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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 2001 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated Under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 1-800-851-9521 or 513-345-7102
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
Without Par
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
As of February 28, 2002, there were 49,230,188 shares of the
Registrant's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates at February 28, 2002, was
approximately $645,113,000 (based upon non-affiliated holdings of
26,559,000 shares and a market price of $24.29 per share).
Documents Incorporated by Reference:
Proxy Statement for the 2002 Annual Meeting of Shareholders (portions
which are incorporated by reference into Part III hereof).
Please address all correspondence to:
Christopher J. Carey
Executive Vice President and Chief Financial Officer
Provident Financial Group, Inc.
One East Fourth Street
Cincinnati, Ohio 45202
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS .............................................. 1
ITEM 2. PROPERTIES ............................................ 4
ITEM 3. LEGAL PROCEEDINGS ..................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ... 4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ........................... 4
ITEM 6. SELECTED FINANCIAL DATA ............................... 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................... 6
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ........................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................... 74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .... 74
ITEM 11. EXECUTIVE COMPENSATION ................................ 74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................ 74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........ 74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ........................................... 74
SIGNATURES ......................................................... 78
FORWARD-LOOKING STATEMENTS
Provident Financial Group, Inc. publishes forward-looking statements
that are subject to numerous assumptions, risks or uncertainties. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. Actual results could differ materially
from those contained in or implied by such forward-looking statements
for a variety of factors including: sharp and/or rapid changes in
interest rates; significant changes in the anticipated economic
scenario which could materially change anticipated credit quality
trends; the ability to generate loans and leases; significant cost,
delay in, or inability to execute strategic initiatives designed to
grow revenues and/or manage expenses; consummation of significant
business combinations or divestitures; and significant changes in
accounting, tax or regulatory practices or requirements and factors
noted in connection with forward-looking statements. Additionally,
borrowers could suffer unanticipated losses without regard to general
economic conditions. The result of these and other factors could cause
differences from expectations in the level of defaults, changes in risk
characteristics of the loan and lease portfolio and changes in the
provision for loan and lease losses. Forward-looking statements speak
only as of the date made. Provident undertakes no obligations to update
any forward-looking statements to reflect events or circumstances
arising after the date on which they are made.
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I
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, 2001, Provident
had total assets of $15.6 billion, loans and leases of $10.5 billion,
deposits of $8.9 billion and shareholders' equity of $893 million.
Additionally, Provident services loans and leases for other entities
including $4.1 billion which have been securitized (off-balance sheet
managed assets) and $2.5 billion which have been sold by a wholly owned
subsidiary through the Fannie Mae DUS program as an approved
seller/servicer.
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, now known as Red Capital Group, 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) and the
opening of corporate lending offices in Akron (OH), Dallas, Hoboken
(NJ), Houston, Minneapolis, Pittsburgh and San Diego during 2000 and
2001.
Provident conducts its banking operations through The Provident Bank.
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 19 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, 2001, Provident and its subsidiaries employed
approximately 3,100 full-time-equivalent employees.
Competition
The financial services business is highly competitive with many
products and services priced on a commodity basis. Provident competes
actively with both national and state chartered banks, savings and loan
associations, securities dealers, mortgage bankers, finance companies
and other financial service entities.
-1-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Supervision and Regulation
Provident is registered as a bank holding company, and is subject to
regulations of the Board of Governors of the Federal Reserve System
("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, incidental to such financial
activity, or complementary to a financial activity. The Act does not
place territorial restrictions on such nonbanking-related activities.
The Gramm-Leach-Bliley Act, which was enacted on November 12, 1999,
permits a qualifying bank holding company to become a financial holding
company and thereby to affiliate with financial companies engaging in a
broader range of activities than had previously been permitted for a
bank holding company, subject to the umbrella regulation of the Federal
Reserve and affiliate regulation by the functional regulators. In
addition, the Act imposes new privacy disclosure and "opt out"
requirements on virtually all regulated financial services
organizations.
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 Federal Deposit Insurance Corporation
("FDIC") in connection with the default of an affiliated insured bank
or savings association.
Provident's subsidiary bank, The Provident Bank, an Ohio
state-chartered member bank of the Federal Reserve System, and its
subsidiaries are subject to supervision and examination by applicable
federal and state banking agencies, including the Federal Reserve, FDIC
and the Ohio Division of Financial Institutions. One aspect of this
supervision is that there are various legal and regulatory limits on
the extent to which The Provident Bank 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 22 included
in "Notes to Consolidated Financial Statements".
