Yield To Amortized Current
Cost Maturity Cost Coupon Rates
(Dollars in Thousands)
U.S. Treasury and Federal Agency
Debentures:
Due in one year or less $8,808 5.70% $17 13.51%
Due after 1 through 5 years 8,071 6.96 - -
Due after 5 through 10 years - - 170 7.26
Due after 10 years - - 185 6.55
Total $16,879 6.30% $372 7.19%
State and Political Subdivisions:
Due in one year or less $6,004 6.09% $- -%
Due after 1 through 5 years 304 6.77 - -
Due after 5 through 10 years 741 7.53 - -
Due after 10 years 3,151 8.36 - -
Total $10,200 6.91% $- -%
Mortgage-Backed Securities:
Due in one year or less $205,833 5.82% $7,896 6.28%
Due after 1 through 5 years 534,036 6.76 183,258 8.07
Due after 5 through 10 years 46,295 7.45 21,758 6.29
Due after 10 years 34,639 7.24 389 6.81
Total $820,803 6.59%$213,301 7.82%
Asset-Backed Securities:
Due in one year or less $50,163 6.70% $- -%
Due after 1 through 5 years 51,935 6.41 75,055 6.16
Due after 5 through 10 years 74,989 6.68 - -
Due after 10 years - - - -
Total $177,087 6.61% $75,055 6.16%
Other Securities:
Due in one year or less $836 6.85% $199 6.46%
Due after 1 through 5 years - - 495 7.85
Due after 5 through 10 years 250 6.75 250 7.00
Due after 10 years 55,576 - - -
Total $56,662 6.83% $944 7.33%
Loans and Leases
Average net loans and leases were 82% and 81% of total average earning
assets in 1997 and 1996, respectively. During these two years, the
composition of the lending portfolio changed significantly. Consumer
loans and leases, as a percent of net loans and leases, decreased from
36% at December 31, 1996 to 24% at December 31, 1997, due primarily to
the sale of consumer loans. During 1997, Provident Financial sold
$1,183.0 million in residential loans and $244.5 million in home
equity loans. In addition, Provident Financial sold and leased back
$342.3 million of automobiles which had previously been accounted for
as consumer lease financings, but are now accounted for as off-balance
sheet operating leases. As a result of loans being sold with servicing
retained and the sale-leaseback transactions, Provident Financial has
a total of $1.5 billion of managed loans and leases not included in
21
<PAGE>
the lending portfolio as of year-end 1997. Provident Financial does
not have a material exposure to foreign, energy or agricultural loans.
Table 10 shows loans and leases outstanding at period end by type of
loan:
TABLE 10: Loan and Lease Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
$ % $ % $ % $ % $ %
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Lending:
Commercial and Financial 2,734 54.9 2,405 45.8 2,251 46.5 1,878 45.2 1,487 44.4
Mortgage 470 9.4 476 9.1 449 9.3 420 10.1 398 11.9
Construction 305 6.1 284 5.4 266 5.5 172 4.2 140 4.2
Lease Financing 340 6.8 239 4.6 129 2.7 110 2.6 101 3.0
Consumer Lending:
Instalment 624 12.6 924 17.6 1,001 20.7 931 22.4 764 22.8
Residential - Held for Sale 136 2.7 74 1.4 - - - - - -
Residential - Portfolio - - 318 6.1 466 9.6 508 12.2 500 14.9
Lease Financing 443 8.9 592 11.3 334 6.9 186 4.5 - -
Total Loans and Leases 5,052 5,312 4,896 4,205 3,390
Reserve for Loan and
Lease Losses (72) (1.4) (67) (1.3) (60) (1.2) (52) (1.2) (41) (1.2)
4,980 100.0 5,245 100.0 4,836 100.0 4,153 100.0 3,349 100.0
</TABLE>
Table 11 shows the composition of the commercial and financial loan
category by industry type at December 31, 1997:
TABLE 11: Commercial and Financial Loans
Amount on
Type Amount % Nonaccrual
(Dollars in Millions)
Construction $136.9 5 $.1
Manufacturing 546.4 20 6.6
Transportation / Utilities 141.4 5 12.4
Wholesale Trade 252.6 9 2.6
Retail Trade 242.5 9 10.2
Finance & Insurance 128.3 5 -
Real Estate Operators / Investment 300.1 11 1.2
Service Industries 443.3 16 1.9
Automobile Dealers 117.0 4 -
Other (1) 425.1 16 2.8
$2,733.6 100 $37.8
(1) Includes various kinds of loans, such as small business loans and
loans with balances under $100,000.
22
<PAGE>
Table 12 shows the composition of commercial mortgage and construction
loans by loan and property type at December 31, 1997:
TABLE 12: Commercial Mortgage and Construction Loans
<TABLE>
<CAPTION>
Investor Developer Owner Occupied Owner Operator Amount on
Type Mortgage Const. Mortgage Const. Mortgage Const. Total Nonaccrual
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments $65.3 $46.8 $2.8 $.3 $- $- $115.2 $-
Office / Warehouse 87.0 41.6 24.4 16.7 - - 169.7 -
Residential Development 13.5 80.5 11.2 10.8 - - 116.0 -
Shopping Centers 115.8 55.2 12.1 - - - 183.1 .4
Land 15.2 15.1 .6 2.0 - - 32.9 -
Industrial Plants 7.2 .6 1.9 2.2 - - 11.9 -
Hotel / Motel / Restaurants .8 3.2 - - 6.9 .7 11.6 -
Healthcare Facilities 3.6 - - - 4.1 - 7.7 -
Auto Sales & Service 15.6 4.7 6.5 .4 - - 27.2 -
Churches 3.0 1.1 7.5 .3 - - 11.9 -
Mobile Home Parks 5.8 1.9 - - - - 7.7 -
Other Commercial Properties 51.2 19.0 7.5 2.1 - - 79.8 -
$384.0 $269.7 $74.5 $34.8 $11.0 $.7 $774.7 $.4
</TABLE>
Commercial and real estate construction loans outstanding at December
31, 1997 are shown in Table 13 by maturity, based on remaining
scheduled repayments of principal:
TABLE 13: Loan Maturities
After 1
Within but Through After
1 Year 5 Years 5 Years Total
(In Thousands)
Commercial and Financial $1,366,582 $970,191 $396,783 $2,733,556
Commercial Construction 72,775 189,616 42,759 305,150
Residential Construction - - 5,732 5,732
Total $1,439,357 $1,159,807 $445,274 $3,044,438
Loans Due After One Year:
At predetermined interest rates $504,655
At floating interest rates 1,100,426
Credit Risk Management
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.
23
<PAGE>
Table 14 shows selected information relating to Provident Financial's
loans, leases and reserves for loan and lease losses:
TABLE 14: Reserve for Loan and Lease Losses
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Daily Average Net Loans
and Leases Outstanding $5,258,975 $4,952,841 $4,397,275 $3,673,803 $3,056,470
Reserve for Loan and Lease
Losses at Beginning of Period $66,693 $60,235 $51,979 $40,542 $35,144
Provision Charged to Expense 44,750 47,000 14,000 12,000 12,000
Acquired Reserves 1,814 1,373 - - 737
Loans and Leases Charged Off:
Commercial Lending:
Commercial and Financial 17,286 17,236 5,096 2,979 3,535
Mortgage 1,505 1,945 94 904 752
Construction - - - - -
Lease Financing 1,367 - - - -
Consumer Lending:
Instalment 24,065 24,342 8,232 5,564 4,549
Residential 1,141 199 127 125 102
Lease Financing 6,009 3,087 647 - -
Total Charge-Offs 51,373 46,809 14,196 9,572 8,938
Recoveries:
Commercial Lending:
Commercial and Financial 1,055 619 6,238 6,614 44
Mortgage 915 333 121 552 165
Construction - - - - -
Lease Financing 306 14 - - -
Consumer Lending:
Instalment 5,766 3,490 1,994 1,806 1,345
Residential 145 36 13 37 45
Lease Financing 1,909 402 86 - -
Total Recoveries 10,096 4,894 8,452 9,009 1,599
Net Loans and Leases
Charged Off 41,277 41,915 5,744 563 7,339
Reserve for Loan and Lease
Losses at End of Period $71,980 $66,693 $60,235 $51,979 $40,542
Net Charge-Offs to Average
Net Loans and Leases .78% .85% .13% .02% .24%
</TABLE>
Explanation as to significant changes in charge-offs between 1995 and
1997 follows:
Commercial and Financial -- Commercial and financial loans of $17.3
million, $17.2 million and $5.1 million were charged off in 1997,
1996 and 1995, respectively. Due to the significant size of many of
the commercial and financial loans, a few large loan charge-offs can
result in a significant fluctuation in the total charge-offs of this
loan type. There were three charge-offs of over one million dollars
in 1997 compared to six in 1996 and one in 1995.
Instalment -- Total charge-offs for instalment loans totaled $24.1
million, $24.3 million and $8.2 million during 1997, 1996 and 1995,
respectively. The increase in total charge-offs for 1997 and 1996 as
compared to 1995 was a result of charge-offs in indirect auto loans
and in the credit card portfolio.
24
<PAGE>
Consumer Lease Financings -- Consumer lease financing charge-offs
during 1997, 1996 and 1995 were $6.0 million, $3.1 million and $.6
million, respectively. The steady increase in charge-offs of this
type is due to the growth in the consumer lease financing portfolio,
prior to the sale-leaseback transactions on leased automobiles.
Table 15 shows the dollar amount of the reserve for loan and lease
losses using management's estimate by principal loan and lease
category:
TABLE 15: Allocation of Reserve for Loan and Lease Losses
December 31,
1997 1996 1995 1994 1993
(In Thousands)
Commercial Lending:
Commercial and Financial $34,844 $28,053 $26,280 $22,031 $17,379
Mortgage 4,461 3,993 3,774 3,493 2,993
Construction 5,496 4,969 4,824 3,886 3,522
Lease Financing 5,303 4,004 1,543 1,355 889
50,104 41,019 36,421 30,765 24,783
Consumer Lending:
Instalment 14,971 17,616 18,683 17,821 14,664
Residential 767 718 958 1,071 1,095
Lease Financing 6,138 7,340 4,173 2,322 -
21,876 25,674 23,814 21,214 15,759
$71,980 $66,693 $60,235 $51,979 $40,542
25
<PAGE>
Table 16 presents a summary of various indicators of credit quality:
TABLE 16: Credit Quality
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
$ % $ % $ % $ % $ %
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual Loans (1):
Commercial Lending:
Commercial & Financial 37,800 63.9 14,164 49.7 26,190 54.7 2,973 28.0 10,740 39.7
Mortgage 335 .6 103 .4 6,716 14.0 1,869 17.6 3,861 14.3
Construction 27 .1 71 .2 78 .2 78 .7 554 2.0
Lease Financing 4,798 8.1 3,973 13.9 2,605 5.4 - - - -
42,960 72.7 18,311 64.2 35,589 74.3 4,920 46.3 15,155 56.0
Consumer Lending:
Instalment - - - - 230 .5 - - 276 1.0
Residential 3,459 5.8 2,805 9.8 1,678 3.5 1,396 13.2 2,344 8.7
Lease Financing - - - - - - - - - -
3,459 5.8 2,805 9.8 1,908 4.0 1,396 13.2 2,620 9.7
Total Nonaccrual Loans 46,419 78.5 21,116 74.0 37,497 78.3 6,316 59.5 17,775 65.7
Renegotiated Loans (2) 377 .6 786 2.8 4,753 9.9 961 9.1 408 1.5
Total Nonperforming
Loans 46,796 79.1 21,902 76.8 42,250 88.2 7,277 68.6 18,183 67.2
Other Real Estate and
Equipment Owned:
Commercial 11,207 18.9 6,102 21.4 3,714 7.8 714 6.8 3,679 13.6
Closed Bank Branches - - - - 189 .4 311 2.9 348 1.3
Residential 1,079 1.8 475 1.7 468 1.0 350 3.3 2,140 7.9
Multifamily - - - - 594 1.2 1,094 10.3 676 2.5
Land 110 .2 15 .1 663 1.4 857 8.1 2,019 7.5
12,396 20.9 6,592 23.2 5,628 11.8 3,326 31.4 8,862 32.8
Nonperforming Assets 59,192 100.0 28,494 100.0 47,878 100.0 10,603 100.0 27,045 100.0
Loans 90 Days Past Due -
Still Accruing 9,811 18,751 26,578 4,673 2,715
Loan and Lease Loss
Reserve as a Percent of:
Total Loans and Leases 1.42 1.26 1.23 1.24 1.20
Nonperforming Loans 153.82 304.51 142.57 714.29 222.97
Nonperforming Assets 121.60 234.06 125.81 490.23 149.91
Nonperforming Loans as a
Percent of Total Loans
and Leases .93 .41 .86 .17 .54
Nonperforming Assets as a
Percent of:
Total Loans, Leases and
Other Real Estate and
Equipment 1.17 .54 .98 .25 .80
Total Assets .83 .42 .77 .20 .58
<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.
