<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, 1998 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 26, 1999, there were 42,639,279 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 26, 1999, was
approximately $734,000,000 (based upon non-affiliated holdings of
18,820,139 shares and a market price of $39.00 per share).
Documents Incorporated by Reference:
Proxy Statement for the 1999 Annual Meeting of Shareholders
(portions which are incorporated by reference into Part III hereof).
Please address all correspondence to:
Christopher Carey
Executive 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 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 4
ITEM 6. SELECTED FINANCIAL DATA 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 73
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 73
ITEM 11. EXECUTIVE COMPENSATION 73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 73
SIGNATURES 76
<PAGE>
PART I
ITEM 1. BUSINESS
Provident Financial Group, Inc.
Provident is a Cincinnati-based commercial banking and financial
services company with full service banking operations in Ohio,
northern Kentucky and southwestern Florida. At December 31, 1998,
Provident had total assets of $8.1 billion, loans and leases of $5.6
billion, deposits of $5.3 billion and shareholders' equity of $704
million. Provident also services an additional $3.2 billion of loans
and leases.
Provident's executive offices are located at One East Fourth Street,
Cincinnati, Ohio 45202 and its Investors Relations telephone number is
(513) 345-7102 or (800) 851-9521.
Provident has expanded its franchise in recent years through internal
growth and acquisitions. Business lines that have been expanded to
operate at a national level include Provident Capital Corp (a middle-
market structured finance products division), Provident Commercial
Group and Information Leasing Corporation (commercial leasing
divisions) and Provident Consumer Financial Services (a mortgage loan
division). Provident has also expanded by acquisitions of Florida
Gulfcoast Bancorp, Inc. located in Sarasota, Florida and South
Hillsborough Community Bank located in Hillsborough County, Florida.
Provident conducts its banking operations through The Provident Bank
(in Ohio) and Provident Bank of Florida. The Provident Bank of
Kentucky was merged into The Provident Bank on March 23, 1998. See
ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Business Lines" and Note P included in
"Notes to Consolidated Financial Statements" for further details as to
the lines of business and the types of financial products and services
offered by Provident.
At December 31, 1998, Provident and its subsidiaries employed
approximately 2,650 employees equating to approximately 2,475 full-
time-equivalent employees.
Competition
The financial services business is highly competitive. Provident
competes actively with both national and state chartered banks,
savings and loan associations, securities dealers, mortgage bankers,
finance companies and other financial service entities.
1
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Supervision and Regulation
Provident is registered as a bank holding company, and is subject to
the regulations of the Board of Governors of the Federal Reserve under
the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank
holding companies are required to file periodic reports with and are
subject to 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 opt out of interstate branching.
Provident is prohibited by the BHCA from engaging in nonbanking
activities, unless such activities are determined by the Federal
Reserve to be closely related to banking. The BHCA does not place
territorial restrictions on the activities of such nonbanking-related
activities.
There are various legal and regulatory limits on the extent to which
Provident's subsidiary banks may pay dividends or otherwise supply
funds to Provident. In addition, federal and state regulatory agencies
also have the authority to prevent a bank or bank holding company from
paying a dividend or engaging in any other activity that, in the
opinion of the agency, would constitute an unsafe or unsound practice.
See ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity" and Note T included
in "Notes to Consolidated Financial Statements".
Federal and state laws regulate the operations of Provident's banking
affiliates, requiring the maintenance of reserves against deposits,
limiting the nature of loans and interest that may be charged thereon,
restricting investments and other activities, and subjecting the
banking affiliates to regulation and examination by the Federal
Reserve or state banking authorities and the FDIC.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") provides that a holding company's controlled insured
depository institutions can be held liable for any loss incurred by,
or reasonably expected to be incurred by, the FDIC in connection with
the default of an affiliated insured bank or savings association.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") covers a wide range of banking regulatory issues including:
(i) the recapitalization of the Bank Insurance Fund; (ii) deposit
insurance reform, including requiring the FDIC to establish a risk-
based premium assessment system; (iii) substantial new examination,
audit and reporting requirements on insured depository institutions
and (iv) a number of other regulatory and supervisory matters. FDICIA
requires federal bank regulatory authorities to take "prompt
corrective action" with respect to bank organizations that do not meet
minimum capital requirements.
2
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Provident'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.
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 income of
Provident and its subsidiaries cannot be predicted.
Provident Securities and Investment Company, a Provident Bank
subsidiary, is licensed as a retail securities broker and is subject
to regulation by the Securities and Exchange Commission ("SEC"), state
securities authorities and the National Association of Securities
Dealers, Inc. ("NASD"). Provident Insurance Agency, a subsidiary of
Provident Securities and Investment, is subject to regulation by state
insurance authorities. Provident Investment Advisors, Inc., a
Provident subsidiary, is a registered investment advisor, subject to
regulation by the SEC and state securities authorities.
ITEM 2. PROPERTIES
Provident and its subsidiaries occupy their headquarters located at
One East Fourth Street, Cincinnati, Ohio and additional office space
in downtown Cincinnati under long-term leases. Provident Bank owns
five buildings in the Queensgate area of Cincinnati that contain
approximately 200,000 square feet which are used for offices, data
processing and warehouse facilities. Provident Bank owns twenty-nine
of its branch locations and leases thirty-five. Provident Florida owns
three of its branch locations and leases four. For information
concerning rental obligations see Note F included in "Notes to
Consolidated Financial Statements".
ITEM 3. LEGAL PROCEEDINGS
During 1998, Provident 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 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 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's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter.
3
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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.
1998 1997
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Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------
High Close $44.00 $50.50 $56.00 $53.00 $52.50 $52.25 $47.00 $39.38
Low Close 27.06 38.25 45.63 45.00 43.25 43.13 33.50 33.50
Period End Close 37.75 40.00 45.63 52.75 48.50 47.31 42.75 35.25
Cash Dividends .20 .20 .20 .20 .20 .20 .16 .16
At February 25, 1999, there were 4,062 holders of record of
Provident's Common Stock.
In 1998 and 1997 Provident paid dividends on its Common Stock of $34.5
million and $29.6 million and on its Preferred Stock of $.8 million
and $.7 million, respectively. Provident increased its quarterly
dividend rate per share from $.20 to $.22 beginning in the first
quarter of 1999. Provident has indicated its intention to pay annual
dividends of approximately 30% of recurring net income. It is expected
that in the next several years, Provident's revenues will consist
principally of dividends paid to it by its subsidiaries and interest
generated from lending and investing activities. A discussion of
limitations and restrictions on the payment of dividends by
subsidiaries to Provident is contained under ITEM 7 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity" and Note T included in "Notes to Consolidated
Financial Statements".
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Five Year
Annual Compound For Year Ended December 31,
Growth Rate 1998 1997 1996 1995 1994
--------------------------------------------------------------------------
(Dollars In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Total Interest Income 17.2% $633,760 $571,812 $520,325 $462,396 $345,829
Total Interest Expense 22.9 (347,067) (309,212) (280,257) (259,747) (163,871)
------------------------------------------------------------
Net Interest Income 12.0 286,693 262,600 240,068 202,649 181,958
Provision for Loan and Lease Losses 21.1 (31,200) (44,750) (47,000) (14,000) (12,000)
Noninterest Income 40.0 222,987 172,658 101,437 61,837 38,468
Noninterest Expense 21.8 (302,406) (225,978) (175,162) (143,320) (120,889)
------------------------------------------------------------
Income Before Income Taxes 17.3 176,074 164,530 119,343 107,166 87,537
Applicable Income Taxes 16.9 (61,122) (57,093) (41,198) (35,306) (29,871)
-------------------------------------------------------------
Net Income (1) 17.5 $114,952 $107,437 $78,145 $71,860 $57,666
=============================================================
Per Common Share Data:
Basic Earnings (1) 11.3% $2.66 $2.59 $1.96 $1.98 $1.56
Diluted Earnings (1) 12.8 2.56 2.45 1.87 1.75 1.40
Dividends Paid 17.3 .80 .72 .54 .47 .42
Book Value 13.6 16.29 14.69 12.54 10.78 9.16
Balances at December 31:
Total Investment Securities 16.6% $1,514,153 $1,381,707 $1,028,207 $959,904 $685,920
Total Loans and Leases 10.7 5,623,505 5,051,842 5,311,448 4,896,076 4,204,538
Total Managed Loans and Leases 21.1 8,843,543 6,584,528 5,568,709 4,896,076 4,204,538
Reserve for Loan and Lease Losses 13.4 75,907 71,980 66,693 60,235 51,979
Total Assets 11.6 8,134,987 7,106,859 6,824,388 6,205,351 5,411,491
Noninterest Bearing Deposits 9.6 669,840 605,166 554,262 523,631 452,458
Interest Bearing Deposits 10.6 4,657,481 4,091,132 4,042,218 3,654,920 3,616,191
Total Deposits 10.5 5,327,321 4,696,298 4,596,480 4,178,551 4,068,649
Long-Term Liabilities 30.3 1,033,173 786,974 949,913 820,083 383,433
Total Shareholders' Equity 15.9 703,854 626,341 513,750 432,537 359,351
Other Statistical Information:
Return on Average Assets (1) 1.45% 1.56% 1.23% 1.29% 1.24%
Return on Average Equity (1) 16.61 19.13 17.03 18.37 16.64
Dividend Payout Ratio 30.72 28.15 28.12 26.17 30.62
Capital Ratios at December 31:
Total Equity to Total Assets 8.65% 8.81% 7.53% 6.97% 6.64%
Tier 1 Leverage Ratio 9.00 9.94 8.97 7.13 7.21
Tier 1 Capital to Risk-Weighted Assets 8.55 9.67 9.19 7.52 7.86
Tier 2 Capital to Risk-Weighted Assets 2.60 3.44 3.81 4.25 4.99
Total Risk-Based Capital to
Risk-Weighted Assets 11.15 13.11 13.00 11.77 12.85
Loan Quality Ratios at December 31:
Reserve for Loan and Lease Losses to
Total Loans and Leases 1.35% 1.42% 1.26% 1.23% 1.24%
Reserve for Loan and Lease Losses to
Nonperforming Loans 178.30 153.82 304.51 142.57 714.29
Nonperforming Loans to Total Loans
and Leases 0.76 0.93 0.41 0.86 0.17
Net Charge-Offs to Average Net Loans
and Leases 0.48 0.78 0.85 0.13 0.02
(1) Selected Financial Data on Operating Income follows (excludes Special Charges and Exit Costs (1998)
and One-Time Deposit Insurance Charges (1996):
Net Income 20.3% $129,255 $107,437 $83,450 $71,860 $57,666
Basic Earnings 13.9 2.99 2.59 2.09 1.98 1.56
Diluted Earnings 15.5 2.88 2.45 1.99 1.75 1.40
Return on Average Assets 1.63% 1.56% 1.31% 1.29% 1.24%
Return on Average Equity 18.67 19.13 18.18 18.37 16.64
</TABLE>
5
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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.
Provident Financial Group, Inc. publishes forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, new banking and financial service products, Year
2000 issues and similar matters. In particular, statements made within
"Business Initiatives", "Performance Review", "Provision for Loan and
Lease Losses", "Credit Risk Management" and "Year 2000 Compliance"
discussions included within MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS have forward looking
statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. Provident notes
that a variety of factors could cause its actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. These risks
and uncertainties include, without limitation, changes in interest
rates, developments in the economies served by Provident,
deterioration in general economic conditions which could adversely
affect borrowers, changes in anticipated credit quality trends, the
ability to achieve the results anticipated from the Performance
Optimization Project, changes in accounting, tax or regulatory
practices or requirements and other factors noted in conjunction with
forward-looking statements. In addition, borrowers could suffer
unanticipated losses without regard to general economic conditions.
The result of these and other factors could cause a difference from
expectations of the level of defaults and a change in the risk
characteristics of the loan and lease portfolio and a change in the
provision for loan and lease losses. Forward-looking statements speak
only as of the date made. Provident undertakes no obligations to
update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
INTRODUCTION
Provident Financial Group, Inc. (Parent) is a holding company for two
FDIC member banks, The Provident Bank (in Ohio) and Provident Bank of
Florida. The Provident Bank of Kentucky was merged into The Provident
Bank on March 23, 1998. Major business lines include: Provident
Capital Corp, a national provider of middle-market structured finance
products; Commercial Banking, a regional provider of commercial
lending products and services; Commercial Mortgage, a regional lender
of commercial real estate credit; Information Leasing Corporation, a
full service, small-ticket equipment leasing company; Provident
Commercial Group, an equipment leasing and finance operation;
Provident Consumer Financial Services, a mortgage loan division;
Consumer Lending, a regional operation originating consumer loans and
leases; and Consumer Banking, providing sales and services of consumer
and small business deposits, loans, trust and brokerage services and
investment products.
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PERFORMANCE SUMMARY
The following table summarizes three-year financial data for
Provident, along with calculated variances from the prior year:
TABLE 1: Three-Year Variance Schedule
<TABLE>
<CAPTION>
Year Ending 1998 Year Ending 1997 Year Ending 1996
-----------------------------------------------------------------
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 $287 $24 9% $263 $23 9% $240 $37 18%
Noninterest Income 223 50 29 173 72 70 101 39 64
Total Revenue 510 74 17 436 95 28 341 76 29
Provision for Loan
and Lease Losses 31 (14) (30) 45 (2) (5) 47 33 236
Noninterest Expense (1) 302 76 34 226 51 29 175 32 22
Net Income (1) 115 8 7 107 29 37 78 6 9
Total Loans and Leases 5,624 572 11 5,052 (259) (5) 5,311 415 8
Total Assets 8,135 1,028 14 7,107 283 4 6,824 619 10
Total Deposits 5,327 631 13 4,696 100 2 4,596 417 10
Long-Term Liabilities 1,033 246 31 787 (163) (17) 950 130 16
Stockholders' Equity 704 78 12 626 112 22 514 81 19
Per Common Share:
Book Value 16.29 1.60 11 14.69 2.15 17 12.54 1.76 16
Diluted Earnings (1) 2.56 0.11 4 2.45 0.58 31 1.87 0.12 7
(1) Variances on Operating Income follows (excludes Special Charges and Exit Costs (1998)
and One-Time SAIF Deposit Insurance Charge (1996):
Noninterest Expense 280 54 24 226 59 35 167 24 17
Net Income 129 22 20 107 24 29 83 11 16
Diluted Earnings 2.88 0.43 18 2.45 0.46 23 1.99 0.24 14
</TABLE>
Provident reported net income of $115.0 million, 107.4 million and
$78.1 million for 1998, 1997 and 1996,respectively. Net income for
these years was significantly impacted by the following events. First,
net income for 1998 and 1996 was reduced by unusual and significant
after-tax charges of $14.3 million (special charges and exit costs)
and $5.3 million (recapitalization of SAIF deposit insurance fund),
respectively. Second, Provident changed the structure of its
securitization transactions to the "cash-out" method beginning in the
first quarter of 1998. Subsequently, the Financial Accounting
Standards Board and Securities and Exchange Commission indicated that
this change be retroactively applied to all securitization
transactions. As a result, previously reported earnings per share was
restated by an additional 3 cents for the first nine months of 1998
and a reduction of 18 cents and 7 cents for 1997 and 1996,
respectively.
Excluding the unusual and significant charges, earnings per diluted
share increased 18% during 1998 to $2.88, compared to $2.45 for 1997
and $1.99 for 1996. Alternatively, if the positive impact of the
accounting change was excluded, it would have resulted in only an 8%
increase in earnings per diluted share during 1998 to $2.85, compared
to $2.63 for 1997 and $2.06 for 1996.
Contributing to the increased income for 1998 and 1997 was 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's emphasis
on fee revenue, primarily from gains on the sale of loans and leases,
rental income on operating leases and non-deposit service charges and
fees. The growth in net interest income was a result of the growth in
the loan and lease portfolio.
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Expenses for Provident have also increased during this three-year time
period. During 1998, management took specific steps to slow the
increase of expenses. First, those business units where the prospect
for future revenue growth did not justify current operating losses
were terminated. Second, a reengineering project, referred to as the
Performance Optimization Project ("POP"), was initiated with areas
being identified where productivity could be improved. Implementation
of the POP process began at the end of 1998 with cost savings expected
to occur during 1999 and the first half of the year 2000. A $22.0
million charge to earnings was taken during the fourth quarter of 1998
covering employee termination benefits, business line exit costs,
equipment disposition and professional fees.
Total assets for 1998, 1997 and 1996 were $8.1 billion, $7.1 billion
and $6.8 billion, respectively. In addition, Provident sells a
significant portion of the loans and leases it originates while
retaining the servicing rights. Managed assets, which represent total
assets plus loans and leases serviced for others, totaled $11.4
billion, $8.6 billion and $7.1 billion as of December 31, 1998, 1997
and 1996, respectively. Asset quality ratios for 1998 improved during
1998 as compared to 1997. The ratio of nonperforming assets to total
assets was .56%, .83% and .42% as of December 31, 1998, 1997 and 1996,
respectively. The ratio of reserve for loan and lease losses to total
loans and leases was 1.35%, 1.42% and 1.26% at December 31, 1998, 1997
and 1996, respectively.
Total deposits for 1998, 1997 and 1996 were $5.3 billion, $4.7 billion
and $4.6 billion. The primary area of deposit growth during the past
two years has been from Provident's issuance of certificates of
deposit ("CD's"), most notably brokered CD's and in-market public
funds CD's. Long-term borrowings increased $246.2 million during 1998
as a result of additional borrowing from the Federal Home Loan Bank.
Shareholders' equity has increased $77.5 million and $112.6 million
during 1998 and 1997, respectively. The growth in equity has been the
result of income exceeding dividends paid, the exercise of stock
options and shares of stock distributed in connection with
acquisitions. During August 1998, the Board of Directors authorized
the purchase of up to 1 million shares of treasury stock. As of
December 31, 1998, Provident had purchased 572,700 shares.
