ITEM 1. BUSINESS -----------------
Provident Financial Group, Inc.
Provident Financial Group, Inc. ("Provident") is a Cincinnati-based commercial banking and financial services company with full service banking operations in Ohio, northern Kentucky and southwestern Florida. Provident also provides commercial financing, equipment leasing and mortgage lending at a national level. At December 31, 2000, Provident had total assets of $13.9 billion, loans and leases of $9.1 billion, deposits of $8.8 billion and shareholders' equity of $991 million. Provident manages an additional $5.8 billion of loans and leases which have been sold with servicing retained.
Provident's executive offices are located at One East Fourth Street, Cincinnati, Ohio 45202 and its Investors Relations telephone number is (513) 345-7102 or (800) 851-9521.
Provident has expanded its franchise in recent years through internal growth and acquisitions. Recent examples of Provident's expansion include the purchase of Bank One Corporation's Housing and Health Care Capital Business in September 2000 (a financier and loan servicer of multi-family and health-care facilities); the acquisitions of Fidelity Financial of Ohio, Inc. in February 2000 and OHSL Financial Corp. in December 1999 (financial institutions located in Cincinnati, Ohio); the purchase of Capstone Realty Advisors, LLC in September 1999 (business specializing in the origination and servicing of commercial real estate loans); the opening of corporate lending offices in Akron, Pittsburgh, Baltimore, Dallas, Denver, Chicago and Houston during 1999 and 2000; and the expansion of four banking centers in Florida during 2000.
Provident conducts its banking operations through The Provident Bank. Provident Bank of Florida was merged into The Provident Bank in early December 2000. Major business lines include Commercial Banking, Retail Banking and Mortgage Banking. See ITEM 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Lines" and Note 17 included in "Notes to Consolidated Financial Statements" for details as to the types of financial products and services offered by these business lines.
At December 31, 2000, Provident and its subsidiaries employed approximately 3,000 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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Supervision and Regulation
Provident is registered as a bank holding company, and is subject to the regulations of the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as amended. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Act requires Federal Reserve approval of 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 Act 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 Bank Holding Company Act from engaging in nonbanking activities, unless such activities are determined by the Federal Reserve to be financial in nature or closely related to banking. The Act 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 The Provident Bank, Provident's Ohio chartered banking subsidiary, 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 21 included in "Notes to Consolidated Financial Statements".
Federal and state laws regulate the operations of The Provident Bank, 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 affiliate to regulation and examination by the Federal Reserve, state banking authorities and the FDIC.
Legislation to overturn Depression-era restrictions on bank affiliations, the Gramm-Leach-Bliley Act, became law on November 12, 1999. This Act eliminates certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial services organizations. It provides for a new type of "Financial Holding Company" under which affiliations among these entities may occur, subject to the umbrella regulation of the Board of Governors of the Federal Reserve System and affiliate regulation by the functional financial regulators. Provident has elected to become a "Financial Holding Company". The Act permits certain non-banking financial activities to be conducted in an operating subsidiary of a bank. In addition, the Act imposes new privacy disclosure and "opt out" requirements on virtually all regulated financial services organizations.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 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 monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of banks and bank holding companies. The nature of future monetary policies and the effect of such policies on the future business and income of Provident and its subsidiaries cannot be predicted.
Red Capital Markets, Inc., a Provident Bank subsidiary, is licensed as a securities broker-dealer and is subject to regulation by the Securities and Exchange Commission, state securities authorities and the National Association of Securities Dealers, Inc. Provident Insurance Agency, Inc., a subsidiary of Red Capital Markets, 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 Securities and Exchange Commission and state securities authorities.
ITEM 2.
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 forty of its branch locations and leases thirty-nine. For information concerning rental obligations, see Note 5 included in "Notes to Consolidated Financial Statements".
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS --------------------------
Provident and its subsidiaries are not parties to any pending legal proceedings other than routine litigation incidental to their business, the results of which will not be material to Provident or its financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------
None in the fourth quarter.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------------------
The Common Stock is traded on the NASDAQ Stock Market under the symbol "PFGI". The following table sets forth, for the periods indicated, the high, low and period end closing sales prices as reported on NASDAQ and the quarterly dividends paid by Provident.
2000 1999 ---------------------------------- ---------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------- High Close $37.81 $29.88 $34.25 $34.78 $43.31 $45.88 $44.38 $41.94 Low Close 24.50 23.94 23.81 25.38 33.63 36.13 35.56 35.31 Period End Close 37.50 29.38 23.81 34.06 35.88 36.56 43.75 38.38 Cash Dividends .24 .24 .24 .24 .22 .22 .22 .22
At February 28, 2001, there were 5,504 holders of record and an additional 6,744 non-registered or "street name" holders of Provident's Common Stock.
Provident paid dividends on its Common Stock of $46.8 million and $40.1 million during 2000 and 1999, respectively, and $.9 million on its Preferred Stock for both years. Provident increased its quarterly dividend rate per share from $.22 to $.24 beginning in the first quarter of 2000. It is expected that in the next several years, Provident's (Parent'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 21 included in "Notes to Consolidated Financial Statements".
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA --------------------------------
Five Year For Year Ended December 31, (Dollars In Millions Compound ------------------------------------------------------------ Except Per Share Amounts) Growth Rate 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------ Earnings: Total Interest Income 14% $ 971 $ 731 $ 694 $ 632 $ 564 Total Interest Expense 16 (583) (394) (383) (345) (305) -------- -------- -------- -------- -------- Net Interest Income 12 388 337 311 287 259 Provision for Loan and Lease Losses 56 (131) (48) (32) (45) (47) Noninterest Income 32 254 272 225 175 102 Noninterest Expense 21 (393) (327) (317) (241) (191) -------- -------- -------- -------- -------- Income Before Income Taxes 1 118 234 187 176 123 Applicable Income Taxes 4 (44) (83) (65) (61) (42) -------- -------- -------- -------- -------- Net Income (1) - $ 74 $ 151 $ 122 $ 115 $ 81 ======== ======== ======== ======== ======== Per Common Share Data: Basic Earnings (1) (4)% $ 1.49 $ 3.18 $ 2.57 $ 2.51 $ 1.84 Diluted Earnings (1) (3) 1.46 3.08 2.48 2.38 1.76 Dividends Paid 15 .96 .88 .80 .72 .54 Book Value 13 20.15 18.91 16.83 15.28 13.38
Selected Balances at December 31: Total Investment Securities 24% 3,014 2,111 1,598 1,468 1,132 Total Loans and Leases 11 9,077 7,011 6,303 5,748 5,939 Reserve for Loan and Lease Losses 20 154 94 79 75 69 Total Assets 16 13,857 10,538 8,950 7,947 7,603 Noninterest Bearing Deposits 20 1,293 1,185 679 610 558 Interest Bearing Deposits 13 7,536 6,045 5,277 4,747 4,675 Long-Term Debt and Junior Subordinated Debentures 29 3,104 1,171 1,112 863 989 Total Shareholders' Equity 15 991 926 802 719 607 Off Balance Sheet Managed Assets - 5,756 5,938 3,220 1,533 257
Other Statistical Information: Return on Average Assets (1) 0.61% 1.53% 1.40% 1.49% 1.16% Return on Average Equity (1) 7.75 18.34 15.57 17.47 15.03 Dividend Payout Ratio 64.85 27.14 30.93 33.12 29.44
Capital Ratios at December 31: Total Equity to Total Assets 7.15% 8.79% 8.96% 9.05% 7.99% Tier 1 Leverage Ratio 9.56 10.87 9.13 9.92 9.24 Tier 1 Capital to Risk-Weighted Assets 9.18 9.97 9.03 10.09 9.66 Total Risk-Based Capital to Risk-Weighted Assets 11.10 11.93 11.53 13.36 13.26
Loan Quality Ratios at December 31: Reserve for Loan and Lease Losses to Total Loans and Leases 1.70% 1.34% 1.25% 1.30% 1.16% Reserve for Loan and Lease Losses to Nonaccrual Loans 160.70 168.94 175.18 157.28 307.67 Nonaccrual Loans to Total Loans and Leases 1.06 0.79 0.71 0.83 0.38 Net Charge-Offs to Average Total Loans and Leases 0.97 0.49 0.43 0.69 0.77
(1) Selected Financial Data on Operating Income follows (excludes Merger and Restructuring Charges (1998 - 2000) and One-Time Deposit Insurance Charges (1996):
Net Income 6% $ 101 $ 154 $ 137 $ 115 $ 88 Basic Earnings 2 2.04 3.24 2.87 2.51 2.02 Diluted Earnings 4 2.00 3.14 2.77 2.38 1.93 Return on Average Assets 0.83% 1.56% 1.56% 1.49% 1.27% Return on Average Equity 10.59 18.68 17.39 17.47 16.45
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ----------------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
This discussion should be read in conjunction with the audited consolidated financial statements. Average balances reported are based on daily calculations.
INTRODUCTION
Provident Financial Group, Inc. ("Provident") is a holding company for The Provident Bank, an FDIC member bank. Major business lines are: Commercial Banking, a provider of credit products and cash management services to commercial customers; Retail Banking, a provider of consumer lending, deposit accounts, trust, brokerage and investment products and services; and Mortgage Banking, an originator and servicer of conforming and nonconforming residential loans to consumers and short-term financing to mortgage originators and brokers.
PERFORMANCE SUMMARY
The following table summarizes three-year financial data for Provident, along with calculated variances from the prior year:
Year Ending 2000 Year Ending 1999 Year Ending 1998 (Dollars in Millions ----------------------------- ---------------------------- ----------------------------- Except Per Share Data) Amount $ Chg % Chg Amount $ Chg % Chg Amount $ Chg % Chg -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 388 $ 51 15% $ 337 $ 26 8% $ 311 $ 24 8% Noninterest Income 254 (18) (7) 272 47 21 225 50 29 Total Revenue 642 33 5 609 73 14 536 74 16 Provision for Loan and Lease Losses 131 83 173 48 16 50 32 (13) (29) Noninterest Expense (1) 393 66 20 327 10 3 317 76 32 Net Income (1) 74 (77) (51) 151 29 24 122 7 6 Total Loans and Leases 9,077 2,066 29 7,011 708 11 6,303 555 10 Total Assets 13,857 3,319 31 10,538 1,588 18 8,950 1,003 13 Total Off Balance Sheet Managed Assets 5,756 (182) (3) 5,938 2,718 84 3,220 1,687 110 Total Deposits 8,829 1,599 22 7,230 1,274 21 5,956 599 11 Long-Term Debt and Junior Subordinated Debentures 3,104 1,933 165 1,171 59 5 1,112 249 29 Stockholders' Equity 991 65 7 926 124 15 802 83 12 Per Common Share: Book Value 20.15 1.24 7 18.91 2.08 12 16.83 1.55 10 Diluted Earnings (1) 1.46 (1.62) (53) 3.08 0.60 24 2.48 0.10 4 Ratio Analysis: Net Interest Margin 3.58% 3.80% 3.84% Return on Average Equity (1) 7.75% 18.34% 15.57% Return on Average Assets (1) 0.61% 1.53% 1.40% Average Equity to Average Assets 7.82% 8.34% 8.97% Dividend Payout to Net Earnings 64.85% 27.14% 30.93%
(1) Financial Data based on Operating Income follows (excludes Merger and Restructuring Charges):
Noninterest Expense $ 354 $31 10 $ 323 $28 9 $ 295 $54 22 Net Income 101 (53) (34) 154 17 12 137 22 19 Diluted Earnings 2.00 (1.14) (36) 3.14 0.37 13 2.77 0.39 16 Return on Average Equity 10.59% 18.68% 17.39% Return on Average Assets 0.83% 1.56% 1.56% Efficiency Ratio 55.07% 52.97% 56.38%
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provident reported net income of $73.6 million, $150.9 million and $122.4 million for 2000, 1999 and 1998, respectively. On an operating income basis (excludes unusual and significant expenses), net income was $100.6 million, $153.7 million and $136.7 million, for 2000, 1999 and 1998, respectively. Operating earnings per diluted share was $2.00 for 2000, compared to $3.14 for 1999 and $2.77 for 1998. On an operating basis, return on average equity was 10.59%, 18.68% and 17.39% and return on average assets was 0.83%, 1.56% and 1.56% for the three years ended 2000, 1999 and 1998, respectively.
The lower net income and financial performance ratios for 2000 were principally the result of two events. First, during the third quarter of 2000, Management decided to change the structure of its securitizations to secured financings, eliminating the use of gain-on-sale accounting. The switch to a secured financing structure does not affect the total profit Provident will recognize over the life of a loan, but rather impacts the timing of income recognition. Secured financing transactions cause reported earnings from securitized loans to be lower in the initial periods, resulting from the absence of gains on loan and lease sales, and higher in later periods, as interest is earned on the loans. As a result, moving away from transaction structures that use gain-on-sale accounting will temporarily cause Provident's earnings to be lower over the next several quarters.
A second reason for the lower net income in 2000 was higher loan loss provision expense, resulting from the following factors. First, general economic conditions weakened during the fourth quarter of 2000 as evidenced by the Federal Reserve reducing key interest rates in early January of 2001. Second, higher charge-offs and declining credit quality ratios were experienced by Provident during the fourth quarter of 2000. Unfavorable business conditions related to three loans totaling $52 million required Provident to move the loans to nonaccrual status. In light of the change in Provident's asset quality indicators and the uncertain economic environment, Provident increased its loan loss reserve ratio from 1.44% at the end of the third quarter to 1.70% at the end of the fourth quarter of 2000.
Provident experienced revenue growth despite the absence of gains on sale of loans and leases during the second half of 2000. Revenue (net interest income plus noninterest income) increased 5% during 2000 over 1999 and 14% during 1999 over 1998. Net interest income increased $51 million, or 15%, for 2000 compared to 1999, after increasing $26 million, or 8%, in 1999 compared to 1998. Higher net interest income was the result of strong loan growth from all business lines. Noninterest income decreased $18 million in 2000 as compared to 1999. However, excluding gains on sale of loans and leases, noninterest income increased $35 million. Accounting for the growth was fee revenue, primarily from increased loan servicing and other fees and charges.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provident's efficiency ratio, on an operating basis, for 2000, 1999 and 1998 was 55.07%, 52.97% and 56.38%, respectively. The absence of gains on sale of loans and leases was primarily responsible for the higher efficiency ratio during 2000. Total noninterest expense, on an operating basis, was $354 million, $323 million and $295 million for 2000, 1999 and 1998, respectively. Strong cost control measures have held the annual growth of these operating expenses to 10% or less over the past two years.
Provident incurred unusual and significant expenses during each of the past three years. During 2000, merger and restructuring charges of $39.3 million were expensed in connection with the acquisition of Fidelity Financial of Ohio and other post-merger business line restructurings. During 1999, Fidelity Financial had taken merger charges of $4.2 million related to their acquisition of Glenway Financial Corporation. Provident initiated a reengineering project and discontinued two business units which resulted in a charge to earnings of $22.0 million during 1998.
Total assets at December 31, 2000, 1999 and 1998 were $13.9 billion, $10.5 billion and $8.9 billion, respectively. Total loans increased to $9.1 billion in 2000 compared to $7.0 billion in 1999 and $6.3 billion in 1998. The growth in loans for 2000 was a result of increased loan originations and the decision to restructure loan securitizations where loans are no longer removed from the balance sheet. Credit quality ratios weakened during 2000 as compared to 1999 and 1998. The ratio of nonperforming assets to total assets was .76%, .56% and .53% as of December 31, 2000, 1999 and 1998, respectively. As a result, Provident increased the ratio of reserve for loan and lease losses to total loans and leases to 1.70% as of December 31, 2000, compared to 1.34% and 1.25% at December 31, 1999 and 1998, respectively.
Total deposits for 2000, 1999 and 1998 were $8.8 billion, $7.2 billion and $6.0 billion. Average core deposits grew 14% from 1999 to 2000 with significant contribution coming from internet deposit-gathering initiatives, a new index checking account product and deposit growth at the Florida banking centers.
Shareholders' equity increased $65 million and $124 million during 2000 and 1999, respectively. The growth in equity has been the result of income exceeding dividends paid, shares of stock issued in connection with acquisitions, and the exercise of stock options.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS LINES
The following table summarizes net operating income by major lines of business for the past three years:
Percentage Increase (Decrease) ------------------- (Dollars in Millions) 2000 1999 1998 '00/'99 '99/'98 --------------------------------------------------------------------- Commercial Banking $ 60.8 $ 69.8 $ 92.4 (13)% (24)% Retail Banking 37.0 44.2 17.3 (16) 155 Mortgage Banking 2.7 39.7 18.5 (93) 115 Corporate Center .1 - 8.5 - - ------ ------ ------ $100.6 $153.7 $136.7 (35)% 12 % ====== ====== ======
Key components of the management reporting process follow:
o Risk-Based Equity Allocations: Provident uses a comprehensive approach for measuring risk and making risk-based equity allocations. Risk measurements are applied to credit, residual, operational and corporate-level risks. o Transfer Pricing: Provident utilizes a matched funded transfer pricing methodology that isolates the business units from fluctuations in interest rates, and provides management with the ability to measure business unit, product and customer level profitability based on the financial characteristics of the products rather than the level of interest rates. o Provision for Loan and Lease Losses: Business lines are charged for provision based upon its level of net charge-offs and the size of its loan/lease portfolio. o Cost Allocations: Provident applies a detailed approach to allocating costs at the business unit, product and customer levels. Allocations are generally based on volume/activity and are reviewed and updated regularly. o "Corporate Center": Corporate Center includes revenue and expenses not allocated to the primary business lines, gain/loss on the sale of investment securities, and any nonrecurring business revenues and expenses. o Prior Periods: Prior periods have been restated to conform with the current business line reporting structure and current methodology of allocating revenue and expense between business lines.
Business line descriptions and fluctuation analysis follow:
o Commercial Banking is a provider of credit products and cash management services to commercial customers. The group includes Commercial Lending, serving middle market clients in the Midwest; Provident Capital Corp., a national financier of business expansions, re-capitalizations, and provider of asset based lending services; Commercial Mortgage, a provider of construction and permanent mortgage financing; Capstone Realty Advisors, a commercial real estate servicing and origination business, Information Leasing Corporation, a national small to mid-ticket equipment leasing company; Provident Commercial Group, a national lessor of large
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equipment; and Red Capital Group, a financier and loan servicer of multi-family and health-care facilities.
Commercial Banking is the company's largest line of business contributing 60% of the Bank's net operating income in 2000. Average loan balances increased 25% and total revenues were up 16% in 2000 compared to 1999. However, net operating income for 2000 declined 13% compared to 1999. The lower net operating income was from higher credit losses resulting in an increase in the level of loan loss reserves and lower cash gains on the securitization and sale of equipment leases. The decrease in net operating income of 24% in 1999 compared to 1998 was primarily attributable to a decline in warrant gains, higher loan loss provision expense and rising operating expenses attributable to the start-up of several new businesses.
Capstone Realty Advisors and Red Capital Group made significant contributions to revenue growth in 2000. Capstone, a commercial real estate servicing and origination business acquired during 1999, was successfully integrated and its operations expanded during 2000. Red Capital, acquired late in 2000, provides a national platform to generate fee income from originating, selling and servicing in the multi-family housing and health-care real estate markets. Plans are to expand both the Capstone and Red Capital businesses in 2001, thereby increasing revenues and improving the balance between spread and fee-based revenue.