</TABLE>
Nonaccrual loans increased $25.3 million during 1997, primarily due to
five loans being placed on nonaccrual status. Other real estate and
equipment owned increased $5.8 million primarily due to property
foreclosures on a commercial mortgage and a lease.
Nonaccrual loans decreased $16.4 million during 1996. Significant
activity within nonaccrual loans included the addition of three loans
totaling $9.6 million, the charge-off of five loans totaling $11.1
million, the transfer of two loans to other real estate and equipment
totaling $6.6 million and two loans being brought current and removed
from nonaccrual status for $8.2 million. Renegotiated loans decreased
$4.0 million primarily due to the sale of one loan.
26
<PAGE>
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 1997 with respect to these loans
was $373,000 compared to $4,285,000 that would have been recognized
had the loans remained current in accordance with their original
terms.
Of the $46.4 million in nonaccrual loans at December 31, 1997,
management estimates approximately $3.3 million of potential loss. The
loss estimate is based, in part, upon information from Provident
Financial's credit watch and impaired loan analyses ("analyses"), and
loss exposure reports. These analyses are prepared quarterly following
detailed discussions between lending officers, the credit and loan
review departments and senior management. The analyses include
nonperforming loans along with loans and leases that were classified
by bank examiners. The analyses also include loans and leases where
potential borrower problems may raise concern about the ability of the
borrower to comply with the present loan repayment terms. These loans
and leases, 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 and lease balance
information and loss estimates from the previous analyses. The loss
exposure report also includes other real estate owned balances and any
loss exposure involving other real estate.
The year-end 1997 analyses and loss exposure reports included
approximately $31.8 million of loans and leases 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 and leases is analyzed each
quarter to determine loss potential. A review of pertinent loan and
lease information, including borrower financial statements and
collateral appraisals, determined that loans and leases with an
aggregate principal amount of approximately $11.0 million had some
loss potential. The loss potential was estimated to be approximately
$4.8 million. In determining this estimate, collateral values are
carefully examined on an ongoing basis. Management considers the
present reserve for loan and lease losses of $72.0 million to be
appropriate and adequate to cover the estimated losses in the lending
portfolio.
27
<PAGE>
Deposits
Average total interest bearing deposits increased 11% during 1997 to
$4.3 billion after increasing 6% during 1996 to $3.8 billion. The
increase in interest bearing deposits for 1997 was the result of the
acquisitions of the Florida banks and the growth in public funds and
custom time deposits. The increase in 1996 was attributable to growth
in brokered deposits and public funds time deposits. The public funds
deposits are secured by depository bonds rather than pledged assets.
For 1997 and 1996, average total interest bearing deposits represented
75% and 71%, respectively, of average interest bearing liabilities.
Provident Financial does not have a material amount of foreign
deposits. Table 17 presents a summary of period end deposit balances:
TABLE 17: Deposits
December 31,
1997 1996 1995
(In Millions)
Noninterest Bearing $605 $554 $524
Interest Bearing Demand Deposits 277 273 263
Savings Deposits 873 559 625
Certificates of Deposit Less than $100,000 1,652 1,792 1,575
Certificates of Deposit of $100,000 or More 1,289 1,418 1,192
$4,696 $4,596 $4,179
At December 31, 1997, maturities on certificates of deposits ("CD's")
of $100,000 or more were as follows (in millions):
3 months or less $373
Over 3 through 6 months 178
Over 6 through 12 months 125
Over 12 months 613
Total $1,289
Included in CD's of $100,000 or more at December 31, 1997, 1996 and
1995 were brokered deposits of $586 million, $765 million and $752
million, respectively.
In 1995, Provident Financial began issuing brokered CD's with embedded
call options combined with interest rate swaps with matching call
dates as part of its CD program. Provident Financial 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. 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 Provident Financial. At December 31, 1997, Provident
Financial had $356 million of callable CD's.
28
<PAGE>
Borrowed Funds
Borrowed funds are an important source of funds to support earning
assets. For 1997, average short-term debt decreased $103.0 million
(14%) and average long-term debt decreased $78.5 million (10%). The
decrease in the average balance for federal funds purchased was the
primary reason for the decline in average short-term debt in 1997. The
repayment of $167.9 million in Federal Home Loan Bank debt was the
primary reason for the decrease in average long-term debt in 1997.
In 1996, average short-term debt increased $122.4 million (19%), while
average long-term debt increased $308.0 million (67%). The increase in
the average balance for federal funds purchased was the primary reason
for the increase in average short-term debt in 1996. The issuance of
$300 million in bank notes in December 1995 was the primary reason for
the increase in average long-term debt in 1996.
In November 1996, Provident Financial established Provident Capital
Trust I. Capital Trust issued Capital Securities of $100 million of
preferred to the public and $3,093,000 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 and prepaid expenses) of Capital Trust are the
Debentures.
Capital Resources
Total stockholders' equity at December 31, 1997 and 1996 was $637.3
million and $516.8 million, respectively. The increase in the
stockholders' equity during 1997 was primarily the result of net
income exceeding dividends paid for the year.
The common dividend payout to net earnings ratio was 25.62%, 26.40%
and 22.78% for 1997, 1996 and 1995, respectively. Provident Financial
declared two common dividend rate increases during 1997. The first
quarter dividend rate was increased from $.14 per share to $.16 per
share and the third quarter dividend rate was increased from $.16 per
share to $.20 per share. Provident Financial also increased the
quarterly common dividend rate during 1996 and 1995 by a total $.02
and $.01, respectively.
The preferred dividend payout to net earnings ratio was .62%, .66% and
3.39% for 1997, 1996 and 1995, respectively. This ratio decreased
significantly in 1996 due to the conversion of 301,146 shares of
Preferred Stock into 4,234,865 shares of Common Stock during December
1995. As of December 31, 1997, 70,272 shares of Preferred Stock remain
outstanding which is convertible into 988,200 shares of Common Stock.
29
<PAGE>
Provident Financial's capital expenditure program in recent years has
included expansion and improvement in the branch, ATM, and telebanking
networks, and improvements to data processing capabilities of
Provident Financial. Capital expenditures for 1998 are estimated to be
approximately $19 million and include the purchase or construction of
computer equipment and software, office building renovations and
branch enhancements. Management believes that currently available
funds and funds provided by normal operations will be sufficient to
meet these capital expenditure requirements.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and
deposit withdrawal requirements of customers as well as to satisfy
liabilities, fund operations and support asset growth. Provident
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 and deposits with other banks. Additional sources
of liquidity include the sale of investment securities and the sale of
commercial and consumer loans and leases. Provident Financial sold
$1.4 billion of residential and home equity loans during 1997. In
addition, Provident Financial sold and leased back $342 million in
leased vehicles during 1997. Another source for providing liquidity 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 bank note program.
Approximately $39.3 million of long-term debt is due to be repaid
during 1998.
Although no significant capital expenditures are expected during 1998,
Provident Financial (Parent) still has liquidity needs. The Parent's
primary liquidity needs will be the payment of dividends to its
preferred and common shareholders, funds for activity within
commercial paper and interest payments on long-term debt. The major
source of liquidity for the Parent is dividends paid to it by its
subsidiaries. The Parent received no dividends in 1997, $25 million in
1996 and $23 million in 1995 from its subsidiaries. The maximum amount
available for dividends that may be paid in 1998 to the Parent by its
banking subsidiaries without approval is approximately $175.4 million,
plus 1998 net earnings. Management believes that amounts available
from the banking subsidiaries will be sufficient to meet the Parent's
liquidity requirements in 1998. Under the Federal Deposit Insurance
Corp. Improvement Act of 1991 ("FDICIA"), an insured depository
institution, such as Provident Financial's banking subsidiaries, would
be prohibited from making capital distributions, including the payment
of dividends, if, after making such distribution, the institution
would become "undercapitalized" (as such term is defined in the
statute). A discussion of restrictions on transfer of funds from
subsidiaries to Provident Financial is presented in Note R, 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, 1997, the Parent
had $175 million and $40 million in lines of credit with unaffiliated
banks to support commercial paper borrowings of $202.0 million and
other general obligations, respectively. As of January 13, 1998, these
lines had not been used.
30
<PAGE>
OFF-BALANCE SHEET FINANCIAL AGREEMENTS
Provident Financial employs derivatives, such as interest rate swaps,
interest rate caps, financial futures and forward contracts primarily
to manage the interest rate risk inherent in Provident Financial's
core businesses.
Provident Financial uses interest rate swaps as its primary off-
balance sheet financial instrument. At December 31, 1997,
approximately $1.54 billion in interest rate swaps held by Provident
Financial essentially convert a fixed rate of interest into a shorter
repricing frequency. Approximately $1.50 billion are pay variable
receive fixed 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.
Interest rate swaps in which Provident Financial 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 real estate loans. Provident
Financial had $46 million of pay fixed receive variable rate swaps at
December 31, 1997.
Provident Financial 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. Generally,
Provident Financial requires bilateral collateral agreements as a
technique to reduce credit risk. These bilateral collateral agreements
have threshold credit limits above which investment securities must be
pledged as collateral for the mark-to-market. At December 31, 1997,
Provident Financial pledged investment securities with a carrying
value of $501,000 as collateral to a counterparty to cover the mark-to-
market. As a second credit risk measure, Provident Financial utilizes
bilateral netting of interest payments. The frequency and timing of
the interest payments are matched between counterparties, thereby
reducing the credit exposure.
At December 31, 1997, there were no past due amounts on any interest
rate swap. Provident Financial has never experienced a credit loss
related to an off-balance sheet financial agreement, and does not
reserve for credit losses on these transactions.
31
<PAGE>
Table 18 shows the changes in interest rate swap agreements for the
years ending December 31, 1997 and 1996. The notional amount of
interest rate swaps decreased during 1997 as a result of a shift in
deposits from fixed rate certificates of deposits to variable rate
premium index deposits. Also, interest rate swaps were eliminated from
the investment securities portfolio due to proposed changes in
accounting treatment by the Financial Accounting Standards Board.
TABLE 18: Interest Rate Swap Agreement Activity
1997 1996
(In Millions)
Beginning Notional Amount $2,134 $1,802
New Contracts 579 729
Matured / Terminated Contracts (1,168) (397)
Ending Notional Amount $1,545 $2,134
Provident Financial uses financial futures contracts and forward
contracts to manage interest rate risk in a manner similar to interest
rate swap agreements. At December 31, 1997, Provident Financial had
$18.5 million in forward contracts and no outstanding positions in
financial futures contracts. The forward contracts were for the
delivery of mortgage back securities at fixed prices from January to
March, 1998.
Provident Financial maintains a portfolio of interest rate swaps and
caps sold to corporate customers at their request to manage the
interest rate risk associated with their borrowings. Provident
Financial offsets the interest rate risk of customer swap and cap
transactions by purchasing an offsetting position in interest rate
swaps and caps of matching terms. Provident Financial executes these
transactions as a customer convenience and does not consider itself to
be a dealer in these financial instruments. At December 31, 1997,
Provident Financial's positions in matched customer interest rate
swaps and caps were $128.8 million in notional principal amount.