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Other than the efficiency ratio which has steadily risen, key
performance ratios of Provident have remained relatively consistent
over the past three years. 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 income to average total assets) and return on equity (net
income to average total equity). The following table provides a
comparison of these and other performance ratios:
TABLE 2: Selected Performance Ratios
1998 1997 1996
---------------------
Net Interest Margin 3.93% 4.03% 3.96%
Efficiency Ratio 56.42 53.06 48.84
Return on Average Assets (Operating Income) 1.63 1.56 1.31
Return on Average Equity (Operating Income) 18.67 19.13 18.18
Average Equity to Average Assets 8.73 8.14 7.22
Dividend Payout to Net Earnings 30.72 28.15 28.12
BUSINESS INITIATIVES
The financial services industry is highly competitive. To compete
effectively, management is focusing on its core strategy and the
application of steady and basic business processes. Provident's plan
is to increase profitability by increasing sales of its existing
products and services in its current markets, introducing its products
and services in new markets, and adding new products and services.
Examples of how this strategy is being applied include:
- - Pricing Disciplines -- Analytical procedures are used to measure the
profitability for all products and services. Risk adjusted capital
allocations, tiered pricing whenever possible, data driven analysis
and return on equity hurdles are used to measure the profitability
of each of the products and services offered.
- - New Commercial Lending and Leasing Offices -- Commercial lending
expanded during 1997 and 1998 by opening four offices in major cities.
Provident Capital Corp opened offices in Chicago and San Francisco;
Provident Commercial Group secured an office in Phoenix; and
Commercial Banking expanded by opening an office in Indianapolis and
placing a greater emphasis on the West Coast of Florida. These
locations are expected to contribute to the continuing growth of the
commercial lending business.
- - Expansion of Information Leasing Corporation -- Information
Leasing is an example of Provident's ability to identify and expand
new products and businesses. This business line entered national
markets in 1997 and implemented credit scoring to its underwriting
procedures and internet-based transaction processing in 1998.
- - National Nonconforming Mortgage Operations -- Provident Consumer
Financial Services, Provident's residential lending and servicing
business line, continues to represent a major business opportunity.
During 1998, over $1.1 billion of nonconforming mortgage loans were
originated.
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- - Warehouse Lending -- During 1997, Provident began originating
warehouse lending lines (short-term financing to mortgage bankers
secured by residential loans). A significant factor in the growth of
Warehouse Lending was the leveraging of the customer relationships
developed by the nonconforming mortgage business of Provident Consumer
Financial Services. As of December 31, 1998, warehouse lending lines
had grown to $470 million of which $400 million had been securitized
and sold.
- - Loan Securitizations and Sales with Retained Servicing --
Management remains committed to moving assets off-balance sheet as
strong lending efforts, from both internal and third-party sources,
continue to generate assets more rapidly than deposits can be
generated. Provident securitizes and/or sells nonconforming
residential loans, equipment leases, warehouse lines, auto leases and
home equity loans, while retaining the servicing of the loans and
leases. The proceeds from the loan securitizations/sales permit
Provident to originate a higher volume of loans and leases than would
normally be possible for a company its size.
- - Increased Concentration on the ATM Network -- In October, 1998 an
agreement was completed to deploy 150 ATMs in Wal-Mart and Sam's Club
stores in Ohio and Kentucky. In January 1999, an agreement was signed
with United Dairy Farmers, a Cincinnati based operator of convenience
stores, to provide an additional 79 ATMs. This will increase total
ATMs at United Dairy Farmers store locations to 203. Through this
agreement, Provident will become the exclusive provider of ATM
services for United Dairy Farmers. With these agreements, Provident's
ATM network will exceed 450 locations.
- - Improved Efficiency -- Provident has recently taken multiple
steps to improve its operating efficiencies including the elimination
or reduction of products and services for which the prospect for
profit was not satisfactory. Programs terminated include the MeritValu
program, Free Market Partners, the national conforming mortgage
division and overlapping branches. In addition, a consulting firm was
employed to assist Provident in identifying process reengineering
opportunities in order to reduce costs, increase fee income and re-
deploy resources to grow revenues. The review, referred to as the
Performance Optimization Project ("POP"), was completed in December
1998, with implementation to follow in 1999 and 2000.
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BUSINESS LINES
Provident has identified eight major lines of business. The following
table summarizes net income by these lines for the past two years.
TABLE 3: Net Income by Business Lines
1998 1997
-------------------
(In Thousands)
Commercial:
Commercial Banking $29,578 $28,829
Provident Capital Corp 24,051 20,602
Commercial Mortgage 17,460 15,168
Information Leasing Corporation 10,285 3,733
Provident Commercial Group 10,135 7,534
Retail:
Provident Consumer Financial Services 18,219 18,442
Consumer Lending 9,891 7,625
Consumer Banking 3,541 5,701
Other 6,095 (197)
Special Charges and Exit Costs (14,303) -
-------------------
$114,952 $107,437
===================
Business line descriptions and fluctuation analysis follows:
Commercial:
Commercial Banking is comprised of the following business units:
Commercial Lending, Business Banking, Corporate Services,
Electronic Merchant Services and International Services. Commercial
Lending 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 nationwide.
Electronic Merchant Services provides retailers with an easy,
inexpensive and convenient system to accept credit cards for
payments of goods and services. International Services provides a
full range of banking services for firms and individuals doing
business outside the United States. Net income increased 3% during
1998 as a result of improved credit quality, which was offset by
net interest margin compression.
Provident Capital Corp is a national provider of funding to support
middle market leveraged financing transactions. Capital Corp is
comprised of the following 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, recapitaliza-
tions, acquisitions and business expansions. Business Credit is a
national provider of asset-based financing for middle-market
manufacturing, distribution service and select technology
companies. Leveraged Capital Partners provides mezzanine financing
to companies with transactions ranging from $2 million to $7
million. Net income for Capital Corp increased for 1998 as a result
of higher fee income, which was partially offset by a higher
provision for loan losses.
11
<PAGE>
Commercial Mortgage provides a variety of loans and services to
support the commercial real estate market primarily in Ohio and the
surrounding geographic area. 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, light industrial buildings and distribution facilities.
Higher net interest income resulting from a larger commercial real
estate loan portfolio was the primary reason for the increase in
net income for 1998.
Information Leasing Corporation 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 acquisitions from existing customers. In addition to
being a direct equipment lessor, Information Leasing manages, on an
outsource basis, the lease acquisition process for certain of its
customers. A cash gain from Information Leasing's first lease
securitization and sale was the primary reason for the higher net
income in 1998.
Provident Commercial Group 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, construction,
distribution, manufacturing and mining equipment, as well as
transportation equipment such as trucks, tractors and freight
containers. Net income for Commercial Group increased for 1998 as a
result of higher rental income along with larger gains realized on
the sale of lease residuals.
Retail:
Provident Consumer Financial Services originates conforming and
nonconforming residential loans to consumers ("residential
lending") and short-term financing to mortgage originators and
brokers ("warehouse lending"). Characteristics of nonconforming
loan originated include: 90% with "B" credit grade or better; 65%
with full documentation and 10% with reduced documentation; 65%
have prepayment penalties; 90% to 95% are secured by first
mortgages; 90% are owner occupied; and, on average, have a 75% to
80% loan-to-value ratio. Consumer Financial Services has an in-
house mortgage servicing department as well as a network platform
that permits the processing of nonconforming mortgage transactions
on a national basis. Consumer Financial Services is licensed to
operate in all 50 states. Generally, residential loans are sold
through securitizations. Warehouse loans are sold with loan
servicing retained.
12
<PAGE>
Net income for its residential lending business was $10.9 million
and $18.8 million for 1998 and 1997, respectively. During 1998, the
nonconforming mortgage lending business increased its staff to
generate higher loan production. Although loan production did
increase, gains recognized on loan sales remained relatively
unchanged. This was due to increased competition, resulting in
higher loan acquisition premiums, and a decrease in the loans'
average life, both of which was experienced industry-wide.
Net income (loss) for its warehouse lending business was $7.3
million and $(.3) million for 1998 and 1997, respectively. The
warehouse lending business began operations during the second half
of 1997. Due to start-up costs and the ramping up of production, a
small loss was incurred during 1997. During 1998, the warehouse
lending business became fully operational which resulted in the
improved net income.
Consumer Lending is comprised of the following business units:
Direct Lending, Indirect Lending, Home Equity and Credit Card.
These business units provide auto leasing, instalment, home equity
and credit card lending to consumers. Services are provided through
third party financing arrangements, direct origination programs and
Provident's retail branch offices. The increase in net income was
due primarily to expansion of auto lease originations into an
additional five midwestern states.
Consumer Banking sells and services consumer and small business
deposits, loans, trust and brokerage services, and investment
products. The physical distribution includes a network of fifty-
eight traditional branches, thirteen in-store branches and
approximately 340 ATM's in Ohio, Kentucky and Florida markets.
Recent 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. The decrease in net
income for Consumer Banking was due primarily to compression in the
deposit margin as a result of lower interest rates and a shift in
customer preference to higher yielding money market accounts.
Other includes income and expenses not allocated to the business
lines, net securities gains and the results of the treasury unit. A
primary reason for the increase in net income for this category was
higher gain on the sale of investment securities.
13
<PAGE>
DETAILED INCOME ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on
loans, leases and investments and interest incurred on deposits and
other borrowed funds. Net interest income is affected by changes in
both interest rates and the amounts of interest earning assets and
interest bearing liabilities outstanding.
Net interest income represents the principal source of income for
Provident. In 1998, 1997 and 1996, net interest income on a taxable
equivalent basis was $286.9 million, $263.0 million and $240.6
million, respectively, which represented approximately 56%, 60% and
70% of net revenues (net interest income plus noninterest income). The
downward trend of this ratio is due primarily to the sale of loans and
leases resulting in lowering interest income and raising noninterest
income.
Net interest margin represents net interest income as a percentage of
total interest earning assets. The net interest margin was 3.93%,
4.03% and 3.96% for 1998, 1997 and 1996, respectively. The decrease in
the margin during 1998 was a result of strong earning asset growth
combined with an increase in market funding and a small decline in
earning asset spreads.
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,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------
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 $3,172.8 $293.1 9.24% $2,581.0 $239.9 9.29% $2,286.2 $212.0 9.27%
Mortgage 446.1 41.7 9.35 495.6 46.6 9.40 457.6 41.5 9.07
Construction 359.0 30.9 8.62 291.9 25.7 8.81 242.1 21.5 8.89
Lease Financing 317.5 34.8 10.97 267.1 29.7 11.12 141.5 11.4 8.02
Consumer Lending:
Instalment 677.3 66.4 9.80 813.5 80.7 9.93 972.9 92.4 9.50
Residential 226.5 20.8 9.19 268.5 21.9 8.14 460.3 39.0 8.47
Lease Financing 506.9 38.2 7.54 616.4 47.8 7.76 457.7 34.3 7.49
------------------------------------------------------------------------------------
Total Loans and Leases 5,706.1 525.9 9.22 5,334.0 492.3 9.23 5,018.3 452.1 9.01
Investment Securities:
Taxable 1,506.4 99.9 6.63 1,164.2 78.5 6.74 1,026.8 67.0 6.53
Tax-Exempt 4.3 .3 7.55 8.3 .5 6.13 14.3 .9 6.10
------------------------------------------------------------------------------------
Total Investment Securities 1,510.7 100.2 6.63 1,172.5 79.0 6.74 1,041.1 67.9 6.52
Trading Account Securities 68.4 6.5 5.51 - - - - - -
Federal Funds Sold and Reverse
Repurchase Agreements 24.9 1.3 5.41 15.3 .9 5.71 17.9 .9 5.25
------------------------------------------------------------------------------------
Total Earning Assets 7,310.1 633.9 8.67% 6,521.8 572.2 8.77% 6,077.3 520.9 8.57%
Cash and Noninterest
Bearing Deposits 193.3 155.9 140.8
Other Assets 426.2 218.4 136.3
-------- -------- --------
Total Assets $7,929.6 $6,896.1 $6,354.4
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest Bearing Liabilities:
Deposits:
Demand Deposits $264.4 5.6 2.13% $246.3 5.5 2.22% $253.5 4.9 1.93%
Savings Deposits 1,091.3 44.5 4.08 629.9 22.2 3.52 578.1 15.7 2.71
Time Deposits 3,046.4 172.1 5.65 3,378.2 193.8 5.74 2,989.5 172.3 5.76
------------------------------------------------------------------------------------
Total Deposits 4,402.1 222.2 5.05 4,254.4 221.5 5.21 3,821.1 192.9 5.05
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements 1,068.5 57.9 5.42 493.8 26.4 5.34 610.0 32.2 5.27
Commercial Paper 232.7 13.0 5.59 156.9 9.2 5.86 143.6 7.9 5.49
Short-Term Notes Payable 1.5 .1 5.60 1.6 .1 5.23 1.7 .1 5.29
------------------------------------------------------------------------------------
Total Short-Term Debt 1,302.7 71.0 5.45 652.3 35.7 5.46 755.3 40.2 5.31
Long-Term Debt 737.9 45.1 6.12 687.3 43.4 6.32 765.8 46.4 6.05
Junior Subordinated Debentures 98.8 8.7 8.76 98.8 8.6 8.77 9.5 .8 8.62
------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 6,541.5 347.0 5.31% 5,692.8 309.2 5.43% 5,351.7 280.3 5.24%
Noninterest Bearing Deposits 545.0 451.0 398.8
Other Liabilities 150.9 190.7 144.9
Shareholders' Equity 692.2 561.6 459.0
Total Liabilities and
-------- -------- --------
Shareholders' Equity $7,929.6 $6,896.1 $6,354.4
======== ------ ======== ------ ======== ------
Net Interest Income $286.9 $263.0 $240.6
====== ====== ======
Net Interest Margin 3.93% 4.03% 3.96%
==== ==== ====
Net Interest Spread 3.36% 3.34% 3.33%
==== ==== ====
</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: 1998 - $22.7
million, 1997 - $18.3 million and 1996 - $17.4 million.
15
<PAGE>
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.
TABLE 5: Net Interest Income Changes Due to Volume and Rates
Year Ended December 31,
------------------------------------------
1998 Changes from 1997 Changes from
1997 Due to 1996 Due to
------------------------------------------
Volume Rate Volume Rate
------------------------------------------
(In Thousands)
Interest Earned On:
Loans and Leases:
Commercial Lending:
Commercial and Financial $54,677 $(1,476) $27,395 $486
Mortgage (4,628) (222) 3,532 1,522
Construction 5,796 (567) 4,384 (204)
Lease Financing 5,536 (418) 12,790 5,561
Consumer Lending:
Instalment (13,354) (981) (15,676) 4,018
Residential (3,663) 2,619 (15,670) (1,444)
Lease Financing (8,289) (1,352) 12,276 1,298
-----------------------------------------
Net Loans and Leases 36,075 (2,397) 29,031 11,237
Investment Securities:
Taxable 22,712 (1,298) 9,206 2,276
Tax-Exempt (282) 100 (364) 4
Trading Account 6,463 - - -
Federal Funds Sold 525 (49) (148) 79
-----------------------------------------
Total 65,493 (3,644) 37,725 13,596
-----------------------------------------
Interest Paid On:
Demand Deposits 392 (230) (143) 712
Savings Deposits 18,373 3,958 1,502 5,001
Time Deposits (18,787) (2,849) 22,303 (865)
-----------------------------------------
Total Deposits (22) 879 23,662 4,848
Short-Term Debt:
Federal Funds Purchased 31,121 384 (6,200) 394
Commercial Paper 4,253 (443) 762 561
Short-Term Notes Payable (3) 6 (6) (1)
-----------------------------------------
Total Short-Term Debt 35,371 (53) (5,444) 954
Long-Term Debt 3,128 (1,448) (4,907) 1,996
Junior Subordinated Debentures 5 (5) 7,832 14
-----------------------------------------
Total 38,482 (627) 21,143 7,812
-----------------------------------------
Net Interest Income $27,011 $(3,017) $16,582 $5,784
=========================================
Provision for Loan and Lease Losses
Charges to the 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 1998, 1997
and 1996, the provision for loan and lease losses was $31.2 million,
$44.8 million and $47.0 million, respectively. Factors that caused
fluctuations in the balance of reserve for loan and lease losses or
the level of credit risk during the three years include:
16
<PAGE>
- - Loan Charge-Offs -- 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. Net charge-
offs for 1998, 1997 and 1996 were $27.3 million, $41.3 million and
$41.9 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 1998 and
1996, total loans and leases grew 11% and 8%, respectively, while in
1997, total loans and leases decreased 5%.
- - 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 22%, 24%
and 36% in 1998, 1997 and 1996 respectively. The decrease in this
percentage was due to the sale of consumer loans and leased vehicles
and the strong growth in commercial lending during this time period.
Noninterest Income
Table 6 details the components of noninterest income and their
change since 1996:
TABLE 6: Noninterest Income
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
-------------------
1998 1997 1996 1998/97 1997/96
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $27,242 $24,752 $21,537 10.1% 14.9%
Other Service Charges and Fees 51,678 37,058 29,328 39.5 26.4
Operating Lease Income 37,481 26,207 10,033 43.0 161.2
Gain on Sales of Loans and Leases 80,221 60,883 26,255 31.8 131.9
Security Gains 12,940 9,713 96 33.2 -
Other 13,425 14,045 14,188 (4.4) (1.0)
-----------------------------------------------
$222,987 $172,658 $101,437 29.1% 70.2%
===============================================
</TABLE>
Noninterest income has grown significantly over the past two years.
Noninterest income increased $50.3 million (29%) during 1998 and
$71.2 million (70%) during 1997. Explanations for the growth in
noninterest income by category follow:
- - Service Charges on Deposit Accounts -- Service charges on deposit
accounts have increased for 1998 and 1997 as a result of increased
fees received on corporate deposit accounts, and ATM usage.
- - Other Service Charges and Fees -- The increased revenue in other
service charges and fees is primarily attributable to two areas.
First, Provident Capital Corp at times lends funds to businesses and
receives stock or stock warrants of the business. This permits Capital
Corp to participate in the business's growth. Subsequently, these
stocks or stock warrants are recognized as noninterest income. Second,
loan servicing fees continue to increase as Provident Consumer
Financial Services retains the servicing of securitized residential
loans sold.