Commercial Banking continued its history of strong asset generation capabilities as witnessed by average loan balances increasing 25% from 1999 to 2000. Contributing to this growth was the expansion of commercial banking offices into the Akron, Baltimore, Chicago, Dallas, Denver, Houston and Pittsburgh markets.
o Retail Banking provides consumer lending, deposit accounts, trust, brokerage and investment products and services to its customers. This business line includes Small Business Banking, Consumer Lending, Consumer Banking and Provident Financial Advisors business units. Net operating income decreased by $7.2 million in 2000 as compared to net operating income growth of $26.9 million in 1999. The decrease in net operating income for 2000 was related primarily to two factors. First, the third quarter decision to change the structure of securitizations to secured financings resulted in the elimination of gain-on-sale accounting. Second, Retail Banking incurred higher loan loss provision expense for 2000 due to on-balance sheet loan growth, and a higher level of loan loss reserves. Total loans for Retail Banking increased by $767 million, or 48%, during the current year primarily as a result of securitized loans now remaining on the balance sheet.
Retail Banking experienced strong growth in deposits during 2000. Average core deposits for 2000 grew by 14% as compared to 1999. Major components of the deposit growth included the successful launch of a new index checking account; internet deposit-gathering initiatives; increased brand awareness through advertising and
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sponsorship of local sports teams and community events; and the opening of four new banking centers in Florida, where branch deposit growth has been strong.
Revenue from deposit and other fees grew during 2000. Growth in deposit fees resulted from higher volume and improved pricing of deposit activity, as well as an increased number and usage of Provident ATMs. Other fee revenue also increased during 2000 primarily from Provident Financial Advisors, Provident's investment and asset management business. Several key accomplishments contributed to this growth, including ongoing investments in training and industry certifications of associates, the establishment of an institutional sales effort and expansion into the Dayton, Cleveland, Indianapolis and Florida markets.
The growth in net operating income for 1999 was the result of loan growth and lower net charge-offs. Auto lease production and managed receivables grew significantly during 1999 as Provident expanded the number of auto dealerships that distribute Provident lease financing products to their customers. In addition, as a result of enhanced credit scoring and the implementation of risk-adjusted pricing systems, direct and indirect installment loans and leases experienced a significant improvement in net charge-offs.
During 1999, noninterest income increased $23 million due to the following factors: Credit card balances of $230 million were securitized, generating a gain of $4 million; auto lease operating income increased $6 million as a result of higher managed lease receivables; and higher fees in the areas of loan servicing, brokerage, fund management and trust contributed to the growth in net income in 1999.
o Mortgage Banking originates and services conforming and nonconforming residential loans to consumers and provides short-term financing to mortgage originators and brokers. Net operating income for 2000 was $2.7 million, as compared to $39.7 million for 1999. The lower operating income for 2000 was driven by the decision to change the structure of securitizations resulting in the elimination of gain-on-sale accounting for the second half of 2000. No incremental net interest income occurred during the initial (third) quarter of this accounting change as prior loan sales had always occurred at the end of the quarter. However, additional net interest income was realized during the fourth quarter of 2000 and should continue to increase in future periods as loans now remain on the balance sheet. As loans remain on the balance sheet, additional provision for loan losses was incurred. Provision expense for 2000 was $29.3 million, compared to $3.9 million and $.6 million in 1999 and 1998, respectively. Partially offsetting the absence of gain-on-sale income and higher provision expense were higher loan servicing fees that increased $6.8 million for the full year 2000 over 1999.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In conjunction with the decision to eliminate the use of gain-on-sale accounting, the level of nonconforming loan originations is being moderated. During the fourth quarter of 2000, Mortgage Banking originated $327 million of nonconforming loans, compared to $674 million during the fourth quarter of 1999. Mortgage Banking is now focusing its efforts toward growing its sub-servicing operations for third-party originators. By leveraging the expertise from its existing loan servicing platform, Provident expects to see significant growth from this low-risk area.
Net operating income for 1999 was $39.7 million, an increase of $21.2 million as compared to 1998. The increase in income was primarily the result of strong nonconforming loan production and accompanying sales during 1999. In 1999, Mortgage Banking securitized and sold nonconforming loans totaling $2.3 billion resulting in the recognition of $73.3 million of gains. This compares to $1.1 billion of securitized and sold loans resulting in $36.3 million of gains during 1998.
Total revenue for 1999 was $125.4 million, as compared to $79.9 million in 1998. The increase in revenue was primarily attributable to an increase in loan servicing fees as well as the gains on the sale of nonconforming loans. Operating expenses increased during 1999 due primarily to increased staffing associated with the higher volume of loans being generated and serviced by this business line.
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 2000, 1999 and 1998, net interest income on a taxable equivalent basis was $388.1 million, $336.6 million and $311.3 million, respectively, which represented 60%, 55% and 58% of net revenues (net interest income plus noninterest income). The ratio increased in 2000 as a result of Provident's decision to change the structure of its securitization activity from loan sales to secured financings. Accordingly, loans and leases now remain on the balance sheet resulting in the recognition of interest income, rather than the recognition of gains on the sale of loans and leases.
Net interest margin represents net interest income as a percentage of total interest earning assets. The net interest margin was 3.58%, 3.80% and 3.84% for 2000, 1999 and 1998, respectively.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of net interest income and illustrates the interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities. The net interest spread is the difference between the average yield earned on assets and the average rate incurred on liabilities. For comparative purposes, the table has been adjusted to reflect tax-exempt income on a fully taxable equivalent basis assuming an income tax rate of 35%.
Year Ended December 31, ---------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------- -------------------------- -------------------------- Average Income/ Avg. Average Income/ Avg. Average Income/ Avg. (Dollars in Millions) Balance Expense Rate Balance Expense Rate Balance Expense Rate -------------------------------------------------------------------------------------------------------------------------- ASSETS Interest Earning Assets: Loans/Leases: Corporate Lending: Commercial $ 4,345 $411.4 9.47% $3,578 $311.6 8.71% $3,178 $293.6 9.24% Mortgage 587 53.8 9.17 538 45.9 8.54 558 51.2 9.19 Construction 681 61.6 9.04 498 40.6 8.15 370 31.9 8.62 Lease Financing 406 48.7 12.00 289 28.6 9.92 318 34.8 10.97 Consumer Lending: Installment 515 58.0 11.25 590 59.9 10.17 708 69.1 9.76 Residential 388 43.1 11.13 898 77.9 8.68 752 60.2 8.00 Lease Financing 641 62.3 9.72 626 51.6 8.24 507 38.2 7.54 ------- ----- ------ ----- ------ ----- Total Loans/Leases 7,563 738.9 9.77 7,017 616.1 8.78 6,391 579.0 9.06 Investment Securities 3,217 227.8 7.08 1,755 110.0 6.26 1,602 106.0 6.62 Federal Funds Sold and Reverse Repurchase Agreements 23 1.5 6.51 24 1.3 5.46 49 2.7 5.57 Other Short-Term Investments 30 2.8 9.28 62 3.3 5.35 68 6.5 5.51 ------- ----- ------ ----- ------ ----- Total Earning Assets 10,833 971.0 8.96% 8,858 730.7 8.25% 8,110 694.2 8.56% Cash and Noninterest Bearing Deposits 241 244 197 Other Assets 1,071 768 455 ------- ------ ------ Total Assets $12,145 $9,870 $8,762 ======= ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Deposits: Demand Deposits $ 370 9.9 2.68% $371 7.3 1.98% $354 7.9 2.24% Savings Deposits 1,379 68.5 4.97 1,335 51.7 3.88 1,160 46.0 3.97 Time Deposits 4,838 301.9 6.24 3,923 209.7 5.35 3,524 199.1 5.65 ------- ----- ------ ----- ------ ----- Total Deposits 6,587 380.3 5.77 5,629 268.7 4.78 5,038 253.0 5.02 Short-Term Debt: Federal Funds Purchased and Repurchase Agreements 1,161 71.1 6.13 981 49.5 5.04 1,068 57.9 5.42 Commercial Paper 203 12.3 6.04 210 10.2 4.87 233 13.0 5.59 Short-Term Notes Payable 47 3.4 7.12 1 .1 4.83 2 .1 5.60 ------- ----- ------ ----- ------ ----- Total Short-Term Debt 1,411 86.8 6.15 1,192 59.8 5.01 1,303 71.0 5.45 Long-Term Debt 1,500 95.8 6.39 924 52.4 5.67 823 50.2 6.11 Junior Subordinated Debentures 235 20.0 8.53 161 13.2 8.20 99 8.7 8.76 ------- ----- ------ ----- ------ ----- Total Interest Bearing Liabilities 9,733 582.9 5.99% 7,906 394.1 4.99% 7,263 382.9 5.27% Noninterest Bearing Deposits 1,215 869 551 Other Liabilities 247 272 162 Shareholders' Equity 950 823 786 ------- ----- ------ ----- ------ ----- Total Liabilities and Shareholders' Equity $12,145 $9,870 $8,762 ======= ====== ====== Net Interest Income $388.1 $336.6 $311.3 ====== ====== ====== Net Interest Margin 3.58% 3.80% 3.84% ==== ==== ==== Net Interest Spread 2.97% 3.26% 3.29% ==== ==== ====
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the changes in net interest income on a tax equivalent basis resulting from changes in volume and changes in rates. Changes not solely due to volume or rate have been allocated proportionately.
Year Ended December 31, ----------------------------------------------- 2000 Changes from 1999 Changes from 1999 Due to 1998 Due to ---------------------- ---------------------- (In Thousands) Volume Rate Volume Rate --------------------------------------------------------------------------------- Interest Earned On: Loans and Leases: Corporate Lending: Commercial $ 70,922 $ 28,883 $ 35,498 $ (17,463) Mortgage 4,384 3,521 (1,763) (3,527) Construction 16,113 4,802 10,526 (1,818) Lease Financing 13,238 6,844 (3,019) (3,163) Consumer Lending: Installment (7,978) 6,030 (11,924) 2,768 Residential (52,682) 17,895 12,363 5,361 Lease Financing 1,261 9,448 9,593 3,812 --------- --------- --------- --------- Net Loans and Leases 45,258 77,423 51,274 (14,030) Investment Securities 101,865 15,940 9,794 (5,872) Federal Funds Sold (49) 240 (1,399) (53) Short-Term Investments (2,170) 1,697 (578) (2,593) --------- --------- --------- --------- Total 144,904 95,300 59,091 (22,548) --------- --------- --------- --------- Interest Paid On: Demand Deposits (7) 2,594 354 (966) Savings Deposits 1,764 15,014 6,785 (1,079) Time Deposits 53,677 38,498 21,730 (11,130) --------- --------- --------- --------- Total Deposits 55,434 56,106 28,869 (13,175) Short-Term Debt: Federal Funds Purchased 10,003 11,681 (4,576) (3,829) Commercial Paper (314) 2,398 (1,220) (1,590) Short-Term Notes Payable 3,252 48 (3) (11) --------- --------- --------- --------- Total Short-Term Debt 12,941 14,127 (5,799) (5,430) Long-Term Debt 36,089 7,396 5,903 (3,790) Junior Subordinated Debentures 6,278 555 5,125 (587) --------- --------- --------- --------- Total 110,742 78,184 34,098 (22,982) --------- --------- --------- --------- Net Interest Income $ 34,162 $ 17,116 $ 24,993 $ 434 ========= ========= ========= =========
Noninterest Income
The following table details the components of noninterest income and their change since 1998:
Percentage Increase (Decrease) ------------------- (Dollars in Thousands) 2000 1999 1998 '00/'99 '99/'98 -------------------------------------------------------------------------------------------- Service Charges on Deposit Accounts $ 35,138 $ 32,724 $ 28,369 7% 15% Loan Servicing Fees 51,706 29,362 6,064 76 384 Other Service Charges and Fees 53,205 41,316 38,108 29 8 Operating Lease Income 42,269 40,902 37,481 3 9 Warrant Gains 7,500 9,147 15,354 (18) (40) Security Gains 155 71 13,044 118 (100) Other 19,290 20,273 23,103 (5) (12) -------- -------- -------- Noninterest Income Before Gain on Sale of Loans and Leases 209,263 173,795 161,523 20 8 Gain on Sale of Loans and Leases: Non-Cash 34,447 83,055 41,070 (59) 102 Cash 10,452 15,814 22,899 (34) (31) -------- -------- -------- Total Noninterest Income $254,162 $272,664 $225,492 (7)% 21% ======== ======== ========
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income before gain on sale of loans and leases increased $35.5 million (20%) during 2000 and $12.3 million (8%) during 1999. Explanations for significant changes in noninterest income by category follow:
o Service Charges on Deposit Accounts: Service charges on deposit accounts increased in both 2000 and 1999 as a result of pricing and volume increases on corporate and personal deposit accounts combined with higher ATM fees from the increased number of ATMs. Since December 31, 1998, an additional 145 ATMs have been placed into service bringing the total number of Provident ATMs to 482.
o Loan Servicing Fees: The increased revenue in 2000 was primarily from increases in the residential mortgage and auto leasing areas. During 1999, the increased revenue was primarily from increases in the residential mortgage, warehouse lending and auto leasing areas.
o Other Service Charges and Fees: Credit card fees and fee income from Red Capital Group, a financing and loan servicer for multi-family and health-care facilities that was purchased in September, were the primary reasons for the increase in 2000. Credit card fees were the primary reason for the increase in revenue in 1999.
o Operating Lease Income: The increase in operating lease revenue in 2000 and 1999 is due primarily to the growth of Provident Commercial Group, a national lessor of large equipment.
o Warrant Gains: Provident's Commercial Banking business line from time to time acquires equity warrants as a part of the lending fee structure established with customers. Warrant gains decreased $1.6 million in 2000 and $6.2 million in 1999.
o Other: The largest components of revenue within other income have been from realized gains on the sale of equipment lease residuals ($3.8 million, $9.2 million and $8.9 million in 2000, 1999 and 1998, respectively) and realized gains on investments in partnerships ($6.0 million in 2000 and $1.7 million in 1998).
o Gain on Sales of Loans and Leases: Gain on sale of loans and leases decreased $54.0 million in 2000 after increasing $34.9 million in 1999. The decrease in 2000 was due to the third quarter decision to change the structure of securitizations resulting in the elimination of gain-on-sale accounting. Securitizations after this date have been structured in order to account for the transactions as secured financings.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides detail of the gain on sales recognized during the past three years.
(In Thousands) 2000 1999 1998 ------------------------------------------------------------------------------ Non-Cash Gains -- Loan and Lease Sales: Nonconforming Residential Loan Securitizations $30,291 $73,304 $36,337 Prime Consumer Home Equity Securitizations 4,156 5,758 4,733 Credit Card Loan Securitizations - 3,993 - ------- ------- ------- 34,447 83,055 41,070 ------- ------- ------- Cash Gains -- Loan and Lease Sales: Equipment Lease Securitizations 9,083 13,164 13,429 Conforming Residential Whole Loan Sales 729 1,911 5,077 Credit Card Whole Loan Sales - - 3,420 Nonconforming Residential Whole Loan Sales - 174 290 Other Loan Sales 640 565 683 ------- ------- ------- 10,452 15,814 22,899 ------- ------- ------- $44,899 $98,869 $63,969 ======= ======= =======
A detailed discussion of the various securitizations of loans and leases is provided under the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Securitization Activity" and Note 15 included in "Notes to Consolidated Financial Statements".
Noninterest Expense
The following table details the components of noninterest expense and their change since 1998:
Percentage Increase (Decrease) ------------------- (Dollars in Thousands) 2000 1999 1998 '00/'99 '99/'98 ------------------------------------------------------------------------------------------ Salaries, Wages and Benefits $172,903 $153,397 $131,779 13% 16% Charges and Fees 23,280 15,679 14,896 49 5 Occupancy 20,631 18,951 18,468 9 3 Depreciation on Operating Lease Equipment 26,636 23,076 21,662 15 7 Equipment Expense 26,045 24,614 21,820 6 13 Professional Fees 21,735 20,163 19,737 8 2 Other 62,379 66,910 66,949 (7) (0) -------- -------- -------- Noninterest Expense Before Significant and Unusual Items 353,609 322,790 295,311 10 9 Merger and Restructuring Charges 39,300 4,200 22,005 836 (81) -------- -------- -------- $392,909 $326,990 $317,316 20% 3% ======== ======== ========
Noninterest expense before significant and unusual items increased $30.8 million (10%) and $27.5 million (9%) during 2000 and 1999, respectively. Components of noninterest expense, along with an explanation as to their fluctuations, follow:
o Salaries, Wages and Benefits: Compensation increased in 2000 due primarily to increased staffing expense of newly acquired businesses (Red Capital Group and Capstone Realty) within the Commercial Banking business line. The increase in compensation expense for 1999 was in the Mortgage Banking business line as well as the Commercial Banking business line.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Charges and Fees: Increased amortization expense of goodwill and mortgage servicing rights, associated with the acquisitions and/or loan servicing of OHSL Financial Corp., Capstone Realty Advisors and Red Capital Group, was the primary reason for the increase in charges and fees in 2000. Higher credit card processing fees were the primary reason for the increase in 1999.
o Occupancy: An increase in rent expense, reflecting the geographic expansion of Commercial Banking during 2000 and Mortgage Banking during 1999, resulted in higher occupancy expense.
o Depreciation on Operating Lease Equipment: The growth of Provident Commercial Group was the primary reason for the increase in depreciation on operating lease equipment.
o Equipment Expense: Equipment expense increased due to higher depreciation expense combined with higher repair and maintenance expenses related to technology investments, branches and ATMs for both 2000 and 1999.
o Professional Fees: The increase in professional fees in 2000 was a result of higher legal fees, primarily associated with the origination and collection of loans, and other miscellaneous professional fees.
o Other: Decreases in data processing expense and other miscellaneous expenses were the primary reasons for the decrease in other noninterest expense in 2000.
o Merger and Restructuring Charges: In connection with Provident's acquisition of Fidelity Financial of Ohio, Inc., direct-merger related and other post-merger business line restructuring charges of $39.3 million were recorded during the first quarter of 2000. This expense included estimates of cash outlays totaling $12.6 million and non-cash write-downs of assets totaling $26.7 million. The cash outlays included severance costs, contract termination charges and professional fees. The non-cash expenses were from the write-down of fixed assets, primarily from the closing and consolidation of branches, and other balance sheet restructurings, primarily from the sale and write-down of acquired residential loans and investment securities. Additional detail of this expense is provided under Note 16 of the "Notes to Consolidated Financial Statements".
Merger and restructuring charges of $4.2 million were recorded during 1999. These charges related to Fidelity Financial and their acquisition of Glenway Financial Corporation during the first quarter of 1999.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provident's efficiency ratio (operating expenses as a percentage of net revenue) had deteriorated from 1996 to 1998. As a result, Provident took two courses of action. First, a reengineering project was initiated during the second half of 1998. Second, an analysis of current and future profitability of various business units was performed. As a result of this analysis, it was determined that the prospects for future revenue growth did not justify the continued operating losses by the MeritValu and Free Market Partners units. Accordingly, these business units were discontinued during the fourth quarter of 1998. In connection with these two initiatives, Provident recorded a restructuring charge of $22 million during the fourth quarter of 1998. This charge was composed of employee termination benefits, fixed asset write-offs, professional fees and exit costs.