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, Provident Financial actively
engages in the interest rate risk management process. At December 31,
1997, Provident Financial's interest rate sensitivity position was
within established guidelines.
Provident Financial 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 rates.
32
<PAGE>
Provident Financial 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 Provident Financial's sensitivities are warranted, off-balance
sheet financial agreements such as interest rate swaps, interest rate
caps and futures contracts are employed. A summary of the interest
rate swap positions may be found in Note O of the "Notes to
Consolidated Financial Statements".
Provident Financial 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. Provident Financial relies most heavily on simulation
analysis as it's primary analytical technique.
Provident Financial 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, liabilities and off-balance sheet financial
agreements and do not give consideration to any management of the
shock by Provident Financial. As a result, these shock scenarios are
considered worst case scenarios through which Provident Financial can
quantify its maximum exposures. At December 31, 1997, a 100 basis
point increase in interest rates would lower net interest income by
4.4% over the following twelve months, while a 100 basis point
decrease in interest rates would raise net interest income by 0.1%.
Similarly, a 200 basis point increase in interest rates would lower
net interest income by 8.4% over the following twelve months, while a
200 basis point decrease in interest rates would raise net interest
income by 1.9%.
Provident Financial also simulates net interest income through a
market driven forecast using forward yield curves implied by the
financial futures markets. Provident Financial develops most of its
strategies and tactics using the forward yield curve as the base
interest rate scenario.
Table 19 provides a summary of Provident Financial'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 based on industry averages.
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. Provident Financial
manages its gap through a targeted 12 month cumulative time horizon.
At December 31, 1997, management assessed its gap position as a
liability sensitivity of approximately 12% 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.
33
<PAGE>
TABLE 19: Gap Analysis
Repricing Time Periods
Within 4 - 12 1 - 5 Over 5
3 Months Months Years Years Total
(Dollars in Millions)
Interest Earning Assets:
Loans and Leases $2,702 $543 $1,417 $390 $5,052
Investments Securities 361 165 562 284 1,372
Federal Funds Sold and Reverse
Repurchase Agreements 2 - - - 2
Total Interest Earning Assets 3,065 708 1,979 674 6,426
Interest Bearing Liabilities:
Deposits 653 1,816 1,306 316 4,091
Short-Term Debt 806 - - - 806
Long-Term Debt and Junior -
Subordinated Debentures 24 26 377 360 787
Total Interest Bearing Liabilities 1,483 1,842 1,683 676 5,684
Interest Rate Swaps (1,348) 122 608 618 -
Interest Sensitivity Gap $234 $(1,012) $904 $616 $742
Cumulative Interest Sensitivity Gap $(778) $126 $742
Cumulative Gap as a Percent of
Earning Assets (12%) 2% 12%
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000.
The Year 2000 issue is being actively addressed as it could
significantly affect Provident Financial's operations. Many of its
computer systems do not meet Year 2000 requirements. It is
management's estimate that it will cost approximately $10 million to
correct all of its application systems. As of December 31, 1997,
Provident Financial has expensed $1.5 million for the correction of
this problem. Management's plan calls for all of its computer programs
to be corrected by the end of the third quarter of 1998, with
subsequent testing of the programs during the fourth quarter of 1998
and all of 1999.
34
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Sensitivity".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors 36
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets 37
Consolidated Statements of Earnings 38
Consolidated Statements of Changes in Shareholders' Equity 39
Consolidated Statements of Cash Flows 40
Notes to Consolidated Financial Statements 41
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) 66
35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Provident Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of
Provident Financial Group, Inc. and subsidiaries as of December 31,
1997 and 1996, 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, 1997. These financial
statements are the responsibility of the management of Provident
Financial Group, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with 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 Financial Group, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Cincinnati, Ohio
January 13, 1998
36
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
1997 1996
ASSETS
Cash and Noninterest Bearing Deposits $274,521 $208,097
Federal Funds Sold and Reverse Repurchase Agreements 1,720 70,650
Investment Securities Available for Sale
(amortized cost - $1,371,303 and $1,026,784) 1,371,507 1,032,907
Loans and Leases (Net of Unearned Income):
Commercial Lending:
Commercial and Financial 2,733,556 2,404,890
Mortgage 469,505 475,882
Construction 305,150 283,673
Lease Financing 340,302 239,064
Consumer Lending:
Instalment 624,340 924,561
Residential - Held for Sale 136,183 73,545
Residential - Portfolio - 318,070
Lease Financing 442,806 591,763
Total Loans and Leases 5,051,842 5,311,448
Reserve for Loan and Lease Losses (71,980) (66,693)
Net Loans and Leases 4,979,862 5,244,755
Premises and Equipment 183,854 145,641
Other Assets 312,195 127,038
$7,123,659 $6,829,088
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $605,166 $554,262
Interest Bearing 4,091,132 4,042,218
Total Deposits 4,696,298 4,596,480
Short-Term Debt 806,125 599,540
Long-Term Debt 688,157 850,934
Guaranteed Preferred Beneficial Interests in
Provident Financial Group, Inc.'s Fixed Rate
Junior Subordinated Debentures 98,817 98,979
Accrued Interest and Other Liabilities 197,001 166,350
Total Liabilities 6,486,398 6,312,283
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized:
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, $.30 Stated Value:
110,000,000 Shares Authorized, 42,325,882
and 40,655,916 Issued 12,482 11,973
Capital Surplus 196,617 160,586
Retained Earnings 417,360 326,599
Reserve for Retirement of Capital Securities 3,667 6,667
Unrealized Gain on Marketable Securities
(net of deferred income tax) 135 3,980
Total Shareholders' Equity 637,261 516,805
$7,123,659 $6,829,088
See notes to consolidated financial statements.
37
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Data)
Year Ended December 31,
1997 1996 1995
Interest Income:
Interest and Fees On Loans and Leases $492,114 $451,805 $411,336
Interest on Investment Securities:
Taxable 77,895 67,013 49,626
Exempt from Federal Income Taxes 331 566 389
78,226 67,579 50,015
Interest on Federal Funds Sold and Reverse
Repurchase Agreements 872 941 1,045
Total Interest Income 571,212 520,325 462,396
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 27,670 20,598 25,516
Time Deposits 193,779 172,341 166,881
221,449 192,939 192,397
Interest on Short-Term Debt 35,640 40,130 37,113
Interest on Long-Term Debt 43,461 46,372 30,237
Interest on Junior Subordinated Debentures 8,662 816 -
Total Interest Expense 309,212 280,257 259,747
Net Interest Income 262,000 240,068 202,649
Provision for Loan and Lease Losses (44,750) (47,000) (14,000)
Net Interest Income After Provision for
Loan and Lease Losses 217,250 193,068 188,649
Noninterest Income:
Service Charges on Deposit Accounts 24,752 21,537 17,114
Other Service Charges and Fees 37,058 29,328 20,800
Operating Lease Income 26,207 10,033 7,024
Gain on Sales of Loans and Leases 73,583 30,955 6,584
Security Gains (Losses) 9,713 96 (86)
Other 14,045 14,188 10,401
Total Noninterest Income 185,358 106,137 61,837
Noninterest Expenses:
Compensation:
Salaries 82,222 65,448 56,773
Benefits 13,047 10,544 9,180
Profit Sharing 6,185 3,838 3,857
Depreciation on Operating Lease Equipment 17,667 7,221 4,888
Occupancy 12,744 9,673 8,931
Professional Services 14,912 11,463 7,335
Deposit Insurance 1,279 10,824 6,168
Equipment Expense 15,208 11,348 9,242
Charges and Fees 12,652 8,583 7,329
Marketing 7,890 5,103 4,283
Other 42,172 31,117 25,334
Total Noninterest Expenses 225,978 175,162 143,320
Earnings Before Income Taxes 176,630 124,043 107,166
Applicable Income Taxes 61,328 42,843 35,306
Net Earnings $115,302 $81,200 $71,860
Basic Earnings Per Common Share $2.79 $2.04 $1.98
Diluted Earnings Per Common Share 2.63 1.94 1.75
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<CAPTION>
Reserve for Unrealized
Retirement Gains (Losses)
Preferred Common Capital Retained of Capital Treasury On Marketable
Stock Stock Surplus Earnings Securities Stock Securities
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $37,000 $10,427 $107,264 $210,355 $10,667 $(134) $(16,228)
Net Earnings 71,860
Cash Dividends Declared on
Common Stock, $.47 Per Share (16,372)
Cash Dividends Declared on
Preferred Stock, $6.56
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
Change in Unrealized Gains (Losses)
on 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
Net Earnings 81,200
Cash Dividends Declared on
Common Stock, $.54 Per Share (21,434)
Cash Dividends Declared on
Preferred Stock, $7.63
Per Share (536)
Allocation for Retirement of
Capital Securities (1,667) 1,667
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 43 1,776
Change in Unrealized Gains (Losses)
on Marketable Securities 1,438
Sale of Treasury Stock 21 38
Shares Issued in Acquisitions 228 21,522
Other (1) (25) (2)
Balance at December 31, 1996 7,000 11,973 160,586 326,599 6,667 - 3,980
Net Earnings 115,302
Cash Dividends Declared on
Common Stock, $.72 Per Share (29,535)
Cash Dividends Declared on
Preferred Stock, $10.13
Per Share (712)
Allocation for Retirement of
Capital Securities (1,000) 1,000
Retirement of Capital
Securities 4,000 (4,000)
Exercise of Stock Options 223 15,845
Acquisitions 286 20,105 2,702 143
Change in Unrealized Gains (Losses)
on Marketable Securities (3,988)
Other 81 4
Balance at December 31, 1997 $7,000 $12,482 $196,617 $417,360 $3,667 $- $135
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net Earnings $115,302 $81,200 $71,860
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 44,750 47,000 14,000
Amortization of Goodwill 1,648 1,187 626
Amortization of Unearned Income and Other (74,428) (46,121) (24,670)
Depreciation of Premises and Equipment 29,723 16,201 12,023
Realized Investment Security (Gains) Losses (9,713) (96) 86
Proceeds From Sale of Loans Held for Sale 1,159,079 467,894 156,309
Origination of Loans Held for Sale (926,060) (469,489) (152,982)
Realized Gains on Loans Held for Sale (56,291) (26,465) (2,410)
Realized Gains on Sale of Other Loans and Leases (17,292) (4,490) (4,174)
(Increase) Decrease in Interest Receivable 607 (2,348) (5,650)
(Increase) Decrease in Other Assets (177,000) 7,134 (9,637)
Increase (Decrease) in Interest Payable (275) (1,563) 8,795
Deferred Income Taxes 23,063 18,918 28,769
Increase in Other Liabilities 8,024 6,810 11,088
Net Cash Provided by Operating Activities 121,137 95,772 104,033
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 2,288,053 79,398 34,316
Proceeds from Maturities and Prepayments 147,916 625,698 227,117
Purchases (2,627,773) (678,794) (289,376)
Investment Securities Held to Maturity:
Proceeds from Sales - - 416
Proceeds from Maturities and Prepayments - - 28,611
Purchases - - (244,755)
Proceeds from Sale-Leaseback Transactions 330,000 - -
Net Increase in Loans and Leases (150,252) (389,778) (671,476)
Net Increase in Premises and Equipment (65,223) (55,845) (42,464)
Acquisitions 13,632 971 (185)
Net Cash Used in Investing Activities (63,647) (418,350) (957,796)
Financing Activities:
Net Increase (Decrease) in Deposits (78,206) 417,770 109,902
Net Increase (Decrease) in Short-Term Debt 206,305 (49,519) 115,533
Principal Payments on Long-Term Debt (208,438) (188,841) (25,637)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 34,440 228,440 462,178
Cash Dividends Paid (30,247) (21,970) (18,809)
Purchase of Treasury Stock - - (6,109)
Proceeds from Sale of Common Stock 16,068 1,878 5,260
Net Increase (Decrease) in Other Equity Items 82 (27) 464
Net Cash Provided by (Used In) Financing Activities (59,996) 387,731 642,782
Increase (Decrease) in Cash and Cash Equivalents (2,506) 65,153 (210,981)
Cash and Cash Equivalents at Beginning of Period 278,747 213,594 424,575
Cash and Cash Equivalents at End of Period $276,241 $278,747 $213,594
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $309,488 $281,820 $250,952
Income Taxes 27,000 18,000 11,000
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to Other Real Estate 13,098 8,906 4,420
Common Stock Issued in Acquisitions 20,391 21,750 1,750
Reclassification of Investment Securities from Held to Maturity
to Available for Sale - - 247,385
Securitization of Residential Loans - 64,025 -
Residual Interest Securities Created from the Sale of Loans 91,969 27,900 -
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND ACQUISITIONS
Effective June 2, 1997, Provident Financial Group, Inc.'s name was
changed from Provident Bancorp, Inc. to better reflect the new
products and services being offered.