17
<PAGE>
- - Operating Lease Income -- The growth in operating lease revenue
is the result of three activities. First, $693.4 million of
automobiles were sold and leased back during 1998 and 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 Corporation was acquired near the end of
1996. During 1998 and 1997, Information Leasing recognized operating
lease revenue of $8.6 million and $8.8 million, respectively. Finally,
the continued expansion of Provident Commercial Group resulted in an
increase in operating lease revenue of $4.1 million and $7.5 million
during 1998 and 1997, respectively.
- - Gain on Sales of Loans and Leases -- Provident securitizes and/or
sells a portion of its loans and leases, while generally retaining the
servicing of these loans and leases. The proceeds from these sales
permit Provident to originate a higher volume of loans and leases than
would normally be possible for a company its size. The following
provides detail of the gain on sales recognized during the past three
years.
TABLE 7: Gain on Sale of Loans and Leases
1998 1997 1996
---------------------------
(In Thousands)
Gain/(Loss) Based on Cash Received:
Equipment Lease Securitization $13,429 $- $-
Equipment Lease Residuals 8,939 1,761 1,694
Auto Lease Sales and Terminations 7,549 4,804 2,468
Conforming Residential Loan Sales 5,077 6,335 2,266
Credit Card Whole Loan Sales 3,420 - -
Nonconforming Whole Loan Sales 290 495 1,800
Other Loan Sales 447 156 328
Gain/(Loss) Based on Retained Interest in
Securitized Assets Received:
Nonconforming Loan Securitizations 36,337 36,886 17,699
Prime Consumer Home Equity Securitizations 4,733 10,446 -
---------------------------
$80,221 $60,883 $26,255
===========================
Equipment leases of $211.3 million, originated or acquired by
our Information Leasing business line, were securitized and sold
during 1998. The recognized gain of $13.4 million was based on cash
cash received.
18
<PAGE>
Nonconforming residential loans, originated or acquired by our
Consumer Financial Services business line, have been securitized
and sold on a quarterly basis since 1996. Total loans securitized
and sold were $1,060 million, $844 million and $264 million in
1998, 1997 and 1996, respectively. Under these types of sales,
gains or losses are determined based on a present value calculation
of future cash flows, using the cash-out methodology, of the
underlying loans, net of interest payments to security holders,
loan loss and prepayment assumptions and normal servicing revenue.
Interest income is recognized throughout the life of the
securitization at the rate that the future cash flows have been
discounted.
Under the securitizations, residual cash flows are retained in the
securitization trusts and allowed to accumulate. These accumulated
cash flows act as credit enhancement assets for the securitization
trusts' security holders. Once certain targeted levels are
achieved, subsequent residual cash flows are distributed to
Provident on an unrestricted basis. In addition, the accumulated
cash flows held within the securitization trusts will also be
distributed to Provident over the term of the securitization. The
cash-in method of determining the fair value of the retained
interest in securitized assets discounts the projected residual
cash flows at the time such cash flows are expected to be received
by the securitization trust. The cash-out method of determining the
fair value of retained interest in securitized assets required by
the FASB and SEC discounts the projected residual cash flows at the
time such cash flows are expected to be distributed to Provident.
During the first quarter of 1998, Provident changed its
securitization structure as discussed in Note C to the Consolidated
Financial Statements, and as a result, the calculation of gains on
securitization of loans was computed using the cash-out method.
Prior to 1998, the cash-in method had been used. During the fourth
quarter of 1998, the Financial Accounting Standards Board and
Securities and Exchange Commission indicated that the cash-out
method is the only acceptable method to calculate gains. The cash-
out method results in lower initial gains on the sale of loans and
higher subsequent interest income from the accretion of the
additional cash-out discount. As discussed in Provident's amended
Form 10-K for 1997, prior years' results were restated to reflect
the change in methodology.
Home equity loans have also been sold and securitized during 1998
and 1997. During 1998, $183.2 million of home equity lines of
credit were sold resulting in a recognized gain of $4.7 million.
During 1997, $244.5 million of home equity loans were sold
providing a gain of $10.4 million.
19
<PAGE>
Management recognizes that there are risks involved in recording
noncash loan sale gains. However, management believes it is making
conservative assumptions as to anticipated prepayment speeds and
credit losses. Prepayment speed assumptions for nonconforming loan
securitizations have been increased, starting with a base 10%
constant prepayment rate ("CPR") for unseasoned loans, and
increasing during the life to a 35% CPR for sales occurring since
June 30, 1998. Weighted average CPR's for all securitizations are
10.6% and 29.5% for the base CPR and ramped CPR, respectively. The
average annual loan loss assumption is 1.06% and the total loan
loss to loans sold is 3.25%.
No assurance can be provided that the level of loan originations
and acquisitions, along with a favorable interest rate market, will
continue to permit the recognition of such gains on sales of loans
in future years.
- - Security Gains -- Security gains increased during 1998 and 1997 as
a result of management's decision to adopt a more active portfolio
management style and to take advantage of interest rate movements.
- - Other -- The largest components of revenue within other income have
been income from investment in partnerships ($1.7 million in 1998
and 2.9 million in 1997) and the receipt of additional consideration
related to a loan that had been restructured ($4.0 million in 1997
and $10.0 million in 1996).
Noninterest Expense
Table 8 details the components of noninterest expense and their change
since 1996:
TABLE 8: Noninterest Expense
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
-------------------
1998 1997 1996 1998/97 1997/96
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Salaries and Employee Benefits $124,639 $101,454 $79,830 22.9% 27.1%
Depreciation on Operating
Lease Equipment 21,662 17,667 7,221 22.6 144.7
Occupancy 16,951 12,744 9,673 33.0 31.7
Professional Services 18,276 14,912 11,463 22.6 30.1
Equipment Expense 20,771 15,208 11,348 36.6 34.0
Charges and Fees 14,317 12,652 8,583 13.2 47.4
Marketing 9,624 7,890 5,103 22.0 54.6
Other 54,161 43,451 33,780 24.6 28.6
------------------------------------------------
Noninterest Expense Before
Significant and Unusual Items 280,401 225,978 167,001 24.1 35.3
Special Charges and Exit Costs 22,005 - - - -
One-Time Deposit Insurance Charge - - 8,161 - -
------------------------------------------------
$302,406 $225,978 $175,162 33.8% 29.0%
================================================
</TABLE>
Noninterest expense before significant and unusual items increased
$54.4 million (24%) and $59.0 million (35%) during 1998 and 1997,
respectively. Components of noninterest expense, along with an
explanation as to their fluctuations, follow:
20
<PAGE>
- - Salaries and Employee Benefits -- The increase in compensation
was primarily from the continued expansion of Consumer Financial
Services and Information Leasing (1998 and 1997), the acquisition of
two Florida banks (1998 and 1997) and the creation of a national
warehouse lending function (1998).
- - Depreciation on Operating Lease Equipment -- The acquisition of
Information Leasing in December, 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 -- An increase in rent expense, primarily in the areas
of Consumer Financial Services (1998 and 1997), Provident Bank of
Florida (1998 and 1997) and warehouse lending (1998) resulted in
higher occupancy expense.
- - Professional Services -- The increase in professional services was
in management consulting fees, temporary employment fees and legal
fees for 1998 and management consulting fees for 1997.
- - Equipment Expense -- Equipment expense has increased primarily as
a result of the purchase and subsequent depreciation of computer and
data processing equipment for both 1998 and 1997.
- - Charges and Fees -- Charges and fees have increased as a result
of higher loan origination costs (1998) and the establishment of a
loss contingency reserve for auto sale-leaseback transactions (1997).
- - Marketing -- The increase in marketing expense is due to
Provident's efforts to improve its name recognition and expand its
customer base. Marketing concepts include the "Personal Banker" and
"Simple Truth About Banking" advertisement campaigns, the introduction
of a new logo and branch signage.
- - Other -- Larger fluctuations within other noninterest expense
include Year 2000 computer compliance (1998 and 1997), communications
expenditures (1998) and management recruitment expenditures (1997).
21
<PAGE>
- - Special Charges and Exit Costs -- Provident's efficiency ratio
(operating expenses as a percentage of net revenue) has increased over
the past three years. As a result, Provident took two courses of
action. First, a Performance Optimization Project ("POP") was
initiated during the second half of 1998. POP is expected to enable
Provident to undertake new revenue generating initiatives without
significantly increasing expenses. As part of POP, Provident
associates developed over 1,000 specific actions to increase
productivity. These actions will be substantially implemented by the
end of 1999. Second, an analysis of current and future profitability
of various business units was performed. As a result of this analysis,
a determination was made that the prospects for future revenue growth
did not justify the continued operating losses by the MeritValu and
Free Markets Partner units. Accordingly, these business units were
formally discontinued during the fourth quarter of 1998. In connection
with these two initiatives, Provident recorded a special charge of $22
million during the fourth quarter of 1998. This charge is composed of
employee termination benefits, fixed asset write-offs, exit costs for
the MeritValu and Free Market Partners units, and professional fees
incurred in completing the reengineering project. Additional details
of these components are provided in Note P to the Consolidated
Financial Statements.
- - One-Time Deposit Insurance Charge -- A one-time charge of $8.2
million was assessed for the recapitalization of the Savings
Association Insurance Fund during 1996.
Income Taxes
The effective tax rate for 1998 and 1997 was 34.7%, while the
effective tax rate for 1996 was 34.5%.
FINANCIAL CONDITION ANALYSIS
Short-Term Investments and Investment Securities
As of December 31, 1998 and 1997, federal funds sold and reverse
repurchase agreements outstanding were $60.0 million and $1.7 million.
The amount of federal funds sold changes daily as cash is managed to
meet reserve requirements and customer needs. After funds have been
allocated to meet lending and investment requirements, any remainder
is placed in overnight federal funds.
As of December 31, 1998 and 1997, Provident Financial held $50.3
million and $- million, respectively, in trading account securities.
Beginning in 1998, Provident Financial began purchasing securities
with the intention of recognizing short-term profits. These securities
are carried at fair value with realized and unrealized gains and
losses reported in other noninterest income.
22
<PAGE>
Investment securities represented approximately 21% of average earning
assets in 1998, compared to 18% in 1997 and 17% in 1996. The amortized
cost and market value of investment securities available for sale at
the dates indicated are summarized in Table 9:
TABLE 9: Investment Securities
Amortized Cost at December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
(In Thousands)
U.S. Treasury and Federal Agency Debentures $152,737 $17,251 $83,307
State and Political Subdivisions 1,939 10,200 5,270
Mortgage-Backed Securities 1,057,902 1,044,304 654,444
Asset-Backed Securities 247,311 252,142 200,071
Other Securities 68,119 57,606 78,992
-----------------------------------
Total Securities $1,528,008 $1,381,503 $1,022,084
===================================
Market Value at December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
(In Thousands)
U.S. Treasury and Federal Agency Debentures $151,338 $17,401 $83,741
State and Political Subdivisions 1,920 10,396 5,270
Mortgage-Backed Securities 1,047,769 1,043,811 658,325
Asset-Backed Securities 245,855 252,009 200,160
Other Securities 67,271 58,090 80,711
-----------------------------------
Total Securities $1,514,153 $1,381,707 $1,028,207
===================================
Table 10 shows the December 31, 1998, maturities and weighted average
yields for investment securities. Yields on equity securities that
comprise the fixed rate, due after 10 years classification of other
securities have been omitted from the table. A 35% tax rate was used
in computing the tax equivalent yield adjustment. The yields shown are
calculated based on original cost and effective yields weighted for
the scheduled maturity of each security. Mortgage-backed and asset-
backed securities are assigned to maturity categories based on their
estimated average lives.
23
<PAGE>
TABLE 10: 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 $844 5.57% $- -%
Due after 1 through 5 years 151,664 5.43 229 6.51
Due after 5 through 10 years - - - -
Due after 10 years - - - -
------------------------------------------
Total $152,508 5.45% $229 6.51%
==========================================
State and Political Subdivisions:
Due in one year or less $- -% $- -%
Due after 1 through 5 years - - - -
Due after 5 through 10 years - - - -
Due after 10 years 1,939 9.09 - -
------------------------------------------
Total $1,939 9.09% $- -%
==========================================
Mortgage-Backed Securities:
Due in one year or less $9,084 10.02% $5,246 6.75%
Due after 1 through 5 years 602,514 6.38 179,789 8.03
Due after 5 through 10 years 160,650 5.95 28,980 12.00
Due after 10 years 18,027 6.52 53,612 12.00
------------------------------------------
Total $790,275 6.89% $267,627 8.68%
==========================================
Asset-Backed Securities:
Due in one year or less $- -% $46,003 5.81%
Due after 1 through 5 years 86,505 5.62 93,341 5.84
Due after 5 through 10 years 21,462 5.75 - -
Due after 10 years - - - -
------------------------------------------
Total $107,967 5.66% $139,344 5.84%
==========================================
Other Securities:
Due in one year or less $- -% $- -%
Due after 1 through 5 years - - 745 7.45
Due after 5 through 10 years 250 7.08 - -
Due after 10 years 67,124 - - -
------------------------------------------
Total $67,374 7.08% $745 7.45%
==========================================
Loans and Leases
As of December 31, 1998 and 1997, total loans and leases were $5,623.5
million and $5,051.8 million, respectively. During 1998, Provident
sold $1,377.6 million in residential loans, $400.0 million in
warehouse lines, $211.3 million in equipment leases and $183.2 million
in home equity loans. In addition, Provident sold and leased back
$351.2 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 has a total of
$3.2 billion and $1.5 billion of managed loans and leases not included
in the lending portfolio as of year-end 1998, and 1997, respectively.
Provident does not have a material exposure to foreign, energy or
agricultural loans. Table 11 shows loans and leases outstanding at
period end by type of loan:
24
<PAGE>
TABLE 11: Loan and Lease Portfolio Composition
December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
By Dollar (In Millions):
Commercial Lending:
Commercial and Financial $3,270.7 $2,733.5 $2,404.9 $2,250.6 $1,878.4
Mortgage 436.1 469.5 475.9 448.9 420.2
Construction 437.6 305.2 283.7 266.4 172.2
Lease Financing 243.7 340.3 239.1 128.7 109.7
Consumer Lending:
Instalment 621.4 624.3 924.5 1,000.9 930.5
Residential 190.7 136.2 391.6 466.4 507.7
Lease Financing 423.3 442.8 591.7 334.2 185.8
--------------------------------------------------
Total Loans and Leases $5,623.5 $5,051.8 $5,311.4 $4,896.1 $4,204.5
==================================================
By Percentage:
Commercial Lending:
Commercial and Financial 58.1% 54.1% 45.3% 46.1% 44.7%
Mortgage 7.8 9.3 9.0 9.2 10.0
Construction 7.8 6.0 5.3 5.4 4.1
Lease Financing 4.3 6.7 4.5 2.6 2.6
Consumer Lending:
Instalment 11.1 12.4 17.4 20.4 22.1
Residential 3.4 2.7 7.4 9.5 12.1
Lease Financing 7.5 8.8 11.1 6.8 4.4
--------------------------------------------------
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
==================================================
Table 12 shows the composition of the commercial and financial loan
category by industry type at December 31, 1998:
TABLE 12: Commercial and Financial Loans
Amount on
Amount Percentage Nonaccrual
----------------------------------
(Dollars in Millions)
Manufacturing $685.5 21.0% $12.0
Service Industries 562.3 17.2 2.9
Real Estate Operators / Investment 371.3 11.4 1.2
Retail Trade 287.5 8.8 9.9
Wholesale Trade 252.0 7.7 1.4
Finance & Insurance 234.9 7.2 .7
Transportation / Utilities 209.7 6.4 .7
Construction 135.6 4.1 .6
Automobile Dealers 115.5 3.5 -
Residential Warehouse Lending 96.4 2.9 1.8
Other (1) 320.0 9.8 3.3
---------------------------------
$3,270.7 100.0% $34.5
=================================
(1) Includes various kinds of loans, such as small business loans and loans
with balances under $100,000.
25
<PAGE>
Table 13 shows the composition of commercial mortgage and construction
loans by property type at December 31, 1998:
TABLE 13: Commercial Mortgage and Construction Loans
<TABLE>
<CAPTION>
Commercial Commercial Amount on
Mortgage Construction Total Percentage Nonaccrual
------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Office / Warehouse $113.2 $81.6 $194.8 22.3% $-
Shopping / Retail 113.5 78.6 192.1 22.0 .3
Residential Development 37.5 129.7 167.2 19.1 -
Apartments 55.0 70.0 125.0 14.3 -
Land 12.8 24.4 37.2 4.3 -
Auto Sales & Service 24.8 2.6 27.4 3.1 -
Hotel / Motel / Restaurants 3.0 15.5 18.5 2.1 -
Industrial Plants 8.4 6.5 14.9 1.7 -
Churches 8.7 4.9 13.6 1.6 -
Healthcare Facilities 4.0 - 4.0 0.5 -
Other Commercial Properties 55.2 23.8 79.0 9.0 -
--------------------------------------------------------
$436.1 $437.6 $873.7 100.0% $.3
========================================================
</TABLE>
Commercial and real estate construction loans outstanding at December
31, 1998 are shown in Table 14 by maturity, based on remaining
scheduled repayments of principal:
TABLE 14: Loan Maturities
After 1
Within but Through After
1 Year 5 Years 5 Years Total
-----------------------------------------
(In Thousands)
Commercial and Financial $1,017,336 $1,399,130 $854,209 $3,270,675
Commercial Construction 137,571 229,924 70,068 437,563
Residential Construction - - 3,259 3,259
-----------------------------------------
Total $1,154,907 $1,629,054 $927,536 $3,711,497
=========================================
Loans Due After One Year:
At predetermined interest rates $799,522
At floating interest rates 1,757,068
Credit Risk Management
Provident maintains a reserve for loan and lease losses in order to
absorb 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 inherent loan and lease
losses. The reserve is increased by the provision for loan and lease
losses. Loans and leases deemed uncollectible are charged off and
deducted from the reserve and recoveries on loans and leases
previously charged off are added to the reserve.