FINANCIAL CONDITION ANALYSIS
Short-Term Investments and Investment Securities
As of December 31, 2000 and 1999, federal funds sold and reverse repurchase agreements outstanding were $83.0 million and $84.0 million. The amount of federal funds sold changes daily as cash is managed to meet reserve requirements and customer needs. After funds have been allocated to meet lending and investment demands, any remainder is placed in overnight federal funds.
As of December 31, 2000 and 1999, Provident held $41.9 million and $0, respectively, in trading account securities. Provident trades investment securities with the intention of recognizing short-term profits. These securities were carried at fair value with realized and unrealized gains and losses reported in other noninterest income.
Provident classified $206.2 million and $0 of loans as held for sale at December 31, 2000 and 1999, respectively. These loans consist of multi-family loans which are insured by either the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal Housing Association ("FHA"). FNMA and FHLMC insured loans are subject to a purchase commitment from FNMA or FHLMC. FHA loans are insured by the Department of Housing and Urban Development. These loans are generally outstanding for sixty days or less. Activities related to both the loans held for sale and the trading account securities are part of the operations of Red Capital Group.
Investment securities held for sale represented 30% of average earning assets during 2000, and 20% during both 1999 and 1998. Funds obtained from deposit growth, debt borrowings, and proceeds from the sale of loans were deployed into investment securities with higher credit quality, increased liquidity and an improved interest rate risk profile during 2000.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The amortized cost and market value of investment securities available for sale at the dates indicated are summarized in the following table:
Amortized Cost at December 31, ------------------------------------ (In Thousands) 2000 1999 1998 ---------------------------------------------------------------------------------- U.S. Treasury and Federal Agency Debentures $ 326,721 $ 240,991 $ 159,741 State and Political Subdivisions 3,317 1,897 2,014 Mortgage-Backed Securities 1,938,546 1,470,270 1,125,574 Asset-Backed Securities 44,257 104,700 247,311 Other Securities 728,363 369,920 77,301 ---------- ---------- ---------- Total Securities $3,041,204 $2,187,778 $1,611,941 ========== ========== ==========
Market Value at December 31, ------------------------------------ (In Thousands) 2000 1999 1998 ---------------------------------------------------------------------------------- U.S. Treasury and Federal Agency Debentures $ 325,457 $ 233,148 $ 158,342 State and Political Subdivisions 3,301 1,880 1,995 Mortgage-Backed Securities 1,915,602 1,408,567 1,115,435 Asset-Backed Securities 42,061 99,753 245,855 Other Securities 727,200 367,689 76,456 ---------- ---------- ---------- Total Securities $3,013,621 $2,111,037 $1,598,083 ========== ========== ==========
The following table shows the December 31, 2000 maturities and weighted average yields for investment securities. Yields on equity securities that comprise the fixed rate, due after 10 years classification of other securities have been omitted from the table. A 35% tax rate was used in computing the tax equivalent yield adjustment. The yields shown are calculated based on original cost and effective yields weighted for the scheduled maturity of each security. Mortgage-backed and asset-backed securities are assigned to maturity categories based on their estimated average lives.
Fixed Rate Floating Rate --------------------- ------------------------ Weighted Weighted Average Average Yield On Amortized Yield To Amortized Current (Dollars in Thousands) Cost Maturity Cost Coupon Rates ----------------------------------------------------------------------------------- U.S. Treasury and Federal Agency Debentures: Due in one year or less $ 182,925 6.71% $ 743 6.37% Due after 1 through 5 years 143,053 5.51 - - ---------- ---- --------- ---- Total $ 325,978 6.18% $ 743 6.37% ========== ==== ========= ==== State and Political Subdivisions: Due after 10 years $ 3,317 8.42% $ - -% ========== ==== ========= ==== Mortgage-Backed Securities: Due in one year or less $ 62,912 7.64% $ - -% Due after 1 through 5 years 1,187,003 8.47 77,024 6.95 Due after 5 through 10 years 523,029 5.88 13,862 7.94 Due after 10 years 74,716 7.36 - - ---------- ---- --------- ---- Total $1,847,660 7.66% $ 90,886 7.10% ========== ==== ========= ==== Asset-Backed Securities: Due after 1 through 5 years $ 44,257 4.77% $ - -% ========== ==== ========= ==== Other Securities: Due in one year or less $ - -% $ 300,614 6.43% Due after 1 through 5 years 14,048 8.00 106,201 5.19 Due after 5 through 10 years 250 6.75 190,886 6.02 Due after 10 years 116,364 - - - ---------- ---- --------- ---- Total $ 130,662 7.98% $ 597,701 6.08% ========== ==== ========= ====
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
As of December 31, 2000 and 1999, total on-balance sheet loans and leases were $9.1 billion and $7.0 billion, respectively. Provident had an additional $5.8 billion and $5.9 billion of off-balance sheet loans and leases as of year-end 2000 and 1999, respectively. Due to the decision to structure and account for future securitizations as secured financings rather than loan sales, on-balance sheet loans and leases are expected to increase, while off-balance sheet loans and leases are expected to decline. For more information concerning off-balance sheet loans and leases, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Securitization Activity". Provident does not have a material exposure to foreign, energy or agricultural loans. The following table shows on-balance sheet loans and leases outstanding at period end by type of loan:
December 31, ---------------------------------------------------------- (Dollars in Millions) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------- Dollar: Corporate Lending: Commercial $ 4,580.2 $ 3,990.9 $ 3,277.9 $ 2,737.1 $ 2,404.9 Mortgage 632.8 576.6 546.5 582.2 563.6 Construction 801.2 559.8 450.6 314.4 293.3 Lease Financing 607.5 391.5 243.7 340.3 239.1 Consumer Lending: Installment 580.1 476.5 650.1 656.8 954.8 Residential 835.5 653.7 710.3 674.6 891.4 Lease Financing 1,039.6 361.9 423.4 442.8 591.8 ---------- ---------- ---------- ---------- ---------- Total Loans and Leases $ 9,076.9 $ 7,010.9 $ 6,302.5 $ 5,748.2 $ 5,938.9 ========== ========== ========== ========== ==========
Percentage: Corporate Lending: Commercial 50.4% 56.9% 52.0% 47.6% 40.5% Mortgage 7.0 8.2 8.7 10.1 9.5 Construction 8.8 8.0 7.1 5.5 4.9 Lease Financing 6.7 5.6 3.9 5.9 4.0 Consumer Lending: Installment 6.4 6.8 10.3 11.4 16.1 Residential 9.2 9.3 11.3 11.8 15.0 Lease Financing 11.5 5.2 6.7 7.7 10.0 ---------- ---------- ---------- ---------- ---------- Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== ==========
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the composition of the commercial loan category by industry type at December 31, 2000, including loan amounts which interest is not being accrued on:
Amount on (Dollars in Millions) Amount Percentage Nonaccrual ----------------------------------------------------------------------- Manufacturing $ 869.6 19.0% $ 8.0 Service Industries 793.1 17.3 50.9 Real Estate Operators / Investment 424.5 9.3 .1 Retail Trade 386.9 8.4 .7 Wholesale Trade 359.3 7.8 1.9 Finance and Insurance 342.1 7.5 .1 Transportation / Utilities 335.2 7.3 1.4 Construction 212.1 4.6 .9 Automobile Dealers 145.4 3.2 - Other 712.0 15.6 10.4 -------- ----- ----- $4,580.2 100.0% $74.4 ======== ===== =====
At December 31, 2000, Provident had approximately $719 million of commercial loans that are shared national credit loans. Shared national credit loans are loans that have a principal balance of at least $20 million and involve at least three participating banks. In an on-going effort to diversify its portfolio, the shared national credit loans that Provident participates in are distributed across nine industry types, with the largest industry concentration accounting for approximately 26% of its total shared national credit loans. The average outstanding balance of a shared national credit loan was $6.7 million. Credit quality for the shared national credit loans was not substantially different than the rest of the commercial loan portfolio.
The following table shows the composition of commercial mortgage and construction loans by property type at December 31, 2000:
Commercial Commercial Amount on (Dollars in Millions) Mortgage Construction Total Percentage Nonaccrual ----------------------------------------------------------------------------------------- Residential Development $ 118.6 $ 215.1 $333.7 23.3% $ .3 Office / Warehouse 111.1 132.1 243.2 17.0 .2 Apartments 97.2 119.5 216.7 15.1 - Shopping / Retail 92.1 137.4 229.5 16.0 .4 Land 38.5 41.5 80.0 5.5 - Healthcare Facilities 34.9 12.2 47.1 3.3 - Hotel / Motel / Restaurants 18.2 47.8 66.0 4.6 - Industrial Plants 15.4 15.9 31.3 2.2 - Auto Sales and Service 11.6 .9 12.5 0.9 - Churches 9.3 2.9 12.2 0.8 - Other Commercial Properties 85.9 75.9 161.8 11.3 .8 ------- ------- -------- ----- ----- $ 632.8 $ 801.2 $1,434.0 100.0% $ 1.7 ======= ======= ======== ===== =====
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial and real estate construction loans outstanding at December 31, 2000 are shown in the following table by maturity, based on remaining scheduled repayments of principal:
After 1 Within but Through After (In Millions) 1 Year 5 Years 5 Years Total ------------------------------------------------------------------------------- Commercial $1,557.8 $2,200.1 $822.3 $4,580.2 Commercial Construction 250.8 399.3 151.1 801.2 Residential Construction - - 2.4 2.4 -------- -------- ------ -------- Total $1,808.6 $2,599.4 $975.8 $5,383.8 ======== ======== ====== ======== Loans Due After One Year: At predetermined interest rates $790.8 At floating interest rates 2,784.4
The following table shows the composition of the installment loan category by loan type at December 31, 2000:
(Dollars in Millions) Amount Percentage ----------------------------------------------------------------------- Home Equity $238.2 41.0% Indirect Installment 210.0 36.2 Direct Installment 67.8 11.7 Credit Card 39.2 6.8 Other Consumer Loans 24.9 4.3 ------ ----- $580.1 100.0% ====== =====
Credit Risk Management
Provident provides for credit loss reserves for both its on and off-balance sheet lending portfolios. Discussion and analysis of the reserves as well as the overall credit quality of the off-balance sheet lending portfolio is provided in Note 15 of the "Notes to Consolidated Financial Statements". The following paragraphs provide information concerning its on-balance sheet credit portfolio.
Provident maintains a reserve for loan and lease losses in order to absorb losses in its on-balance sheet portfolio. The reserve is maintained at a level which management considers adequate to absorb loan and lease losses given the conditions at the time. 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 while recoveries on loans and leases previously charged off are added back to the reserve.
During the fourth quarter of 2000, general economic conditions weakened and Provident began to see signs of deterioration in the portion of the commercial loan portfolio with lower credit ratings. As a result of the change in asset quality indicators and the uncertain economic environment, the ratio of loan and lease losses to total loans and leases was increased to 1.70%. Unfavorable business conditions required Provident to place three large loans, totaling approximately $52 million, on nonaccrual status late in the fourth quarter of 2000. In conjunction with the changes in asset quality indicators in the fourth quarter and the uncertain economic environment, several large
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
commercial loan charge-offs were recorded in the fourth quarter of 2000.
The following table shows selected information relating to Provident's reserve for loan and lease losses:
December 31, ---------------------------------------------------- (In Thousands) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------- Reserve for Loan and Lease Losses at Beginning of Period $ 94,045 $78,867 $74,615 $68,961 $61,671 Provision Charged to Expense 131,281 48,417 31,597 45,119 47,298 Acquired Reserves 2,377 1,263 - 1,814 2,013 Loans and Leases Charged Off: Corporate Lending: Commercial 63,497 25,145 14,403 17,286 17,236 Mortgage 96 247 3 1,505 2,022 Construction - - - - - Lease Financing 2,892 6,736 5,173 1,367 - Consumer Lending: Installment 7,535 10,159 12,856 24,065 24,342 Residential 8,022 759 900 1,175 228 Lease Financing 5,136 4,244 3,855 6,009 3,087 -------- ------- ------- ------- ------- Total Charge-Offs 87,178 47,290 37,190 51,407 46,915 -------- ------- ------- ------- ------- Recoveries: Corporate Lending: Commercial 3,406 2,742 836 1,055 619 Mortgage 20 42 1,344 915 333 Construction - - - - - Lease Financing 1,290 3,102 226 306 14 Consumer Lending: Installment 5,282 4,523 5,901 5,766 3,490 Residential 127 266 190 177 36 Lease Financing 3,650 2,113 1,348 1,909 402 -------- ------- ------- ------- ------- Total Recoveries 13,775 12,788 9,845 10,128 4,894 -------- ------- ------- ------- ------- Net Loans and Leases Charged Off 73,403 34,502 27,345 41,279 42,021 -------- ------- ------- ------- ------- Reserve for Loan and Lease Losses at End of Period $154,300 $94,045 $78,867 $74,615 $68,961 ======== ======= ======= ======= =======
On a percentage basis, the following table provides annual net charge-offs to average total loans and leases by category:
December 31, ------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------- Corporate Lending: Commercial 1.38% .63% .43% .63% .73% Mortgage .01 .04 (.24) .10 .32 Construction - - - - - Lease Financing .39 1.26 1.56 .40 (.01) Consumer Lending: Installment .44 .96 .98 2.17 2.10 Residential 2.04 (1) .05 .09 .13 .02 Lease Financing .23 .34 .49 .67 .59 --- --- --- --- --- Net Charge-Offs to Average Total Loans and Leases .97% .49% .43% .69% .77% === === === === === (1) The net charge-off percentage for residential loans would be 1.22% for 2000 if charge-offs resulting from the implementation of the FFIEC Uniform Retail Credit Classification and Account Management Policy had been excluded.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Explanation as to significant changes in charge-offs between 1998 and 2000 follows:
o Commercial: Net charge-offs to average loans were 1.38%, .63% and .43% for 2000, 1999 and 1998, respectively. Due to the size of many of the commercial loans, a change in the number of large charge-offs can result in a significant fluctuation in the total charge-offs of this loan type. There were sixteen charge-offs greater than one million dollars in 2000 compared to seven in 1999 and three in 1998. The increase in large charge-offs in 2000 was primarily due to the decline in asset quality indicators combined with the uncertain economic environment. Generally, Provident obtains collateral on its larger commercial loans, which reduces its credit exposure.
o Commercial Lease Financings: Net charge-offs to average leases were .39%, 1.26% and 1.56% for 2000, 1999 and 1998, respectively. The decrease in the charge-off percentage from 1999 to 2000 was primarily due to a decrease in net charge-offs from Information Leasing Corporation, Provident's small to mid-ticket equipment leasing company. The decrease in the charge-off percentage from 1998 to 1999 was due to a decrease in the net charge-offs from Provident Commercial Group, Provident's large ticket equipment leasing company.
o Installment: Net charge-offs to average loans were .44%, .96% and .98% for 2000, 1999 and 1998, respectively. The decrease in the charge-offs for 2000 as compared to 1999 was a result of lower charge-offs in home equity and credit card loans. The reduction in home equity charge-offs was due to continued focus on credit quality standards on the origination of these loans and improved technology of collection systems.
o Residential: Net charge-offs to average loans were 2.04%, .05%, and .09% for 2000, 1999 and 1998, respectively. The increase in charge-offs for 2000 was due primarily to a one-time charge-off of $3.2 million related to a new regulatory consumer lending policy that became effective on December 31, 2000. The net charge-off ratio excluding this one-time charge-off was 1.22%, which now includes activity that has historically been shown off-balance sheet.
o Consumer Lease Financings: Net charge-offs to average leases were .23%, .34% and .49% for 2000, 1999 and 1998, respectively. The decrease in charge-offs of auto leases reflects the implementation of risk-based pricing origination standards within this lending product. In addition, Provident acquires insurance coverage for its auto lease residuals to reduce the level of losses on the sale of autos at the termination of their lease agreements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the dollar amount of the reserve for loan and lease losses, using management's estimate, by principal loan and lease category. While amounts are allocated to various portfolio categories, the total reserve, less the portion attributable to reserves as prescribed under provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", is available to absorb losses from any loan or lease category.
December 31, ---------------------------------------------------- (In Thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------- Corporate Lending: Commercial $ 99,917 $ 70,722 $ 50,919 $ 41,227 $ 32,641 Mortgage 7,691 4,440 5,154 5,897 5,944 Construction 5,215 2,095 3,377 3,413 3,297 Lease Financing 12,437 4,152 3,730 5,815 3,159 -------- -------- -------- -------- -------- 125,260 81,409 63,180 56,352 45,041 Consumer Lending: Installment 8,431 7,881 10,448 11,696 11,651 Residential 13,911 1,685 2,507 2,288 4,256 Lease Financing 6,698 3,070 2,732 4,279 8,013 -------- -------- -------- -------- -------- 29,040 12,636 15,687 18,263 23,920 -------- -------- -------- -------- -------- $154,300 $ 94,045 $ 78,867 $ 74,615 $ 68,961 ======== ======== ======== ======== ========
The following table presents a summary of various indicators of credit quality:
December 31, -------------------------------------------------------- (Dollars In Thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------ Nonperforming Assets: Nonaccrual Loans: Corporate Lending: Commercial $ 74,401 $ 43,452 $ 34,544 $ 37,800 $ 14,164 Mortgage 1,712 3,003 933 335 309 Construction - 216 - 27 71 Lease Financing 6,503 1,309 4,002 4,798 3,973 -------- -------- -------- -------- -------- 82,616 47,980 39,479 42,960 18,517 Consumer Lending: Installment - 48 38 - - Residential 13,404 7,640 5,504 4,482 3,897 Lease Financing - - - - - -------- -------- -------- -------- -------- 13,404 7,688 5,542 4,482 3,897 -------- -------- -------- -------- -------- Total Nonaccrual Loans 96,020 55,668 45,021 47,442 22,414 Other Real Estate and Equipment Owned 8,805 3,870 2,767 12,440 6,997 -------- -------- -------- -------- -------- Total Nonperforming Assets $104,825 $ 59,538 $ 47,788 $ 59,882 $ 29,411 ======== ======== ======== ======== ======== Loans 90 Days Past Due - Still Accruing $ 28,780 $ 15,769 $ 10,661 $ 9,985 $ 19,482 Loan and Lease Loss Reserve as a Percent of: Total Loans and Leases 1.70% 1.34% 1.25% 1.30% 1.16% Nonaccrual Loans 160.70 168.94 175.18 157.28 307.67 Nonperforming Assets 147.20 157.96 165.04 124.60 234.47 Nonaccrual Loans as a Percent of Total Loans and Leases 1.06 .79 .71 .83 .38 Nonperforming Assets as a Percent of: Total Loans, Leases and Other Real Estate and Equipment 1.15 .85 .76 1.04 .49 Total Assets .76 .56 .53 .75 .39
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and leases are generally placed on nonaccrual status when the payment of principal and/or interest is past due 90 days or more. However, installment loans and consumer leases are not placed on nonaccrual status because they are charged off in the month the loans and leases reach 120 days past due. In addition, loans that are well secured and in the process of collection are not placed on nonaccrual status. When a loan is placed on nonaccrual status, any interest income previously recognized that has not been received is reversed. Future interest income is recorded only when a payment is received and collection of principal is considered reasonably assured.
Although loans and leases may be classified as nonaccrual, many continue to pay interest irregularly or at less than the original contractual rates. The gross amount of interest income recognized during 2000 with respect to these loans and leases was $1.2 million compared to $9.6 million that would have been recognized had the loans and leases remained current in accordance with their original terms.