Provident Financial is a Cincinnati-based bank holding company which
owns and operates three banking subsidiaries, The Provident Bank,
Provident Bank of Kentucky and Provident Bank of Florida. (The
Provident Bank of Kentucky will be merged into The Provident Bank on
March 23, 1998.) While Provident Financial banking subsidiaries are
located in Ohio, northern Kentucky and southwest Florida, it provides
services to customers on a national basis.
In September 1997, Provident Financial acquired Florida Gulfcoast
Bancorp, Inc., the parent of Enterprise National Bank for 712,712
shares of Provident Financial Common Stock having an aggregate value
of $34.9 million. Enterprise operated three branches in Sarasota
County, Florida. The acquisition was accounted for as a pooling of
interest. Prior periods' financial information has not been restated
due to immateriality.
In February 1997, Provident Financial purchased South Hillsborough
Community Bank for 189,259 shares of Provident Financial Common Stock,
having an aggregate value of $7.2 million. South Hillsborough had
three offices located in Southeast Hillsborough County, approximately
20 miles south of Tampa. The acquisition was accounted for as a
purchase with $3.0 million of goodwill being recorded. South
Hillsborough was renamed Provident Bank of Florida and merged with
Enterprise National Bank in 1997.
In December 1996, Provident Financial acquired Information Leasing
Corporation, an equipment leasing company, and Procurement
Alternatives Corporation, Information Leasing's affiliated lease
servicing company. Provident Financial issued 776,786 shares of its
Common Stock at the date of the acquisition plus an additional 84,183
shares of its Common Stock during 1997 for meeting certain financial
objectives. An additional 174,746 shares of its Common Stock and $2
million will be paid to the former shareholders if additional
financial objectives are met over the next three fiscal years. The
acquisition was accounted for as a purchase with $20.6 million of
goodwill being recorded.
In 1995, Provident Financial purchased Mathematical Investment
Management, Inc., a mutual fund advisor, for 103,622 shares of
Provident Financial Common Stock. The mutual fund assets advised by
Mathematical Investment were merged into Riverfront Funds, Inc.
("Riverfront"), a proprietary family of mutual funds. The purchase
method was used to account for the acquisition with $1.9 million of
goodwill being recorded.
Pro-forma results of operations as though South Hillsborough,
Information Leasing, Procurement Alternatives and Mathematical
Investment had occurred at the beginning of the period are not
provided due to the immaterial effects it would have on Provident
Financial's financial statements taken as a whole.
41
<PAGE>
B. ACCOUNTING POLICIES The following is a summary of significant
accounting policies:
BASIS OF PRESENTATION The consolidated financial statements include
the accounts of Provident Financial and its subsidiaries, all of which
are wholly owned. Provident Financial'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 Investment securities are classified as
available for sale or trading. Securities classified as available for
sale are intended to be held for indefinite periods of time. 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 (net
of taxes) reported as a separate component of shareholders' equity.
Securities purchased with the intention of recognizing short-term
profits are classified as trading and are included with "Other
Assets". These securities are carried at fair value with unrealized
gains and losses classified as "Noninterest Income". The specific
identification method is 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. Provident Financial generally recognizes income
on impaired loans on a cash basis.
42
<PAGE>
FINANCE LEASING 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 Provident Financial's net
investment in the lease. The investment includes the sum of the
aggregate rentals receivable and the estimated residual value of
leased equipment less unearned income and third party debt on
leveraged leases. Commercial leases are generally placed on nonaccrual
status when payments are past due 90 days or more while consumer
leases are generally charged off when 120 days to 150 days past due.
LOAN AND LEASE LOSS RESERVE The reserve for loan and lease losses is
maintained to absorb potential losses in the lending portfolio.
Management's determination of the adequacy of the reserve is based on
reviews of specific loans and leases, credit loss experience, general
economic conditions and other pertinent factors. The reserve is
increased by charges to earnings, as provisions for loan and lease
losses. Loans and leases deemed uncollectible are charged off and
deducted from the reserve and recoveries on loans and leases
previously charged off are added to the reserve.
Provident Financial accounts for impaired loans in accordance with
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". Provident Financial considers a
commercial nonperforming loan 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. Provident Financial measures
the value of an impaired loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
if more practical, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent.
LOAN SALES Provident Financial classifies loans that are intended to
be sold within a short period of time as held for sale. Such loans are
carried at the lower of aggregate cost or market value. Gains and
losses on loan sales are included in "Noninterest Income". For
unsecuritized loan sales, 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.
43
<PAGE>
Provident Financial began selling nonconforming residential loans in
1996 and home equity loans in 1997. These sales have been primarily
through securitized public offerings. Under these types of sales,
gains or losses are determined based on the calculated present value
of future cash flows of the underlying loans, net of interest payments
to security holders, loan loss assumptions and normal servicing
revenue. These net cash flows, which are represented by residual
interest securities, are included in "Investment Securities Available
for Sale".
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was adopted
by Provident Financial on January 1, 1996. Under this SFAS, 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 SFAS, no costs of the
loan were allocated to the servicing. The adoption of this SFAS had no
material impact on Provident Financial's consolidated financial
position or results of operations.
Provident Financial adopted SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
effective January 1, 1997. This SFAS provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. These
standards are based on a financial-components approach that focuses on
control. Under this approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when
extinguished. Also, this SFAS provides standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. The adoption of SFAS No. 125 did not have a
material impact on Provident Financial's financial position or results
of operations.
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.
Provident Financial adopted 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 SFAS requires that long-lived
assets and certain identifiable intangibles be 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. The adoption of SFAS 121 had no material impact on Provident
Financial's consolidated financial position or results of operations.
44
<PAGE>
OTHER REAL ESTATE OWNED Real estate owned is recorded at the lower of
cost or fair value and is included in "Other Assets". Provident
Financial'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.
INTANGIBLES The excess of the purchase price over net identifiable
tangible and intangible assets acquired in a purchase business
combination (goodwill) is included in other assets. Goodwill related
to bank acquisitions is amortized over varying periods not exceeding
25 years. Goodwill related to nonbank acquisitions is amortized over
varying periods not exceeding 40 years.
RESERVE FOR RETIREMENT OF CAPITAL SECURITIES The Capital Notes of
Provident Bank included in "Long-Term Debt" are designated as "Capital
Securities" under Ohio law. In accordance with the terms of the Notes,
Provident Bank 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 SFAS No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, adoption of a fair value-based
accounting method for stock-based employee compensation plans.
Provident Financial elected to continue its accounting in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
whereby no compensation expense is recognized for the granting of
stock options.
INCOME TAXES Provident Financial files a consolidated federal income
tax return that includes all of its subsidiaries. Subsidiaries provide
for income taxes on a separate-return basis and remit to Provident
Financial amounts determined to be currently payable.
OFF-BALANCE SHEET FINANCIAL AGREEMENTS Provident Financial 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, 1997, 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.
45
<PAGE>
EARNINGS PER COMMON SHARE SFAS No. 128, "Earnings Per Share" was
issued in 1997. This SFAS replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per
share amounts for all periods have been presented, and where
appropriate, restated as required by the SFAS.
C. INVESTMENT SECURITIES The amortized cost and estimated market
values of securities available for sale at December 31 were as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands)
1997:
U.S. Treasury and Federal Agency
Debentures $17,251 $175 $(25) $17,401
State and Political Subdivisions 10,200 196 - 10,396
Mortgage-Backed Securities 1,034,104 1,572 (2,065) 1,033,611
Asset-Backed Securities 252,142 110 (243) 252,009
Other Securities 57,606 1,788 (1,304) 58,090
$1,371,303 $3,841 $(3,637) $1,371,507
1996:
U.S. Treasury and Federal Agency
Debentures $83,307 $498 $(64) $83,741
State and Political Subdivisions 5,270 - - 5,270
Mortgage-Backed Securities 659,144 5,571 (1,690) 663,025
Asset-Backed Securities 200,071 413 (324) 200,160
Other Securities 78,992 3,149 (1,430) 80,711
$1,026,784 $9,631 $(3,508) $1,032,907
Investment securities with a carrying value of approximately $441.9
million and $476.1 million at December 31, 1997, and 1996,
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 1997, 1996 and 1995 gross gains of $12,553,000, $96,000 and $18,000
and gross losses of $2,840,000, $- and $104,000, respectively, were
realized on the sale of securities Available for Sale. In 1995, FHLB
stock, classified as Held to Maturity, was sold. Provident Financial
was no longer required to hold the stock due to the sale of deposits
of Heritage Savings Bank. 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 1997, 1996 or 1995. Taxes
on security gains (losses) were $3.4 million, $34,000 and ($30,000) in
1997, 1996 and 1995, respectively.
46
<PAGE>
Mortgage-backed and asset-backed securities are shown below based on
their estimated average lives at December 31, 1997. All other
securities are shown by contractual maturity. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Market Value
(In Thousands)
Due in one year or less $279,756 $278,618
Due after 1 through 5 years 853,154 854,014
Due after 5 through 10 years 144,453 144,420
Due after 10 years 93,940 94,455
Total $1,371,303 $1,371,507
Included in investment securities are residual interest securities
representing the present value of net cash flows due to Provident
Financial from loan securitizations and sales. Components of the
residual interest securities and the underlying assumptions follow:
<TABLE>
<CAPTION>
Closed-End
Nonconforming Closed-End Open-End
Residential Home Equity Home Equity
(Dollars in Thousands)
<S> <C> <C> <C>
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $186,485 $6,040 $10,947
Less:
Off-Balance Sheet Allowance for Loan Losses (41,725) (595) (504)
Servicing and Insurance Expense (21,487) (1,068) (1,779)
Discount to Present Value (30,687) (615) (1,357)
Carrying Value of Residual Interest Securities $92,586 $3,762 $7,307
Assumptions Used (Weighted Average):
Prepayment Speed (initial) 10.00% 15.00% n/a
Prepayment Speed (ramps up to) 26.00 15.00 n/a
Repayment Rate (overall) n/a n/a 40.00%
Provision for Loan Losses (annual basis) 1.13 0.30 0.15
Provision for Loan Losses (% of original balance) 3.78 0.79 0.30
Discount Rate 11.34 9.36 9.23
</TABLE>
D. LEASING Provident Financial originates leases which are
classified as either finance leases or operating leases, based on the
terms of the lease arrangement. When a lease is classified as a
finance lease, the future lease payments, net of unearned income, and
the estimated residual value of the leased property at the end of the
lease term is recorded as an asset under "Loans and Leases". The
amortization of the unearned income is recorded as interest income.
When a lease is classified as an operating lease, the leased property
is recorded as an asset and included within "property and premises".
The rental income is recorded as noninterest income while the
depreciation on the leased property is recorded as noninterest
expense.
47
<PAGE>
Commercial lease financing includes the leasing of transportation
equipment, manufacturing equipment, data processing and office
equipment. The majority of the leases are classified as direct
financing leases, with expiration dates over the next 1 to 8 years.
Rentals receivable at December 31, 1997 and 1996 include $17.3 million
and $12.5 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 $58.2 million and $47.4 million in total at December 31,
1997 and 1996, respectively.