26
<PAGE>
Table 15 shows selected information relating to Provident's loans,
leases and reserves for loan and lease losses:
TABLE 15: Reserve for Loan and Lease Losses
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Daily Average Net Loans
and Leases Outstanding $5,627,122 $5,258,975 $4,952,841 $4,397,275 $3,673,803
======================================================
Reserve for Loan and Lease
Losses at Beginning of Period $71,980 $66,693 $60,235 $51,979 $40,542
Provision Charged to Expense 31,200 44,750 47,000 14,000 12,000
Acquired Reserves - 1,814 1,373 - -
Loans and Leases Charged Off:
Commercial Lending:
Commercial and Financial 14,391 17,286 17,236 5,096 2,979
Mortgage - 1,505 1,945 94 904
Construction - - - - -
Lease Financing 5,173 1,367 - - -
Consumer Lending:
Instalment 12,856 24,065 24,342 8,232 5,564
Residential 841 1,141 199 127 125
Lease Financing 3,855 6,009 3,087 647 -
------------------------------------------------------
Total Charge-Offs 37,116 51,373 46,809 14,196 9,572
------------------------------------------------------
Recoveries:
Commercial Lending:
Commercial and Financial 834 1,055 619 6,238 6,614
Mortgage 1,344 915 333 121 552
Construction - - - - -
Lease Financing 226 306 14 - -
Consumer Lending:
Instalment 5,901 5,766 3,490 1,994 1,806
Residential 190 145 36 13 37
Lease Financing 1,348 1,909 402 86 -
------------------------------------------------------
Total Recoveries 9,843 10,096 4,894 8,452 9,009
Net Loans and Leases ------------------------------------------------------
Charged Off 27,273 41,277 41,915 5,744 563
------------------------------------------------------
Reserve for Loan and Lease
Losses at End of Period $75,907 $71,980 $66,693 $60,235 $51,979
======================================================
Net Charge-Offs to Average
Net Loans and Leases .48% .78% .85% .13% .02%
======================================================
</TABLE>
Explanation as to significant changes in charge-offs between 1996 and
1998 follows:
- - Commercial and Financial -- Commercial and financial loans of
$14.4 million, $17.3 million and $17.2 million were charged off in
1998, 1997 and 1996, respectively. Due to the size of many of the
commercial and financial loans, a few large charge-offs can result in
a significant fluctuation in the total charge-offs of this loan type.
There were three charge-offs greater than one million dollars in 1998
and 1997 and six in 1996. Generally, Provident obtains collateral on
its larger commercial and financial loans, which reduces its credit
exposure.
- - Commercial Lease Financings -- Charge-offs for commercial lease
financings have increased during the past three years reflecting the
growth in this credit product. Average commercial lease financings
were $317.5 million, $267.1 million and 141.5 million in 1998, 1997
and 1996, respectively.
27
<PAGE>
- - Instalment -- Charge-offs for instalment loans totaled $12.9
million, $24.1 million and $24.3 million during 1998, 1997 and 1996,
respectively. The decrease in total charge-offs for 1998 as compared
to 1997 and 1996 was a result of fewer charge-offs in indirect auto
loans and in the credit card portfolio. The reduction of indirect auto
loan and credit card charge-offs was due to higher credit quality
standards on the origination of the loans and improved technology of
collection systems.
- - Consumer Lease Financings -- Consumer lease financing charge-offs
during 1998, 1997 and 1996 were $3.9 million, $6.0 million and $3.1
million, respectively. The fluctuation in charge-offs of auto leases
reflects the implementation of risk-based pricing origination
standards and the change in the average balance of the auto lease
portfolio.
Table 16 shows the dollar amount of the reserve for loan and lease
losses using management's estimate by principal loan and lease
category. Unallocated reserves have been proportionately applied among
the various loan categories.
TABLE 16: Allocation of Reserve for Loan and Lease Losses
December 31,
---------------------------------------
1998 1997 1996 1995 1994
---------------------------------------
(In Thousands)
Commercial Lending:
Commercial and Financial $39,578 $34,844 $28,053 $26,280 $22,031
Mortgage 4,031 4,461 3,993 3,774 3,493
Construction 6,742 5,496 4,969 4,824 3,886
Lease Financing 4,269 5,303 4,004 1,543 1,355
---------------------------------------
54,620 50,104 41,019 36,421 30,765
Consumer Lending:
Instalment 14,786 14,971 17,616 18,683 17,821
Residential 717 767 718 958 1,071
Lease Financing 5,784 6,138 7,340 4,173 2,322
---------------------------------------
21,287 21,876 25,674 23,814 21,214
---------------------------------------
$75,907 $71,980 $66,693 $60,235 $51,979
=======================================
28
<PAGE>
Table 17 presents a summary of various indicators of credit quality:
TABLE 17: Credit Quality
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual Loans (1):
Commercial Lending:
Commercial & Financial 34,544 76.3 37,800 63.9 14,164 49.7 26,190 54.7 2,973 28.0
Mortgage 335 .7 335 .6 103 .4 6,716 14.0 1,869 17.6
Construction - - 27 .1 71 .2 78 .2 78 .7
Lease Financing 4,002 8.8 4,798 8.1 3,973 13.9 2,605 5.4 - -
------------------------------------------------------------------------------
38,881 85.8 42,960 72.7 18,311 64.2 35,589 74.3 4,920 46.3
Consumer Lending:
Instalment - - - - - - 230 .5 - -
Residential 3,692 8.1 3,459 5.8 2,805 9.8 1,678 3.5 1,396 13.2
Lease Financing - - - - - - - - - -
------------------------------------------------------------------------------
3,692 8.1 3,459 5.8 2,805 9.8 1,908 4.0 1,396 13.2
------------------------------------------------------------------------------
Total Nonaccrual Loans 42,573 93.9 46,419 78.5 21,116 74.0 37,497 78.3 6,316 59.5
Renegotiated Loans (2) - - 377 .6 786 2.8 4,753 9.9 961 9.1
------------------------------------------------------------------------------
Total Nonperforming
Loans 42,573 93.9 46,796 79.1 21,902 76.8 42,250 88.2 7,277 68.6
------------------------------------------------------------------------------
Other Real Estate and
Equipment Owned:
Commercial 1,337 3.0 11,207 18.9 6,102 21.4 3,714 7.8 714 6.8
Closed Bank Branches - - - - - - 189 .4 311 2.9
Residential 1,307 2.9 1,079 1.8 475 1.7 468 1.0 350 3.3
Multifamily - - - - - 594 1.2 1,094 10.3
Land 91 .2 110 .2 15 .1 663 1.4 857 8.1
------------------------------------------------------------------------------
2,735 6.1 12,396 20.9 6,592 23.2 5,628 11.8 3,326 31.4
------------------------------------------------------------------------------
Nonperforming Assets 45,308 100.0 59,192 100.0 28,494 100.0 47,878 100.0 10,603 100.0
==============================================================================
Loans 90 Days Past Due -
Still Accruing 9,219 9,811 18,751 26,578 4,673
Loan and Lease Loss
Reserve as a Percent of:
Total Loans and Leases 1.35 1.42 1.26 1.23 1.24
Nonperforming Loans 178.30 153.82 304.51 142.57 714.29
Nonperforming Assets 167.54 121.60 234.06 125.81 490.23
Nonperforming Loans as a
Percent of Total Loans
and Leases .76 .93 .41 .86 .17
Nonperforming Assets as a
Percent of:
Total Loans, Leases and
Other Real Estate and
Equipment .81 1.17 .54 .98 .25
Total Assets .56 .83 .42 .77 .20
<FN>
(1) Provident 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>
29
<PAGE>
Loans and leases are generally placed on nonaccrual status when the
payment of principal and/or interest is past due 90 days or more.
However, instalment loans and consumer leases are not placed on
nonaccrual status because they are charged off when the loans and
leases reach 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.
Although loans and leases may be classified as nonaccrual or
renegotiated, many continue to pay interest irregularly or at less the
than the original contractual rates. The gross amount of interest
income recognized during 1998 with respect to these loans and leases
was $2.5 million compared to $4.9 million that would have been
recognized had the loans and leases remained current in accordance
with their original terms.
Nonaccrual loans decreased $3.8 million during 1998. Significant
activity within nonaccrual loans included the addition of nine loans
to nonaccrual, the charge-off of three loans and seven loans being
brought current or paid-off resulting in their removal from nonaccrual
status. Other real estate decreased $9.7 million due primarily to the
sale of four properties.
Nonaccrual loans increased $25.3 million during 1997, due primarily 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.
Management's determination of the adequacy of the reserve is based on
an assessment of the losses inherent in the lending portfolio. This
assessment consists of loans and leases evaluated on an individual
basis, as well as those evaluated as a group.
Detailed analyses are performed on loans and leases that have been
placed on nonaccrual. Potential losses are determined on these loans
based upon discussions among lending officers, credit, loan review and
collection associates, and senior management. Of the $42.6 million in
nonaccrual loans at December 31, 1998, management estimates
approximately $13.9 million of potential loss. In addition, management
estimates approximately $11.5 million of potential loss on $38.3
million of loans and leases that are current, but which due to the
possible credit problems, were considered to be in need of closer
monitoring.
The adequacy of the reserve for loan and lease losses is also based
upon internal credit grades and loan types. Through a review of the
borrowers' payment history, financial statements and collateral
appraisals, credit grades are assigned to loans and leases above a
fixed dollar amount within the commercial lending portfolio.
Management projects potential loan losses by credit grade and loan
type based upon Provident's past six-year charge-off history.
30
<PAGE>
In addition to the factors discussed above, the reserve for loan and
lease losses includes management's determination of the reserve
necessary for economic conditions within industry concentrations and
regional markets in which Provident's borrowers operate. This
determination inherently involves a higher degree of uncertainty and
considers current risk factors that may not have been considered in
Provident's historical loss factors.
Deposits
Average interest bearing deposits increased $147.7 million (3%) and
$433.3 million (11%) during 1998 and 1997, respectively. The increase
in interest bearing deposits for 1998 and 1997 was primarily
attributable to the growth in Provident's issuance of CD's, most
notably brokered CD's and in-market public funds CD's. The public
funds deposits are generally secured by depository bonds rather than
pledged assets. For 1998 and 1997, average total interest bearing
deposits represented 67% and 75%, respectively, of average interest
bearing liabilities. Provident does not have a material amount of
foreign deposits. Table 18 presents a summary of period end deposit
balances:
TABLE 18: Deposits
December 31,
--------------------
1998 1997 1996
--------------------
(In Millions)
Noninterest Bearing $670 $605 $554
Interest Bearing Demand Deposits 289 277 273
Savings Deposits 1,312 873 559
Certificates of Deposit Less than $100,000 1,282 1,652 1,792
Certificates of Deposit of $100,000 or More 1,774 1,289 1,418
--------------------
$5,327 $4,696 $4,596
====================
At December 31, 1998, maturities on CD's of $100,000 or more were as
follows (in millions):
3 months or less $293
Over 3 through 6 months 316
Over 6 through 12 months 171
Over 12 months 994
------
Total $1,774
======
Included in CD's of $100,000 or more at December 31, 1998, 1997 and
1996 were brokered deposits of $1,096 million, $586 million and $765
million, respectively.
Provident issues brokered CD's with embedded call options combined
with interest rate swaps with matching call dates as part of its CD
program. Provident 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. At December 31, 1998, Provident had $897 million of
callable CD's.
31
<PAGE>
Borrowed Funds
Borrowed funds are an important component of total funds to support
earning assets. Provident's ability to generate interest-earning
assets exceeded its capacity to generate deposits. In 1998, average
short-term debt, used for interim funding of loans to be securitized,
increased $650.4 million (100%) and average long-term debt increased
$50.6 million (7%). The increase in the average balance for federal
funds purchased was the primary reason for the increase in average
short-term debt. Two Federal Home Loan Bank ("FHLB") advances totaling
$225 million were the primary reasons for the increase in average long-
term debt.
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 FHLB debt was the primary reason for the decrease in
average long-term debt in 1997.
During 1996, Provident established Provident Capital Trust I. Capital
Trust issued Capital Securities of $100 million of preferred stock to
the public and $3,093,000 of common stock to Provident. Proceeds from
the issuance of the capital securities were invested in Provident's
8.60% Junior Subordinated Debentures, due 2026. Taken together,
Provident'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, 1998 and 1997 was $703.9
million and $626.3 million, respectively. The increase in the
stockholders' equity during 1998 was primarily the result of net
income exceeding dividends paid for the year.
During 1998, Provident announced that its Board of Directors had
authorized the purchase of up to one million shares (2.3%) of its
common stock. Shares purchased pursuant to the buy-back program will
be used to fund various company benefit plans and for other corporate
purposes. As of December 31, 1998 Provident had purchased 572,700
shares.
The dividend payout to net income ratio was 30.72%, 28.15% and 28.12%
for 1998, 1997 and 1996, respectively. It is Provident's intention to
pay annual dividends of approximately 30% of net income. Provident
announced an increase in its quarterly common dividend rate from $.20
per share to $.22 per share beginning with the first quarter in 1999.
During 1997, Provident increased its common dividend rate from $.14
per share to $.20 per share.
Capital adequacy ratios are provided in the Selected Financial Data
Table and Selected Performance Ratios (Table 1) of this report.
32
<PAGE>
Provident's capital expenditure program typically includes the
purchase of computer equipment and software, branch additions and
enhancements, ATM additions and office building renovations. Capital
expenditures for 1999 are estimated to be approximately $21 million
and include the purchase of data processing hardware and software,
branch additions, renovations and enhancements, facility renovations,
and ATMs. Management believes that currently available funds and funds
provided by normal operations will be sufficient to meet these capital
expenditure requirements.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and
deposit withdrawal requirements of customers as well as to satisfy
liabilities, fund operations and support asset growth. Provident has a
number of sources to provide for liquidity needs. First, liquidity
needs can be met by the liquid assets on its balance sheet such as
cash and deposits with other banks. Additional sources of liquidity
include the sale of investment securities and the sale of commercial
and consumer loans and leases. Another source for providing liquidity
is the generation of new deposits. Provident may borrow both short-
term and long-term funds. Provident has an additional $687.5 million
available for borrowing under a bank note program. Approximately
$139.1 million of long-term debt is due to be repaid during 1999.
Although no significant capital expenditures are expected during 1999,
Provident (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 and Junior Subordinated
Debentures. The major source of liquidity for the Parent is dividends
paid to it by its subsidiaries. The Parent received dividends of $51
million, $- million and $25 million in 1998, 1997 and 1996,
respectively. The maximum amount available for dividends that may be
paid in 1999 to the Parent by its banking subsidiaries without
approval is approximately $175.9 million, plus 1999 net earnings.
Management believes that amounts available from the banking
subsidiaries will be sufficient to meet the Parent's liquidity
requirements in 1999. Under the Federal Deposit Insurance Corp.
Improvement Act of 1991 ("FDICIA"), an insured depository institution,
such as Provident's banking subsidiaries, would be prohibited from
making capital distributions, including the payment of dividends, if,
after making such distribution, the institution would become
"undercapitalized" (as such term is defined in the statute). A
discussion of restrictions on transfer of funds from subsidiaries to
Provident Financial is presented in Note T, 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, 1998, the Parent
had $175 million and $40 million in lines of credit with unaffiliated
banks to support commercial paper borrowings of $259.9 million and
other general obligations, respectively. As of January 19, 1999, these
lines had not been used.
33
<PAGE>
MARKET RISK MANAGEMENT
The responsibility of monitoring and managing market and liquidity
risk at Provident is assigned to the Asset Liability Committee
("ALCO"). The Market and Liquidity Risk Unit provides ALCO with the
necessary analysis and reports. The main source of market risk is the
risk of loss in the value of financial instruments that may result
from the changes in interest rates. ALCO is bound to guidelines stated
in the relevant policies approved by the Board of Directors.
In addition, ALCO is responsible for liquidity risk management. Retail
deposits constitute a stable source to fund loan growth. Management's
goal is to offer a wide variety of retail deposit products to ensure a
growing market presence. To supplement retail deposits, Provident
utilizes various sources of wholesale deposits. Borrowing through the
Federal Home Loan Bank and offering short and medium term deposits to
institutional investors are part of this strategy. Asset
securitizations and conduit funding supplement the on-balance sheet
sources. Through term and commercial paper conduit markets, Provident
has the ability to take advantage of the liquid asset-backed
securities market. In addition, in order to meet any unexpected
changes in asset and liability positions, Provident maintains a liquid
investment portfolio that may be used as a ready source of funds.
Interest rate risk management guidelines and policies are approved by
the Board of Directors. ALCO is responsible for monitoring and
managing the interest rate risk of both the balance sheet and off-
balance sheet financial instruments. The Market and Liquidity Risk
Unit, as an extension of ALCO, utilizes an asset/liability simulation
to monitor interest rate risk. The simulation model measures changes
in net interest income due to changes in the yield curve, and performs
stress tests on net interest income. Parallel shifts as well as
changes in the slope of the yield curve are performed to calculate
potential adverse effect. The Interest Rate Risk Policy specifically
states the boundaries for the percentage changes in net interest
income. The Board of Directors also approves the limits for changes in
the market value of equity. This is the change in the difference
between the discounted value of assets and the discounted value of
liabilities. The impairment or the improvement is measured as a
percentage of total assets. Again, the Market and Liquidity Risk Unit
monitors this ratio on a monthly basis.
In addition to the natural balance sheet hedges ALCO utilizes off-
balance sheet instruments to manage interest rate risk. Interest rate
swaps are the most widely used tool to manage interest rate risk, but
from time to time interest rate caps and floors may also be utilized.
Provident has used off-balance sheet tools effectively for a number of
years and has developed important expertise and knowledge to achieve a
safe and sound interest rate risk management process.
34
<PAGE>
The following table summarizes the change to net interest income, as a
percentage, over the next 12-month period based on an instantaneous
and permanent change in the pricing of all interest rate sensitive
assets, liabilities and off-balance sheet financial agreements. The
effects of these interest rate fluctuations are considered worst case
scenarios, as the analysis does not give consideration to any
management of the new interest rate environment. These tests are
performed on a monthly basis and the results are presented to the
Board of Directors.