Federal and state laws regulate other aspects of the operations of The
Provident Bank, including requiring the maintenance of reserves against
deposits, limiting the nature of loans and interest that may be charged
thereon, and restricting investments and other activities.
-2-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
As a regulated financial services firm, Provident's relationships and
good standing with its regulators are of fundamental importance to the
continuation and growth of Provident's businesses. The Federal Reserve,
the FDIC, and the Ohio Division of Financial Institutions, and other
regulators have broad enforcement powers, and powers to approve, deny,
or refuse to act upon applications or notices of Provident or its
subsidiaries to conduct new activities, acquire or divest businesses or
assets or reconfigure existing operations. Provident and its
subsidiaries are subject to examination by various regulators which
results in examination reports and ratings (which are not publicly
available pursuant to regulatory rules) that can impact the conduct and
growth of Provident's businesses. These examinations consider not only
compliance with applicable laws and regulations, but also capital
levels, asset quality and risk, management ability and performance,
earnings, liabilities, and various other factors. The ratings are
largely at the discretion of the regulator and involve many qualitative
judgments that are not as a practical matter subject to review or
appeal.
State and federal banking agencies possess broad powers to take
corrective action as deemed appropriate for an insured depository
institution and its holding company. The extent of these powers depends
upon whether the institution in question is considered "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized."
Generally, as an institution is deemed to be less well capitalized, the
scope and severity of the agencies' powers increase, ultimately
permitting the agency to appoint a receiver for the institution.
Business activities may also be influenced by an institution's capital
classification. As of December 31, 2001, Provident and The Provident
Bank were deemed to be well capitalized for the above purposes. See
Note 15 included in "Notes to Consolidated Financial Statement."
The monetary policies of regulatory authorities, including the Federal
Reserve, have a significant effect on the operating results of banks
and bank holding companies. The nature of future monetary policies and
the effect of such policies on the future business and income of
Provident and its subsidiaries cannot be predicted.
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.
-3-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 2. PROPERTIES
- -------------------
Provident and its significant subsidiaries occupy their headquarters
located at One East Fourth Street, Cincinnati, Ohio under long-term
leases. Additional operation centers are leased in Cincinnati,
Columbus, Cleveland, Atlanta and Sarasota. Provident owns buildings in
Greater Cincinnati that contain approximately 300,000 square feet which
are used for offices, data processing and warehouse facilities.
Provident owns forty-one of its full-service banking center locations
and leases thirty-six. For information concerning rental obligations,
see Note 5 included in "Notes to Consolidated Financial Statements".
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None in the fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Common Stock is traded on the NASDAQ 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.
2001 2000
---------------------------------- ----------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
High Close $26.29 $35.09 $33.37 $37.38 $37.81 $29.88 $34.25 $34.78
Low Close 21.41 24.90 27.06 25.88 24.50 23.94 23.81 25.38
Period End Close 26.28 25.25 32.92 28.13 37.50 29.38 23.81 34.06
Cash Dividends .24 .24 .24 .24 .24 .24 .24 .24
At February 28, 2002, there were 5,048 holders of record and an
additional 9,977 non-registered or "street name" holders of Provident's
Common Stock.
Provident paid dividends on its Common Stock of $47.1 million and $46.8
million during 2001 and 2000, respectively, and $.9 million on its
Preferred Stock for both years. Provident's quarterly dividend rate per
share was $.24 for 2001 and 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
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 22 included
in "Notes to Consolidated Financial Statements".