Nonaccrual loans increased $40.4 million during 2000. The increase was composed of $121.4 million of additions to nonaccrual loans, $13.2 million of payments on nonaccrual loans, $61.5 million of nonaccrual loans charged off and $6.3 million transferred to other real estate. Other real estate increased $4.9 million during 2000. Activity in other real estate included $12.5 million of additions from foreclosed properties, $4.7 million of charge-offs on property in other real estate and $2.9 million of sales and payments on properties.
Nonaccrual loans increased $10.6 million during 1999. The increase was composed of $60.3 million of additions to nonaccrual loans, $20.8 million of payments on nonaccrual loans, $26.7 million of nonaccrual loans charged-off and $2.2 million transferred to other real estate.
Management's determination of the adequacy of the reserve is based on an assessment of the losses given the conditions at the time. This assessment consists of certain loans and leases being evaluated on an individual basis, as well as all loans and leases being categorized based on common credit risk attributes and being evaluated as a group.
Provident's Credit Administration Group is responsible for the establishment and oversight of Provident's credit risk policies. The credit risk policies address underwriting standards, internal lending limits and methodologies for the monitoring of credit risk within the various loan and lease portfolios. Loans and leases are primarily monitored by closely following changes and trends in assigned risk ratings. Credit scoring models are used for consumer and small business loans and leases, while larger commercial, commercial mortgage and commercial construction loans are assigned individual risk ratings. These ratings are assigned based upon individual credit analysis and are reported to management on a regular basis. Portfolio Audit, part of Provident's Internal Audit Department, independently reviews risk ratings to ensure that credit rating assignments are accurate and substantiated by thorough analysis. Their findings are reported to senior management.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and leases that have been placed on nonaccrual status are further evaluated for potential losses based upon review and discussion among lending officers, credit, loan review, portfolio audit and collection associates, and senior management. Factors that are considered include the market value of collateral or real estate associated with a specific loan or lease, cash flows generated by the borrower, third-party guarantees, the general economic climate and any specific industry trends that may affect an individual loan or lease. Total nonaccrual loans at December 31, 2000 were $96.0 million. In addition, $99.0 million of performing loans were being closely monitored due to possible credit problems.
The adequacy of the reserve for loan and lease losses is monitored on a continual basis and is based upon management's evaluation of numerous factors. These factors include the quality of the current loan portfolio, the trend in the loan portfolio's risk ratings, current economic conditions, loan concentrations, evaluation of specific loss estimates for all significant problem loans, payment histories, collateral valuations, historical charge-off and recovery experience, estimates of charge-offs for the upcoming year and other pertinent information.
Additional loan loss estimates associated with securitized asset sales are provided for separately from the reserve for loan and lease losses. For more information on credit exposures on securitized asset sales, see Note 15 of the "Notes to Consolidated Financial Statements".
Noninterest Earning Assets
Leased equipment increased $44 million, or 26%, during 2000. The addition of four operating leases was primarily responsible for the increase.
Other assets increased $60 million, or 12%, during 2000 as a result of an increase in mortgage servicing assets. The value of mortgage servicing rights are capitalized when loans are sold with servicing retained or when loan servicing is purchased. The value of these capitalized servicing rights is amortized over the period of estimated net servicing revenue, with the carrying value of these rights being periodically reviewed for impairment. As of December 31, 2000, mortgage servicing assets totaled $76.6 million, consisting of $29.0 million from securitization and sale activity, $28.2 million from Red Capital Group operations and $19.4 million from Capstone Realty Advisors operations.
Deposits
Deposits increased $1.6 billion (22%) and $1.3 billion (21%) during 2000 and 1999, respectively. The increase in deposits in 2000 was primarily attributable to the growth in certificates of deposit, while the increase in 1999 was primarily due to the growth in certificates of deposit and noninterest bearing deposits. Provident has experienced strong deposit growth as average core deposits have grown by 14% during 2000, with significant contribution from its internet deposit-gathering
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
initiatives, a new index checking account product and deposit growth at the Florida banking centers. For 2000 and 1999, average total interest bearing deposits represented 68% and 71%, respectively, of average interest bearing liabilities. Provident does not have a material amount of foreign deposits. The following table presents a summary of period end deposit balances:
December 31, ------------------------ (In Millions) 2000 1999 1998 -------------------------------------------------------------------------------- Noninterest Bearing Deposits of Securitization Trusts $ 496 $ 426 $ 132 Other Noninterest Bearing Deposits 797 759 547 Interest Bearing Demand Deposits 464 397 385 Savings Deposits 1,458 1,351 1,378 Certificates of Deposit Less than $100,000 2,239 1,952 1,673 Certificates of Deposit of $100,000 or More 3,375 2,345 1,841 ------ ------ ------ $8,829 $7,230 $5,956 ====== ====== ======
At December 31, 2000, maturities on certificates of deposit of $100,000 or more were as follows (in millions):
3 months or less $ 248 Over 3 through 6 months 224 Over 6 through 12 months 430 Over 12 months 2,473 ------ Total $3,375 ======
Included in certificates of deposit of $100,000 or more at December 31, 2000, 1999 and 1998 were brokered deposits of $2.2 billion, $1.6 billion and $1.1 billion, respectively.
Provident issues brokered certificates of deposit with embedded call options combined with interest rate swaps with matching call dates as part of its certificate of deposit program. Provident has the right to redeem the certificates of deposit on specific dates prior to their stated maturity while the interest rate swaps are callable at the option of the swap counterparty. The terms and conditions of the call options embedded in the interest rate swaps match those of the certificates of deposit, offsetting any option risk exposure to Provident. At December 31, 2000, Provident had $1.9 billion of brokered callable certificates of deposit.
Borrowed Funds
Borrowed funds are an important component of total funds necessary to support earning assets. In 2000, short-term debt decreased $339 million (35%) and average long-term debt increased $1.8 billion (192%). Decreases in federal funds purchased and repurchase agreements were the primary reasons for the decrease in average short-term debt. In the third quarter of 2000, the decision was made to change the structure of securitizations resulting in the elimination of gain-on-sale accounting. Securitizations consummated since that time have been structured to account for the transactions as secured financings. Approximately $1.6 billion of long-term debt has been issued in 2000 as part of these secured financings. Also during 2000, Federal Home Loan Bank ("FHLB") advances have increased $455 million. Partially
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offsetting these increases in long-term debt was a $200 million reduction in medium-term notes.
During the fourth quarter of 2000, Provident established Provident Capital Trust III. Capital Trust III issued capital securities of $112.5 million of preferred stock to the public and $3.5 million of common stock to Provident. Proceeds from the issuance of the capital securities were invested in Provident's 10.25% junior subordinated debentures due 2030.
During the second quarter of 1999, Provident established Provident Capital Trust II. Capital Trust II issued Capital Securities of $125 million of preferred stock to the public and $3.9 million of common stock to Provident. Proceeds from the issuance of the capital securities were invested in Provident's 8.75% junior subordinated debentures, due 2029.
ASSET SECURITIZATION ACTIVITY
From 1996 through the second quarter of 2000, the structure of many of Provident's securitizations resulted in the transactions being treated as sales. As such, gains or losses were recognized, loans and leases were removed from the balance sheet and residual assets, representing the present value of future cash flows, were recorded. While the performance of Provident's residual assets have generally been better than or consistent with their initial estimates, other companies utilizing securitization structures requiring gain-on-sale accounting have experienced problems and consequently, the market penalized all companies using gain-on-sale accounting. Although gain-on-sale accounting is in compliance with Generally Accepted Accounting Principles, the investment community clearly signaled its dissatisfaction with this accounting method and management believed this sentiment had become a structural impediment to Provident's stock appreciation. Additionally, newly proposed regulatory guidelines regarding securitization activity discourage the use of gain-on-sale accounting by limiting the amount of residual assets that can be included as part of regulatory capital.
As a result of these factors, Provident announced during the third quarter of 2000 that it would change the structure of future securitizations to secured financings thereby eliminating the use of gain-on-sale accounting. The switch to a secured financing structure does not affect the total profit Provident will recognize over the life of the asset, but rather impacts the timing of income recognition. Secured financing transactions cause reported earnings from securitized assets to be lower in the initial periods, resulting from the absence of gains on loan and lease sales, and higher in later periods, as interest is earned on the assets. As a result, moving away from transaction structures that use gain-on-sale accounting caused Provident's earnings to be lower in 2000 and will also lower 2001 earnings.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securitization activity under the gain-on-sale accounting structure has had a significant impact on Provident's financial condition and results of operations. The following discusses this impact on the Consolidated Statements of Income and Consolidated Balance Sheets.
Impact on Consolidated Statements of Income: Based on the asset type, terms and structure of the securitization transaction, a gain may be recognized immediately upon the sale of the assets and/or income is recognized throughout the life of the securitization. The following table provides a summary of principal sold and gains recognized for the various types of securitization structures during the past three years:
2000 1999 1998 --------------------- --------------------- --------------------- (In Thousands) Principal Gain Principal Gain Principal Gain ------------------------------------------------------------------------------------------------------ Structured as Sales: Non-Cash Gains: Nonconforming Residential $1,030,000 $30,291 $2,330,047 $73,304 $1,060,000 $36,337 Prime Home Equity 158,598 4,156 169,999 5,758 183,150 4,733 Credit Card - - 230,000 3,993 - - ---------- ------- ---------- ------- ---------- ------- 1,188,598 34,447 2,730,046 83,055 1,243,150 41,070 Cash Gains: Equipment Leases 223,705 9,083 223,764 13,164 211,276 13,429
Non-Recognition of Gains: Automobile Leases - n/a 858,815 n/a 351,185 n/a Warehouse Lending - n/a 251,200 n/a 400,000 n/a ---------- ------- ---------- ------- ---------- ------- - n/a 1,110,015 n/a 751,185 n/a ---------- ------- ---------- ------- ---------- ------- Total Sales $1,412,303 $43,530 $4,063,825 $96,219 $2,205,611 $54,499 ========== ======= ========== ======= ========== ======= Structured as Secured Financings: Nonconforming Residential $532,341 n/a $ - n/a $ - n/a Prime Home Equity 170,052 n/a - n/a - n/a Equipment Leases 128,101 n/a - n/a - n/a Automobile Leases 451,732 n/a - n/a - n/a ---------- ------- ---------- ------- ---------- ------- Total Secured Financings $1,282,226 n/a $ - n/a $ - n/a ========== ======= ========== ======= ========== =======
The securitization and sale of nonconforming residential, prime home equity and credit card loans have resulted in the recognition of non-cash gains. Gains recognized under this structure are referred to as non-cash gains as Provident receives cash equal to the amount of loans sold. The gains or losses are determined based on a present value calculation of future cash flows of the underlying loans, net of interest payments to security holders, loan loss and prepayment assumptions and normal servicing revenue. These net cash flows, which are represented by retained interests on securitized assets ("RISAs"), are included in investment securities.
Cash gains have been recognized from the securitization and sale of equipment leases. Under the structure of these securitizations, Provident sells the lease payments under the lease contract but retains ownership of the underlying equipment. The cash received from these sales exceeds the present value of the lease payments and generates the cash gain.
The securitization and sale of automobile leases do not result in the recognition of gains. Under the structure of the sale of the automobile leases, Provident sells the ownership of the automobiles and leases the vehicles back from the investor in a sale-leaseback arrangement. Lease payments paid by Provident to the investor may be more or less than that received by Provident from the consumer. The difference in the
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lease payments, net of credit losses and servicing fees, is recognized as net operating lease income or expense over the life of the securitization. For the years ended December 31, 2000, 1999 and 1998, net operating lease income recognized on these automobile lease securitizations was $3.8 million, $8.4 million and $7.8 million, respectively. Sales of mortgage warehouse lines do not result in up-front gains due to the very short-term nature of the underlying assets sold.
Underlying assumptions used in the initial determination of future cash flows on the loan and lease portfolios accounted for as sales follow:
Weighted Average of All Securitizations ---------------------------------------------------- Nonconforming Prime Equipment Auto Residential Home Equity Leasing Leasing ---------------------------------------------------- Assumptions Used: Prepayment Speed(1): Initial Rate 12.36% 10.00% n/a n/a Peak Rate 32.84% 30.00% n/a n/a Calculated Weighted Average Life of the Loan Portfolios 2.6 Years 2.1 Years n/a n/a Estimated Credit Losses(2): Annual Basis 1.09% 0.20% 1.00% 0.50% Percentage of Original Balance 2.94% 0.42% 1.97% n/a Discount Rate 11.88% 10.63% 9.29% n/a
(1)Provident applies an annual prepayment model that adjusts the monthly speeds to account for declining loan balances. Nonconforming residential loans typically experience higher prepayment speeds compared to conforming loans. For nonconforming residential loans, Provident uses a prepayment curve that applies a 10% prepayment rate to new loans (higher for seasoned loans) and ramps up to 35% after 12 months. Provident continues to use the 35% prepayment rate for the remainder of the portfolio life.
(2)Provident applies a cumulative static pool approach to credit losses. Higher prepayment speeds and shorter average lives do not alter the cumulative credit loss assumption. As a result, higher prepayment speeds increase the annualized losses.
Gain-on-sale accounting requires management to make assumptions regarding prepayment speeds and credit losses for the securitized loan and lease pools. The performance of the pools are extensively monitored, and adjustments to these assumptions will be made if necessary.
Provident retains the servicing of the loans and leases it securitizes and sells. As a result, a significant level of assets is serviced by Provident, which do not appear on its balance sheet. These off-balance sheet assets were primarily responsible for the generation of $51.7 million, $29.4 million and $6.1 million in loan servicing fees during 2000, 1999 and 1998, respectively.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact on Consolidated Balance Sheets: The impact from the securitization and sale of various loans and leases can be seen in several areas of Provident's balance sheet. The most significant area has been the removal of loans and leases that Provident continues to service. The following table provides a summary of these off-balance sheet managed assets:
December 31, ------------------------------------ (In Thousands) 2000 1999 1998 ---------------------------------------------------------------- Nonconforming Residential $3,625,033 $3,393,179 $1,670,359 Auto Leases 1,134,844 1,366,598 648,928 Prime Home Equity 471,873 398,882 313,445 Equipment Leases 359,457 298,161 187,654 Credit Card 165,000 230,000 - Warehouse - 251,200 400,000 ---------- ---------- ---------- $5,756,207 $5,938,020 $3,220,386 ========== ========== ==========
Nonconforming residential loans, originated or acquired by the Mortgage Banking business line, have been securitized on a regular basis since 1996. Major characteristics of these nonconforming loans include: 54% with an "A" credit grade and 32% with a "B" credit grade; 69% with full documentation; 68% have prepayment penalties; 96% are secured by first mortgages; 92% are owner occupied; and, on average, have a 78% loan-to-value ratio.
A summary of nonconforming residential loans originated by year and loans outstanding as of year-end is provided below by loan type for the past three years:
December 31, ------------------------------------ (In Thousands) 2000 1999 1998 ---------------------------------------------------------------------------- Loan Originations: Fixed Rate, Fully Amortizing $ 669,797 $ 876,015 $ 337,846 Fixed Rate, 15-Year Balloon Payments 350,476 546,679 176,838 ---------- ---------- ---------- Total Fixed Rate Loans 1,020,273 1,422,694 514,684 Adjustable Rate, 3/27 Loans 436,467 807,388 446,839 Adjustable Rate, 2/28 Loans 38,235 87,602 69,544 Other Adjustable Rate Loans 36,263 12,454 29,189 ---------- ---------- ---------- Total Adjustable Rate Loans 510,965 907,444 545,572 ---------- ---------- ---------- Total Originations $1,531,238 $2,330,138 $1,060,256 ========== ========== ========== Loans Outstanding: Fixed Rate, Fully Amortizing $1,626,464 $1,199,040 $ 431,384 Fixed Rate, 15-Year Balloon Payments 910,242 728,926 258,012 ---------- ---------- ---------- Total Fixed Rate Loans 2,536,706 1,927,966 689,396 Adjustable Rate, 3/27 Loans 1,619,723 1,304,129 722,258 Adjustable Rate, 2/28 Loans 163,780 183,142 139,245 Other Adjustable Rate Loans 86,685 75,512 119,460 ---------- ---------- ---------- Total Adjustable Rate Loans 1,870,188 1,562,783 980,963 ---------- ---------- ---------- Total Outstanding $4,406,894 $3,490,749 $1,670,359 ========== ========== ==========
Information concerning retained interests in securitized assets, such as its components, sensitivity to key economic assumptions and its cash flows, as well as details of the credit quality of the off-balance sheet loans may be found in Note 15 of the "Notes to Consolidated Financial Statements".
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Total stockholders' equity at December 31, 2000 and 1999 was $991 million and $926 million, respectively. The increase in stockholders' equity during 2000 was primarily the result of net income exceeding dividends paid for the year and an increase in the market value of investment securities classified as available for sale.
During 1998, Provident announced that its Board of Directors had authorized the purchase of up to one million shares (2.3%) of its common stock. The purchases were to be made from time to time in open market or in privately negotiated transactions at the discretion of management. The buy-back plan was cancelled in August 1999. Total shares purchased under the buy-back program were 801,800 shares. These shares, along with newly issued shares, were used in the acquisition of OHSL Financial Corp. in December 1999.
The dividend payout to net income ratio was 64.85%, 27.14% and 30.93% for 2000, 1999 and 1998, respectively. Provident announced an increase in its quarterly common dividend rate from $.22 per share to $.24 per share beginning with the first quarter in 2000. In the first quarter of 1999, Provident increased its quarterly common dividend rate from $.20 per share to $.22 per share.
Capital adequacy ratios are provided in the Selected Financial Data Table and the Performance Summary Sections of this report.
Provident's capital expenditure program typically includes the purchase of computer equipment and software, branch additions and enhancements, ATM additions and office building renovations. Capital expenditures for 2001 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, the secured financing of commercial and consumer loans and leases and the generation of new deposits. Provident may also borrow both short-term and long-term funds. Provident has an additional $1.4 billion available for borrowing under a bank note program as the program was increased from $1.0 billion to $1.5 billion in July 1999. Approximately $142.1 million of long-term debt is due to be repaid during 2001.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The parent company's primary liquidity needs during 2001 will be the payment of dividends to its preferred and common shareholders, funds for activity of the commercial paper operations and interest payments on long-term debt and junior subordinated debentures. The major source of liquidity for the parent company is dividends paid to it by its subsidiaries. Provident received dividends of $37 million, $60 million and $51 million in 2000, 1999 and 1998, respectively. The maximum amount available for dividends that may be paid in 2001 to the parent company by The Provident Bank, Provident's banking subsidiary, without approval is approximately $128 million, plus 2001 net earnings. Management believes that dividends available from Provident Bank will be sufficient to meet the parent company's liquidity requirements in 2001. Under the Federal Deposit Insurance Corp. Improvement Act of 1991, an insured depository institution, such as Provident Bank, 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 is presented in Note 21, included in "Notes to Consolidated Financial Statements".
At December 31, 2000, the parent company had $200 million in general purpose lines of credit with unaffiliated banks. As of February 28, 2001, these lines had not been used.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------------------------------------------
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 analyses and reports. The main source of market risk is the risk of loss in the value of financial instruments that may result from the changes in interest rates. ALCO is bound to guidelines stated in the relevant policies approved by the Board of Directors.