TABLE 19: Interest Rate Sensitivity
1998 1997
-------------
100 Basis Points Decrease 2.4% .1%
100 Basis Points Increase (2.6) (4.4)
200 Basis Points Decrease 4.6 1.9
200 Basis Points Increase (5.2) (8.4)
OFF-BALANCE SHEET FINANCIAL AGREEMENTS
Provident 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's core businesses.
Provident uses interest rate swaps as its primary off-balance sheet
financial instrument. At December 31, 1998, Provident held
approximately $1.8 billion in interest rate swaps that essentially
convert a fixed rate of interest into a shorter repricing frequency.
Approximately $1.7 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 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 had $49
million of pay fixed/receive variable rate swaps at December 31, 1998.
Provident manages the credit risk in these transactions through its
counterparty credit policy, which limits transactions to
counterparties classified as investment grade by the rating agencies
of Moody's and Standard & Poor's. Generally, Provident requires
bilateral collateral agreements as a technique to reduce credit risk.
These bilateral collateral agreements have threshold credit limits
above which investment securities must be pledged as collateral for
the mark-to-market. At December 31, 1998, Provident pledged investment
securities with a carrying value of $504,000 as collateral to a
counterparty to cover the mark-to-market. As a second credit risk
measure, Provident utilizes bilateral netting of interest payments.
The frequency and timing of the interest payments are matched between
counterparties, thereby reducing the credit exposure.
At December 31, 1998, there were no past due amounts on any interest
rate swap. Provident has never experienced a credit loss related to an
off-balance sheet financial agreement, and does not reserve for credit
losses on these transactions.
35
<PAGE>
Table 20 shows the changes in interest rate swap agreements for the
years ending December 31, 1998 and 1997. The notional amount of
interest rate swaps increased during 1998 as a result of acquiring
additional hedges on its callable CD's. See the "Deposits" section of
this report for additional details.
TABLE 20: Interest Rate Swap Agreement Activity
1998 1997
---------------------
(In Millions)
Beginning Notional Amount $1,545 $2,134
New Contracts 869 579
Called / Matured / Terminated Contracts (618) (1,168)
---------------------
Ending Notional Amount $1,796 $1,545
=====================
Provident uses financial futures contracts and forward contracts to
manage interest rate risk in a manner similar to interest rate swap
agreements. At December 31, 1998, Provident had $63.6 million in
forward contracts and no outstanding positions in financial futures
contracts. The forward contracts were for the delivery of mortgage
backed securities at fixed prices in January and February 1999.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This SFAS establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires that derivatives be recognized
as either assets or liabilities on the balance sheet and to measure
those instruments at fair value. The accounting of the gain or loss
resulting from the change in fair value depends on the intended use of
the derivative. For a derivative used as a hedging instrument, the
gain or loss on the derivative will be recognized in earnings together
with the offsetting loss or gain on the hedged item. This results in
earnings recognition for only the amount that the hedge is ineffective
in achieving offsetting changes in fair value. The provisions of this
SFAS become effective January 1, 2000.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that its hedges are highly effective and that the
adoption of this SFAS will not have a material impact on Provident's
financial position or the results of its operations.
YEAR 2000 COMPLIANCE
The Year 2000 Issue arose because many existing computer programs use
only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results before, during and
after January 1, 2000.
36
<PAGE>
Provident has been actively addressing the Year 2000 Issue since 1996
as it could result in an interruption in certain normal business
activities or operations. Such interruptions could materially affect
Provident's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 issue,
including third party vendors and customers, Provident is unable to
determine at this time whether Year 2000 failures will significantly
affect Provident's results of operations, liquidity and financial
condition. Steps taken by Provident are expected to significantly
reduce the level of uncertainty about the Year 2000 issues. It is
management's estimate that it will cost a total of $10 million to
correct all of its application systems. Since inception, Provident has
expensed $6.4 million for the correction of this problem. The
following summarizes its Year 2000 readiness.
Mainframe Applications: Provident has completed the Year 2000 code
remediation and implemented the changes into production. Additionally,
all third-party upgrades required to ensure Year 2000 compliance have
been installed. Provident has performed future date testing at an
application level throughout the conversion and upgrade process. In
addition an integrated systems Millennium Verification Test was
executed offsite in the fourth quarter of 1998. Provident has
established a logical partition (LPAR) to allow for continued
production verification tests that include third-party and corporate
customer interfaces.
PC Applications: Provident has established a Year 2000 PC test lab for
verification of PC software applications, spreadsheets and databases.
Plans call for date simulated testing to be completed on vendor
purchased software, and Provident written spreadsheets and databases
by the end of the first quarter of 1999. As of December 31, 1998, 68%
of the software has been tested to ensure Year 2000 compliance.
Environmental/Embedded Systems: Provident has solicited, and received
from vendors, the Year 2000 compliance information on its
environmental and other embedded systems. To assist in testing these
systems within the various facilities owned or leased, Provident has
secured the services of an outside provider. This project is currently
on target to meet a June, 1999 deadline.
Third Party Interdependencies: Provident has solicited, and continues
to monitor, the readiness of all third party interdependencies.
Testing has begun with our main interface, the Federal Reserve Bank,
to verify our ACH, wire and daily cash settlement activity. Remaining
Year 2000 compliance testing is scheduled to be completed during the
first quarter of 1999.
Vendors/Customers: Letters and questionnaires have been sent out to
significant vendors and borrowers of Provident. Both vendor and
customer responses are being actively monitored and updated on an on-
going basis.
37
<PAGE>
Contingency Plans: Year 2000 business resumption contingency plans
have been developed and documented. These plans are designed to focus
on Provident's processes for achieving Year 2000 readiness with the
assumption that all business processes, functions and applications
will fail during the Year 2000 date change. These plans define
processes and comprehensive procedures covering company-wide
contingency strategies, financial business center sales and services,
and individual business units necessary to assuring continuity or
resumption of business operations in the event of Year 2000
disruptions. Master listings of external dependencies and interfaces
including corporate customers, vendors, service providers,
infrastructure and information sources are provided for within these
plans.
38
<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 40
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets 41
Consolidated Statements of Income 42
Consolidated Statements of Changes in Shareholders' Equity 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) 72
39
<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,
1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ERNST & YOUNG LLP
Cincinnati, Ohio
January 19, 1999
40
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
------------------------
1998 1997
------------------------
ASSETS
Cash and Noninterest Bearing Deposits $267,441 $274,521
Federal Funds Sold and Reverse Repurchase Agreements 60,000 1,720
Trading Account Securities 50,333 -
Investment Securities Available for Sale
(amortized cost - $1,528,008 and $1,381,503) 1,514,153 1,381,707
Loans and Leases (Net of Unearned Income):
Commercial Lending:
Commercial and Financial 3,270,675 2,733,556
Mortgage 436,127 469,505
Construction 437,563 305,150
Lease Financing 243,722 340,302
Consumer Lending:
Instalment 621,357 624,340
Residential - Held for Sale 190,707 136,183
Lease Financing 423,354 442,806
------------------------
Total Loans and Leases 5,623,505 5,051,842
Reserve for Loan and Lease Losses (75,907) (71,980)
------------------------
Net Loans and Leases 5,547,598 4,979,862
Leased Equipment 167,006 112,396
Premises and Equipment 78,621 71,458
Other Assets 449,835 285,195
------------------------
$8,134,987 $7,106,859
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $669,840 $605,166
Interest Bearing 4,657,481 4,091,132
------------------------
Total Deposits 5,327,321 4,696,298
Short-Term Debt 807,503 806,125
Long-Term Debt 934,294 688,157
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 98,879 98,817
Accrued Interest and Other Liabilities 263,136 191,121
------------------------
Total Liabilities 7,431,133 6,480,518
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized:
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 43,345,149 and 42,325,882 Issued 12,805 12,482
Capital Surplus 224,745 196,617
Retained Earnings 489,751 406,440
Reserve for Retirement of Capital Securities - 3,667
Treasury Stock, 572,700 Shares in 1998 (21,425) -
Accumulated Other Comprehensive Income (9,022) 135
------------------------
Total Shareholders' Equity 703,854 626,341
------------------------
$8,134,987 $7,106,859
========================
See notes to consolidated financial statements.
41
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Year Ended December 31,
------------------------------
1998 1997 1996
------------------------------
Interest Income:
Interest and Fees On Loans and Leases $525,827 $492,114 $451,805
Interest on Investment Securities:
Taxable 99,909 78,495 67,013
Exempt from Federal Income Taxes 213 331 566
------------------------------
100,122 78,826 67,579
Other Interest Income 7,811 872 941
------------------------------
Total Interest Income 633,760 571,812 520,325
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 50,163 27,670 20,598
Time Deposits 172,143 193,779 172,341
------------------------------
222,306 221,449 192,939
Interest on Short-Term Debt 70,958 35,640 40,130
Interest on Long-Term Debt 45,141 43,461 46,372
Interest on Junior Subordinated Debentures 8,662 8,662 816
------------------------------
Total Interest Expense 347,067 309,212 280,257
------------------------------
Net Interest Income 286,693 262,600 240,068
Provision for Loan and Lease Losses (31,200) (44,750) (47,000)
------------------------------
Net Interest Income After Provision for
Loan and Lease Losses 255,493 217,850 193,068
Noninterest Income:
Service Charges on Deposit Accounts 27,242 24,752 21,537
Other Service Charges and Fees 51,678 37,058 29,328
Operating Lease Income 37,481 26,207 10,033
Gain on Sales of Loans and Leases 80,221 60,883 26,255
Security Gains 12,940 9,713 96
Other 13,425 14,045 14,188
------------------------------
Total Noninterest Income 222,987 172,658 101,437
Noninterest Expenses:
Compensation:
Salaries 103,910 82,222 65,448
Benefits 15,105 13,047 10,544
Profit Sharing 5,624 6,185 3,838
Depreciation on Operating Lease Equipment 21,662 17,667 7,221
Occupancy 16,951 12,744 9,673
Professional Services 18,276 14,912 11,463
Equipment Expense 20,771 15,208 11,348
Charges and Fees 14,317 12,652 8,583
Marketing 9,624 7,890 5,103
Special Charges and Exit Costs 22,005 - -
Other 54,161 43,451 41,941
------------------------------
Total Noninterest Expenses 302,406 225,978 175,162
------------------------------
Income Before Income Taxes 176,074 164,530 119,343
Applicable Income Taxes 61,122 57,093 41,198
------------------------------
Net Income $114,952 $107,437 $78,145
==============================
Basic Earnings Per Common Share $2.66 $2.59 $1.96
Diluted Earnings Per Common Share 2.56 2.45 1.87
See notes to consolidated financial statements.
42
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<CAPTION>
Retained
Earnings
Including
Reserve for Accumulated
Retirement Other
Preferred Common Capital of Capital Treasury Comprehensive Comprehensive
Stock Stock Surplus Securities Stock Income Total Income
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $7,000 $11,703 $137,313 $274,017 $(38) $2,542 $432,537
Net Income 78,145 78,145 $78,145
Cash Dividends Declared on
Common Stock, $.54 Per Share (21,434) (21,434)
Cash Dividends Declared on
Preferred Stock, $7.63
Per Share (536) (536)
Exercise of Stock Options 43 1,776 1,819
Sale of Treasury Stock 21 38 59
Acquisitions 228 21,522 21,750
Change in Unrealized
Gains (Losses) on
Marketable Securities 1,438 1,438 1,438
Other (1) (25) (2) (28)
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 7,000 11,973 160,586 330,211 - 3,980 513,750 $79,583
========
Net Income 107,437 107,437 $107,437
Cash Dividends Declared on
Common Stock, $.72 Per Share (29,535) (29,535)
Cash Dividends Declared on
Preferred Stock, $10.13
Per Share (712) (712)
Exercise of Stock Options 223 15,845 16,068
Acquisitions 286 20,105 2,702 143 23,236
Change in Unrealized
Gains (Losses) on
Marketable Securities (3,988) (3,988) (3,988)
Other 81 4 85
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,000 12,482 196,617 410,107 - 135 626,341 $103,449
========
Net Income 114,952 114,952 $114,952
Cash Dividends Declared on
Common Stock, $.80 Per Share (34,518) (34,518)
Cash Dividends Declared on
Preferred Stock, $11.25
Per Share (790) (790)
Exercise of Stock Options 298 25,000 25,298
Purchase of Treasury Stock (21,425) (21,425)
Distribution of Contingent Shares
for Prior Year Acquisition 25 3,128 3,153
Change in Unrealized
Gains (Losses) on
Marketable Securities (9,157) (9,157) (9,157)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 $7,000 $12,805 $224,745 $489,751 $(21,425) $(9,022) $703,854 $105,795
============================================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $114,952 $107,437 $78,145
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 31,200 44,750 47,000
Amortization of Goodwill 2,634 1,648 1,187
Other Amortization and Accretion (73,788) (101,428) (46,121)
Depreciation of Leased Equipment
and Premises and Equipment 38,626 29,723 16,201
Realized Investment Security Gains (12,940) (9,713) (96)
Proceeds From Sale of Loans Held for Sale 1,323,116 1,159,079 467,894
Origination of Loans Held for Sale (1,433,993) (926,060) (469,489)
Realized Gains on Residential Loans Held for Sale (42,006) (43,591) (21,765)
Realized Gains on Sale of Other Loans and Leases (38,215) (17,292) (4,490)
Increase in Trading Account Securities (50,333) - -
(Increase) Decrease in Interest Receivable (10,056) 607 (2,348)
(Increase) Decrease in Other Assets (127,066) (150,000) 7,134
Increase (Decrease) in Interest Payable 3,456 (275) (1,563)
Deferred Income Taxes 1,148 18,828 17,273
Increase in Other Liabilities 72,313 8,024 6,810
---------------------------------
Net Cash Provided by (Used in) Operating Activities (200,952) 121,737 95,772
---------------------------------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 4,098,626 2,288,053 79,398
Proceeds from Maturities and Prepayments 665,344 147,316 625,698
Purchases (4,809,785) (2,627,773) (678,794)
Proceeds from Sale-Leaseback Transactions 351,185 330,000 -
Net Increase in Loans and Leases (799,701) (150,252) (389,778)
Net Increase in Operating Lease Equipment (76,273) (34,918) (41,436)
Net Increase in Premises and Equipment (24,126) (30,305) (14,409)
Acquisitions - 13,632 971
---------------------------------
Net Cash Used in Investing Activities (594,730) (64,247) (418,350)
---------------------------------
Financing Activities:
Net Increase (Decrease) in Deposits 631,023 (78,206) 417,770
Net Increase (Decrease) in Short-Term Debt 1,378 206,305 (49,519)
Principal Payments on Long-Term Debt (40,616) (208,438) (188,841)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 286,532 34,440 228,440
Cash Dividends Paid (35,308) (30,247) (21,970)
Purchase of Treasury Stock (21,425) - -
Proceeds from Exercise of Stock Options 25,298 16,068 1,878
Net Increase (Decrease) in Other Equity Items - 82 (27)
---------------------------------
Net Cash Provided by (Used In) Financing Activities 846,882 (59,996) 387,731
---------------------------------
Increase (Decrease) in Cash and Cash Equivalents 51,200 (2,506) 65,153
Cash and Cash Equivalents at Beginning of Period 276,241 278,747 213,594
---------------------------------
Cash and Cash Equivalents at End of Period $327,441 $276,241 $278,747
=================================
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $343,611 $309,488 $281,820
Income Taxes 35,500 27,000 18,000
Non-Cash Activity:
Transfer of Loans and Premises and Equipment
to Other Real Estate 3,213 13,098 8,906
Common Stock Issued in Acquisitions - 20,391 21,750
Securitization of Residential Loans - - 64,025
Residual Interest in Securitized Assets
Created from the Sale of Loans 137,319 106,269 23,200
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND ACQUISITIONS Provident is a Cincinnati-based
bank holding company which owns and operates two banking subsidiaries,
The Provident Bank and Provident Bank of Florida. (The Provident Bank
of Kentucky was merged into The Provident Bank on March 23, 1998.)
While Provident banking subsidiaries are located in Ohio, northern
Kentucky and southwest Florida, it provides services to customers on
a national basis.
In September 1997, Provident acquired Florida Gulfcoast Bancorp, Inc.,
the parent of Enterprise National Bank for 712,712 shares of Provident
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 purchased South Hillsborough Community
Bank for 189,259 shares of Provident 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 acquired Information Leasing Corporation,
an equipment leasing company, and Procurement Alternatives
Corporation, Information Leasing's affiliated lease servicing company.
Provident issued 776,786 shares of its Common Stock at the date of the
acquisition plus an additional 172,619 shares of its Common Stock and
$1,689,000 during 1998 and 1997 for meeting certain financial
objectives. An additional 86,310 shares of its Common Stock and
$311,000 will be paid to the former shareholders if additional
financial objectives are met over the next two fiscal years. The
acquisition was accounted for as a purchase with $25.4 million of
goodwill being recorded.
Pro-forma results of operations as though South Hillsborough,
Information Leasing and Procurement Alternatives had occurred at the
beginning of the period are not provided due to the immaterial effects
it would have on Provident's financial statements taken as a whole.
B. ACCOUNTING POLICIES The following is a summary of significant
accounting policies:
BASIS OF PRESENTATION The consolidated financial statements include
the accounts of Provident and its subsidiaries, all of which are
wholly owned. Certain estimates are required to be made by management
in the preparation of the consolidated financial statements. 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.
45
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. These
securities are stated at fair value with unrealized gains and losses
(net of taxes) reported as a separate component of shareholders'
equity.
Securities purchased with the intention of recognizing short-term
profits are classified as trading. These securities are carried at
fair value with unrealized gains and losses included in "Noninterest
Income". The specific identification method is used for determining
gains and losses from securities transactions.
LOANS 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 the loans reach 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 generally recognizes income
on impaired loans on a cash basis.
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 that yields
a level rate of return in relation to Provident's net investment in
the lease. The investment includes the sum of the aggregate rentals
receivable and the estimated residual value of leased equipment less
unearned income and third party debt on leveraged leases. Commercial
leases are generally placed on nonaccrual status when payments are
past due 90 days or more while consumer leases are generally charged
off when 120 days to 150 days past due.