Consumer lease financing is the leasing of automobiles. The leases are
classified as direct financing leases, with expiration dates over the
next 1 to 6 years. This type of credit was initiated in 1994 and is
principally directed toward individuals.
The components of the net investment in lease financing at December 31
were as follows:
<TABLE>
<CAPTION>
1997 1996
Commercial Consumer Commercial Consumer
(In Thousands)
<S> <C> <C> <C> <C>
Rentals Receivable $279,301 $247,785 $211,350 $387,067
Leases in Process 38,680 7,024 1,104 7,701
Estimated Residual Value of
Leased Assets 96,052 255,976 81,011 306,034
414,033 510,785 293,465 700,802
Less: Unearned Income (73,731) (67,979) (54,401) (109,039)
Net Investment in Lease Financing $340,302 $442,806 $239,064 $591,763
</TABLE>
The following is a schedule by year of future minimum lease payments
to be received for the next five years as of December 31, 1997:
Commercial Consumer
(In Thousands)
1998 $95,698 $83,873
1999 69,246 77,047
2000 50,036 54,192
2001 31,471 25,414
2002 15,937 6,697
Thereafter 16,913 562
Total $279,301 $247,785
Operating leases consist of the leasing of transportation equipment,
manufacturing equipment, data processing and office equipment to
commercial clients. Terms of the leases range from 1 to 12 years. At
the expiration of an operating lease, the leased property is generally
sold or another lease agreement is initiated. As of December 31, 1997
and 1996, leased equipment, net of depreciation, totaled $112.4
million and $95.1 million, respectively.
48
<PAGE>
In addition to the leases discussed above, Provident Financial sold
$342.3 million of vehicles, subject to finance leases, to
institutional investors under sale-leaseback transactions. Under terms
of these transactions, Provident Financial continues to collect rental
payments from its original lessees. Provident Financial, as lessee, is
accounting for the leaseback of these vehicles as operating leases.
Differences between the rentals received from the original lessees and
the rentals paid to the investors will be recorded as noninterest
income.
E. RESERVE FOR LOAN AND LEASE LOSSES The changes in the loan and
lease loss reserve for the years ended December 31 were as follows:
1997 1996 1995
(In Thousands)
Balance at Beginning of Period $66,693 $60,235 $51,979
Provision for Loan and Lease Losses
Charged to Earnings 44,750 47,000 14,000
Acquired Reserves 1,814 1,373 -
Recoveries Credited to the Reserve 10,096 4,894 8,452
123,353 113,502 74,431
Losses Charged to the Reserve (51,373) (46,809) (14,196)
Balance at End of Period $71,980 $66,693 $60,235
The following table shows Provident Financial's investment in impaired
loans as defined under SFAS No. 114 as amended by SFAS No. 118:
1997 1996
(In Thousands)
Impaired Loans Requiring a Valuation Allowance of
$2.4 Million in 1997 and $2.2 Million in 1996 $3,325 $5,159
Impaired Loans Not Requiring a Valuation Allowance 6,273 5,484
Total Impaired Loans $9,598 $10,643
Average Balance of Impaired Loans for the Year $14,310 $16,428
The valuation allowance recorded on impaired loans is included in the
reserve for loan losses.
Loans and leases on nonaccrual status at December 31, 1997, 1996 and
1995 were $46.4 million, $21.1 million and $37.5 million,
respectively. Loans renegotiated to provide a reduction or deferral of
interest or principal were $377,000, $786,000 and $4,753,000 at
December 31, 1997, 1996 and 1995, respectively.
49
<PAGE>
F. PREMISES AND EQUIPMENT The following is a summary of premises and
equipment at December 31:
1997 1996
(In Thousands)
Land $8,321 $7,381
Buildings 22,929 21,266
Leasehold Improvements 10,604 6,650
Furniture and Fixtures 98,181 70,887
Operating Lease Equipment 143,211 112,418
283,246 218,602
Less Depreciation and Amortization (99,392) (72,961)
Total $183,854 $145,641
The future gross minimum rentals under noncancelable leases for the
rental of premises and equipment for 1998 and subsequent years are as
follows:
Premises Equipment
(In Thousands)
1998 $8,195 $694
1999 7,651 495
2000 7,148 230
2001 6,752 48
2002 6,654 -
Thereafter 34,192 -
Total $70,592 $1,467
Rent expense for all bank premises and equipment leases was
$8,519,000, $6,596,000 and $5,692,000 in 1997, 1996 and 1995,
respectively.
G. SHORT-TERM DEBT Short-term debt was as follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $602,588 $458,375 $490,419
Commercial Paper 202,018 139,665 145,321
U.S. Treasury Demand Notes 1,519 1,500 1,500
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 5.68% 5.96% 5.60%
Commercial Paper 5.33 5.17 5.60
U.S. Treasury Demand Notes 5.25 5.15 5.15
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $687,374 $713,830 $717,349
Commercial Paper 202,018 143,867 150,503
U.S. Treasury Demand Notes 2,746 1,500 1,500
</TABLE>
At December 31, 1997, Provident Financial had $175 million and $40
million in lines of credit with unaffiliated banks to support
commercial paper borrowings and other general obligations,
respectively. As of January 13, 1998, these lines had not been used.
50
<PAGE>
H. LONG-TERM DEBT Long-term debt consisted of the following at
December 31:
<TABLE>
<CAPTION>
Stated Effective Maturity December 31,
Description Rate (1) Rate (2) Date 1997 1996
(In Thousands)
<S> <C> <C> <C> <C> <C>
Provident Financial:
Miscellaneous Notes Payable (3) Various Various Various $1,913 $2,458
Subsidiaries:
$1 Billion Bank Notes Program:
Fixed Rate Senior Notes 6.13 6.48 2000 299,571 299,426
Fixed Rate Senior Notes (4) 7.17 5.64 2005 12,500 12,500
Notes Payable to Federal
Home Loan Bank:
LIBOR Based Notes n/a n/a n/a - 50,000
LIBOR Based Notes n/a n/a n/a - 117,195
LIBOR Based Notes 5.75 5.75 1999 11,000 -
Fixed Rate Notes (5) Various Various Various 2,416 1,356
Subordinated Notes:
Fixed Rate Notes 6.38 6.31 2004 99,607 99,542
Fixed Rate Notes 7.13 6.87 2003 74,942 74,931
Fixed Rate Capital Notes 9.00 9.27 1998 4,000 8,000
Debt Secured by Equipment Leases:
Fixed Rate Notes 5.74 5.22 2004 96,251 104,213
Fixed Rate Notes 5.84 5.32 2004 23,116 24,999
Fixed Rate Notes 5.63 5.63 2005 32,676 -
Fixed Rate Notes (6) Various Various Various 30,129 56,214
Fixed Rate Notes 16.00 16.00 1998 36 100
686,244 848,476
Total $688,157 $850,934
<FN>
(1) Stated rate reflects interest rate on notes as of December 31, 1997.
(2) Effective rate reflects interest rate paid as of December 31, 1997 after
adjustments for notes issued at discount or premium, capitalized fees associated
with the issuance of the debt and interest rate swap agreements entered to alter
the note rate.
(3) Interest rates range up to 9.50% and maturity dates range 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 5.00% to 9.50% and maturity dates which vary up to 2005.
(6) Interest rates vary from 6.12% to 17.10% and maturity dates which vary up to 2002.
</TABLE>
Under Provident Bank's amended $1 Billion Bank Notes program, notes
can be issued with either fixed or floating rates. The notes are not
secured nor insured by the FDIC. Subordinated notes qualify as Tier 2
capital while senior notes do not. At December 31, 1997, $687.5
million was available under this program.
Of the $312.5 million issued under the $1 Billion Bank Notes program,
Provident Financial issued $12.5 million with a callable debt
structure. The notes have a final maturity of 2005, but have a call
option exercisable by Provident Financial 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 Provident Financial'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, Provident Financial 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,
Provident Financial may execute another interest rate swap to hedge
51
<PAGE>
the notes for the remaining five years to maturity. Because the terms
of the call options are matching, any options risk to Provident
Financial has been neutralized.
The 6.38% Subordinated Notes, which qualify as Tier 2 capital, were
issued through an underwritten offering in 1994 by Provident Bank.
They are subordinated to the claims of depositors and other creditors
of Provident Bank and are not insured by the FDIC. The 7.13%
Subordinated Notes, which also qualify as Tier 2 capital, were issued
in 1993 by Provident Bank. The 9% Fixed Rate Capital Notes are
designated as "Capital Securities" under Ohio law and, in accordance
with the terms of the Notes, Provident Bank classifies a portion of
its undivided profits as "Reserve for Retirement of Capital
Securities".
Provident Financial borrowed $162.7 million through sale-leaseback
transactions with various investors during 1997 and 1996. The
borrowings are secured by auto leases within the consumer lease
financing portfolio. The debt calls for principal payments throughout
the life of the borrowings.
As discussed in Note A, Provident Financial purchased Information
Leasing, an equipment leasing company during 1996. Information Leasing
financed their leases by borrowing funds from various institutions of
which $30.1 million was outstanding at December 31, 1997. Payment
requirements on the debt matches the rentals receivable on the
equipment lease payments.
As of December 31, 1997, scheduled principal payments on long-term
debt for the following five years were as follows:
1998 1999 2000 2001 2002
(In Thousands)
Provident Financial Group, Inc. $787 $589 $262 $207 $68
Subsidiaries 38,522 32,033 317,846 18,178 18,773
I. Guaranteed Preferred Beneficial Interests in Provident Financial
Group, Inc.'s Fixed Rate Junior Subordinated Debentures In November
1996, Provident Financial established Provident Capital Trust I.
Capital Trust issued Capital Securities of $100 million of preferred
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. 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 Preferred
Capital Securities qualify as Tier 1 capital for bank regulatory
purposes. The sole assets (excluding interest receivable on the
Debentures and prepaid expenses) of Capital Trust are the Debentures.
52
<PAGE>
Both the Capital Securities and Debentures call for semi-annual
dividend/interest payments. Provident Financial has the right to defer
payment of interest on the Debentures at any time for a period not
exceeding ten consecutive semi-annual periods. If interest payments on
the Debentures are deferred, distributions on the Capital Securities
will also be deferred. The Capital Securities are mandatorily
redeemable upon the maturity of the Debentures on December 1, 2026 or
upon earlier redemption as provided by the Indenture. Provident
Financial has the right to redeem the Debentures, in whole or in part,
on or after December 1, 2006 at a premium, declining ratably to par on
December 1, 2016.
J. INCOME TAXES The composition of income tax expense follows:
1997 1996 1995
(In Thousands)
Current:
State $375 $37 $74
U.S. 37,890 23,888 6,463
38,265 23,925 6,537
Deferred 23,063 18,918 28,769
Total $61,328 $42,843 $35,306
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting
and taxable income. None of these differences were material.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of Provident Financial's deferred tax
liabilities and assets as of December 31 are as follows:
1997 1996 1995
(In Thousands)
Deferred Tax Liabilities:
Excess Lease and Partnership Income $115,197 $98,222 $63,204
Recapture of Excess Reserve for Bad Debts 337 1,175 4,035
Other - Net 13,833 10,947 8,190
Total Deferred Tax Liabilities 129,367 110,344 75,429
Deferred Tax Assets:
Provision for Loan and Lease Losses 28,250 20,973 20,456
Deferred Compensation 5,255 3,464 2,053
Alternative Minimum Tax Credit 1,813 10,687 -
Other - Net 7,408 9,569 6,962
Total Deferred Tax Assets 42,726 44,693 29,471
Net Deferred Tax Liabilities $86,641 $65,651 $45,958
K. BENEFIT PLANS Provident Financial has a Retirement Plan for the
benefit of its employees. Included under this plan is an Employee
Stock Ownership Plan ("ESOP") and a Personal Investment Election Plan
("PIE Plan"). Provident Financial also maintains a Life and Health
Plan for Retired Employees ("LH Plan"), an Employee Stock Purchase
Plan ("ESPP"), a Deferred Compensation Plan ("DCP") and stock option
plans.