In addition, ALCO is responsible for liquidity risk management. Provident offers a wide variety of retail deposit products to provide a stable funding source for loan growth. To supplement its retail deposits, Provident utilizes various sources of wholesale deposits. Borrowing through the Federal Home Loan Bank and offering short and medium term deposits to institutional investors are part of this strategy. Both asset securitizations treated as secured financings and those treated as sales provide funding for the origination of additional loans and leases. Through term and commercial paper conduit markets, Provident has the ability to take advantage of the liquid asset-backed securities market. In addition, in order to meet any unexpected changes in asset and liability positions, Provident maintains a liquid investment portfolio that may be used as a ready source of funds.
Interest rate risk management guidelines and policies are approved by the Board of Directors. ALCO is responsible for monitoring and managing the interest rate risk of both the balance sheet and off-balance sheet financial instruments. The Market and Liquidity Risk Unit, as an extension of ALCO, utilizes asset/liability simulation to monitor interest rate risk. The simulation model measures the impact on net interest income due to changes in the yield curve, and performs stress tests on net interest income. The Interest Rate Risk Policy specifically states the boundaries for the percentage changes in net interest income. The Board of Directors also approves the limits for changes in the market value of equity. This is the change in the difference between the discounted value of assets and the discounted value of liabilities. The impairment or the improvement is measured as a percentage of total assets. Again, the Market and Liquidity Risk Unit monitors this ratio on a monthly basis.
In addition to natural balance sheet hedges, ALCO utilizes off-balance sheet instruments to manage interest rate risk. Interest rate swaps are the most widely used tool to manage interest rate risk, but from time to time, interest rate caps and floors may also be utilized. Provident has used off-balance sheet tools effectively for a number of years and has developed the necessary expertise and knowledge to achieve a safe and sound interest rate risk management process.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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 instruments. 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.
2000 1999 --------------- 100 Basis Points Decrease 1.2% 0.2% 100 Basis Points Increase (1.4) (0.1)
200 Basis Points Decrease 2.5 0.4 200 Basis Points Increase (3.7) (0.5)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors .................. 37
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets .................................... 38 Consolidated Statements of Income .............................. 39 Consolidated Statements of Changes in Shareholders' Equity ..... 40 Consolidated Statements of Cash Flows .......................... 41 Notes to Consolidated Financial Statements ..................... 42
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) ........... 70
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors Provident Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Provident Financial Group, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000. These financial statements are the responsibility of the management of Provident Financial Group, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Provident Financial Group, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio January 16, 2001
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- (Dollars in Thousands) 2000 1999 ------------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 286,051 $ 292,134 Federal Funds Sold and Reverse Repurchase Agreements 82,977 84,009 Trading Account Securities 41,949 - Loans Held for Sale 206,168 - Investment Securities Available for Sale (amortized cost - $3,041,204 and $2,187,778) 3,013,621 2,111,037 Loans and Leases: Corporate Lending: Commercial 4,580,215 3,990,923 Mortgage 632,801 576,570 Construction 801,211 559,797 Lease Financing 607,478 391,529 Consumer Lending: Installment 580,046 476,508 Residential 835,510 653,679 Lease Financing 1,039,645 361,907 ------------ ------------ Total Loans and Leases 9,076,906 7,010,913 Reserve for Loan and Lease Losses (154,300) (94,045) ------------ ------------ Net Loans and Leases 8,922,606 6,916,868 Leased Equipment 215,227 171,258 Premises and Equipment 103,919 100,099 Receivables from Securitization Trusts 417,420 355,222 Other Assets 567,447 507,299 ------------ ------------ $ 13,857,385 $ 10,537,926 ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest Bearing $ 1,293,396 $ 1,185,245 Interest Bearing 7,535,714 6,044,743 ------------ ------------ Total Deposits 8,829,110 7,229,988 Short-Term Debt 639,023 977,835 Long-Term Debt 2,774,493 950,821 Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated Debentures 329,239 220,069 Accrued Interest and Other Liabilities 294,737 232,991 ------------ ------------ Total Liabilities 12,866,602 9,611,704 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, 48,814,463 and 48,619,073 Issued 14,469 14,410 Capital Surplus 314,895 308,237 Retained Earnings 672,348 646,472 Accumulated Other Comprehensive Loss (17,929) (49,897) ------------ ------------ Total Shareholders' Equity 990,783 926,222 ------------ ------------ $ 13,857,385 $ 10,537,926 ============ ============
See notes to consolidated financial statements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------- (In Thousands, Except Per Share Data) 2000 1999 1998 ----------------------------------------------------------------------------------- Interest Income: Interest and Fees On Loans and Leases $ 738,974 $ 616,233 $ 578,867 Interest on Investment Securities 227,701 109,894 105,421 Other Interest Income 4,306 4,588 9,663 --------- --------- --------- Total Interest Income 970,981 730,715 693,951 Interest Expense: Interest on Deposits: Savings and Demand Deposits 78,421 59,057 53,917 Time Deposits 301,918 209,743 199,128 --------- --------- --------- Total Interest on Deposits 380,339 268,800 253,045 Interest on Short-Term Debt 86,797 59,729 70,958 Interest on Long-Term Debt 95,839 52,354 50,237 Interest on Junior Subordinated Debentures 20,033 13,200 8,662 --------- --------- --------- Total Interest Expense 583,008 394,083 382,902 --------- --------- --------- Net Interest Income 387,973 336,632 311,049 Provision for Loan and Lease Losses (131,281) (48,417) (31,597) --------- --------- --------- Net Interest Income After Provision for Loan and Lease Losses 256,692 288,215 279,452 Noninterest Income: Service Charges on Deposit Accounts 35,138 32,724 28,369 Loan Servicing Fees 51,706 29,362 6,064 Other Service Charges and Fees 53,205 41,316 38,108 Operating Lease Income 42,269 40,902 37,481 Gain on Sales of Loans and Leases - Non-Cash 34,447 83,055 41,070 Gain on Sales of Loans and Leases - Cash 10,452 15,814 22,899 Warrant Gains 7,500 9,147 15,354 Security Gains 155 71 13,044 Other 19,290 20,273 23,103 --------- --------- --------- Total Noninterest Income 254,162 272,664 225,492 Noninterest Expenses: Salaries, Wages and Benefits 172,903 153,397 131,779 Charges and Fees 23,280 15,679 14,896 Occupancy 20,631 18,951 18,468 Depreciation on Operating Lease Equipment 26,636 23,076 21,662 Equipment Expense 26,045 24,614 21,820 Professional Fees 21,735 20,163 19,737 Merger and Restructuring Charges 39,300 4,200 22,005 Other 62,379 66,910 66,949 --------- --------- --------- Total Noninterest Expenses 392,909 326,990 317,316 --------- --------- --------- Income Before Income Taxes 117,945 233,889 187,628 Applicable Income Taxes 44,331 82,940 65,201 --------- --------- --------- Net Income $ 73,614 $ 150,949 $ 122,427 ========= ========= ========= Basic Earnings Per Common Share $ 1.49 $ 3.18 $ 2.57 Diluted Earnings Per Common Share 1.46 3.08 2.48
See notes to consolidated financial statements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Other (In Thousands, Preferred Common Capital Retained Treasury Comprehensive Except Per Share Data) Stock Stock Surplus Earnings Stock Income/(Loss) Total ----------------------------------------------------------------------------------------------------------------- Balance at January 1, 1998 $ 7,000 $13,827 $247,578 $ 450,099 $ - $ 417 $ 718,921
Net Income 122,427 122,427 Change in Unrealized Gains (Losses) on Marketable Securities (9,441) (9,441) --------- Comprehensive Income 112,986 Cash Dividends Declared on: Common Stock ($.80/share) (37,079) (37,079) Preferred Stock ($11.25/share) (790) (790) Principal Payments on Loans/ Amortization of Expense Related to Employee Stock Benefit Plans 397 397 Exercise of Stock Options and Accompanying Tax Benefits 298 25,693 25,991 Purchase of Treasury Stock (21,425) (21,425) Distribution of Contingent Shares for Prior Year Acquisition 25 3,128 3,153 ------- ------- -------- --------- ------- -------------- --------- Balance at December 31, 1998 7,000 14,150 276,796 534,657 (21,425) (9,024) 802,154
Net Income 150,949 150,949 Change in Unrealized Gains (Losses) on Marketable Securities (40,873) (40,873) --------- Comprehensive Income 110,076 Cash Dividends Declared on: Common Stock ($.88/share) (40,100) (40,100) Preferred Stock ($12.38/share) (870) (870) Principal Payments on Loans/ Amortization of Expense Related to Employee Stock Benefit Plans 918 57 975 Exercise of Stock Options and Accompanying Tax Benefits 68 4,619 4,687 Purchase of Treasury Stock (8,645) (8,645) Acquisition 169 22,191 1,779 30,070 54,209 Distribution of Contingent Shares for Prior Year Acquisition 23 3,232 3,255 Deferred Compensation Tax Adjustment 481 481 ------- ------- -------- --------- ------- -------------- --------- Balance at December 31, 1999 7,000 14,410 308,237 646,472 - (49,897) 926,222
Net Income 73,614 73,614 Change in Unrealized Gains (Losses) on Marketable Securities 31,968 31,968 --------- Comprehensive Income 105,582 Cash Dividends Declared on: Common Stock ($.96/share) (46,789) (46,789) Preferred Stock ($13.50/share) (949) (949) Principal Payments on Loans/ Amortization of Expense Related to Employee Stock Benefit Plans 780 780 Liquidation of Employee Stock Benefit Plans 1,469 1,469 Exercise of Stock Options and Accompanying Tax Benefits 59 3,842 3,901 Deferred Compensation Tax Adjustment 567 567 ------- ------- -------- --------- ------- -------------- --------- Balance at December 31, 2000 $ 7,000 $14,469 $314,895 $ 672,348 $ - $ (17,929) $ 990,783 ======= ======= ======== ========= ======= ============== =========
See notes to consolidated financial statements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------- (In Thousands) 2000 1999 1998 --------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 73,614 $ 150,949 $ 122,427 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan and Lease Losses 131,281 48,417 31,597 Amortization of Goodwill 3,871 2,371 2,489 Other Amortization and Accretion (28,311) (18,925) (10,043) Depreciation of Leased Equipment and Premises and Equipment 48,379 44,119 39,678 Tax Benefit Received from Exercise of Stock Options 513 1,613 12,827 Realized Investment Security Gains (155) (71) (13,044) Proceeds From Sale of Loans Held for Sale 1,049,470 2,483,213 1,384,836 Origination of Loans Held for Sale (1,192,804) (2,460,853) (1,468,591) Realized Gains on Loans Held for Sale (30,607) (75,389) (41,704) (Increase) Decrease in Trading Account Securities 32,767 15,737 (15,737) Increase in Interest Receivable (23,635) (18,460) (10,153) Increase in Other Assets (2,654) (48,084) (32,465) Increase (Decrease) in Interest Payable 22,209 (2,640) 3,456 Deferred Income Taxes 24,647 17,935 (825) Increase (Decrease) in Other Liabilities (25,206) (43,962) 66,534 ----------- ----------- ----------- Net Cash Provided by Operating Activities 83,379 95,970 71,282 ----------- ----------- ----------- Investing Activities: Investment Securities Available for Sale: Proceeds from Sales 2,229,586 427,275 4,101,350 Proceeds from Maturities and Prepayments 485,028 259,415 737,624 Purchases (2,885,170) (814,706) (4,846,791) Increase in Receivables Due From Securitization Trusts (91,134) (250,326) (104,896) Net Increase in Loans and Leases (2,580,382) (876,813) (572,237) Net Increase in Operating Lease Equipment (70,605) (27,327) (76,273) Net Increase in Premises and Equipment (23,863) (27,140) (23,402) Acquisitions (129,190) 791 - ----------- ----------- ----------- Net Cash Used in Investing Activities (3,065,730) (1,308,831) (784,625) ----------- ----------- ----------- Financing Activities: Net Increase in Deposits of Securitization Trusts 69,470 294,843 131,623 Net Increase in Deposits 1,459,652 787,862 467,784 Net Increase (Decrease) in Short-Term Debt (436,107) 204,928 (34,718) Principal Payments on Long-Term Debt (492,459) (232,974) (101,508) Proceeds from Issuance of Long-Term Debt and Company's Junior Subordinated Debentures 2,416,214 225,435 344,973 Cash Dividends Paid (47,738) (40,970) (37,869) Purchase of Treasury Stock - (8,645) (21,425) Proceeds from Exercise of Stock Options 3,388 3,074 13,164 Net Increase in Other Equity Items 2,816 481 - ----------- ----------- ----------- Net Cash Provided by Financing Activities 2,975,236 1,234,034 762,024 ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents (7,115) 21,173 48,681 Cash and Cash Equivalents at Beginning of Period 376,143 354,970 306,289 ----------- ----------- ----------- Cash and Cash Equivalents at End of Period $ 369,028 $ 376,143 $ 354,970 =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 560,801 $ 396,093 $ 379,536 Income Taxes 58,883 47,120 39,901 Non-Cash Activity: Transfer of Loans and Premises and Equipment to Other Real Estate 14,365 5,470 3,474 Stock Issued in Purchase-Accounting Acquisitions - 54,209 - Residual Interest in Securitized Assets Created from the Sale of Loans 106,098 220,566 137,319
See notes to consolidated financial statements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - ACCOUNTING POLICIES: The following is a summary of significant accounting policies:
NATURE OF OPERATIONS: Provident Financial Group, Inc. ("Provident") is a bank holding company headquartered in Cincinnati, Ohio. Provident operates bank and other financial service subsidiaries principally in Ohio, northern Kentucky and southwest Florida. Principal products and services provided by Provident include commercial lending, lease financing, cash management, retail lending, deposit accounts, mortgage banking, brokerage services, investment products and trust services.
BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Provident and its subsidiaries, all of which are wholly owned. Certain estimates are required to be made by management in the preparation of the consolidated financial statements. Actual results may differ from those estimates. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to conform to the current year presentation.
STATEMENTS OF CASH FLOWS: For cash flow purposes, cash equivalents include amounts due from banks and federal funds sold and reverse repurchase agreements. Generally, federal funds sold and reverse repurchase agreements are purchased and sold for one-day periods.
SECURITIES: Securities are classified as available for sale or trading. Securities classified as available for sale are intended to be held for indefinite periods of time. These securities are stated at fair value with unrealized gains and losses (net of taxes) reported as a separate component of shareholders' equity.
Securities purchased with the intention of selling them in the near term are classified as trading. These securities are carried at fair value with unrealized gains and losses included in noninterest income. The specific identification method is used for determining gains and losses from securities transactions.
LOANS AND LEASES: Loans are generally stated at the principal amount outstanding, net of unearned income. Loans that are intended to be sold within a short period of time are classified as held for sale. Loans held for sale are reported at the lower of aggregate cost or market value. Interest on loans is computed on the outstanding principal balance. The portion of loan fees which exceeds the direct costs to originate the loan is deferred and recognized as interest income over the actual lives of the related loans using the interest method. Any premium or discount applicable to specific loans purchased is amortized over the remaining lives of such loans using the interest method. Loans are generally placed on nonaccrual status when the payment of principal and/or interest is past due 90 days or more. However, installment loans are not placed on nonaccrual status because they are charged off in the month the loans reach 120 days past due. In addition, loans that are well secured and in the process of collection are not placed on nonaccrual status. When a loan is placed on nonaccrual status, any interest income previously recognized that has not been received is reversed. Future interest income is recorded only when a payment is received and collection of principal is considered reasonably assured.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident generally recognizes income on impaired loans on a cash basis.
Unearned income on direct financing leases is amortized over the terms of the leases resulting in an approximate level rate of return on the net investment in the leases. Income from leveraged lease transactions is recognized using a method that yields a level rate of return in relation to Provident's net investment in the lease. The investment includes the sum of the aggregate rentals receivable and the estimated residual value of leased equipment less unearned income and third party debt on leveraged leases. Commercial leases are generally placed on nonaccrual status when payments are past due 90 days or more while consumer leases are generally charged off in the month the leases reach 120 days past due.
LOAN AND LEASE LOSS RESERVE: The reserve for loan and lease losses is maintained to absorb losses in the lending portfolio. Management's determination of the adequacy of the reserve is based on reviews of specific loans and leases, credit loss experience, general economic conditions and other pertinent factors. The reserve is increased by charges to earnings, as provisions for loan and lease losses. Loans and leases deemed uncollectible are charged off and deducted from the reserve and recoveries on loans and leases previously charged off are added back to the reserve.
Provident considers a commercial nonperforming loan to be an impaired loan when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Provident measures the value of an impaired loan based on the present value of expected future cash flows discounted at the loan's effective interest rate or, if more practical, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.
LOAN AND LEASE SECURITIZATIONS: Provident securitizes many of the loans and leases it originates and purchases. Securitizations provide Provident with immediate cash flows to fund additional loan and lease originations and purchases. Prior to June 30, 2000, Provident's securitizations were generally structured as sales, resulting in the removal of the loans and leases from the balance sheet and the recognition of gains or losses on the income statement. Since June 30, 2000, Provident's securitizations have been structured as secured financings, resulting in additional debt on the balance sheet and no recognition of gains or losses on the income statement. The switch to a secured financing structure does not affect the total profit Provident will recognize over the life of a loan, but rather impacts the timing of income recognition. Secured financing transactions cause reported earnings from securitized loans to be lower in the initial periods, resulting from the absence of gains on loan and lease sales, and higher in later periods, as interest is earned on the loans. As a result, moving away from transaction structures that use gain-on-sale accounting will temporarily cause Provident's earnings to be lower over the near term.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, when Provident structured its securitization transactions as sales, it retained (a) future cash flows of the underlying loans, net of payments due to investors of the securitization trust, servicing fees and other fees (referred to as Retained Interests in Securitized Assets or "RISAs"), (b) servicing rights on the loans and leases, and (c) cash reserve accounts used to absorb credit losses on the loans securitized. Gain or loss on the sale of the loans depends in portion on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the assets retained based on their relative fair value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for assets retained, so Provident generally estimates fair value based on the present value of future expected cash flows estimated using management's best estimates of the key assumptions, including credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved.
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.
OTHER REAL ESTATE: Other real estate acquired through partial or total satisfaction of loans is recorded at the lower of cost or fair value and is included in other assets of the consolidated balance sheets. Provident's policy is to include the unpaid balance of applicable loans in the cost of other real estate. However, in no case is the carrying value of real estate owned greater than fair value.
MORTGAGE SERVICING RIGHTS: Mortgage servicing rights associated with loans sold with servicing retained or the purchase of loan servicing, are capitalized and included in other assets. The value of these capitalized servicing rights is amortized over the period of estimated net servicing revenue and recorded as a reduction of servicing income. The carrying value of these rights is periodically reviewed for impairment.
GOODWILL: The excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination (goodwill) is included in other assets. Goodwill related to acquisitions is amortized over varying periods not exceeding 25 years.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, adoption of a fair value-based accounting method for stock-based employee compensation plans. Provident elected to continue its accounting in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", whereby no compensation expense is recognized for the granting of stock options when the exercise price of the option equals the market price of the underlying stock at date of grant.