-4-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
For Year Ended December 31,
(Dollars In Millions ------------------------------------------------------
Except Per Share Amounts) 2001 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Earnings:
Total Interest Income $ 1,107 $ 971 $ 731 $ 694 $ 632 $ 564
Total Interest Expense (634) (583) (394) (383) (345) (305)
------- ------- ------- ------ ------ ------
Net Interest Income 473 388 337 311 287 259
Provision for Loan and Lease Losses (226) (131) (48) (32) (45) (47)
Noninterest Income 226 254 272 225 175 102
Noninterest Expense (437) (393) (327) (317) (241) (191)
------- ------- ------- ------ ------ ------
Income Before Income Taxes 36 118 234 187 176 123
Applicable Income Taxes (13) (44) (83) (65) (61) (42)
------- ------- ------- ------ ------ ------
Net Income $ 23 $ 74 $ 151 $ 122 $ 115 $ 81
======= ======= ======= ====== ====== ======
Per Common Share Data:
Basic Earnings $ .46 $ 1.49 $ 3.18 $ 2.57 $ 2.51 $ 1.84
Diluted Earnings .46 1.46 3.08 2.48 2.38 1.76
Dividends Paid .96 .96 .88 .80 .72 .54
Book Value 18.00 20.15 18.91 16.83 15.28 13.38
Selected Balances at December 31:
Total Investment Securities 3,559 3,014 2,111 1,598 1,468 1,132
Total Loans and Leases 10,496 9,077 7,011 6,303 5,748 5,939
Reserve for Loan and Lease Losses 241 154 94 79 75 69
Total Assets 15,647 13,857 10,538 8,950 7,947 7,603
Noninterest Bearing Deposits 995 1,293 1,185 679 610 558
Interest Bearing Deposits 7,859 7,536 6,045 5,277 4,747 4,675
Long-Term Debt and Junior
Subordinated Debentures 3,392 3,104 1,171 1,112 863 989
Total Shareholders' Equity 893 991 926 802 719 607
Off Balance Sheet Managed Assets 4,118 5,756 5,938 3,220 1,533 257
Other Statistical Information:
Return on Average Assets .16% .61% 1.53% 1.40% 1.49% 1.16%
Return on Average Equity 2.39 7.75 18.34 15.57 17.47 15.03
Dividend Payout Ratio 205.76 64.85 27.14 30.93 33.12 29.44
Capital Ratios at December 31:
Total Equity to Total Assets 5.70% 7.15% 8.79% 8.96% 9.05% 7.99%
Tier 1 Leverage Ratio 7.87 9.56 10.87 9.13 9.92 9.24
Tier 1 Capital to Risk-Weighted Assets 8.86 9.18 9.97 9.03 10.09 9.66
Total Risk-Based Capital to
Risk-Weighted Assets 11.41 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 2.29% 1.70% 1.34% 1.25% 1.30% 1.16%
Reserve for Loan and Lease Losses to
Nonaccrual Loans 136.07 160.70 168.94 175.18 157.28 307.67
Nonaccrual Loans to Total Loans
and Leases 1.68 1.06 0.79 0.71 0.83 0.38
Net Charge-Offs to Average Total
Loans and Leases 1.48 0.97 0.49 0.43 0.69 0.77
Selected Financial Data on an Operating Income Basis
[Excludes Merger and Restructuring Charges (1998 - 2000)
and One-Time Deposit Insurance Charges (1996)]:
Net Income $ 23 $ 101 $ 154 $ 137 $ 115 $ 88
Basic Earnings 0.46 2.04 3.24 2.87 2.51 2.02
Diluted Earnings 0.46 2.00 3.14 2.77 2.38 1.93
Return on Average Assets 0.16% 0.83% 1.56% 1.56% 1.49% 1.27%
Return on Average Equity 2.39 10.59 18.68 17.39 17.47 16.45
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
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
Provident reported net income of $23.3 million, $73.6 million and
$150.9 million for 2001, 2000 and 1999, respectively. On an operating
income basis (excludes unusual and significant expenses), net income
was $23.3 million, $100.6 million and $153.7 million for 2001, 2000 and
1999, respectively. Operating earnings per diluted share was $.46, for
2001, compared to $2.00 for 2000 and $3.14 for 1999. On an operating
basis, return on average equity was 2.39%, 10.59% and 18.68% and return
on average assets was 0.16%, 0.83% and 1.56% for the three years ended
2001, 2000 and 1999, respectively. The following table summarizes
three-year financial data for Provident, along with calculated
variances from the prior year:
Year Ended 2001 Year Ended 2000 Year Ended 1999
(Dollars in Millions ------------------------ ------------------------ ------------------------
Except Per Share Data) Amount $ Chg % Chg Amount $ Chg % Chg Amount $ Chg % Chg
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income $ 473 $ 85 22% $ 388 $ 51 15% $ 337 $ 26 8%
Noninterest Income 226 (28) (11) 254 (18) (7) 272 47 21
Total Revenue 699 57 9 642 33 5 609 73 14
Provision for Loan
and Lease Losses 226 95 73 131 83 173 48 16 50
Noninterest Expense 437 44 11 393 66 20 327 10 3
Net Income 23 (51) (69) 74 (77) (51) 151 29 24