53
<PAGE>
The ESOP covers all employees who are qualified as to age and length
of service. It is a trusteed plan with the entire cost borne by
Provident Financial. All fund assets are allocated to the
participants. Provident Financial's contributions are discretionary by
the directors of Provident Financial. Provident Financial incurred
expense of $6.1 million, $3.5 million and $3.5 million in 1997, 1996
and 1995, respectively.
The PIE Plan, a tax deferred retirement plan, covers all employees who
are qualified as to age and length of service. Employees who wish to
participate in the PIE Plan may contribute from 1% to 8% of their pre-
tax salaries (to a maximum prescribed by the Internal Revenue Service)
to the plan as voluntary contributions. Provident Financial will make
a matching contribution equal to 25% of the pre-tax voluntary
contributions made by the employees during the plan year. The
contribution made by Provident Financial is charged against earnings
as the employees' contributions are made. Provident Financial incurred
expense of $646,000, $505,000 and $456,000 for this retirement plan
for 1997, 1996 and 1995, respectively.
Provident Financial's LH Plan provides medical coverage as well as
life insurance benefits to eligible retirees. The LH Plan is
contributory until the retiree reaches age 62 after which time
Provident Financial pays the entire cost, however, Provident
Financial's responsibility for the payment of premiums is limited to a
maximum of two times the monthly premium costs as of the effective
date of the LH Plan. Monthly premiums exceeding the maximum amount
payable by Provident Financial shall be the responsibility of the
retiree. Provident Financial may amend or terminate the LH Plan at any
time, without the consent of the retirees.
The ESPP provides eligible employees with an opportunity to purchase
Provident Financial's Common Stock through payroll deduction in an
amount up to 10% of their compensation, at a price equal to eighty-
five percent of the fair market price on either the first or the last
business day of each calendar month, whichever is lower. Provident
Financial incurred expense of $219,000, $168,000 and $132,000 for the
ESPP for 1997, 1996 and 1995, respectively.
The DCP permits participants, selected by the Compensation Committee
of the Board of Directors, to defer compensation in a manner that
aligns their interests with those of Provident Financial shareholders
through the investment of deferred compensation in Provident Financial
Common Stock. The DCP allows participants to postpone the receipt of
5% to 50% of compensation until retirement. Amounts deferred are
invested in a Provident Bank Stock Account or a Self-Directed Account.
Provident Financial will credit the Provident Bank Stock Account with
an amount dependent upon Provident Financial's pre-tax earnings per
share, for each share of Provident Financial Common Stock in the
account. The calculated credit is charged against earnings by
Provident Financial annually. Under the DCP, Provident Financial
expensed approximately $2,624,000, $1,925,000 and $995,000 in 1997,
1996 and 1995, respectively.
54
<PAGE>
Provident Financial has three Employee Stock Option Plans, an Advisory
Director's Stock Option Plan and an Outside Directors' Stock Option
Plan. The Employee Stock Option Plans made 8.4 million options
available for grant. These plans authorize the issuance of options to
purchase Common Stock for officers and key employees. The options are
to be granted, with exercise prices at the approximate market value,
as of the date of grant. Options become exercisable beginning one year
from date of grant generally at the rate of 20% per year. The Advisory
Directors' Stock Option Plan and Outside Directors' Stock Option Plan
authorized the issuance of 371,250 and 168,750 options, respectively.
The terms of these options are comparable to the terms of the Employee
Stock Option Plans.
The following table summarizes option activity for the three years
ended December 31, 1997:
Weighted
Average Number of Options
Exercise Options Available
Price Outstanding for Grant
At January 1, 1995 $9.14 2,862,051 1,487,513
Authorized - - -
Granted 15.18 585,000 (585,000)
Exercised 8.38 (148,552) -
Canceled 10.39 (41,963) 41,963
At December 31, 1995 10.25 3,256,536 944,476
Authorized - - 450,000
Granted 24.81 1,175,967 (1,175,967)
Exercised 9.53 (174,357) -
Canceled 15.84 (36,982) 36,982
At December 31, 1996 14.28 4,221,164 255,491
Authorized - - 4,000,000
Granted 40.49 840,225 (840,225)
Exercised 8.93 (780,465) -
Canceled 16.91 (113,135) 113,135
At December 31, 1997 20.50 4,167,789 3,528,401
At December 31, 1997, 1996 and 1995, there were 2,012,954, 2,138,571
and 1,845,346 options exercisable respectively, having a weighted
average option price per share of $11.45, $9.15 and $8.71,
respectively. The following table summarizes information about stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
$ 7.85 - $11.61 1,400,047 3.2 $8.53 1,360,896 $8.47
$12.00 - $17.95 825,157 6.9 14.36 438,413 14.14
$21.17 - $31.95 970,855 8.4 23.68 185,145 23.37
$33.63 - $52.19 971,730 9.4 39.79 28,500 35.04
55
<PAGE>
For purposes of providing the pro forma disclosures required under
SFAS No. 123, the fair value of stock options granted in 1995, 1996
and 1997 was estimated at the date of grant using a Black-Scholes
option pricing model. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
Provident Financial's stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, management believes that the Black-Scholes model may not
necessarily provide a reliable single measure of the fair value of its
stock options.
The following weighted-average assumptions were used in the option
pricing model for 1997, 1996 and 1995 respectively: risk-free interest
rates of 6.47%, 6.55% and 6.55%; dividend yields of 3.00%, 3.75% and
5.00%; volatility factors of the expected market price of Provident
Financial's Common Stock of .232, .228 and .234 and an expected life
of the option of 8, 9 and 9 years. Based on these assumptions, the
weighted-average fair value of options granted in 1997, 1996 and 1995
was $11.51, $6.78 and $3.24, respectively.
No compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the
fair values at grant dates as discussed above, Provident Financial's
net income and earnings per share would not have been materially
different from amounts reported.
L. PREFERRED STOCK In 1991, Provident Financial issued 371,418
shares of Non-Voting Convertible Preferred Stock to American Financial
Group as partial consideration for the acquisition of Hunter Savings
Association. Pursuant to the terms of the Preferred Stock, Provident
Financial elected to change the dividend rate from $8.00 per share to
a rate equivalent to that paid on its Common Stock. In December 1995,
301,146 shares of the Preferred Stock were converted into 4,234,865
shares of Common Stock. As of December 31, 1997 and 1996, 70,272
shares of Preferred Stock remain outstanding. These shares have a
stated value and liquidation value of $100 per share and a conversion
ratio of 14.0625 shares of Provident Financial's Common Stock for each
share of Convertible Preferred Stock.
56
<PAGE>
M. EARNINGS PER SHARE The following table sets forth the computation
of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Numerator:
Net Income $115,302 $81,200 $71,860
Preferred Stock Dividends (712) (536) (2,437)
Numerator for Basic Earning Per Share --
Income Available to Common Stockholders 114,590 80,664 69,423
Effect of Dilutive Securities --
Convertible Preferred Stock Dividends 712 536 2,437
Numerator for Diluted Earnings Per Share --
Income Available to Common Stockholders After
Assumed Conversions $115,302 $81,200 $71,860
Denominator:
Denominator for Basic Earnings Per Share --
Weighted-Average Shares 41,135 39,596 35,115
Effect of Dilutive Securities:
Convertible Preferred Stock 988 988 5,165
Stock Options 1,651 1,277 804
Dilutive Potential Common Shares 2,639 2,265 5,969
Denominator for Diluted Earnings Per Share --
Adjusted Weighted-Average Shares and Assumed
Conversions 43,774 41,861 41,084
Basic Earnings Per Share $2.79 $2.04 $1.98
Diluted Earnings Per Share $2.63 $1.94 $1.75
</TABLE>
N. REGULATORY CAPITAL REQUIREMENTS Provident Financial and its
banking subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on Provident
Financial's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Provident
Financial and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of its assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Provident Financial and its banking subsidiaries to
maintain minimum ratios of 4.00% for Tier 1 capital to average assets,
4.00% for Tier 1 capital to risk-weighted assets, and 8.00% for total
risk-based capital to risk-weighted assets. As of December 31, 1997,
Provident Financial and its banking subsidiaries meet all capital
requirements to which it is subject.
57
<PAGE>
As of December 31, 1997, Provident Financial and its banking
subsidiaries' capital ratios were categorized as well capitalized for
regulatory purposes. To be categorized as well capitalized, Provident
Financial and its banking subsidiaries must maintain minimum ratios of
5.00% for Tier 1 capital to average assets, 6.00% for Tier 1 capital
to risk-weighted assets, and 10.00% for total risk-based capital to
risk-weighted assets. There have been no subsequent conditions or
events which management believes have changed the institutions'
status.
<TABLE>
<CAPTION>
1997 1996
Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 Capital (to Average Assets):
Provident Financial (Consolidated) $704,364 10.13% $585,609 9.02%
The Provident Bank 533,766 8.36 417,420 6.65
The Provident Bank of Kentucky 28,905 10.85 25,759 10.76
Provident Bank of Florida 16,150 8.34 n/a n/a
Tier 1 Capital (to Risk-Weighted Assets):
Provident Financial (Consolidated) 704,364 9.81 585,609 9.23
The Provident Bank 533,766 7.82 417,420 6.81
The Provident Bank of Kentucky 28,905 17.00 25,759 13.11
Provident Bank of Florida 16,150 9.81 n/a n/a
Total Risk-Based Capital (to Risk-Weighted Assets):
Provident Financial (Consolidated) 951,283 13.25 827,574 13.05
The Provident Bank 778,217 11.40 658,811 10.75
The Provident Bank of Kentucky 30,536 17.96 27,705 14.10
Provident Bank of Florida 17,891 10.87 n/a n/a
</TABLE>
O. OFF-BALANCE SHEET FINANCIAL AGREEMENTS Provident Financial 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, forward contracts 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 Provident
Financial's asset/liability management program, are structured to
modify interest rate risk of specified assets and/or liabilities
resulting from interest rate fluctuations. Interest rate swap
agreements have a credit risk component based on the ability of a
counterparty to meet the obligations to Provident Financial under the
terms of the interest rate swap agreement. Notional principal amounts
express the volume of the transactions, but Provident Financial's
potential exposure to credit risk is limited only to the flow of
interest payments. Provident Financial manages its credit risk in
these transactions through counterparty credit policies. At December
31, 1997, Provident Financial had bilateral collateral agreements in
place with its counterparties, against which Provident Financial has
pledged investment securities with a carrying value of $501,000 as
collateral.
58
<PAGE>
Summary information with respect to the interest rate swap portfolio
used to manage Provident Financial's interest rate sensitivity
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31,
Weighted Average 1996
Notional Unrealized Unrealized Receive Pay Life Notional
Amount Gross Gains Gross Losses Rate Rate (Years) Amount
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Pay Variable Receive Fixed $1,499 $7.6 $(5.7) 6.36% 5.95% 4.86 $2,102
Pay Fixed Receive Variable 46 .3 (.5) 8.86 7.82 4.97 32
$1,545 $7.9 $(6.2) $2,134
</TABLE>
The expected notional maturities of Provident Financial's interest
rate swap portfolio at December 31, 1997 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 $226 $600 $45 $628
Pay Fixed Receive Variable - 8 28 10
Since many of the commitments to extend credit are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Provident Financial
evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by Provident
Financial 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.