LOAN AND LEASE LOSS RESERVE The reserve for loan and lease losses is
maintained to absorb losses in the lending portfolio. Management's
determination of the adequacy of the reserve is based on reviews of
specific loans and leases, credit loss experience, general economic
conditions and other pertinent factors. The reserve is increased by
charges to earnings, as provisions for loan and lease losses. Loans
and leases deemed uncollectible are charged off and deducted from the
reserve and recoveries on loans and leases previously charged off are
added to the reserve.
46
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident considers a commercial nonperforming loan to be an impaired
loan when it is probable that all amounts due will not be collected
according to the contractual terms of the loan agreement. Provident
measures the value of an impaired loan based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, if more practical, at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent.
LOAN SALES Provident 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 whole loan sales,
gains and losses are determined by the difference between the sale
proceeds and the carrying value of loans sold.
Provident has sold nonconforming residential loans and home equity
loans through securitized public offerings. Under these types of
sales, gains or losses are determined based on a present value
calculation of future cash flows, using the cash-out methodology, of
the underlying loans, net of interest payments to security holders,
loan loss and prepayment assumptions and normal servicing revenue.
These net cash flows, which are represented by retained interest on
securitized assets, are included in "Investment Securities Available
for Sale".
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise -- an amendment of FASB Statement No. 65" becomes
effective January 1, 1999. This Statement requires that an entity,
which securitizes a mortgage loan held for sale, classify the
resulting mortgage-backed security or other retained interests based
on its ability and intent to sell or hold those investments. Prior to
this SFAS, the security had to be treated as a trading security. The
adoption of SFAS No. 134 is not expected to have a material impact on
Provident's financial position or results of operations.
LEASED EQUIPMENT AND PREMISES AND EQUIPMENT Leased equipment and
premises and equipment are stated at cost less depreciation and
amortization that are computed principally on the straight-line method
over the estimated useful lives of the assets. Leased equipment and
premises and equipment are reviewed for impairment whenever
circumstances indicate that the carrying value of the assets may not
be recoverable. An impairment loss is recorded when the sum of the
expected future cash flows is less than the carrying amount of the
assets.
OTHER REAL ESTATE OWNED Real estate owned is recorded at the lower of
cost or fair value and is included in "Other Assets". Provident's
policy is to include the unpaid balance of applicable loans in the
cost of real estate owned. However, in no case is the carrying value
of real estate owned greater than net realizable value.
47
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 elected to continue its accounting in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", whereby no
compensation expense is recognized for the granting of stock options.
INCOME TAXES Provident files a consolidated federal income tax return
that includes all of its subsidiaries. Subsidiaries provide for income
taxes on a separate-return basis and remit to Provident amounts
determined to be currently payable.
OFF-BALANCE SHEET FINANCIAL AGREEMENTS Provident 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, 1998, 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.
48
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" becomes effective January 1, 2000. This SFAS establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires that derivatives be recognized
as either assets or liabilities in the balance sheet and to measure
those instruments at fair value. The accounting of the gain or loss
resulting from the change in fair value depends on the intended use of
the derivative. For a derivative used as a hedging instrument, the
gain or loss on the derivative will be recognized in earnings together
with the offsetting loss or gain on the hedged item. This results in
earnings recognition for only the amount that the hedge is ineffective
in achieving offsetting changes in fair value.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that its hedges are highly effective and that the
adoption of this SFAS will not have a material impact on Provident's
financial position or the results of its operations.
COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income"
establishes standards for the reporting of comprehensive income and
its components. Comprehensive income includes net income and certain
items that are reported directly within a separate component of
stockholders' equity and bypass net income. The provisions of this
SFAS became effective with 1998 interim reporting and are disclosed
within the Consolidated Statements of Changes in Shareholders' Equity.
Implementation of this statement had no impact on net income or
shareholders' equity. Prior periods have been restated to conform to
the current presentation.
SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires that public business
enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise for which discrete financial information is available and
evaluated regularly by the chief operating decision-maker in the
determination of resource allocation and performance. This disclosure
is provided in Note P.
49
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENT SECURITIES The amortized cost and estimated market
values of securities available for sale at December 31 were as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
1998:
U.S. Treasury and Federal Agency
Debentures $152,737 $46 $(1,445) $151,338
State and Political Subdivisions 1,939 - (19) 1,920
Mortgage-Backed Securities 1,057,902 869 (11,002) 1,047,769
Asset-Backed Securities 247,311 319 (1,775) 245,855
Other Securities 68,119 29 (877) 67,271
------------------------------------------------
$1,528,008 $1,263 $(15,118) $1,514,153
================================================
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 1,044,304 1,572 (2,065) 1,043,811
Asset-Backed Securities 252,142 110 (243) 252,009
Other Securities 57,606 1,788 (1,304) 58,090
------------------------------------------------
$1,381,503 $3,841 $(3,637) $1,381,707
================================================
</TABLE>
Investment securities with a carrying value of approximately $683.7
million and $441.9 million at December 31, 1998, and 1997,
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 1998, 1997 and 1996 gross gains of $14.4 million, $12.5 million and
$.1 million and gross losses of $1.5 million, $2.8 million and $-,
respectively, were realized on the sale of securities available for
sale. Taxes on security gains were $4.5 million, $3.4 million and
$34,000 in 1998, 1997 and 1996, respectively.
Mortgage-backed and asset-backed securities are shown below based on
their estimated average lives at December 31, 1998. 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 $61,177 $61,191
Due after 1 through 5 years 1,114,787 1,104,610
Due after 5 through 10 years 211,342 208,616
Due after 10 years 140,702 139,736
-----------------------
Total $1,528,008 $1,514,153
=======================
50
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in investment securities are the retained interest in
securitized assets representing the present value of net cash flows
due to Provident from loan securitizations and sales. Components of
the retained interest in securitized assets and the underlying
assumptions follow:
Nonconforming Prime
Residential Home Equity
--------------------------
(In Thousands)
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $345,340 $30,306
Less:
Estimated Credit Loss (64,845) (2,400)
Servicing and Insurance Expense (33,352) (4,275)
Discount to Present Value (50,184) (2,822)
--------------------
Carrying Value of Retained Interest in
Securitized Assets $196,959 $20,809
====================
<TABLE>
<CAPTION>
Nonconforming Residential Prime Home Equity
---------------------------------------------------------------
December Weighted December Weighted
1998 Average 1998 Average
Transaction (All Transactions) Transaction (All Transactions)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions Used:
Prepayment Speed (initial) 12.70% 10.60% 10.00% 11.45%
Prepayment Speed (levels up to) 35.00 29.50 30.00 25.65
Estimated Credit Losses:
Annual Basis 1.05 1.06 0.20 0.20
Percentage of Original Balance 2.70 3.25 0.36 0.41
Discount Rate 12.00 11.68 10.00 9.58
</TABLE>
The average life, using a 35% prepayment assumption, of the
nonconforming mortgage portfolio underlying the December 1998
transaction is approximately 2.5 years.
In order to improve the economic benefit of the securitization
transactions, Provident changed the credit enhancement structure of
the nonconforming mortgage securitizations for 1998. Credit
enhancement was previously accomplished using an over-
collateralization feature, which would be funded from cash flows. The
1998 transactions were credit enhanced with an initial cash deposit.
The change in structure allows excess cash flows to be returned to
Provident more quickly.
51
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. LEASING Provident originates leases which are classified as
either finance leases or operating leases, based on the terms of the
lease arrangement. When a lease is classified as a finance lease, the
future lease payments, net of unearned income, and the estimated
residual value of the leased property at the end of the lease term is
recorded as an asset under "Loans and Leases". The amortization of the
unearned income is recorded as interest income. When a lease is
classified as an operating lease, the leased property, net of
depreciation, is recorded as "Leased Equipment". The rental income is
recorded as noninterest income while the depreciation on the leased
property is recorded as noninterest expense.
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 10 years.
Rental receivable at December 31, 1998 and 1997 include $20.9 million
and $17.3 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 $50.6 million and $58.2 million in total at December 31,
1998 and 1997, respectively.
Consumer lease financing is the leasing of automobiles. The leases are
classified as direct financing leases, with expiration dates over the
next 1 to 7 years.
The components of the net investment in lease financing at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------
Commercial Consumer Commercial Consumer
---------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Rentals Receivable $172,251 $194,378 $279,301 $247,785
Leases in Process 37,509 33,804 38,680 7,024
Estimated Residual Value of
Leased Assets 97,982 239,826 96,052 255,976
--------------------------------------------
307,742 468,008 414,033 510,785
Less: Unearned Income (64,020) (44,654) (73,731) (67,979)
--------------------------------------------
Net Investment in Lease Financing $243,722 $423,354 $340,302 $442,806
============================================
</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, 1998:
Commercial Consumer
---------------------
(In Thousands)
1999 $41,467 $75,428
2000 40,175 58,167
2001 27,226 34,109
2002 19,804 15,810
2003 12,686 8,442
Thereafter 30,893 2,422
--------------------
Total $172,251 $194,378
====================
52
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating leases consist of the leasing of transportation equipment,
manufacturing equipment, data processing and office equipment to
commercial clients. Terms of the leases range from 1 to 10 years. At
the expiration of an operating lease, the leased property is generally
sold or another lease agreement is initiated. Accumulated depreciation
of the operating lease equipment was $45.6 million and $30.8 million
as of December 31, 1998 and 1997, respectively. The future gross
minimum rentals, by year, under noncancelable leases for the rental of
leased equipment are $29.2 million for 1999; $22.0 million for 2000;
$18.1 million for 2001; $14.6 million for 2002; $10.4 million for 2003
and $14.4 million thereafter.
In addition to the leases discussed above, Provident sold $351.2
million and $342.3 million of vehicles, which had been classified as
finance leases, to institutional investors under sale-leaseback
transactions during 1998 and 1997, respectively. Under terms of these
transactions, Provident continues to collect rental payments from its
original lessees. Provident, 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 are 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:
1998 1997 1996
---------------------------
(In Thousands)
Balance at Beginning of Period $71,980 $66,693 $60,235
Provision for Loan and Lease Losses
Charged to Earnings 31,200 44,750 47,000
Acquired Reserves - 1,814 1,373
Recoveries Credited to the Reserve 9,843 10,096 4,894
---------------------------
113,023 123,353 113,502
Losses Charged to the Reserve (37,116) (51,373) (46,809)
---------------------------
Balance at End of Period $75,907 $71,980 $66,693
===========================
The following table shows Provident's investment in impaired loans as
defined under SFAS No. 114 as amended by SFAS No. 118:
1998 1997
-------------------
(In Thousands)
Impaired Loans Requiring a Valuation Allowance of
$10.7 Million in 1998 and $2.4 Million in 1997 $18,921 $3,325
Impaired Loans Not Requiring a Valuation Allowance 2,000 6,273
-------------------
Total Impaired Loans $20,921 $9,598
===================
Average Balance of Impaired Loans for the Year $16,787 $14,310
The valuation allowance recorded on impaired loans is included in the
reserve for loan losses.
53
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and leases on nonaccrual status at December 31, 1998, 1997 and
1996 were $42.6 million, $46.4 million and $21.1 million,
respectively. Loans renegotiated to provide a reduction or deferral of
interest or principal were $-, $377,000 and $786,000 at December 31,
1998, 1997 and 1996, respectively.
F. PREMISES AND EQUIPMENT The following is a summary of premises and
equipment at December 31:
1998 1997
--------------------
(In Thousands)
Land $8,990 $8,321
Buildings 24,525 22,929
Leasehold Improvements 12,736 10,604
Furniture and Fixtures 114,554 98,181
--------------------
160,805 140,035
Less Depreciation and Amortization (82,184) (68,577)
--------------------
Total $78,621 $71,458
====================
Rent expense for all bank premises and equipment leases was
$11,417,000, $8,519,000 and $6,596,000 in 1998, 1997 and 1996,
respectively. The future gross minimum rentals, by year, under
noncancelable leases for the rental of premises and equipment are
$11.4 million in 1999, $10.7 million in 2000, $8.7 million in 2001,
$7.3 million in 2002, $7.0 million in 2003 and $31.9 million
thereafter.
G. SHORT-TERM DEBT Short-term debt was as follows at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $560,712 $602,588 $458,375
Commercial Paper 245,291 202,018 139,665
U.S. Treasury Demand Notes 1,500 1,519 1,500
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 4.44% 5.68% 5.96%
Commercial Paper 4.50 5.33 5.17
U.S. Treasury Demand Notes 4.18 5.25 5.15
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $1,627,934 $687,374 $713,830
Commercial Paper 259,925 202,018 143,867
U.S. Treasury Demand Notes 1,500 2,746 1,500
</TABLE>
At December 31, 1998, Provident 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
19, 1999, these lines had not been used.
54
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 1997
- ---------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Provident Financial Group (Parent):
Miscellaneous Notes Payable (3) Various Various Various $2,617 $1,913
Subsidiaries:
$1 Billion Bank Notes Program:
Fixed Rate Senior Notes 6.13% 6.02% 2000 299,716 299,571
Fixed Rate Senior Notes 7.17 7.50 2005 12,500 12,500
Notes Payable to Federal Home Loan Bank:
Fixed Rate Notes 4.66 4.66 2008 125,000 -
Fixed Rate Notes 5.39 5.39 1999 100,000 -
LIBOR Based Notes 5.23 5.23 1999 11,000 11,000
Fixed Rate Notes (4) Various Various Various 2,251 2,416
Subordinated Notes:
Fixed Rate Notes 6.38 6.06 2004 99,672 99,607
Fixed Rate Notes 7.13 6.23 2003 74,953 74,942
Fixed Rate Capital Notes n/a n/a n/a - 4,000
Debt Secured by Auto Leases:
Fixed Rate Notes 5.74 4.82 2004 87,033 96,251
Fixed Rate Notes 6.00 6.00 2006 45,000 -
Fixed Rate Notes 5.77 5.77 2005 26,412 32,676
Fixed Rate Notes 5.84 4.90 2004 21,259 23,116
Fixed Rate Notes 5.62 5.62 2005 13,923 -
Debt Secured by Equipment Leases:
Fixed Rate Notes (5) Various Various Various 12,958 30,165
-------------------
931,677 686,244
-------------------
Total $934,294 $688,157
===================
<FN>
(1) Stated rate reflects interest rate on notes as of December 31, 1998.
(2) Effective rate reflects interest rate paid as of December 31, 1998 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 2004.
(4) Interest rates vary from 5.00% to 9.50% and maturity dates which vary up to 2015.
(5) Interest rates vary from 6.12% to 17.10% and maturity dates which vary up to 2004.
</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 are they insured by the FDIC. Subordinated notes qualify
as Tier 2 capital while senior notes do not. At December 31, 1998,
$687.5 million was available under this program.
The notes payable to the Federal Home Loan Bank are collateralized by
investment securities with a book value of $308.4 million. They are
subordinated to the claims of depositors and other creditors of
Provident and are not insured by the FDIC.
The 6.38% Subordinated Notes, which qualify as Tier 2 capital, were
issued through an underwritten offering in 1994 by Provident Bank.
They are subordinated to the claims of depositors and other creditors
of Provident Bank and are not insured by the FDIC. The 7.13%
Subordinated Notes, which also qualify as Tier 2 capital, were issued
in 1993 by Provident Bank.
55
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident borrowed $222.7 million through sale-leaseback transactions
with various investors. Auto leases within the consumer lease
financing portfolio secure the borrowings. The debt calls for
principal payments throughout the life of the borrowings. As of
December 31, 1998, $193.6 million remains outstanding.
Provident purchased Information Leasing, an equipment leasing company
during 1996. Information Leasing financed their leases by borrowing
funds from various institutions of which $13.0 million was outstanding
at December 31, 1998. Payment requirements on the debt match the
rental receivable on the equipment lease payments.
As of December 31, 1998, scheduled principal payments on long-term
debt for the following five years were as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Provident Financial Group, Inc. $784 $520 $451 $297 $226
Subsidiaries 138,351 324,420 24,855 25,742 102,867
</TABLE>
I. Guaranteed Preferred Beneficial Interests in Company's Junior
Subordinated Debentures In 1996, Provident established Provident
Capital Trust I. Capital Trust issued $100 million of preferred
capital securities to the public and $3.1 million of common capital
securities to Provident. Proceeds from the issuance of the capital
securities were invested in Provident's 8.60% Junior Subordinated
Debentures. Provident fully guarantees 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, receivables and prepaid expenses) of Capital Trust are
the Debentures.
Both the Capital Securities and Debentures call for semi-annual
dividend/interest payments. Provident 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 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:
1998 1997 1996
-------------------------------
(In Thousands)
Current:
State $752 $375 $37
Federal 59,222 37,890 23,888
-------------------------------
59,974 38,265 23,925
Deferred 1,148 18,828 17,273
-------------------------------
Total $61,122 $57,093 $41,198
===============================
56
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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's deferred tax
liabilities and assets as of December 31 are as follows:
1998 1997 1996
------------------------------
(In Thousands)
Deferred Tax Liabilities:
Excess Lease and Partnership Income $113,789 $115,197 $98,222
Deferred Loan Costs 7,037 1,415 660
Other - Net 8,514 8,520 9,817
------------------------------
Total Deferred Tax Liabilities 129,340 125,132 108,699
------------------------------
Deferred Tax Assets:
Provision for Loan and Lease Losses 31,908 28,250 20,973
Deferred Compensation 5,724 5,255 3,464
Alternative Minimum Tax Credit - 1,813 10,687
Unrealized Loss on Investment Securities 4,849 - 572
Other - Net 8,225 7,408 8,997
------------------------------
Total Deferred Tax Assets 50,706 42,726 44,693
------------------------------
Net Deferred Tax Liabilities $78,634 $82,406 $64,006
==============================
K. BENEFIT PLANS Provident has a Retirement Plan for the benefit of
its employees. Included under this plan is an Employee Stock Ownership
Plan ("ESOP") and a Personal Investment Election Plan ("PIE Plan").
Provident also maintains a Life and Health Plan for Retired Employees
("LH Plan"), an Employee Stock Purchase Plan ("ESPP"), a Deferred
Compensation Plan ("DCP") and stock option plans.
The ESOP covers all employees who are qualified as to age and length
of service. It is a trusteed plan with the entire cost borne by
Provident. All fund assets are allocated to the participants.