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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS: Provident employs derivatives such as interest rate swaps, caps and floors, financial futures and forward contracts to manage the interest sensitivity of certain on and off-balance sheet assets and liabilities. The net interest income or expense on interest rate swaps, caps and floors is accrued and recognized as an adjustment to the interest income or expense of the associated on and off-balance sheet asset or liability. Realized gains and losses on interest rate swap, cap and floor transactions used to manage interest rate risk that are terminated prior to maturity are deferred and amortized as a yield adjustment over the remaining original life of the agreement. Deferred gains and losses are recorded in other assets and accrued interest and other liabilities, as applicable. Futures and forward contracts are also used to manage exposure to changes in interest rates. Realized gains and losses on futures and forward contracts used for risk management are deferred. These deferred items are either amortized to interest income or expense over the life of the assets and liabilities they are associated with, or are recognized as a component of income in the period of disposition of the assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138, becomes effective for fiscal years beginning after June 15, 2000. This SFAS establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that derivatives be recognized as either assets or liabilities in the balance sheet and that those instruments be measured at fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in earnings recognition only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred and reported as accumulated other comprehensive income, a component of shareholders' equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings.
On January 1, 2001, Provident will adopt the provisions of SFAS No. 133 as amended. Generally, Provident uses its derivatives as hedging instruments. After-tax transition amounts, associated with establishing the fair values of the derivative instruments and hedged items on the balance sheet, of $0 and $28.4 million will be recorded as reductions of net income and accumulated other comprehensive income, respectively. The transition adjustments will be presented as cumulative effect adjustments in the 2001 consolidated financial statements.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in September 2000 and replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. In general, SFAS No. 140 is effective for transfers of financial assets occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management believes that the adoption of this SFAS will not have a material impact on Provident's financial position or the results of its operations.
NOTE 2 - INVESTMENT SECURITIES: The amortized cost and estimated market values of securities available for sale at December 31 were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market (In Thousands) Cost Gains Losses Value -------------------------------------------------------------------------------------------- 2000: U.S. Treasury and Federal Agency Debentures $ 326,721 $ 350 $ (1,614) $ 325,457 State and Political Subdivisions 3,317 - (16) 3,301 Mortgage-Backed Securities 1,938,546 7,615 (30,559) 1,915,602 Asset-Backed Securities 44,257 - (2,196) 42,061 Other Securities 728,363 10 (1,173) 727,200 ----------- ----------- ----------- ----------- $ 3,041,204 $ 7,975 $ (35,558) $ 3,013,621 =========== =========== =========== =========== 1999: U.S. Treasury and Federal Agency Debentures $ 240,991 $ - $ (7,843) $ 233,148 State and Political Subdivisions 1,897 - (17) 1,880 Mortgage-Backed Securities 1,470,270 17 (61,720) 1,408,567 Asset-Backed Securities 104,700 1 (4,948) 99,753 Other Securities 369,920 10 (2,241) 367,689 ----------- ----------- ----------- ----------- $ 2,187,778 $ 28 $ (76,769) $ 2,111,037 =========== =========== =========== ===========
Investment securities with a carrying value of approximately $1.3 billion and $.8 billion at December 31, 2000 and 1999, respectively, were pledged as collateral to secure public and trust deposits, repurchase agreements, Federal Home Loan Bank advances, interest rate derivatives and for other purposes.
In 2000, 1999 and 1998 gross gains of $4.2 million, $.5 million and $14.5 million and gross losses of $4.0 million, $.4 million and $1.5, respectively, were realized on the sale of securities available for sale.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage-backed and asset-backed securities are shown below based on their estimated average lives at December 31, 2000. All other securities are shown by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated (In Thousands) Cost Market Value -------------------------------------------------------- Due in one year or less $ 547,194 $ 547,104 Due after 1 through 5 years 1,571,586 1,572,468 Due after 5 through 10 years 728,027 709,533 Due after 10 years 194,397 184,516 ---------- ---------- Total $3,041,204 $3,013,621 ========== ==========
NOTE 3 - 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 are 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 costs of the leased property, net of depreciation, is recorded as "Leased Equipment". 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, manufacturing, construction, communication, data processing and office equipment. The majority of the leases are classified as direct financing leases, with expiration dates over the next 1 to 10 years. Rentals receivable at December 31, 2000 and 1999 include $109 million and $41 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 $127 million and $82 million in total at December 31, 2000 and 1999, 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:
2000 1999 -------------------------- ---------------------------- (In Thousands) Commercial Consumer Commercial Consumer --------------------------------------------------------------------------------------------- Rentals Receivable $ 581,166 $ 725,038 $ 318,054 $ 183,718 Leases in Process 15,003 3,717 48,798 12,947 Estimated Residual Value of Leased Assets 180,153 524,635 115,295 234,741 776,322 1,253,390 482,147 431,406 Less: Unearned Income (168,844) (213,745) (90,618) (69,499) ----------- ----------- ----------- ----------- Net Investment in Lease Financing $ 607,478 $ 1,039,645 $ 391,529 $ 361,907 =========== =========== =========== ===========
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule by year of future minimum lease payments to be received for the next five years as of December 31, 2000:
(In Thousands) Commercial Consumer ------------------------------------- 2001 $150,949 $195,578 2002 137,699 177,375 2003 94,956 158,182 2004 60,394 117,868 2005 38,176 62,026 Thereafter 98,992 14,009 -------- -------- Total $581,166 $725,038 ======== ========
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 $67.4 million and $53.2 million as of December 31, 2000 and 1999, respectively. The future gross minimum rentals, by year, under noncancelable leases for the rental of leased equipment are $34.0 million for 2001; $28.0 million for 2002; $22.3 million for 2003; $14.3 million for 2004; $6.6 million for 2005 and $8.0 million thereafter.
In addition to the leases discussed above, Provident sold vehicles, which had been classified as finance leases, to institutional investors under sale-leaseback transactions. Under terms of these transactions, Provident continues to collect rental payments from its original lessees. Provident, as lessee in the sale-leaseback transactions, is accounting for the leaseback of these vehicles as operating leases. Differences between the rentals received from the original lessees and the rentals paid to the investors are recorded as noninterest income. Outstanding leases under these sale-leaseback transactions totaled $1,135 million and $1,367 million as of December 31, 2000 and 1999, respectively.
NOTE 4 - RESERVE FOR LOAN AND LEASE LOSSES: The changes in the loan and lease loss reserve for the years ended December 31 were as follows:
(In Thousands) 2000 1999 1998 ------------------------------------------------------------------------- Balance at Beginning of Period $ 94,045 $ 78,867 $ 74,615 Provision for Loan and Lease Losses Charged to Earnings 131,281 48,417 31,597 Acquired Reserves 2,377 1,263 - Recoveries Credited to the Reserve 13,775 12,788 9,845 --------- --------- --------- 241,478 141,335 116,057 Losses Charged to the Reserve (87,178) (47,290) (37,190) --------- --------- --------- Balance at End of Period $ 154,300 $ 94,045 $ 78,867 ========= ========= =========
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows Provident's investment in impaired loans as defined under SFAS No. 114 as amended by SFAS No. 118:
(In Thousands) 2000 1999 ----------------------------------------------------------------------- Impaired Loans Requiring a Valuation Allowance of $8.1 Million in 2000 and $13.3 Million in 1999 $29,161 $30,469 Impaired Loans Not Requiring a Valuation Allowance - 2,000 ------- ------- Total Impaired Loans $29,161 $32,469 ======= =======
Average Balance of Impaired Loans for the Year $38,000 $30,990
The valuation allowance recorded on impaired loans is included in the reserve for loan losses.
Loans and leases on nonaccrual status at December 31, 2000, 1999 and 1998 were $96.0 million, $55.7 million and $45.0 million, respectively. Loans renegotiated to provide a reduction or deferral of interest or principal were $0, $1,541,000 and $371,000 at December 31, 2000, 1999 and 1998, respectively.
NOTE 5 - PREMISES AND EQUIPMENT: The following is a summary of premises and equipment at December 31:
(In Thousands) 2000 1999 ----------------------------------------------------------- Land $ 11,779 $ 12,290 Buildings 38,772 38,537 Leasehold Improvements 16,827 14,061 Furniture and Fixtures 148,196 137,306 --------- --------- 215,574 202,194 Less Depreciation and Amortization (111,655) (102,095) --------- --------- Total $ 103,919 $ 100,099 ========= =========
Rent expense for all bank premises and equipment leases was $14.1 million, $12.9 million and $11.6 million in 2000, 1999 and 1998, respectively. The future gross minimum rentals, by year, under noncancelable leases for the rental of premises and equipment are $13.2 million in 2001, $11.7 million in 2002, $11.3 million in 2003, $10.0 million in 2004, $8.5 million in 2005 and $30.1 million thereafter.
NOTE 6 - SHORT-TERM DEBT: Short-term debt was as follows:
(Dollars in Thousands) 2000 1999 1998 -------------------------------------------------------------------------------------------- Year End Balance: Federal Funds Purchased and Repurchase Agreements $ 443,073 $ 774,551 $ 560,712 Commercial Paper 187,090 201,784 245,291 Short Term Notes 8,860 1,500 1,500 Weighted Average Interest Rate at Year End: Federal Funds Purchased and Repurchase Agreements 5.97% 4.35% 4.44% Commercial Paper 6.02 5.09 4.50 Short Term Notes 6.90 4.52 4.18 Maximum Amount Outstanding at Any Month End: Federal Funds Purchased and Repurchase Agreements $1,819,778 $1,261,003 $1,627,934 Commercial Paper 209,393 229,058 259,925 Short Term Notes 177,560 1,500 1,500
At December 31, 2000, Provident had $200 million in general purpose lines of credit with unaffiliated banks. As of January 16, 2001, these lines had not been used.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT: Long-term debt consisted of the following:
December 31, Stated Effective Maturity ------------------------ (Dollars in Thousands) Rate(1) Rate(2) Date 2000 1999 ------------------------------------------------------------------------------------------------- Provident (Parent Company): Miscellaneous Notes Various Various Various $ 1,245 $ 1,759 Subsidiaries: $1.5 Billion Bank Notes Program: Fixed Rate Senior 8.50% 8.53% 2002 99,789 299,861 Fixed Rate Senior 7.17 6.80 2005 12,500 12,500 Notes Payable to Federal Home Loan Bank: Fixed Rate 5.57 5.57 2008 9,000 134,000 Fixed/Floating Rate 5.85 5.85 2009 246,336 - Fixed/Floating Rate 5.98 5.98 2010 420,000 - Fixed/Floating Rate Various Various Various 62,681 149,415 Subordinated Notes: Floating Rate Notes 9.67 9.67 2001 24,750 - Fixed Rate 7.13 7.54 2003 74,975 74,964 Fixed Rate 6.38 7.14 2004 99,802 99,737 Secured Debt Financings: Fixed Rate (Auto Sale-Leaseback) 5.76 5.76 2004 83,777 96,561 Fixed Rate (Auto Sale-Leaseback) 6.05 6.05 2005 33,328 36,936 Fixed Rate (Auto Sale-Leaseback) 5.35 5.35 2007 32,511 35,109 Floating Rate (Residential/HELOC) 6.98 7.60 2005 981,840 - Floating Rate (Equipment Leasing) 7.27 7.29 2005 126,915 - Fixed Rate (Auto Leasing) 5.89 6.13 2007 458,360 - Miscellaneous Notes Various Various Various 6,684 9,979 ----------- --------- 2,773,248 949,062 ----------- --------- Total $ 2,774,493 $ 950,821 =========== =========
(1) Stated rate reflects interest rate on notes as of December 31, 2000. (2) Effective rate reflects interest rate paid as of December 31, 2000 after adjustments for notes issued at discount or premium, capitalized fees associated with the issuance of the debt and interest rate swap agreements entered to alter the payment characteristics.
Under Provident Bank's amended $1.5 Billion Bank Notes program, notes can be issued with either fixed or floating rates. The Bank Notes program was increased from $1.0 billion to $1.5 billion in July 1999. The notes are not secured nor does the FDIC insure them. At December 31, 2000, $1.4 billion was available under this program.
The notes payable to the Federal Home Loan Bank are collateralized by investment securities and residential loans with a book value of $1.1 billion. They are subordinated to the claims of depositors and other creditors of Provident and are not insured by the FDIC.
At December 31, 2000, $200 million of subordinated notes were outstanding. Subordinated notes qualify as Tier 2 capital for regulatory capital calculations. These notes are subordinated to the claims of depositors and other creditors of Provident and are not insured by the FDIC.
Provident borrowed $223 million through on-balance sheet sale-leaseback transactions with various investors. Auto leases within the consumer lease financing portfolio secure the borrowings. The debt calls for principal payments throughout the life of the borrowings. As of December 31, 2000, $150 million remains outstanding.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the third quarter of 2000, Provident decided to change the structure of its securitizations resulting in the elimination of gain-on-sale accounting. Future securitizations of loans and leases will be structured to account for the transactions as secured financings. Approximately $1.6 billion of long-term debt has been issued in 2000 as part of these secured financings. Included in the secured debt financings are $982 million collateralized by residential and home equity loans, $127 million collateralized by small to mid-ticket equipment leases and $458 million collateralized by auto leases.
As of December 31, 2000, scheduled principal payments on long-term debt for the following five years were as follows:
(In Thousands) 2001 2002 2003 2004 2005 ----------------------------------------------------------------------------------- Provident (Parent Company) $ 443 $ 309 $ 322 $ 172 $ - Subsidiaries 141,702 194,856 160,417 205,400 1,064,990
NOTE 8 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES: Wholly-owned subsidiary trusts of Provident have issued $337.5 million of preferred securities and, in turn, purchased $337.5 million of newly-authorized Provident junior subordinated debentures. The debentures provide interest and principal payments to fund the trusts' obligations. Provident fully and unconditionally guarantees the preferred securities. The preferred securities qualify as Tier 1 capital for bank regulatory purposes. The sole assets of the trusts are the debentures. The junior subordinated debentures consisted of the following at December 31:
December 31, Stated Effective Maturity ------------------- (Dollars in Thousands) Rate Rate(1) Date 2000 1999 ------------------------------------------------------------------------------- November 1996 Issuance 8.60% 8.67% 12/01/26 $ 99,004 $ 98,941 June 1999 Issuance 8.75% 8.14% 06/30/29 121,259 121,128 November 2000 Issuance 10.25% 9.03% 12/31/30 108,976 - -------- -------- Total $329,239 $220,069 ======== ========
(1) Effective rate reflects interest rate paid as of December 31, 2000 after adjustments for notes issued at discount or premium, capitalized fees associated with the issuance of the debt and interest rate swap agreements entered to alter the payment characteristics.
NOTE 9 - INCOME TAXES: The composition of income tax expense follows:
(In Thousands) 2000 1999 1998 ----------------------------------------------- Current: Federal $ 18,035 $ 63,034 $ 65,274 State 1,649 1,971 752 -------- -------- -------- 19,684 65,005 66,026 Deferred 24,647 17,935 (825) -------- -------- -------- Total $ 44,331 $ 82,940 $ 65,201 ======== ======== ========
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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Provident's deferred tax liabilities and assets as of December 31 are as follows:
(In Thousands) 2000 1999 1998 --------------------------------------------------------------------------- Deferred Tax Liabilities: Excess Lease and Partnership Income $154,426 $137,916 $119,315 Securitizations 38,515 15,410 - Deferred Loan Costs 19,085 11,094 6,462 Other - Net 14,348 14,071 10,381 -------- -------- -------- Total Deferred Tax Liabilities 226,374 178,491 136,158 -------- -------- -------- Deferred Tax Assets: Provision for Loan and Lease Losses 60,754 39,989 32,766 Unrealized Loss on Investment Securities 9,654 26,843 4,850 Deferred Compensation 7,803 6,596 5,141 Securitizations - - 5,988 Other - Net 12,027 10,763 9,755 -------- -------- -------- Total Deferred Tax Assets 90,238 84,191 58,500 -------- -------- -------- Net Deferred Tax Liabilities $136,136 $ 94,300 $ 77,658 ======== ======== ========
NOTE 10 - MERGERS AND ACQUISITIONS: In September 2000, Provident purchased Bank One Corporation's Housing and Health Care Capital business, including the operations and substantially all of the assets of Banc One Capital Funding Corporation, a wholly-owned subsidiary of Bank One. The business, which was renamed Red Capital Group, engages in the financing and loan servicing of multi-family and health-care facilities. Provident paid $129 million for the net assets with $11 million of goodwill being recorded which is being amortized over a 15 year period. As the acquisition was recorded under the purchase accounting method, the assets acquired and liabilities assumed were recorded at estimated fair value and the accounts and operations of Red Capital Group have been included in the consolidated financial statements from the date of acquisition only.
In February 2000, Provident acquired Fidelity Financial of Ohio, Inc., a holding company for Centennial Bank. Centennial operated fifteen banking centers in the greater Cincinnati metropolitan area and held deposits of $588 million. Provident issued 4.6 million shares of its common stock for the acquisition. The merger was accounted for as a pooling-of-interests. Accordingly, the assets acquired and liabilities assumed were recorded at historical value. The consolidated financial statements and other financial information for periods prior to the merger date include the accounts and operations of Fidelity Financial.
In December 1999, Provident purchased OHSL Financial Corp., the parent of Oak Hills Savings and Loan Company, F.A., for approximately 1.4 million shares of Provident Common Stock having an aggregate value of $54 million. Oak Hills, which had six branches located in Cincinnati, was merged with The Provident Bank. The acquisition was accounted for as a purchase transaction with $30 million of goodwill being recorded. The goodwill is being amortized over a 20 year period.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - BENEFIT PLANS: Provident has a Retirement Plan for the benefit of its employees. Included under this plan is an Employee Stock Ownership Plan ("ESOP") and a Personal Investment Election Plan ("PIE Plan"). Provident also maintains a Life and Health Plan for Retired Employees ("LH Plan"), 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 paid approximately $5.9 million, $8.8 million and $7.3 million for 2000, 1999 and 1998, 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 10% 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 on the first 8% of their pre-tax salaries during the plan year. The contribution made by Provident is charged against earnings as the employees' contributions are made. Provident incurred expense of $1.4 million, $1.2 million and $1.0 million for this retirement plan for 2000, 1999 and 1998, respectively.
Provident's LH Plan provides medical coverage as well as life insurance benefits to eligible retirees. Provident pays the entire cost for retirees retiring prior to 1993, 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. Retirees retiring after 1992 are responsible for the entire cost of the LH premiums.
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 paid approximately $0, $1.7 million and $1.2 million for 2000, 1999 and 1998, respectively.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident has Employee Stock Option Plans, an Advisory Directors' Stock Option Plan and an Outside Directors' Stock Option Plan. During the first quarter of 2000, Provident established an Employee Stock Option Plan for the benefit of all Provident associates not participating in other stock option plans. The other stock option plans are for the benefit of its key employees and directors. The Employee Stock Option Plans made 9.2 million options available for grant. 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.