Provident Financial's commitments to extend credit which are not
reflected in the balance sheet at December 31 are as follows:
1997 1996
(In Millions)
Commitments to Extend Credit $2,036 $1,699
Standby Letters of Credit 123 116
59
<PAGE>
P. TRANSACTIONS WITH AFFILIATES At December 31, 1997, Carl H.
Lindner, members of his immediate family and trusts for their benefit,
owned 44% of American Financial Group's Common Stock. This group,
along with Carl H. Lindner's siblings and their families and entities
controlled by them, or established for their benefit, owned 55% of
Provident Financial's Common Stock. Provident Financial leases its
home office space and other office space from a trust, for the benefit
of a subsidiary of American Financial Group. During 1995, the lease
agreements were rewritten and extended to the year 2010, with
Provident Financial receiving $1.2 million which represented the net
present value of the difference between payments of the old and
current lease agreements. Provident Financial was amortizing the
amount received against rent expense until September 1997, which was
the expiration of the old lease agreements. Provident Financial also
leased one of its branch locations and ninety-eight ATM locations from
principal shareholders and their affiliates. Rentals charged by
American Financial Group and affiliates for the years ended December
31, 1997, 1996 and 1995 amounted to $2.0 million, $2.1 million $1.4
million, respectively. Rentals of $217,000, $201,000 and $306,000 were
charged by principal shareholders and their affiliates during 1997,
1996 and 1995, respectively, for branch and ATM locations.
Provident Bank offers shares of The Riverfront Funds, Inc., a
proprietary family of mutual funds, to customers. Riverfront is a
registered investment company with seven portfolios, each having a
different investment objective. Provident Bank manages the portfolios
and performs other related services, such as shareholder services and
acting as fund accountant and custodian. Riverfront is offered to
customers of Provident Bank, including personal trust, employee
benefit, agency and custodial clients, as well as individual
investors. At December 31, 1997, Riverfront had total assets of $380.5
million. Approximately $23.8 million of the amount was held by
Provident Financial and $181.6 million was held by Provident Bank's
trust department. During 1997, 1996 and 1995, Provident Financial
recorded approximately $1,387,000, $1,150,000 and $950,000 of income
net of related expenses, respectively, from management fees of
Riverfront.
Provident Financial has had certain transactions with various
executive officers, directors and principal holders of equity
securities of Provident Financial and its subsidiaries and entities in
which these individuals are principal owners. Various loans and leases
have been made as well as the sale of commercial paper and repurchase
agreements to these persons. Such loans to these persons aggregated
approximately $32.3 million and $38.9 million at December 31, 1997,
and 1996, respectively. None of these loans were held by the parent
company. During 1997, new loans aggregating $10.1 million were made to
such parties and loans aggregating $16.7 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, 1997,
and 1996, Provident Financial's commercial paper amounting to $13.7
million and $4.0 million, respectively, was held by these persons.
Additionally, repurchase agreements in the amount of $10.8 million and
$16.8 million had been sold to these persons at December 31, 1997, and
1996, respectively. All of these transactions were at market interest
rates.
60
<PAGE>
Q. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated
fair values for certain financial instruments as of December 31 are
shown in the following table. In cases where quoted market prices are
not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. Because no secondary market exists for
many of Provident Financial's assets and liabilities, the derived fair
values are calculated estimates, and the fair values provided herein
do not necessarily represent the actual values which may be realized
in the disposition of these instruments. The aggregate fair value
amounts presented do not represent the underlying value of Provident
Financial. 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.
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $276,241 $276,241 $278,747 $278,747
Trading Account Assets (Included in
Other Assets) 538 538 633 633
Investment Securities 1,371,507 1,371,507 1,032,907 1,032,907
Loans (Excluding Lease Financing) 4,268,734 4,313,519 4,480,621 4,502,759
Less: Reserve for Loan Losses (60,539) - (55,349) -
Net Loans 4,208,195 4,313,519 4,425,272 4,502,759
Financial Liabilities:
Deposits 4,696,298 4,731,184 4,596,480 4,607,983
Short-Term Debt 806,125 806,125 599,540 599,540
Long-Term Debt (Excluding Lease
Financing Debt) and Junior
Subordinated Debentures 604,769 607,143 764,387 759,694
Off-Balance Sheet Financial Instruments:
Interest Rate Swaps:
Asset Based:
Loans - (260) - 231
Liability Based:
Deposits - 3,421 - (3,308)
Long-Term Debt - (1,405) - (11,531)
The following methods and assumptions were used by Provident Financial
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.
61
<PAGE>
Investment securities and trading account assets: Fair values
for investment securities and trading account assets 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. Residual
interest securities are valued using discounted cash flow
techniques. Significant assumptions used in the valuation are
shown in Note C.
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 are estimated using discounted cash flow analyses
and interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Off-balance sheet financial instruments: Fair value for
interest rate swaps is based upon current market quotes.
Deposit liabilities: The fair values disclosed for demand
deposits are equal to their carrying amounts. The carrying
amounts for variable-rate, fixed-term money market accounts
and certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term debt: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other
short-term borrowings approximate their fair values.
Long-term debt and junior subordinated debentures: The fair
values of long-term borrowings that are traded in the markets
are equal to their quoted market prices. The fair values of
other long-term borrowings (other than deposits) are
estimated using discounted cash flow analyses, based on
Provident Financial's current incremental borrowing rates for
similar types of borrowing arrangements.
62
<PAGE>
R. ADDITIONAL INFORMATION
LEGAL CONTINGENCIES Provident Financial is subject to litigation in
the ordinary course of business. Management does not expect such
litigation will have a material adverse effect on Provident
Financial's financial position.
RESTRICTIONS ON CASH AND NONINTEREST BEARING DEPOSITS Federal Reserve
Board regulations require that Provident Bank, The Provident Bank of
Kentucky and Provident Bank of Florida maintain certain minimum
reserve balances. The average amount of those reserve balances for the
year ended December 31, 1997, was approximately $44.8 million.
INVESTMENT IN PARTNERSHIPS Provident Financial's share of
partnerships was carried at approximately $22.0 million and $15.4
million at December 31, 1997, and 1996, respectively, which includes
equity in net earnings of $2,935,000, $536,000 and $601,000 in the
years 1997, 1996 and 1995, respectively.
OTHER REAL ESTATE OWNED At December 31, 1997, and 1996, the carrying
value of other real estate and equipment owned was $12.4 million and
$6.6 million, respectively.
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. Auto Leasing 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. Auto Leasing is a separate legal entity from
Commercial Group and each maintains separate books and records with
respect to its assets and liabilities. As of December 31, 1997 Auto
Leasing had total assets of $55.8 million. These assets are not
available to creditors of Commercial Group to secure any indebtedness
of Commercial Group, or otherwise to satisfy the claims of such
creditors against Commercial Group.
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 1998 by Provident Bank, Provident
Kentucky and Provident Florida to its parent without approval is
approximately $175.4 million, plus 1998 net earnings. 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 $82.7 million to any single
affiliate, and $165.3 million to all affiliates combined of which
$24.5 million was loaned at December 31, 1997.
63
<PAGE>
PARENT COMPANY FINANCIAL INFORMATION Parent Company only condensed
financial information for Provident Financial, Inc. is as follows:
<TABLE>
BALANCE SHEETS (PARENT ONLY)
(In Thousands)
<CAPTION>
December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $115,785 $239,469
Investment Securities Available for Sale 169,839 14,676
Loans (net of reserve for loan losses of $1,295 and $1,295) 6,911 10,772
Investment in Subsidiaries:
Banking 610,091 471,879
Non-Banking 5,175 5,017
Premises and Equipment 1,504 1,567
Accounts Receivable from Banking Subsidiaries 13,776 -
Other Assets 30,007 22,297
$953,088 $765,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable to Banking Subsidiaries $- $984
Accounts Payable and Accrued Expenses 9,986 3,693
Commercial Paper 202,018 139,665
Long-Term Debt 1,913 2,458
Junior Subordinated Debentures 101,910 102,072
Total Liabilities 315,827 248,872
Shareholders' Equity 637,261 516,805
$953,088 $765,677
</TABLE>
<TABLE>
STATEMENTS OF EARNINGS (PARENT ONLY)
(In Thousands)
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Income:
Dividends from Banking Subsidiaries $ - $25,000 $23,000
Interest Income from Banking Subsidiaries 5,605 6,538 6,358
Other Interest Income 7,364 1,625 2,373
Noninterest Income 4,157 763 811
17,126 33,926 32,542
Expenses:
Interest Expense 18,219 8,833 8,686
Noninterest Expense 4,542 3,124 3,622
22,761 11,957 12,308
Earnings Before Taxes and Equity in Undistributed
Net Earnings of Subsidiaries (5,635) 21,969 20,234
Applicable Income Tax Credits 2,494 1,675 1,774
Earnings Before Equity in Undistributed Net Earnings
of Subsidiaries (3,141) 23,644 22,008
Equity in Undistributed Net Earnings of Subsidiaries 118,443 57,556 49,852
Net Earnings $115,302 $81,200 $71,860
</TABLE>
64
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(In Thousands)
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net Earnings $115,302 $81,200 $71,860
Adjustment to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Net Earnings from Subsidiaries (118,443) (82,556) (72,852)
Cash Dividends Received From Subsidiaries - 25,000 23,000
Amortization of Goodwill and Other 396 39 54
Depreciation of Premises and Equipment 54 446 304
Realized Investment Security Gains (1,068) - -
Proceeds From Sale of Loans Held for Sale 41,123 32,581 -
Origination of Loans Held for Sale (41,943) (32,491) -
Realized Gains on Loans Held for Sale (58) (90) -
(Increase) Decrease in Interest Receivable (396) 64 (27)
(Increase) Decrease in Other Assets (23,327) (8,713) 1,837
Increase (Decrease) in Interest Payable (1) 675 80
Deferred Income Taxes 2,457 (2,811) (1,092)
Increase (Decrease) in Other Liabilities 5,310 (4,229) 10,343
Net Cash Provided by (Used In) Operating
Activities (20,594) 9,115 33,507
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 11,571 - -
Proceeds from Maturities and Prepayments 20,329 1,700 -
Purchases (187,386) (1,892) (31)
Investment Securities Held to Maturity:
Proceeds from Maturities and Prepayments - - 1,700
Purchases - - (1,652)
Net Decrease in Loans 4,739 8,870 10,990
Net Decrease in Premises and Equipment 9 29 15
Acquisitions - - (185)
Net Cash Provided by (Used In) Investing
Activities (150,738) 8,707 10,837
Financing Activities:
Net Increase (Decrease) in Short-Term Debt 62,353 (5,656) 4,505
Principal Payments on Long-Term Debt (545) (836) (5,598)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures - 102,320 404
Cash Dividends Paid (30,247) (21,970) (18,809)
Purchase of Treasury Stock - - (6,109)
Proceeds from Sale of Common Stock 16,068 1,878 5,260
Contribution to Subsidiaries - (3,093) -
Net Increase (Decrease) in Other Equity Items 19 (27) 464
Net Cash Provided by (Used in) Financing
Activities 47,648 72,616 (19,883)
Increase (Decrease) in Cash and
Cash Equivalents (123,684) 90,438 24,461
Cash and Cash Equivalents at Beginning of Year 239,469 149,031 124,570
Cash and Cash Equivalents at End of Year $115,785 $239,469 $149,031
</TABLE>
65
<PAGE>
SUPPLEMENTARY DATA
Quarterly Consolidated Results of Operations - (Unaudited)
The following are quarterly consolidated results of operations for the
two years ended December 31, 1997.