Provident's contributions are discretionary by the directors of
Provident. Provident incurred expense of $6.2 million, $6.1 million
and $3.5 million in 1998, 1997 and 1996, respectively.
The PIE Plan, a tax deferred retirement plan, covers all employees who
are qualified as to age and length of service. Employees who wish to
participate in the PIE Plan may contribute from 1% to 8% of their pre-
tax salaries (to a maximum prescribed by the Internal Revenue Service)
to the plan as voluntary contributions. Provident will make a matching
contribution equal to 25% of the pre-tax voluntary contributions made
by the employees during the plan year. The contribution made by
Provident is charged against earnings as the employees' contributions
are made. Provident incurred expense of $845,000, $646,000 and
$505,000 for this retirement plan for 1998, 1997 and 1996,
respectively.
57
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident's LH Plan provides medical coverage as well as life
insurance benefits to eligible retirees. The LH Plan is contributory
until the retiree reaches age 62 after which time Provident pays the
entire cost, however, Provident's responsibility for the payment of
premiums is limited to a maximum of two times the monthly premium
costs as of the effective date of the LH Plan. Monthly premiums
exceeding the maximum amount payable by Provident shall be the
responsibility of the retiree. Provident may amend or terminate the LH
Plan at any time, without the consent of the retirees.
The ESPP provides eligible employees with an opportunity to purchase
Provident's Common Stock through payroll deduction in an amount up to
10% of their compensation, at a price equal to eighty-five percent of
the fair market price on either the first or the last business day of
each calendar month, whichever is lower. Provident incurred expense of
$266,000, $219,000 and $168,000 for the ESPP for 1998, 1997 and 1996,
respectively.
The DCP permits participants, selected by the Compensation Committee
of the Board of Directors, to defer compensation in a manner that
aligns their interests with those of Provident shareholders through
the investment of deferred compensation in Provident Common Stock. The
DCP allows participants to postpone the receipt of 5% to 50% of
compensation until retirement. Amounts deferred are invested in a
Provident Bank Stock Account or a Self-Directed Account. Provident
will credit the Provident Bank Stock Account with an amount dependent
upon Provident's pre-tax earnings per share, for each share of
Provident Common Stock in the account. The calculated credit is
charged against earnings by Provident annually. Under the DCP,
Provident expensed approximately $1.4 million, $2.6 million and $1.9
million in 1998, 1997 and 1996, respectively.
Provident 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 427,500 and 168,750 options, respectively.
The terms of these options are comparable to the terms of the Employee
Stock Option Plans.
58
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option activity for the three years
ended December 31, 1998:
Weighted
Average Number of Options
Exercise Options Available
Price Outstanding for Grant
-------------------------------------
At January 1, 1996 $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
Granted 47.02 866,125 (866,125)
Exercised 13.51 (1,061,225) -
Canceled 31.04 (375,013) 375,013
------------------------
At December 31, 1998 27.86 3,597,676 3,037,289
========================
At December 31, 1998, 1997 and 1996, there were 1,679,900, 2,012,954
and 2,138,571 options exercisable respectively, having a weighted
average option price per share of $17.81, $11.45 and $9.15,
respectively. The following table summarizes information about stock
options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- -------------------------------------------------------------------------------
$ 7.95 - $11.19 670,884 3.5 $8.87 670,884 $8.87
$12.00 - $17.95 677,782 6.0 14.50 477,396 14.35
$21.17 - $31.95 678,870 7.4 23.99 261,007 23.76
$33.63 - $54.47 1,570,140 8.9 43.40 270,613 40.33
For purposes of providing the pro forma disclosures required under
SFAS No. 123, the fair value of stock options granted in 1998, 1997
and 1996 was estimated at the date of grant using a Black-Scholes
option pricing model. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
Provident's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
management believes that the Black-Scholes model may not necessarily
provide a reliable single measure of the fair value of its stock
options.
59
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted-average assumptions were used in the option
pricing model for 1998, 1997 and 1996 respectively: risk-free interest
rates of 5.46%, 6.47% and 6.55%; dividend yields of 3.00%, 3.00% and
3.75%; volatility factors of the expected market price of Provident's
Common Stock of .234, .232 and .228 and an expected life of the option
of 7, 8 and 9 years. Based on these assumptions, the weighted-average
fair value of options granted in 1998, 1997 and 1996 was $12.05,
$11.51 and $6.78, respectively.
No compensation cost has been recognized for stock option grants. Had
compensation cost been determined for stock option awards based on the
fair values at grant dates as discussed above, Provident's net income
and earnings per share would not have been materially different from
amounts reported.
L. PREFERRED STOCK In 1991, Provident issued 371,418 shares of Non-
Voting Convertible Preferred Stock to American Financial Group as
partial consideration for the acquisition of Hunter Savings
Association. During 1995, 301,146 shares of the Preferred Stock were
converted into 4,234,865 shares of Common Stock. As of December 31,
1998 and 1997, 70,272 shares of Preferred Stock remain outstanding.
These shares have a stated value and liquidation value of $100 per
share and a conversion ratio of 14.0625 shares of Provident's Common
Stock for each share of Convertible Preferred Stock.
M. EARNINGS PER SHARE The following table sets forth the computation
of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
-----------------------------
(In Thousands)
<S> <C> <C> <C>
Numerator:
Net Income $114,952 $107,437 $78,145
Preferred Stock Dividends (790) (712) (536)
-----------------------------
Numerator for Basic Earning Per Share --
Income Available to Common Stockholders 114,162 106,725 77,609
Effect of Dilutive Securities --
Convertible Preferred Stock Dividends 790 712 536
-----------------------------
Numerator for Diluted Earnings Per Share --
Income Available to Common Stockholders After
Assumed Conversions $114,952 $107,437 $78,145
=============================
Denominator:
Denominator for Basic Earnings Per Share --
Weighted-Average Shares 42,913 41,135 39,596
Effect of Dilutive Securities:
Convertible Preferred Stock 988 988 988
Stock Options 1,029 1,651 1,277
-----------------------------
Dilutive Potential Common Shares 2,017 2,639 2,265
-----------------------------
Denominator for Diluted Earnings Per Share --
Adjusted Weighted-Average Shares and Assumed
Conversions 44,930 43,774 41,861
=============================
Basic Earnings Per Share $2.66 $2.59 $1.96
=============================
Diluted Earnings Per Share $2.56 $2.45 $1.87
=============================
</TABLE>
60
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. REGULATORY CAPITAL REQUIREMENTS Provident and its banking
subsidiaries are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on Provident's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Provident and its banking
subsidiaries must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Provident and its banking subsidiaries to maintain
minimum ratios of 4.00% for Tier 1 capital to average assets, 4.00%
for Tier 1 capital to risk-weighted assets, and 8.00% for total risk-
based capital to risk-weighted assets. As of December 31, 1998,
Provident and its banking subsidiaries meet all capital requirements
to which it is subject.
As of December 31, 1998, Provident and its banking subsidiaries'
capital ratios were categorized as well capitalized for regulatory
purposes. To be categorized as well capitalized, Provident and its
banking subsidiaries must maintain minimum ratios of 5.00% for Tier 1
capital to average assets, 6.00% for Tier 1 capital to risk-weighted
assets, and 10.00% for total risk-based capital to risk-weighted
assets. There have been no subsequent conditions or events which
management believes have changed the institutions' status.
<TABLE>
<CAPTION>
1998 1997
------------------------------------
Amount Ratio Amount Ratio
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 Capital (to Average Assets):
Provident (Consolidated) $776,249 9.00% $693,444 9.94%
The Provident Bank 620,544 7.81 522,846 8.15
Provident Bank of Florida 18,254 6.67 16,150 8.34
Tier 1 Capital (to Risk-Weighted Assets):
Provident (Consolidated) 776,249 8.55 693,444 9.67
The Provident Bank 620,544 7.29 522,846 7.67
Provident Bank of Florida 18,254 7.25 16,150 9.81
Total Risk-Based Capital (to Risk-Weighted Assets):
Provident (Consolidated) 1,011,790 11.15 940,363 13.11
The Provident Bank 855,379 10.06 767,297 11.25
Provident Bank of Florida 29,153 11.58 17,891 10.87
</TABLE>
61
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. Special Charges and Exit Costs In order to improve the efficiency
of the operations, management undertook two initiatives during 1998.
First, a reengineering project, known as the Performance Optimization
Project ("POP"), was implemented. POP is expected to enable Provident
to undertake new revenue generating initiatives without significantly
increasing expenses. As part of POP, Provident associates developed
over 1,000 specific actions to increase productivity. These actions
will be substantially implemented by the end of 1999. Second, an
analysis of current and future profitability of various business units
was performed. As a result of this analysis, a determination was made
that the prospects for future revenue growth did not justify the
continued operating losses by the MeritValu and Free Markets Partner
business units. Accordingly, these business units were formally
discontinued during the fourth quarter of 1998. In connection with
these initiatives, Provident recorded a special charge of $22 million
during the fourth quarter of 1998. This charge is composed of employee
termination benefits, fixed asset write-offs, exit costs for the
MeritValu and Free Market Partners units, and professional fees
incurred in completing the reengineering project.
Employee termination benefits of $6 million were accrued pursuant to
the initiatives described above during 1998. POP identified
approximately 500 positions to be eliminated. However, approximately
400 of these positions will be accounted for through attrition, the
elimination of open positions and position redeployments to support on-
going business growth in 1999 and beyond. As a result of POP,
approximately 100 associates will be terminated. An additional 50
associates were terminated as a result of the elimination of the
MeritValu and Free Market Partners businesses.
During the fourth quarter of 1998, Provident abandoned certain fixed
assets with a net book value of $2 million. Also Provident abandoned
certain equipment with a net book value of $4 million directly related
to the MeritValu and Free Market Partners business units that were
terminated. The $6 million charge was recognized to write-down the
assets to fair value. Since Provident expects to recover only nominal
amounts from the disposal of these assets, fair value was determined
to be $-.
Exit costs for the MeritValu and Free Market Partners are composed of
cash payments to terminate certain contracts and the non-cash write-
off of capitalized advances to third party vendors that have no future
value. Revenues and operating income of activities exited are not
significant to Provident's operating results.
62
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the major components of the special charge,
as well as the related amounts applied against the reserve in 1998.
Provident expects that the remaining reserve of $7 million, which
represents estimated future cash outlays, will be substantially
utilized during 1999.
<TABLE>
<CAPTION>
Severance Fixed Asset Exit Professional
Costs Write-Offs Costs Fees Total
--------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Special Charge $6 $6 $5 $5 $22
Utilization:
Cash (1) - (2) (3) (6)
Non-Cash - (6) (3) - (9)
-------------------------------------------------
Balance as of December 31, 1998 $5 $- $- $2 $7
=================================================
</TABLE>
P. Line of Business Reporting Provident has eight major lines of
business based on its management structure. A brief summary of each
business follows.
- - Commercial Banking provides traditional commercial lending products
and services.
- - Provident Capital Corp is a national provider of funding to support
middle market leveraged financing transactions.
- - Commercial mortgage provides loans and services to support the
commercial real estate market.
- - Information Leasing Corporation is a full service equipment leasing
company that focuses on establishing strategic relationships with
high volume, quality equipment vendors and customers.
- - Provident Commercial Group provides lease and loan financing to
commercial and industrial customers nationwide for the acquisition
of equipment.
- - Provident Consumer Financial Services originates conforming and
nonconforming residential loans to consumers and short-term financing
to mortgage originators and brokers.
- - Consumer Lending provides auto leasing, instalment, home equity and
credit card lending to consumers.
- - Consumer Banking offers deposit accounts, trust, brokerage services
and investment products to consumer and small business customers.
Financial results are determined based on an assignment of balance
sheet and income statement items to each business line. A matched
maturity transfer pricing process is used to allocate interest income
and expense among the business lines. The provision for loan losses is
allocated to business lines based upon an assigned credit risk factor
of the loans in their portfolio, current year loan growth and net
charge-offs. Activity-based costing is used to allocate expenses for
centrally provided services. Taxes are computed at a 35 percent tax
rate.
63
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the components of net income by line of
business for the past two years. Other represents income and expenses
not allocated to the business lines, net securities gains and the
results of the treasury unit. Special charges and exit costs have been
excluded from the business lines and shown separately.
<TABLE>
<CAPTION>
Net Provision Non- Non- Total
Interest for Loan Interest Interest Net Average
Income Losses Income Expense Taxes Income Assets
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Commercial:
Commercial Banking $74,751 $4,820 $6,251 $30,678 $15,926 $29,578 $1,668,299
Capital Corp 36,465 11,327 18,545 6,681 12,951 24,051 668,886
Commercial Mortgage 30,305 (185) 381 4,009 9,402 17,460 857,958
Information Leasing 12,194 3,336 25,585 18,620 5,538 10,285 207,750
Commercial Group 7,240 1,965 28,613 18,295 5,458 10,135 474,842
Retail:
Consumer Financial
Services 25,390 762 49,199 45,797 9,811 18,219 551,571
Consumer Lending 41,349 16,811 29,473 38,794 5,326 9,891 1,198,956
Consumer Banking 57,825 681 45,087 96,783 1,907 3,541 312,325
Other 1,174 (8,317) 19,853 20,744 2,505 6,095 1,989,034
Special Charges and
Exit Costs - - - 22,005 (7,702) (14,303) -
---------------------------------------------------------------------------
$286,693 $31,200 $222,987 $302,406 $61,122 $114,952 $7,929,621
===========================================================================
1997:
Commercial:
Commercial Banking $76,511 $13,215 $7,608 $26,551 $15,524 $28,829 $1,681,261
Capital Corp 32,993 6,218 10,999 6,078 11,094 20,602 590,470
Commercial Mortgage 27,962 811 309 4,126 8,166 15,168 773,472
Information Leasing 9,451 1,590 10,805 12,923 2,010 3,733 166,447
Commercial Group 7,627 904 19,588 14,720 4,057 7,534 523,273
Retail:
Consumer Financial
Services 9,086 526 45,678 25,866 9,930 18,442 295,706
Consumer Lending 49,326 16,015 7,774 29,354 4,106 7,625 1,245,391
Consumer Banking 56,236 83 39,140 86,522 3,070 5,701 244,081
Other (6,592) 5,388 30,757 19,838 (864) (197) 1,375,913
---------------------------------------------------------------------------
$262,600 $44,750 $172,658 $225,978 $57,093 $107,437 $6,896,014
===========================================================================
</TABLE>
Q. OFF-BALANCE SHEET FINANCIAL AGREEMENTS Provident uses financial
instruments with off-balance sheet risk to manage its interest rate
risk and to meet the financing needs of its customers. These financial
instruments include derivatives such as interest rate swaps, 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.
64
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swaps: Interest rate swap agreements involve the
exchange of interest payment obligations without the exchange of the
underlying principal amounts. Such interest rate swap transactions,
which are a part of Provident's asset/liability management program,
are structured to modify interest rate risk of specified assets and/or
liabilities resulting from interest rate fluctuations. Interest rate
swap agreements have a credit risk component based on the ability of a
counterparty to meet the obligations to Provident under the terms of
the interest rate swap agreement. Notional principal amounts express
the volume of the transactions, but Provident's potential exposure to
credit risk is limited only to the flow of interest payments.
Provident manages its credit risk in these transactions through
counterparty credit policies. At December 31, 1998, Provident had
bilateral collateral agreements in place with its counterparties,
against which Provident has pledged investment securities with a
carrying value of $504,000 as collateral.
Summary information with respect to the interest rate swap portfolio
used to manage Provident's interest rate sensitivity follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
Weighted Average December 31,
----------------------- 1997
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 $1,747 $22.6 $(5.1) 6.51% 5.56% 8.85 $1,499
Pay Fixed/Receive Variable 49 - (1.4) 6.15 6.62 6.80 46
--------------------------------- ------
$1,796 $22.6 $(6.5) $1,545
================================= ======
</TABLE>
The expected notional maturities of Provident's interest rate swap
portfolio at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
After 1 After 3 After 5
1 Year Through 3 Through 5 Through 10 After 10
or Less Years Years Years Years
----------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Pay Variable/Receive Fixed $213 $351 $130 $343 $710
Pay Fixed/Receive Variable 1 7 15 20 6
</TABLE>
Credit Commitments and Standby Letters of Credit: Since many of the
commitments to extend credit are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Provident evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by Provident upon extension of credit is
based on management's credit evaluation of the 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.
65
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident's commitments to extend credit which are not reflected in
the balance sheet at December 31 are as follows:
1998 1997
----------------
(In Millions)
Commitments to Extend Credit $2,015 $2,036
Standby Letters of Credit 128 123
R. TRANSACTIONS WITH AFFILIATES At December 31, 1998, 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 54% of
Provident's Common Stock. Provident leases its home office space and
other office space from a trust, for the benefit of a subsidiary of
American Financial Group. Provident also leased one of its branch
locations and 125 ATM locations from principal shareholders and their
affiliates. Rentals charged by American Financial Group and affiliates
for the years ended December 31, 1998, 1997 and 1996 amounted to $2.3
million, $2.0 million $2.1 million, respectively. Rentals of $302,000,
$217,000 and $201,000 were charged by principal shareholders and their
affiliates during 1998, 1997 and 1996, respectively, for branch and
ATM locations.
During 1998, a partner of Keating, Muething & Klekamp ("KMK") became
the trustee of a trust for the benefit of the family of Mr. Lindner.
This trust held approximately 7% of Provident's Common Stock. During
1998, $3.2 million was paid by and on behalf of Provident for legal
services to KMK.
Provident has had certain transactions with various executive
officers, directors and principal holders of equity securities of
Provident and its subsidiaries and entities in which these individuals
are principal owners. Various loans and leases have been made as well
as the sale of commercial paper and repurchase agreements to these
persons. Such loans to these persons aggregated approximately $45.9
million and $32.3 million at December 31, 1998, and 1997,
respectively. None of these loans were held by the parent company.