Total Loans and Leases 10,496 1,419 16 9,077 2,066 29 7,011 708 11
Total Assets 15,647 1,790 13 13,857 3,319 31 10,538 1,588 18
Total Off Balance Sheet
Managed Assets 4,118 (1,638) (28) 5,756 (182) (3) 5,938 2,718 84
Total Deposits 8,854 25 0 8,829 1,599 22 7,230 1,274 21
Long-Term Debt and Junior
Subordinated Debentures 3,392 288 9 3,104 1,933 165 1,171 59 5
Stockholders' Equity 893 (98) (10) 991 65 7 926 124 15
Per Common Share:
Book Value 18.00 (2.15) (11) 20.15 1.24 7 18.91 2.08 12
Diluted Earnings 0.46 (1.00) (68) 1.46 (1.62) (53) 3.08 0.60 24
Ratio Analysis:
Net Interest Margin 3.45% 3.58% 3.80%
Return on Average Equity 2.39% 7.75% 18.34%
Return on Average Assets 0.16% 0.61% 1.53%
Average Equity to
Average Assets 6.49% 7.82% 8.34%
Dividend Payout to
Net Earnings 205.76% 64.85% 27.14%
Financial Data on Operating Income Basis (excludes Merger and Restructuring Charges):
Noninterest Expense $ 437 $ 83 23 $ 354 $ 31 10 $ 323 $ 28 9
Net Income 23 (78) (77) 101 (53) (34) 154 17 12
Diluted Earnings 0.46 (1.54) (77) 2.00 (1.14) (36) 3.14 0.37 13
Return on Average Equity 2.39% 10.59% 18.68%
Return on Average Assets 0.16% 0.83% 1.56%
Efficiency Ratio 62.51% 55.07% 52.97%
Efficiency Ratio (excluding
charges related to aircraft) 59.07% 55.07% 52.97%
-6-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The lower net income and financial performance ratios for 2001 and 2000
as compared to 1999 were principally the result of two factors. First,
earnings were affected by adverse economic conditions as well as the
negative impact the September 11 events had on the airline industry.
During the second half of 2001, Provident recorded additional credit
costs and other expenses of $81 million related to the events of
September 11 of which $66 million were for secured commercial airline
loans and leases and $15 million were for other industry loans and
leases. In light of Provident's analyses of the lending portfolio and
changes in asset quality indicators, as reflected by higher
charge-offs, declining credit quality ratios and the uncertain economic
environment, Provident increased its loan loss reserve ratio from 1.34%
to 1.70% during 2000 and to 2.29% during 2001.
A second reason for lower earnings in 2001 and 2000 was management's
decision to change the structure of its securitizations to secured
financings, eliminating the use of gain-on-sale accounting. The switch
to secured financing structures, which was made during the third
quarter of 2000, 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, on a comparative
basis, cause reported earnings from securitized loans to be lower in
the initial periods and higher in later periods, as interest is earned
on the loans. Gains recognized from securitization transactions were
$0, $44 million and $96 million during 2001, 2000 and 1999,
respectively.
Provident experienced revenue growth despite the absence of gains on
sale of loans and leases during 2001 and the second half of 2000.
Revenue (net interest income plus noninterest income) increased 9%
during 2001 over 2000 and 5% during 2000 over 1999. Net interest income
increased $85 million, or 22%, for 2001 compared to 2000, after
increasing $51 million, or 15%, in 2000 compared to 1999. Higher net
interest income was primarily the result of loans remaining on the
balance sheet, rather than being sold through securitization
transactions, and strong loan growth during 2000. Noninterest income
decreased $28 million in 2001 and $18 million in 2000. However,
excluding gains on securitization transactions, noninterest income
increased $16 million and $34 million during 2001 and 2000,
respectively.
Provident's efficiency ratio, on an operating basis and excluding the
charges related to aircraft, for 2001, 2000 and 1999 was 59.07%, 55.07%
and 52.97%, respectively. The absence of gains on sale of loans and
leases was primarily responsible for the higher efficiency ratio during
2001 and 2000. Total noninterest expense, on an operating basis, was
$437 million, $354 million and $323 million for 2001, 2000 and 1999,
respectively. The increase in noninterest expense during 2001 was
primarily the result of the acquisition of Red Capital Group,
additional investments within existing businesses where growth
opportunities exist, and the write-down of aircraft associated with
commercial airline loans and leases.