<TABLE>
<CAPTION>
1997 1996
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest Income $145,178 $146,512 $142,236 $137,286 $135,648 $131,267 $127,612 $125,798
Total Interest Expense 77,739 81,031 76,689 73,753 72,068 70,892 68,963 68,334
Net Interest Income 67,439 65,481 65,547 63,533 63,580 60,375 58,649 57,464
Provision for Loan and Lease Losses (9,250) (9,500) (15,000) (11,000) (9,250) (14,000) (13,750) (10,000)
Net Interest Income After Provision
for Loan and Lease Losses 58,189 55,981 50,547 52,533 54,330 46,375 44,899 47,464
Service Charges on Deposit Accounts 6,514 6,331 6,329 5,578 5,826 5,529 5,317 4,865
Other Service Charges and Fees 11,171 6,281 10,373 9,233 5,957 6,771 7,373 9,227
Operating Lease Income 7,592 6,616 6,405 5,594 3,089 2,490 2,022 2,432
Gain on Sale of Loans and Leases 14,240 25,635 18,800 14,908 12,645 16,187 1,149 974
Security Gains 5,264 1,196 1,030 2,223 - - 96 -
Other 5,022 2,158 3,857 3,008 799 2,334 8,082 2,973
Total Noninterest Income 49,803 48,217 46,794 40,544 28,316 33,311 24,039 20,471
Compensation 27,660 25,696 24,371 23,727 21,736 20,370 18,298 19,426
Depreciation on Operating Lease
Equipment 4,905 4,601 4,409 3,752 2,307 1,787 1,464 1,663
Occupancy 3,882 3,516 2,700 2,646 2,522 2,324 2,454 2,373
Professional Services 4,523 3,660 3,681 3,048 3,435 4,019 2,183 1,826
Deposit Insurance 290 340 342 307 161 8,889 887 887
Equipment Expense 4,334 3,989 3,618 3,267 3,186 2,998 2,805 2,359
Charges and Fees 2,194 4,023 3,002 3,433 2,867 2,199 2,044 1,473
Marketing 2,313 1,694 1,841 2,042 877 2,367 623 1,236
Other 12,196 11,279 9,897 8,800 8,755 8,358 7,312 6,692
Total Noninterest Expense 62,297 58,798 53,861 51,022 45,846 53,311 38,070 37,935
Earnings Before Income Taxes 45,695 45,400 43,480 42,055 36,800 26,375 30,868 30,000
Applicable Income Taxes 15,402 15,898 15,280 14,748 12,800 9,100 10,618 10,325
Net Earnings $30,293 $29,502 $28,200 $27,307 $24,000 $17,275 $20,250 $19,675
Net Earnings Per Common Share:
Basic $.72 $.71 $.69 $.67 $.60 $.43 $.51 $.49
Diluted .68 .67 .65 .63 .57 .41 .49 .47
Cash Dividends .20 .20 .16 .16 .14 .14 .14 .12
Fully Tax Equivalent Margin:
Net Interest Income $67,439 $65,481 $65,547 $63,533 $63,580 $60,375 $58,649 $57,464
Tax Equivalent Adjustment 107 89 86 78 128 141 142 115
Tax Equivalent Net Interest Income $67,546 $65,570 $65,633 $63,611 $63,708 $60,516 $58,791 $57,579
</TABLE>
Quarterly basic earnings per share numbers do not add to the year-to-
date amount for 1996 due to rounding.
66
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
The following items are incorporated by reference to Provident
Financial's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after the close of
Provident Financial's fiscal year ending December 31, 1997:
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 35 for a list of
all financial statements filed as a part of this report.
2. Schedules to the consolidated financial statements
required by Article 9 of Regulation S-X have been omitted as
they are not required, not applicable or the information
required thereby is set forth in the related financial
statements.
3. Exhibits:
Number Exhibit Description Filing Status
3.1 Articles of Incorporation Incorporated by reference to
Form 10-Q for quarter ending
June 30, 1997.
3.2 Code of Regulations Incorporated by reference to
Proxy Statement for the 1994
Annual Meeting of
Shareholders.
67
<PAGE>
Number Exhibit Description Filing Status
4.1 Instruments defining the Provident Financial has no
rights of security holders outstanding issue of
indebtedness exceeding 10%
of the assets of Provident
Financial and Consolidated
Subsidiaries. A copy of the
instruments defining the
rights of security holders
will be furnished to the
Commission upon request.
4.2 Plan of Reorganization Incorporated by reference to
relating to Series D, Form 10-K for 1995.
Non-Voting Convertible
Preferred Stock
10.1 Junior Subordinated Incorporated by reference to
Indenture, dated as of Exhibit 4.1 on Form 8-K dated
November 27, 1996, between November 27, 1996.
Provident Financial and the
Bank of New York, as
Indenture Trustee
10.2 Amended and Restated Incorporated by reference to
Declaration of Trust of Exhibit 4.3 on Form 8-K dated
Provident Capital Trust I, November 27, 1996.
dated as of November 27,
1996
10.3 Form of Guarantee Agreement Incorporated by reference to
to be entered into by registration statement number
Provident Financial and The 333-20769.
Bank of New York, as
Guarantee Trustee
Management Compensatory Agreements
10.4 Provident Financial 1990 Incorporated by reference to
Employee Stock Purchase Post-Effective Amendment No.
Plan 1 to Form S-8 (File No.
33-34904).
10.5 Provident Financial Incorporated by reference to
Retirement Plan (As Form S-8 (File No. 33-90792).
amended)
10.6 Provident Financial 1988 Incorporated by reference to
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).
68
<PAGE>
Number Exhibit Description Filing Status
10.7 Provident Financial 1992 Incorporated by reference to
Advisory Directors' Stock Form 8-K filed October 22,
Option Plan (As amended) 1992, and Form S-8 (File No.
33-62707).
10.8 Provident Financial 1992 Incorporated by reference to
Outside Directors' Stock Form S-8 (File No. 33-51230).
Option Plan
10.9 Provident Financial Incorporated by reference to
Restricted Stock Plan Form S-2 (File No. 33-44641).
10.10 Provident Financial 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.
Financial Group, Inc.
23 Consent of Independent Filed herewith.
Auditors
27.1 Financial Data Schedule Filed herewith.
27.2 Restated Financial Data Filed herewith.
Schedule for 1995 and 1996
(b) Reports on Form 8-K:
Date of Report Item 5. Other Events
November 14, 1997 Pursuant to SEC Accounting Series Release No.
135 "Pooling-of-Interests Accounting",
Provident Financial disclosed net earnings of
$7.7 million, or 17 cents per fully diluted
share, for October 1997, and $92.7 million,
or $2.12 per fully diluted share, for the ten
months ended, October 31, 1997.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, Provident Financial Group, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Provident Financial Group, Inc.
/s/Allen L. Davis
Allen L. Davis
President
March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of Provident Financial Group, Inc. and in the capacities and on
the dates indicated.
Signature Capacity Date
/s/Allen L. Davis Director and President March 19, 1998
Allen L. Davis (Principal Executive Officer)
/s/Jack M. Cook Director March 19, 1998
Jack M. Cook
/s/Thomas D. Grote, Jr. Director March 19, 1998
Thomas D. Grote, Jr.
/s/Philip R. Myers Director March 19, 1998
Philip R. Myers
/s/Joseph A. Pedoto Director March 19, 1998
Joseph A. Pedoto
/s/Joseph A. Steger Director March 19, 1998
Joseph A. Steger
/s/John R. Farrenkopf Vice President and March 19, 1998
John R. Farrenkopf Chief Financial and Accounting
Officer (Principal Financial
Officer and Principal
Accounting Officer)
70
<PAGE>
EXHIBIT 21 - SUBSIDIARIES OF PROVIDENT FINANCIAL
The following table sets forth all of Provident Financial's
subsidiaries as of the date of this report.
State of
Jurisdiction
% of Voting Under the Laws
Securities of which
Owned Organized
The Provident Bank 100 Ohio
Provident Commercial Group, Inc. 100 Ohio
Provident Auto Leasing Company 100 Delaware
Provident Securities and Investment
Company 100 Ohio
PB Realty, Inc. 100 Ohio
Provident Consumer Financial
Services, Inc. 100 Ohio
Information Leasing Corporation 100 Ohio
Procurement Alternatives Corporation 100 Ohio
The Provident Bank of Kentucky 100 Kentucky
FGBI Acquisition Corp. 100 Florida
Provident Bank of Florida 100 Florida
Provident Investment Advisers, Inc. 100 Ohio
Provident Mortgage Company 100 Ohio
Provident Capital Trust I 100 Delaware
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference (1) in the Registration
Statements (Form S-8 No. 33-34906, Form S-8 No. 33-43102 and Form S-8
No. 33-84094) pertaining to the Provident Financial Group, Inc. 1988
Stock Option Plan, (2) in Post-Effective Amendment No. 1 to the
Registration Statement (Form S-8 No. 33-34904) pertaining to the 1990
Provident Financial Group, Inc. Employee Stock Purchase Plan, (3) in
the Registration Statement (Form S-8 No. 33-90792) pertaining to the
Provident Financial Group, Inc. Retirement Plan, (4) in the
Registration Statements (Form S-8 No. 33-51230 and No. 33-62707)
pertaining to the 1992 Outside Directors' Stock Option Plan and the
1992 Advisory Directors' Stock Option Plan and (5) in the Registration
Statement (Form S-8 No. 33-61576) pertaining to the Provident
Financial Group, Inc. Deferred Compensation Plan of our report dated
January 13, 1998, with respect to the consolidated financial
statements of Provident Financial Group, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-K for December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 274,521
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,720
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,371,507
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,051,842
<ALLOWANCE> 71,980
<TOTAL-ASSETS> 7,123,659
<DEPOSITS> 4,696,298
<SHORT-TERM> 806,125
<LIABILITIES-OTHER> 295,818
<LONG-TERM> 688,157
0
7,000
<COMMON> 12,482
<OTHER-SE> 617,779
<TOTAL-LIABILITIES-AND-EQUITY> 7,123,659
<INTEREST-LOAN> 492,114
<INTEREST-INVEST> 78,226
<INTEREST-OTHER> 872
<INTEREST-TOTAL> 571,212
<INTEREST-DEPOSIT> 221,449
<INTEREST-EXPENSE> 309,212
<INTEREST-INCOME-NET> 262,000
<LOAN-LOSSES> 44,750
<SECURITIES-GAINS> 9,713
<EXPENSE-OTHER> 225,978
<INCOME-PRETAX> 176,630
<INCOME-PRE-EXTRAORDINARY> 115,302
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,302
<EPS-PRIMARY> 2.79
<EPS-DILUTED> 2.63
<YIELD-ACTUAL> 4.02
<LOANS-NON> 46,419
<LOANS-PAST> 9,811
<LOANS-TROUBLED> 377
<LOANS-PROBLEM> 31,798
<ALLOWANCE-OPEN> 66,693
<CHARGE-OFFS> 51,373
<RECOVERIES> 10,096
<ALLOWANCE-CLOSE> 71,980
<ALLOWANCE-DOMESTIC> 71,980
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-K for December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 208,097 213,594
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 70,650 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,032,907 959,904
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 5,311,448 4,896,076
<ALLOWANCE> 66,693 60,235
<TOTAL-ASSETS> 6,829,088 6,205,351
<DEPOSITS> 4,596,480 4,178,551
<SHORT-TERM> 599,540 637,240
<LIABILITIES-OTHER> 265,329 136,940
<LONG-TERM> 850,934 820,083
0 0
7,000 7,000
<COMMON> 11,973 11,703
<OTHER-SE> 497,832 413,834
<TOTAL-LIABILITIES-AND-EQUITY> 6,829,088 6,205,351
<INTEREST-LOAN> 451,805 411,336
<INTEREST-INVEST> 67,579 50,015
<INTEREST-OTHER> 941 1,045
<INTEREST-TOTAL> 520,325 462,396
<INTEREST-DEPOSIT> 192,939 192,397
<INTEREST-EXPENSE> 280,257 259,747
<INTEREST-INCOME-NET> 240,068 202,649
<LOAN-LOSSES> 47,000 14,000
<SECURITIES-GAINS> 96 (86)
<EXPENSE-OTHER> 175,162 143,320
<INCOME-PRETAX> 124,043 107,166
<INCOME-PRE-EXTRAORDINARY> 81,200 71,860
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 81,200 71,860
<EPS-PRIMARY> 2.04 1.98
<EPS-DILUTED> 1.94 1.75
<YIELD-ACTUAL> 3.96 3.86
<LOANS-NON> 21,116 37,497
<LOANS-PAST> 18,751 26,578
<LOANS-TROUBLED> 786 4,753
<LOANS-PROBLEM> 37,627 27,904
<ALLOWANCE-OPEN> 60,235 51,979
<CHARGE-OFFS> 46,809 14,196
<RECOVERIES> 4,894 8,452
<ALLOWANCE-CLOSE> 66,693 60,235
<ALLOWANCE-DOMESTIC> 66,693 60,235
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