During 1998, new loans aggregating $24.8 million were made to such
parties and loans aggregating $11.2 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, 1998,
and 1997, these persons held Provident's commercial paper amounting to
$19.4 million and $13.7 million, respectively. Additionally,
repurchase agreements in the amount of $37.8 million and $10.8 million
had been sold to these persons at December 31, 1998, and 1997,
respectively. All of these transactions were at market interest rates.
66
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
S. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated
fair values for certain financial instruments as of December 31 are
shown in the following table. In cases where quoted market prices are
not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. Because no secondary market exists for
many of Provident's assets and liabilities, the derived fair values
are calculated estimates, and the fair values provided herein do not
necessarily represent the actual values which may be realized in the
disposition of these instruments. The aggregate fair value amounts
presented do not represent the underlying value of Provident. What is
presented below is a point-in-time valuation that is affected, in
part, by unrealized gains and losses resulting from management's
implementation of its program to manage overall interest rate risk. It
is not management's intention to immediately dispose of a significant
portion of its financial instruments. As a result, the following fair
value information should not be interpreted as a forecast of future
earnings and cash flows.
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $327,441 $327,441 $276,241 $276,241
Trading Account Securities 50,333 50,333 - -
Investment Securities 1,514,153 1,514,153 1,381,707 1,381,707
Loans (Excluding Lease Financing) 4,956,429 5,021,042 4,268,734 4,313,519
Less: Reserve for Loan Losses (65,854) - (60,539) -
---------------------------------------
Net Loans 4,890,575 5,021,042 4,208,195 4,313,519
Financial Liabilities:
Deposits 5,327,321 5,444,426 4,696,298 4,731,184
Short-Term Debt 807,503 807,503 806,125 806,125
Long-Term Debt (Excluding Lease
Financing Debt) and Junior
Subordinated Debentures 826,588 819,325 604,769 607,143
Off-Balance Sheet Financial Instruments:
Interest Rate Swaps:
Asset Based:
Loans - (1,371) - (260)
Liability Based:
Deposits - 1,123 - 3,421
Long-Term Debt - 16,374 - (1,405)
The following methods and assumptions were used by Provident in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in
the balance sheet for cash and short-term instruments
approximate those assets' fair values.
67
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trading account securities and investment securities: Fair
values for trading account securities and investment
securities are based on quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments. Retained interest in securitized assets is
valued using discounted cash flow techniques. Significant
assumptions used in the valuation are shown in Note C.
Loans: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are
based on carrying values. The fair values for certain
residential mortgage loans and other consumer loans are based
on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans are
estimated using discounted cash flow analyses and interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Deposits: The fair values disclosed for demand deposits are
equal to their carrying amounts. The carrying amounts for
variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term debt: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other
short-term borrowings approximate their fair values.
Long-term debt and junior subordinated debentures: The fair
values of long-term borrowings that are traded in the markets
are equal to their quoted market prices. The fair values of
other long-term borrowings (other than deposits) are
estimated using discounted cash flow analyses, based on
Provident's current incremental borrowing rates for similar
types of borrowing arrangements.
Off-balance sheet financial instruments: Fair value for
interest rate swaps is based upon current market quotes.
68
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
T. ADDITIONAL INFORMATION
LEGAL CONTINGENCIES Provident is subject to litigation in the
ordinary course of business. Management does not expect such
litigation will have a material adverse effect on Provident's
financial position.
RESTRICTIONS ON CASH AND NONINTEREST BEARING DEPOSITS Federal Reserve
Board regulations require that The Provident Bank and Provident Bank
of Florida maintain certain minimum reserve balances. The average
amount of those reserve balances for the year ended December 31, 1998,
was approximately $50.1 million.
INVESTMENT IN PARTNERSHIPS Provident's share of partnerships was
carried at approximately $28.5 million and $22.0 million at December
31, 1998, and 1997, respectively, which includes equity in net income
of $1,714,000, $2,935,000 and $536,000 in the years 1998, 1997 and
1996, respectively.
OTHER REAL ESTATE OWNED At December 31, 1998, and 1997, the carrying
value of other real estate and equipment owned was $2.7 million and
$12.4 million, respectively.
RESTRICTED ASSETS During 1997 and 1998, Provident formed Provident
Auto Leasing Company, Provident Auto Rental Corp. and Provident Lease
Receivables Corporation. 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
Rental's purpose is limited to the securitization and sale of leased
vehicles to investors under sale-leaseback transactions. Lease
Receivables' function is limited to the sale of equipment leases while
retaining the servicing rights. Auto Leasing, Auto Rental and Lease
Receivables are legal entities and each maintains books and records
with respect to its assets and liabilities. The assets of these
subsidiaries, totaling $542.5 million, are not available to secure
financing or otherwise satisfy claims of creditors of Provident or any
of its other subsidiaries.
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 1999 by Provident Bank and Provident
Florida to its parent without approval is approximately $175.9
million, plus 1999 net income. Pursuant to Federal Reserve and State
regulations, the maximum amount available to be loaned to affiliates
(as defined), including their Parent, by the banking subsidiaries, was
approximately $88.5 million to any single affiliate, and $176.9
million to all affiliates combined of which $18.8 million was loaned
at December 31, 1998.
69
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL INFORMATION Parent Company only condensed
financial information for Provident Financial Group, Inc. is as
follows:
<TABLE>
BALANCE SHEETS (PARENT ONLY)
(In Thousands)
<CAPTION>
December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $193,470 $115,785
Investment Securities Available for Sale 148,545 169,839
Loans (net of reserve for loan losses of $1,295 and $1,295) (234) 6,911
Investment in Subsidiaries:
Banking 667,459 599,171
Non-Banking 3,710 5,175
Premises and Equipment 1,468 1,504
Accounts Receivable from Banking Subsidiaries 45,616 13,776
Other Assets 31,327 30,007
----------------------
$1,091,361 $942,168
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable and Accrued Expenses $37,627 $9,986
Commercial Paper 245,291 202,018
Long-Term Debt 2,617 1,913
Junior Subordinated Debentures 101,972 101,910
----------------------
Total Liabilities 387,507 315,827
Shareholders' Equity 703,854 626,341
----------------------
$1,091,361 $942,168
======================
</TABLE>
<TABLE>
STATEMENTS OF INCOME (PARENT ONLY)
(In Thousands)
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Income:
Dividends from Banking Subsidiaries $51,000 $- $25,000
Interest Income from Banking Subsidiaries 4,899 5,605 6,538
Other Interest Income 10,097 7,364 1,625
Noninterest Income 1,748 4,157 763
--------------------------------
67,744 17,126 33,926
Expenses:
Interest Expense 22,088 18,219 8,833
Noninterest Expense 4,684 4,542 3,124
--------------------------------
26,772 22,761 11,957
--------------------------------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiaries 40,972 (5,635) 21,969
Applicable Income Tax Credits 4,157 2,494 1,675
--------------------------------
Income Before Equity in Undistributed Net Income
of Subsidiaries 45,129 (3,141) 23,644
Equity in Undistributed Net Income of Subsidiaries 69,823 110,578 54,501
--------------------------------
Net Income $114,952 $107,437 $78,145
================================
</TABLE>
70
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(In Thousands)
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $114,952 $107,437 $78,145
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Net Income from Subsidiaries (120,823) (110,578) (79,501)
Cash Dividends Received From Subsidiaries 51,000 - 25,000
Amortization of Goodwill and Other 690 396 39
Depreciation of Premises and Equipment 36 54 446
Realized Investment Security (Gains) Losses 29 (1,068) -
Proceeds From Sale of Loans Held for Sale 1,831 41,123 32,581
Origination of Loans Held for Sale - (41,943) (32,491)
Realized (Gains) Losses on Loans Held for Sale 2 (58) (90)
(Increase) Decrease in Interest Receivable (48) (396) 64
Increase in Other Assets (33,485) (23,327) (8,713)
Increase (Decrease) in Interest Payable (27) (1) 675
Deferred Income Taxes (845) 2,457 (2,811)
Increase (Decrease) in Other Liabilities 27,668 5,310 (4,229)
------------------------------
Net Cash Provided by (Used In) Operating
Activities 40,980 (20,594) 9,115
------------------------------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 10,202 11,571 -
Proceeds from Maturities and Prepayments 43,252 20,329 1,700
Purchases (34,603) (187,386) (1,892)
Net Decrease in Loans 5,312 4,739 8,870
Net Decrease in Premises and Equipment - 9 29
------------------------------
Net Cash Provided by (Used In) Investing
Activities 24,163 (150,738) 8,707
------------------------------
Financing Activities:
Net Increase (Decrease) in Short-Term Debt 43,273 62,353 (5,656)
Principal Payments on Long-Term Debt (788) (545) (836)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 1,492 - 102,320
Cash Dividends Paid (35,308) (30,247) (21,970)
Purchase of Treasury Stock (21,425) - -
Proceeds from Exercise of Stock Options 25,298 16,068 1,878
Contribution to Subsidiaries - - (3,093)
Net Increase (Decrease) in Other Equity Items - 19 (27)
------------------------------
Net Cash Provided by Financing Activities 12,542 47,648 72,616
------------------------------
Increase (Decrease) in Cash and
Cash Equivalents 77,685 (123,684) 90,438
Cash and Cash Equivalents at Beginning of Year 115,785 239,469 149,031
------------------------------
Cash and Cash Equivalents at End of Year $193,470 $115,785 $239,469
==============================
</TABLE>
71
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTARY DATA
Quarterly Consolidated Results of Operations - (Unaudited)
The following are quarterly consolidated results of operations for the
two years ended December 31, 1998.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------
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 $165,523 $165,752 $155,299 $147,186 $145,578 $146,712 $142,236 $137,286
Total Interest Expense 88,810 91,275 86,472 80,510 77,739 81,031 76,689 73,753
-------------------------------------------------------------------------------------
Net Interest Income 76,713 74,477 68,827 66,676 67,839 65,681 65,547 63,533
Provision for Loan and Lease Losses (11,700) (9,500) (5,000) (5,000) (9,250) (9,500) (15,000) (11,000)
-------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan and Lease Losses 65,013 64,977 63,827 61,676 58,589 56,181 50,547 52,533
Service Charges on Deposit Accounts 7,163 6,878 6,789 6,412 6,514 6,331 6,329 5,578
Other Service Charges and Fees 13,531 9,346 13,843 14,958 11,171 6,281 10,373 9,233
Operating Lease Income 9,535 9,487 9,405 9,054 7,592 6,616 6,405 5,594
Gain on Sale of Loans and Leases 19,865 25,807 21,023 13,526 10,540 22,035 15,500 12,808
Security Gains 3,163 4,061 2,024 3,692 5,264 1,196 1,030 2,223
Other 6,466 1,149 3,747 2,063 5,022 2,158 3,857 3,008
-------------------------------------------------------------------------------------
Total Noninterest Income 59,723 56,728 56,831 49,705 46,103 44,617 43,494 38,444
Compensation 32,240 31,493 31,569 29,337 27,660 25,696 24,371 23,727
Depreciation on Operating Lease
Equipment 5,635 5,503 5,242 5,282 4,905 4,601 4,409 3,752
Occupancy 4,412 4,628 4,104 3,807 3,882 3,516 2,700 2,646
Professional Services 5,004 4,958 4,341 3,973 4,523 3,660 3,681 3,048
Equipment Expense 6,002 5,755 4,783 4,231 4,334 3,989 3,618 3,267
Charges and Fees 4,308 4,008 3,607 2,394 2,194 4,023 3,002 3,433
Marketing 2,178 2,122 3,017 2,307 2,313 1,694 1,841 2,042
Special Charges and Exit Costs 22,005 - - - - - - -
Other 14,132 12,488 14,241 13,300 12,486 11,619 10,239 9,107
-------------------------------------------------------------------------------------
Total Noninterest Expense 95,916 70,955 70,904 64,631 62,297 58,798 53,861 51,022
-------------------------------------------------------------------------------------
Income Before Income Taxes 28,820 50,750 49,754 46,750 42,395 42,000 40,180 39,955
Applicable Income Taxes 9,938 17,730 17,364 16,090 14,247 14,708 14,125 14,013
-------------------------------------------------------------------------------------
Net Income $18,882 $33,020 $32,390 $30,660 $28,148 $27,292 $26,055 $25,942
=====================================================================================
Net Earnings Per Common Share:
Basic $.44 $.76 $.75 $.71 $.67 $.66 $.63 $.63
Diluted .42 .73 .72 .68 .63 .62 .60 .60
Cash Dividends .20 .20 .20 .20 .20 .20 .16 .16
Fully Tax Equivalent Margin:
Net Interest Income $76,713 $74,477 $68,827 $66,676 $67,839 $65,681 $65,547 $63,533
Tax Equivalent Adjustment 45 58 59 99 107 89 86 78
-------------------------------------------------------------------------------------
Tax Equivalent Net Interest Income $76,758 $74,535 $68,886 $66,775 $67,946 $65,770 $65,633 $63,611
=====================================================================================
</TABLE>
Financial results for the first nine months of 1998 have been restated
as a result of retroactively changing its method of measuring the fair
value of retained interests in securitized assets to the cash-out
method. Quarterly diluted earnings per share numbers do not add to the
year-to-date amount for 1998 due to rounding.
72
<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's
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after the close of Provident's fiscal
year ending December 31, 1998:
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 39 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.
73
<PAGE>
Number Exhibit Description Filing Status
------ -------------------------- -----------------------------
4.1 Instruments defining the Provident 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 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 and The 333-20769.
Bank of New York, as
Guarantee Trustee
Management Compensatory Agreements
10.4 Provident 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 Incorporated by reference to
Retirement Plan (As Form S-8 (File No. 33-90792).
amended)
10.6 Provident 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).
74
<PAGE>
Number Exhibit Description Filing Status
------ -------------------------- -----------------------------
10.7 Provident 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 1992 Incorporated by reference to
Outside Directors' Stock Form S-8 (File No. 33-51230).
Option Plan
10.9 Provident Incorporated by reference to
Restricted Stock Plan Form S-2 (File No. 33-44641).
10.10 Provident 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 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K:
Date of Report: January 28, 1999
Item 5. Other Events: For the nine months ended September 30,
1998 and the years ended December 31, 1997 and 1996, Provident
Financial Group, Inc. changed the methodology used in the
calculation of gains on its securitizations of loans. In 1997
and 1996, Provident used the "cash-in" method to calculate gains.
During the fourth quarter of 1998, the Financial Accounting
Standards Board and Securities and Exchange Commission indicated
that the "cash-out" method is the only acceptable method to
calculate gains. Accordingly, the change in methodology increased
previously reported nine months 1998 net income by $1.2 million
or 3 cents per share and reduced 1997 net income by $7.9 million
or 18 cents per share to $107.4 million or $2.45 per share and
reduced 1996 net income by $3.1 million or 7 cents per share to
$78.1 million or $1.87 per share. Provident will amend its Annual
Report on Form 10-K for the year ended December 31, 1997, in
connection with the restatement.
75
<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/Robert L. Hoverson
--------------------------
Robert L. Hoverson
President
March 18, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of Provident Financial Group, Inc. and in the capacities and on
the dates indicated.
Signature Capacity Date
- ----------------------- ---------------------------- --------------
/s/Robert L. Hoverson Director and President March 18, 1999
- ----------------------- (Principal Executive Officer)
Robert L. Hoverson
/s/Jack M. Cook Director March 18, 1999
- -----------------------
Jack M. Cook
/s/Thomas D. Grote, Jr. Director March 18, 1999
- -----------------------
Thomas D. Grote, Jr.
/s/Philip R. Myers Director March 18, 1999
- -----------------------
Philip R. Myers
/s/Joseph A. Pedoto Director March 18, 1999
- -----------------------
Joseph A. Pedoto
/s/Sidney A. Peerless Director March 18, 1999
- -----------------------
Sidney A. Peerless
/s/Joseph A. Steger Director March 18, 1999
- -----------------------
Joseph A. Steger
/s/Christopher J. Carey Executive Vice President March 18, 1999
- ----------------------- and Chief Financial Officer
Christopher J. Carey
76
EXHIBIT 21 - SUBSIDIARIES OF PROVIDENT FINANCIAL GROUP, INC.
The following table sets forth all of Provident's active 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 Auto Rental Corp. 1998-1 100 Delaware
Provident Auto Rental Corp. 1998-2 100 Delaware
Provident Securities and Investment Company 100 Ohio
Provident Insurance Agency 100 Ohio
PB Realty, Inc. 100 Ohio
Information Leasing Corporation 100 Ohio
Provident Lease Receivables Corp. 100 Delaware
Procurement Alternatives Corporation 100 Ohio
FGBI Acquisition Corp. 100 Florida
Provident Bank of Florida 100 Florida
Provident Investment Advisers, Inc. 100 Ohio
Provident Capital Trust I 100 Delaware
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 19, 1999, 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, 1998.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-K for December 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 267,441
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 60,000
<TRADING-ASSETS> 50,333
<INVESTMENTS-HELD-FOR-SALE> 1,514,153
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,623,505
<ALLOWANCE> 75,907
<TOTAL-ASSETS> 8,134,987
<DEPOSITS> 5,327,321
<SHORT-TERM> 807,503
<LIABILITIES-OTHER> 362,015
<LONG-TERM> 934,294
0
7,000
<COMMON> 12,805
<OTHER-SE> 684,049
<TOTAL-LIABILITIES-AND-EQUITY> 8,134,987
<INTEREST-LOAN> 525,827
<INTEREST-INVEST> 100,122
<INTEREST-OTHER> 7,811
<INTEREST-TOTAL> 633,760
<INTEREST-DEPOSIT> 222,306
<INTEREST-EXPENSE> 347,067
<INTEREST-INCOME-NET> 286,693
<LOAN-LOSSES> 31,200
<SECURITIES-GAINS> 12,940
<EXPENSE-OTHER> 302,406
<INCOME-PRETAX> 176,074
<INCOME-PRE-EXTRAORDINARY> 114,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,952
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.56
<YIELD-ACTUAL> 3.93
<LOANS-NON> 42,573
<LOANS-PAST> 9,219
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 38,334
<ALLOWANCE-OPEN> 71,980
<CHARGE-OFFS> 37,116
<RECOVERIES> 9,843
<ALLOWANCE-CLOSE> 75,907
<ALLOWANCE-DOMESTIC> 75,907
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