The following table summarizes option activity for the three years ended December 31, 2000:
2000 1999 1998 ---------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Number of Exercise Number of Exercise Number of Price Options Price Options Price Options ---------------------------------------------------------------------------------------------- Outstanding at Beginning of Year $30.00 4,205,113 $27.52 3,747,888 $20.38 4,351,399 Acquired - - 9.16 12,616 - - Granted 27.29 2,079,600 37.78 761,285 46.81 875,509 Exercised 17.27 (196,130) 14.46 (219,682) 13.46 (1,099,689) Canceled 35.30 (608,218) 27.37 (96,994) 30.97 (379,331) ------ --------- ------ --------- ------ --------- Outstanding at End of Year $28.84 5,480,365 $30.00 4,205,113 $27.52 3,747,888 ====== ========= ====== ========= ====== =========
At December 31, 2000, 1999 and 1998, there were 2,396,315, 2,159,150 and 1,830,112 options exercisable, respectively, having a weighted average option price per share of $24.26, $22.04 and $17.94, respectively. The following table summarizes information about stock options outstanding at December 31, 2000:
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 - $12.00 568,147 1.6 $ 9.00 568,147 $ 9.00 $12.01 - $18.00 549,672 4.1 14.58 549,672 14.58 $18.01 - $27.00 1,601,104 8.0 25.57 440,361 23.78 $27.01 - $40.00 1,768,577 8.3 32.97 372,021 35.76 $40.01 - $54.47 992,865 7.1 46.01 466,114 45.56
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 2000, 1999 and 1998 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.
The following weighted-average assumptions were used in the option pricing model for 2000, 1999 and 1998 respectively: risk-free interest rates of 6.13%, 5.36% and 5.46%; dividend yields of 3.00%, 3.50% and 3.00%; volatility factors of the expected market price of Provident's Common Stock of 26.9%, 24.4% and 23.4% and an expected life of the option of 7 years for each year. Based on these assumptions, the weighted-average fair value of options granted in 2000, 1999 and 1998 was $8.78, $9.17 and $12.05, respectively.
No compensation cost has been recognized for stock option grants. Had compensation cost been determined for stock option awards based on the fair values at grant dates as discussed above, Provident's net income and earnings per share would have been as follows:
Year Ended December 31, ----------------------------- (In Thousands, Except Per Share Data) 2000 1999 1998 ----------------------------------------------------------------------- Pro-forma Net Income $67,049 $146,142 $119,350 Pro-forma Earnings Per Share: Basic 1.36 3.08 2.51 Diluted 1.33 2.98 2.42
NOTE 12 - PREFERRED STOCK: In 1991, Provident issued 371,418 shares of Non-Voting Convertible Preferred Stock to American Financial Group as partial consideration for the acquisition of Hunter Savings Association. During 1995, 301,146 shares of the Preferred Stock were converted into 4,234,865 shares of Common Stock. As of December 31, 2000 and 1999, 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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31, ----------------------------------- (In Thousands Except Per Share Data) 2000 1999 1998 ---------------------------------------------------------------------------------------- Basic: Net Income $ 73,614 $ 150,949 $ 122,427 Less Preferred Stock Dividends (949) (870) (790) --------- --------- --------- Income Available to Common Shareholders 72,665 150,079 121,637 Weighted-Average Common Shares Outstanding 48,744 47,187 47,288 --------- --------- --------- Basic Earnings Per Share $ 1.49 $ 3.18 $ 2.57 ========= ========= ========= Diluted: Net Income $ 73,614 $ 150,949 $ 122,427 Weighted-Average Common Shares Outstanding 48,744 47,187 47,288 Assumed Conversion of: Convertible Preferred Stock 988 988 988 Dilutive Stock Options (Treasury Stock Method) 608 843 1,090 --------- --------- --------- Dilutive Potential Common Shares 50,340 49,018 49,366 --------- --------- --------- Diluted Earnings Per Share $ 1.46 $ 3.08 $ 2.48 ========= ========= =========
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS: Provident and its banking subsidiary, The Provident Bank, 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 Provident Bank 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 Provident Bank 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, 2000, Provident and Provident Bank meet all capital requirements to which it is subject.
As of December 31, 2000, Provident and Provident Bank's capital ratios were categorized as well capitalized for regulatory purposes. To be categorized as well capitalized, Provident and Provident Bank 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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents Provident and Provident Bank's regulatory capital information at December 31:
2000 1999 ------------------- ------------------- (Dollars in Thousands) Amount Ratio Amount Ratio ----------------------------------------------------------------------------------------- Tier 1 Capital (to Average Assets): Provident (Consolidated) $1,242,389 9.56% $1,112,059 10.87% The Provident Bank 983,031 7.64 901,962 9.40 Tier 1 Capital (to Risk-Weighted Assets): Provident (Consolidated) 1,242,389 9.18 1,112,059 9.97 The Provident Bank 983,031 7.32 901,962 8.42 Total Risk-Based Capital (to Risk-Weighted Assets): Provident (Consolidated) 1,502,512 11.10 1,330,872 11.93 The Provident Bank 1,491,476 11.10 1,219,127 11.38
NOTE 15 - ASSET SECURITIZATION SALES: During 2000, 1999 and 1998, Provident sold $1.4 billion, $3.0 billion and $1.5 billion, respectively, of loans and leases in securitization transactions. A summary of gains recognized on securitizations structured as sales follows:
(In Thousands) 2000 1999 1998 --------------------------------------------------------------- Non-Cash Gains: Nonconforming Residential Loans $30,291 $73,304 $36,337 Prime Home Equity Loans 4,156 5,758 4,733 Credit Card Loans - 3,993 - ------- ------- ------- 34,447 83,055 41,070 Cash Gains - Equipment Leases 9,083 13,164 13,429 ------- ------- ------- Total Gains $43,530 $96,219 $54,499 ======= ======= =======
For securitizations structured as sales, Provident retained servicing responsibilities and subordinated interests. Provident receives annual servicing fees approximating 0.50% (for nonconforming residential and prime home equity loans) and 0.75% (for equipment leases) of the outstanding balance. Provident also possesses the rights to future cash flows arising after the investors of the securitization trusts have received the return for which they contracted, referred to as retained interests in securitized assets ("RISAs"). RISAs are subordinate to investors of the securitization trust with its value subject to prepayment and interest rate risks on the transferred assets. Components of the RISAs, which are included within investment securities on the balance sheet, follow:
December 31, 2000 December 31, 1999 --------------------------- --------------------------- Nonconforming Prime Nonconforming Prime (In Thousands) Residential Home Equity Residential Home Equity ----------------------------------------------------------------------------------------------- Estimated Cash Flows of Underlying Loans, Net of Payments to Certificate Holders $ 402,122 $ 29,117 $ 497,560 $ 32,270 Less: Estimated Credit Loss (1) (6,045) (275) (19,904) (711) Servicing and Insurance Expense (46,650) (4,026) (54,918) (4,569) Discount to Present Value (47,324) (1,892) (66,538) (3,235) --------- --------- --------- --------- Carrying Value of RISA $ 302,103 $ 22,924 $ 356,200 $ 23,755 ========= ========= ========= =========
(1) Only the pre-1998 securitizations provide for estimated credit losses within the cash flows of the RISAs. Credit losses for securitizations beginning in 1998 have been provided for in the cash reserve accounts discussed below. The carrying value on nonconforming residential RISAs, net of all loss estimates, is $201.9 million.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident has provided for credit enhancements to its securitizations structured as sales in the form of cash reserve accounts that are funded at closing. The cash reserve accounts are funded at a significantly higher balance than the level of estimated credit losses to improve the credit grade of the securitization and thereby reduce the rate paid to investors of the securitization trust. Credit losses are absorbed directly into the cash reserve accounts. The remaining funds not used to cover such losses are returned to Provident over the term of the securitization. Provident estimates the amount of all credit losses based upon loan credit grades, collateral, market conditions and other pertinent factors. Cash reserve accounts that earn interest are recorded as investment securities and accounts that do not earn interest are recorded as receivables from securitization trusts. Detail of the cash reserve accounts, net of loss estimates, at December 31 were as follows:
Cash Loss Net Cash (In Thousands) Reserves Estimates Reserves -------------------------------------------------------------------------- 2000: Nonconforming Residential Loans (1) $ 467,413 $(100,224) $ 367,189 Equipment Leases 61,972 (12,249) 49,723 Prime Home Equity Loans (1) 29,450 (1,171) 28,279 Credit Card 29,700 - 29,700 --------- --------- --------- $ 588,535 $(113,644) $ 474,891 ========= ========= ========= 1999: Nonconforming Residential Loans $ 358,101 $ (79,664) $ 278,437 Equipment Leases 35,583 (8,678) 26,905 Prime Home Equity Loans 21,136 (1,312) 19,824 Credit Card 30,056 - 30,056 --------- --------- --------- $ 444,876 $ (89,654) $ 355,222 ========= ========= =========
(1)Total loss estimates, including those contained within the RISAs, are $106.3 million for nonconforming residential loans and $1.4 million for prime home equity loans as of December 31, 2000.
Various economic assumptions are used in the measurement of RISAs and loss estimates of cash reserve accounts. As of the date of securitization, the key assumptions used for securitizations completed during the year indicated are as follows:
Nonconforming Prime Equipment Residential Home Equity Leasing --------------------------- --------------------------- --------------------------- 2000 1999 1998 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Prepayment Speed: Initial Rate 13.73% 13.41% 12.88% 10.00% 10.00% 10.00% n/a n/a n/a Peak Rate 35.00% 35.00% 32.95% 30.00% 30.00% 30.00% n/a n/a n/a Weighted Average Life (in years) 2.4 2.4 2.7 2.1 2.1 2.0 n/a n/a n/a Estimated Credit Losses: Annual Basis 1.14% 1.10% 0.99% 0.20% 0.20% 0.20% 1.00% 1.00% 1.00% Percentage of Original Balance 2.84% 2.70% 2.70% 0.47% 0.40% 0.36% 2.00% 2.00% 1.92% Discount Rate 12.00% 12.00% 12.04% 12.00% 12.00% 10.00% 8.00% 8.00% 12.00%
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sensitivity table provides the effects of an immediate 10% and 20% adverse change to key economic assumptions on RISAs and cash reserve accounts as of December 31, 2000:
Nonconforming Prime Equipment (Dollars in Millions) Residential Home Equity Leasing --------------------------------------------------------------------------------------------- Peak Prepayment Speed Assumption (Annual Rate)(1) 26% CPR 36% CPR n/a Impact on Fair Value of 10% Adverse Change $ (15.3) $ (1.9) n/a Impact on Fair Value of 20% Adverse Change $ (30.5) $ (3.1) n/a
Estimated Credit Loss Assumption(1) (Percentage of Original Balance) 3.00% 0.30% 3.08% Impact on Fair Value of 10% Adverse Change $ (13.5) $ (0.3) $(1.2) Impact on Fair Value of 20% Adverse Change $ (26.9) $ (0.5) $(2.5)
RISA Discount Rate(1) 12.00% 10.77% n/a Impact on Fair Value of 10% Adverse Change $ (7.9) $ (0.2) n/a Impact on Fair Value of 20% Adverse Change $ (15.5) $ (0.5) n/a
(1) The assumptions used at the time of securitization and the assumptions used in subsequently measuring the carrying amount / fair value of the RISA and cash reserve accounts, while not the same, are conservative estimates at different points in time.
These sensitivities are hypothetical and should be used with caution. The effect of a variation in a particular assumption on the fair value of the RISA and cash reserve accounts is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
The table below summarizes certain cash flows received from and paid to securitization trusts:
Year Ended December 31 ----------------------------------------- (In Thousands) 2000 1999 1998 --------------------------------------------------------------------------------------- Proceeds From New Securitizations $ 1,412,303 $ 2,723,810 $ 1,454,426 Cash Flows Received from Interests Retained 130,720 88,490 19,094 Servicing Fees Received 10,464 14,815 21,293 Prepayment and Late Fees Received 13,365 8,345 4,793 Net Servicing Advances (44,246) (28,050) (6,161)
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents quantitative information about delinquencies, net credit losses and components of securitized and portfolio loans and leases:
2000 1999 ---------------------------------------- ---------------------------------------- Nonconforming Prime Home Equipment Nonconforming Prime Home Equipment (Dollars in Thousands) Residential Equity Leases Residential Equity Leases -------------------------------------------------------------------------------------------------------------- Average Assets: Securitized and Sold $3,665,639 $ 452,213 $ 383,804 $2,361,001 $ 309,624 $ 270,384 Portfolio 345,397 160,187 177,728 349,299 113,967 104,048 ---------- ---------- ---------- ---------- ---------- ---------- Total Managed Assets $4,011,036 $ 612,400 $ 561,532 $2,710,300 $ 423,591 $ 374,432 ========== ========== ========== ========== ========== ========== Year-End Assets: Securitized and Sold $3,625,033 $ 471,873 $ 359,457 $3,393,179 $ 398,882 $ 298,161 Portfolio 781,861 238,162 325,281 97,570 90,793 165,265 ---------- ---------- ---------- ---------- ---------- ---------- Total Managed Assets $4,406,894 $ 710,035 $ 684,738 $3,490,749 $ 489,675 $ 463,426 ========== ========== ========== ========== ========== ========== Net Charge-Offs: Total Managed Assets $ 31,582 $ 1,406 $ 9,096 $ 19,493 $ 1,144 $ 10,128 ========== ========== ========== ========== ========== ========== Net Charge-Offs to Average Assets: Total Managed Assets 0.79% 0.23% 1.62% 0.72% 0.27% 2.70% ========== ========== ========== ========== ========== ========== 30 Days or More Delinquencies to Year-End Assets: Total Managed Assets 11.05% 0.49% 4.20% 8.28% 1.28% 3.26% ========== ========== ========== ========== ========== ==========
NOTE 16 - MERGER AND RESTRUCTURING CHARGES: In connection with Provident's acquisition of Fidelity Financial, direct-merger related and other post-merger business line restructuring charges of $39.3 million were recorded during the first quarter of 2000. These charges included non-cash write-downs of assets totaling $26.7 million. A charge of $5.1 million was taken on the write-down of fixed assets, primarily from the closing and consolidation of banking centers. Balance sheet restructuring, consisting primarily of the sale and write-down of acquired residential loans and investment securities, accounted for the remaining $21.6 million of these non-cash charges.
The merger and restructuring charges also included cash outlays totaling $12.6 million. The largest of the cash outlays was for severance costs totaling $8.6 million. Additionally, contract termination charges, primarily from lease buyout agreements on rented facilities, of $2.3 million were expensed. Finally, professional fees in connection with the acquisition of Fidelity Financial of $1.7 million were incurred. As of December 31, 2000, substantially all cash outlays had been paid.
NOTE 17 - LINE OF BUSINESS REPORTING: Provident's three major business lines, referred to as Commercial Banking, Retail Banking and Mortgage Banking, are based on the products and services offered, and its management structure. Commercial Banking offers a full range of commercial lending and financial products and services to corporate businesses. Retail Banking provides consumer lending, deposit accounts, trust, brokerage and investment products and services to consumers and small businesses. Mortgage Banking originates and services conforming and nonconforming residential loans to consumers and provides short-term financing to mortgage originators and brokers.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial results are determined based on an assignment of balance sheet and income statement items to each business line. Equity allocations are made based on various risk measurements of the business line. A matched funded transfer pricing process is used to allocate interest income and expense among the business lines. Provision for loan and lease losses are charged to business lines based on its level of net charge-offs and the size of its lending portfolio. Activity-based costing is used to allocate expenses for centrally provided services.
Selected financial information is included in the following table for Provident's three major lines of business for the past three years. Corporate Center represents income and expenses not allocated to the major business lines, gain/loss on the sale of investment securities, and any nonrecurring business revenues and expenses. Prior periods have been restated to conform with the current business line reporting structure and current methodology of allocating revenue and expense between business lines.
(In Millions) 2000 1999 1998 ------------------------------------------------------------------ Total Revenue: Commercial Banking $ 291.3 $ 251.5 $ 252.4 Retail Banking 254.2 232.3 191.2 Mortgage Banking 96.4 125.4 79.9 Corporate Center .2 .1 13.0 ------- -------- ------- $ 642.1 $ 609.3 $ 536.5 ======= ======== ======= Net Income: Commercial Banking $ 60.8 $ 69.8 $ 92.4 Retail Banking 37.0 44.1 17.3 Mortgage Banking 2.7 39.7 18.5 Corporate Center .1 - 8.5 Merger and Restructuring Charges (27.0) (2.7) (14.3) ------- -------- ------- $ 73.6 $ 150.9 $ 122.4 ======= ======== ======= Average Assets: Commercial Banking $ 5,458 $ 4,553 $ 3,961 Retail Banking 2,397 1,746 1,655 Mortgage Banking 1,248 647 540 Corporate Center 3,042 2,924 2,606 ------- ------- ------- $12,145 $ 9,870 $ 8,762 ======= ======= =======
NOTE 18 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Provident uses financial instruments with off-balance sheet risk to manage its interest rate risk. These financial instruments include interest rate derivatives such as interest rate swaps, interest rate caps and interest rate floors along with commitments to extend credit and standby letters of credit. These instruments may involve credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
Interest Rate Swaps, Caps and Floors: Interest rate swaps are agreements between two parties to exchange periodic interest payments that are calculated on a notional principal amount. Provident enters into swaps to synthetically alter the repricing characteristics of specific assets, liabilities and off-balance sheet loan securitizations. As only interest payments are exchanged, cash requirements and credit risk are significantly less than the notional amounts.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest rate caps protect against the impact of rising interest rates on interest-bearing financial instruments. When interest rates go above a cap's strike rate, the cap provides for receipt of payments based on its notional amount. Interest rate floors work similarly to interest rate caps, however, floors protect interest earning assets against the impact of falling interest rates.
Interest rate derivative instruments have a credit risk component based on the ability of a counterparty to meet the obligations to Provident under the terms of the instruments. Notional principal amounts express the volume of the transactions, but Provident's potential exposure to credit risk is limited only to the market value of the instruments. Provident manages its credit risk in these instruments through counterparty credit policies. At December 31, 2000, Provident had bilateral collateral agreements in place with its counterparties, against which Provident has pledged investment securities with a carrying value of $108 million as collateral. There were no past due amounts on any instruments as of December 31, 2000. Provident has never experienced a credit loss related to these instruments.
As noted earlier, the interest rate derivatives are hedged against specific financial instruments. A summary of the notional amount of the interest rate derivatives, as segregated by its related hedge, at December 31 follows:
Interest Rate Swaps ------------------- Interest Rate Caps Interest Receive Pay ------------------- Rate (In Millions) Fixed Fixed Purchased Sold Floors --------------------------------------------------------------------------------------------- At December 31, 2000: Off-Balance Sheet Securitizations $338 $1,966 $ 2,167 $2,167 $ - Certificates of Deposit 2,412 - - - - Long-Term / Subordinated Debt 748 797 696 696 - Premium Index Deposits - 195 - - - Loans / Securities - 47 - - 2,000 For Customers' Purposes - - 48 - - ------ ------ ------- ------ ------ Totals $3,498 $3,005 $ 2,911 $2,863 $2,000 ====== ====== ======= ====== ====== At December 31, 1999: Off-Balance Sheet Securitizations $ - $1,378 $ 1,531 $1,531 $ - Certificates of Deposit 1,903 - - - - Long-Term / Subordinated Debt 709 - - - - Loans / Securities - 482 - - - For Customers' Purposes - - 30 - - ------ ------ ------- ------ ------ Totals $2,612 $1,860 $ 1,561 $1,531 $ - ====== ====== ======= ====== ======
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information with respect to the interest rate derivatives used to manage Provident's interest rate sensitivity at December 31, 2000 follows:
Interest Rate Swaps ------------------- Interest Rate Caps Interest Receive Pay ------------------- Rate (In Millions) Fixed Fixed Purchased Sold Floors ----------------------------------------------------------------------------------- Notional Amount $ 3,498 $ 3,005 $ 2,911 $ 2,863 $ 2,000 Unrealized Gross Gains 26 1 29 - 13 Unrealized Gross Losses (45) (46) - (32) - Weighted Average: Receive Rate 6.33% 6.63% n/a n/a n/a Pay Rate 6.23% 6.69% n/a n/a n/a Strike Rate n/a n/a 8.99% 8.99% 6.00%;5.25% Life (in years) 12.0 7.2 13.9 14.1 5.0
(1) Provident has purchased and sold an interest rate floor with matching notional amounts and terms except for the strike prices. In the fourth quarter of 2000, Provident entered into a series of interest rate floor agreements to manage the interest rate risk associated with its off-balance sheet mortgage loan securitization activities. The agreements have a purchase strike rate of 6.00% and a sale strike rate of 5.25%.
The expected notional maturities of Provident's interest rate derivative portfolio at December 31, 2000 are as follows:
Interest Rate Swaps ------------------- Interest Rate Caps Interest Receive Pay ------------------- Rate (In Millions) Fixed Fixed Purchased Sold Floors Total ----------------------------------------------------------------------------------------- Less than 1 Year $ 75 $ 637 $ - $ - $ - $ 712 From 1 to 5 Years 736 321 48 - 2,000 3,105 From 5 to 10 Years 398 1,216 - - - 1,614 From 10 to 15 Years 1,337 831 2,515 2,515 - 7,198 More than 15 Years 952 - 348 348 - 1,648 ------- ------- ------- ------ ------ ------- Total $ 3,498 $ 3,005 $ 2,911 $2,863 $2,000 $14,277 ======= ======= ======= ====== ====== =======
Credit Risk Transfer Transaction: During the fourth quarter of 2000, Provident entered a Credit Risk Transfer Transaction with a counterparty. Under this transaction, Provident transferred 98% of the credit risk on a $1.8 billion auto lease portfolio, while retaining a 2% first-loss position. As a result of this transaction, Provident was able to lower its credit concentration in auto leasing while reducing its regulatory capital requirements.
Credit Commitments and Standby Letters of Credit: Since many of the commitments to extend credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Provident evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by Provident upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral is obtained based on management's credit assessment of the customer.
Provident's commitments to extend credit which are not reflected in the balance sheet at December 31 are as follows:
(In Millions) 2000 1999 -------------------------------------------------- Commitments to Extend Credit $2,519 $2,068 Standby Letters of Credit 213 131
NOTE 19 - TRANSACTIONS WITH AFFILIATES: At December 31, 2000, Carl H. Lindner, members of his immediate family and trusts for their benefit, owned 45% 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 49% of Provident's Common Stock. Provident leases its home office space and other office space from a trust, for the benefit of a subsidiary of American Financial Group. Rentals charged by American Financial Group and affiliates for the years ended December 31, 2000, 1999 and 1998 amounted to $3.0 million, $2.5 million and $2.3 million, respectively.
Provident has had certain transactions with various executive officers, directors and principal holders of equity securities of Provident and its subsidiaries and entities in which these individuals are principal owners. Various loans and leases have been made as well as the sale of commercial paper and repurchase agreements to these persons. Such loans and leases to these persons aggregated approximately $42.5 million and $61.0 million at December 31, 2000 and 1999, respectively. During 2000, new loans and leases aggregating $14.2 million were made to such parties and loans and leases aggregating $32.7 million were repaid. All of the loans and leases were made at market interest rates and, in the opinion of management, all amounts are fully collectible. At December 31, 2000 and 1999, these persons held Provident's commercial paper amounting to $16.7 million and $20.0 million, respectively. Additionally, repurchase agreements in the amount of $12.8 million and $4.8 million had been sold to these persons at December 31, 2000 and 1999, respectively. All of these transactions were at market interest rates.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - 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.
2000 1999 -------------------------- -------------------------- Carrying Fair Carrying Fair (In Thousands) Value Value Value Value --------------------------------------------------------------------------------------- Financial Assets: Cash and Cash Equivalents $ 369,028 $ 369,028 $ 376,143 $ 376,143 Trading Account Securities 41,949 41,949 - - Loans Held for Sale 206,168 206,168 - - Investment Securities 3,013,621 3,013,621 2,111,037 2,111,037 Loans and Leases 9,076,906 9,094,744 7,010,913 6,856,898 Less: Reserve for Losses (154,300) - (94,045) - --------- --------- --------- --------- Net Loans and Leases 8,922,606 9,094,744 6,916,868 6,856,898 Financial Liabilities: Deposits 8,829,110 8,772,651 7,229,988 7,052,155 Short-Term Debt 639,023 639,023 977,835 977,835 Long-Term Debt and Junior Subordinated Debentures 3,103,732 3,132,238 1,170,890 1,131,985 Off-Balance Sheet Financial Instruments: Interest Rate Swaps - (63,785) - (136,320) Interest Rate Caps - (2,523) - 44 Interest Rate Floors - 12,889 - -
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.
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 interests in securitized assets is valued using discounted cash flow techniques. Significant assumptions used in the valuation are presented in Note 15.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and leases: 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 and leases are estimated using discounted cash flow analyses and interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. The fair values disclosed for loans held for sale are equal to their carrying amounts.
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, caps and floors is based upon current market quotes.
NOTE 21 - 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 maintain certain minimum reserve balances. The average amount of those reserve balances for the year ended December 31, 2000, was approximately $63.8 million.
OTHER REAL ESTATE OWNED: At December 31, 2000 and 1999, the carrying value of other real estate and equipment owned was $8.8 million and $3.9 million, respectively.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTED ASSETS: Provident formed the subsidiaries listed below to account for and support the process of transferring, securitizing and/or selling of vehicle and equipment leases. These subsidiaries are separate legal entities and each maintains books and records with respect to its assets and liabilities. The assets of these subsidiaries, which are included in the consolidated financial statements, are not available to secure financing or otherwise satisfy claims of creditors of Provident or any of its other subsidiaries.
The subsidiaries and their total assets as of December 31, 2000 and 1999 follow (in thousands):
December 31, ------------------- Subsidiary 2000 1999 ----------------------------------------------------------------------- Provident Auto Rental LLC (2000-1) $381,754 $ - Provident Auto Leasing Company 376,631 447,388 Provident Lease Receivables Company LLC 233,566 74,768 Provident Auto Rental LLC 1999-1 174,763 180,485 Provident Auto Rental Company LLC 1998-2 34,556 27,745 Provident Auto Rental Company LLC 1998-1 31,291 30,851 Provident Auto Rental LLC (2000-2) 24,236 - Provident Auto Rental Company, LLC (1999-PRU) - 89,207
The above amounts include items which are eliminated in the Consolidated Financial Statements.
RESTRICTIONS ON TRANSFER OF FUNDS FROM SUBSIDIARIES TO PARENT: The transfer of funds by The Provident Bank 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 2001 by Provident Bank to its parent without approval is approximately $128.0 million, plus 2001 net income. Pursuant to Federal Reserve and State regulations, the maximum amount available to be loaned to affiliates (as defined), including their Parent, by Provident Bank, was approximately $158.4 million to any single affiliate, and $316.9 million to all affiliates combined of which $42.7 million was loaned at December 31, 2000.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL INFORMATION: Parent Company only condensed financial information for Provident Financial Group, Inc. is as follows:
BALANCE SHEETS (PARENT ONLY)
December 31, ----------------------- (In Thousands) 2000 1999 ------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents $ 94,336 $ 153,530 Investment Securities Available for Sale 299,323 186,147 Investment in Subsidiaries: Banking 1,062,679 984,690 Non-Banking 11,613 7,755 Premises and Equipment 9 1,437 Accounts Receivable from Banking Subsidiaries - 28,448 Other Assets 103,013 36,694 ---------- ---------- $1,570,973 $1,398,701 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts Payable to Banking Subsidiaries $ 28,214 $ - Other Accounts Payable and Accrued Expenses 23,963 41,908 Commercial Paper 187,090 201,784 Long-Term Debt 1,245 1,759 Junior Subordinated Debentures 339,678 227,028 ---------- ---------- Total Liabilities 580,190 472,479 Shareholders' Equity 990,783 926,222 ---------- ---------- $1,570,973 $1,398,701 ========== ==========
STATEMENTS OF INCOME (PARENT ONLY)
Year Ended December 31, ------------------------------ (In Thousands) 2000 1999 1998 ----------------------------------------------------------------------------------- Income: Dividends from Banking Subsidiaries $ 37,000 $ 60,000 $ 51,000 Interest Income from Banking Subsidiaries 13,232 8,869 4,899 Other Interest Income 4,951 5,504 10,097 Noninterest Income 5,712 1,976 1,748 -------- -------- -------- 60,895 76,349 67,744 Expenses: Interest Expense 34,795 24,934 22,088 Noninterest Expense 2,668 3,030 4,684 -------- -------- -------- 37,463 27,964 26,772 -------- -------- -------- Income Before Taxes and Equity in Undistributed Net Income of Subsidiaries 23,432 48,385 40,972 Applicable Income Tax Credits 6,624 4,439 4,157 -------- -------- -------- Income Before Equity in Undistributed Net Income of Subsidiaries 30,056 52,824 45,129 Equity in Undistributed Net Income of Subsidiaries 43,558 98,125 77,298 -------- -------- -------- Net Income $ 73,614 $150,949 $122,427 ======== ======== ========
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
Year Ended December 31, ----------------------------------- (In Thousands) 2000 1999 1998 ------------------------------------------------------------------------------------ Operating Activities: Net Income $ 73,614 $ 150,949 $ 122,427 Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Income from Subsidiaries (80,558) (158,125) (128,298) Cash Dividends Received From Subsidiaries 37,000 60,000 51,000 Amortization of Goodwill and Other 805 799 690 Depreciation of Premises and Equipment 7 31 36 Tax Benefit Received from Exercise of Stock Options 513 1,613 12,827 Realized Investment Security (Gains) Losses 493 (63) 29 (Increase) Decrease in Interest Receivable 39 (1,913) (48) (Increase) Decrease in Other Assets (41,454) 18,321 (24,472) Increase (Decrease) in Interest Payable 76 (129) (27) Increase in Other Liabilities 10,193 4,410 26,823 --------- --------- --------- Net Cash Provided by Operating Activities 728 75,893 60,987 --------- --------- --------- Investing Activities: Investment Securities Available for Sale: Proceeds from Sales 129,648 115,829 10,202 Proceeds from Maturities and Prepayments 87,358 17,996 43,252 Purchases (330,583) (171,683) (34,603) Net Decrease in Premises and Equipment 1,421 - - --------- --------- --------- Net Cash Provided by (Used In) Investing Activities (112,156) (37,858) 18,851 --------- --------- --------- Financing Activities: Net Increase (Decrease) in Short-Term Debt (14,694) (43,507) 43,273 Principal Payments on Long-Term Debt (74,764) (914) (788) Proceeds from Issuance of Long-Term Debt and Junior Subordinated Debentures 186,706 124,984 1,492 Cash Dividends Paid (47,738) (40,970) (37,869) Purchase of Treasury Stock - (8,645) (21,425) Proceeds from Exercise of Stock Options 3,388 3,074 13,164 Contribution to Subsidiaries (3,480) (112,478) - Net Increase in Other Equity Items 2,816 481 - --------- --------- --------- Net Cash Provided by (Used In) Financing Activities 52,234 (77,975) (2,153) --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents (59,194) (39,940) 77,685 Cash and Cash Equivalents at Beginning of Year 153,530 193,470 115,785 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 94,336 $ 153,530 $ 193,470 ========= ========= =========
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, 2000.
Fourth Third Second First (In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------- 2000: Total Interest Income $ 276,982 $ 238,454 $ 233,616 $ 221,929 Total Interest Expense (171,781) (143,187) (139,313) (128,727) --------- --------- --------- --------- Net Interest Income 105,201 95,267 94,303 93,202 Provision for Loan and Lease Losses (69,331) (42,550) (9,700) (9,700) --------- --------- --------- --------- Net Interest Income After Provision for Loan and Lease Losses 35,870 52,717 84,603 83,502 Noninterest Income 62,489 52,452 70,283 68,938 Noninterest Expense (96,831) (88,151) (84,905) (123,022) --------- --------- --------- --------- Income Before Income Taxes 1,528 17,018 69,981 29,418 Applicable Income Taxes (528) (6,065) (25,092) (12,646) --------- --------- --------- --------- Net Income $ 1,000 $ 10,953 $ 44,889 $ 16,772 ========= ========= ========= ========= Net Earnings Per Common Share: Basic $ .02 $ .22 $ .92 $ .34 Diluted .02 .22 .89 .33 Cash Dividends .24 .24 .24 .24
1999: Total Interest Income $ 196,860 $ 184,887 $ 177,064 $ 171,904 Total Interest Expense (109,163) (100,065) (92,130) (92,725) --------- --------- --------- --------- Net Interest Income 87,697 84,822 84,934 79,179 Provision for Loan and Lease Losses (10,807) (16,485) (8,150) (12,975) --------- --------- --------- --------- Net Interest Income After Provision for Loan and Lease Losses 76,890 68,337 76,784 66,204 Noninterest Income 72,047 76,214 59,345 65,058 Noninterest Expense (84,520) (83,978) (78,133) (80,359) --------- --------- --------- --------- Income Before Income Taxes 64,417 60,573 57,996 50,903 Applicable Income Taxes (22,803) (21,337) (20,432) (18,368) --------- --------- --------- --------- Net Income $ 41,614 $ 39,236 $ 37,564 $ 32,535 ========= ========= ========= ========= Net Earnings Per Common Share: Basic $ .87 $ .83 $ .79 $ .69 Diluted .84 .80 .77 .67 Cash Dividends .22 .22 .22 .22
Quarterly earnings per share numbers do not necessarily add to the year-to-date amounts due to rounding.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 9.
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, 2000:
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ------------------------------------------------------------------------
(a) 1. See Index to Financial Statements on page 36 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.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status ------ ------------------- ------------- 4.1 Instruments defining the Provident has no rights of security outstanding issue of holders indebtedness exceeding 10% of the assets of Provident Financial and Consolidated Subsidiaries. A copy of the instruments defining the rights of security holders will be furnished to the Commission upon request.
4.2 Plan of Reorganization Incorporated by reference to relating to Series D, Form 10-K for 1995. Non-Voting Convertible Preferred Stock
10.1 Junior Subordinated Incorporated by reference to Indenture, dated as of Exhibit 4.1 on Form 8-K dated November 27, 1996, November 27, 1996. between Provident and the Bank of New York, as Indenture Trustee
10.2 Amended and Restated Incorporated by reference to Declaration of Trust of Exhibit 4.3 on Form 8-K dated Provident Capital Trust November 27, 1996. I, dated as of November 27, 1996
10.3 Form of Guarantee Incorporated by reference to Agreement entered into registration statement number by Provident and The 333-20769. Bank of New York, as Guarantee Trustee
10.4 Provident 1990 Employee Incorporated by reference to Stock Purchase Plan(1) Post-Effective Amendment No. 1 to Form S-8 (File No. 33-34904).
10.5 Provident Retirement Plan Incorporated by reference to (As amended)(1) Form S-8 (File No. 33-90792).
10.6 Provident 1988 Stock Incorporated by reference to Option Plan (As amended)(1) Form S-8 (File No. 33-34906), Form S-8 (File No. 33-43102) and Form S-8 (File No. 33-84094).
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status ------ ------------------- ------------- 10.7 Provident 1992 Advisory Incorporated by reference to Directors' Stock Option Form 8-K filed October 22, Plan (As amended)(1) 1992, and Form S-8 (File No. 33-62707).
10.8 Provident 1992 Outside Incorporated by reference to Directors' Stock Option Form S-8 (File No. 33-51230). Plan(1)
10.9 Provident Restricted Incorporated by reference to Stock Plan(1) Form S-2 (File No. 33-44641).
10.10 Registration of Preferred Incorporated by reference to Capital Securities, Form S-3 (File No. 333-80231). Between Provident Capital Trust II, Provident and Chase Manhattan Bank
10.11 Agreement and Plan of Incorporated by reference to Reorganization between Form S-4 (File No. 333-88723). Provident and Fidelity Financial of Ohio, Inc.
10.12 Employment agreement Incorporated by reference to between Provident Financial Form 10-K for 1999. and Christopher J. Carey(1)
10.13 Registration of Preferred Incorporated by reference to Capital Securities of Form S-3 as amended by Form Provident Capital Trust Form S-3/A File No. III and IV 333-93603).
10.14 Registration of Glenway Incorporated by reference to Financial Corporation 1990 Form S-8 (File No. 333-96503). Stock Option and Incentive Plan, Fidelity Federal Savings Bank 1992 Stock Incentive Plan, Fidelity Financial of Ohio, Inc. 1997 Stock Option Plan, OHSL Financial Corp. 1992 Stock Option and Incentive Plan and Provident 2000 Employee Stock Option Plan(1)
10.15 Provident Deferred Filed herewith. Compensation Plan (As Amended)(1)
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status ------ ------------------- -------------
12.1 Computation of Ratios of Filed herewith. Earnings to Fixed Charges
12.2 Computation of Ratios of Filed herewith. Earnings to Combined Fixed Charges and Preferred Stock Dividends
21 Subsidiaries of Provident Filed herewith.
23 Consent of Independent Filed herewith. Auditors
(1) Management Compensatory Agreements
(b) Reports on Form 8-K:
Form 8-K (Item 7) filed on October 30, 2000 disclosing the supplemental consolidated balance sheets of Provident as of December 31, 1999 and 1998, and the related supplemental consolidated financial statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. The supplemented consolidated financial statements give retroactive effect to the merger of Provident and Fidelity Financial on February 4, 2000, which has been accounted for using the pooling of interests method. In addition, a consent of independent auditors was provided.
Form 8-K (Items 5 and 7) filed on November 8, 2000 stating that Provident entered into an Underwriting Agreement relating to the sale of $100,000,000 aggregate liquidation amount of 10 1/4 Trust Preferred Securities of Provident Capital Trust III.
Form 8-K (Items 5 and 7) filed on November 22, 2000 stating that Provident entered into an Underwriting Agreement relating to the sale of $12,500,000 aggregate liquidation amount of 10 1/4 Trust Preferred Securities of Provident Capital Trust III.
Form 8-K (Item 5) filed on January 30, 2001 reaffirming current earnings per share expectations for 2001 to fall within the range of $2.75 - $2.85. In addition, the first quarter of 2001 earnings per share is being targeted to fall within the range of $.50 - $.55.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Provident Financial Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Provident Financial Group, Inc.
/s/Robert L. Hoverson --------------------- Robert L. Hoverson President March 5, 2001
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 5, 2001 ----------------------- (Principal Executive Officer) Robert L. Hoverson
/s/Jack M. Cook Director March 5, 2001 ----------------------- Jack M. Cook
/s/Thomas D. Grote, Jr. Director March 5, 2001 ----------------------- Thomas D. Grote, Jr.
/s/Philip R. Myers Director March 5, 2001 ----------------------- Philip R. Myers
/s/Joseph A. Pedoto Director March 5, 2001 ----------------------- Joseph A. Pedoto
/s/Sidney A. Peerless Director March 5, 2001 ----------------------- Sidney A. Peerless
/s/Joseph A. Steger Director March 5, 2001 ----------------------- Joseph A. Steger
/s/Christopher J. Carey Executive Vice President March 5, 2001 ----------------------- and Chief Financial Officer Christopher J. Carey