-7-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident incurred unusual and significant expenses during 2000 and
1999. 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.
Total assets at December 31, 2001, 2000 and 1999 were $15.6 billion,
$13.9 billion and $10.5 billion, respectively. Total loans and leases
increased to $10.5 billion in 2001 compared to $9.1 billion in 2000 and
$7.0 billion in 1999. The growth for 2001 was primarily the result of
the decision to hold loans and leases originated during the first half
of 2001 on the balance sheet. Credit quality ratios weakened during
2001 and 2000 as compared to 1999. The ratio of nonperforming assets to
total assets was 1.26%, .76% and .56% as of December 31, 2001, 2000 and
1999, respectively. As a result of this and other asset quality
indicators, Provident increased the ratio of reserve for loan and lease
losses to total loans and leases to 2.29% and 1.70% as of December 31,
2001 and 2000, respectively, compared to 1.34% at December 31, 1999.
Total deposits for 2001, 2000 and 1999 were $8.9 billion, $8.8 billion
and $7.2 billion, respectively. During 2001, retail deposits increased
16% to $5.6 billion at December 31, 2001 from $4.8 billion at December
31, 2000. Offsetting this increase were securitization trust deposits
held as credit enhancements being released.
Shareholders' equity at December 31, 2001, 2000 and 1999 were $893
million, $991 million and $926 million, respectively. The decrease in
shareholders' equity during 2001 was primarily the result of the
adoption of the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and dividends exceeding net income.
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) 2001 2000 1999 '01/'00 '00/'99
- -------------------------------------------------------------------------
Commercial Banking $ - $ 60.8 $ 69.8 (100)% (13)%
Retail Banking 29.5 37.0 44.2 (20) (16)
Mortgage Banking (6.2) 2.7 39.7 (330) (93)
Corporate Center - .1 - (100) -
------ ------- -------
$ 23.3 $ 100.6 $ 153.7 (77)% (35)%
====== ======= =======
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, operational
and other corporate-level risks.
-8-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Business line descriptions and fluctuation analyses 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
equipment; and Red Capital Group, a financier and loan servicer of
multi-family and health-care facilities.
Driven primarily by the acquisition of approximately $500 million of
equipment leases during the second quarter of 2001 by Information
Leasing, and a continued focus on mortgage lending through both Red
Capital and the Commercial Mortgage business units, average loan
balances increased 20% and total revenues were up 19% in 2001
compared to 2000. However, net operating income for 2001 failed to
keep pace with the asset and revenue growth. Net operating income
declined for 2001 as increased operating revenues were offset by
credit deterioration.
Positive strides made during the first half of 2001 were minimized
in the second half by the economic slow down. The economic
weakening, which surfaced early credit issues, was accentuated by
the impact of the events of September 11. The majority of the drop
in income was related to credit write-offs and residual impairments
from loans and leases to the commercial airline industry. In
addition, net operating income was reduced as a result of a higher
level of loan loss reserve to total loans and the change in
securitization structures which eliminated gain-on-sale accounting.
-9-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capstone Realty Advisors and Red Capital Group continued to expand
and made significant contributions to revenue growth in 2001. The
favorable interest rate environment during the year provided for an
increase in demand for their services. Both Capstone and Red Capital
provide a platform to generate fee income from originating, selling
and servicing mortgage loans which improves Provident's balance
between interest spread and fee-based revenues.
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 $7.5 million and $7.1
million for 2001 and 2000, respectively. The decrease in net
operating income for both years was related primarily to higher loan
loss provision and lower gain on sale of loans revenue. Retail
Banking incurred a higher provision due to on-balance sheet loan
growth and a higher level of loan loss reserves. Total loans and
leases for Retail Banking increased by 36% during 2001 and 48%
during 2000 primarily as a result of securitized loans and leases
now remaining on the balance sheet and an emphasis toward
originating prime home equity loans. The third quarter of 2000
decision to change the structure of securitizations to secured
financings resulted in the elimination of gain-on-sale accounting.
Retail Banking had recognized gains of $4.2 million and $9.8 million
during 2000 and 1999, respectively.
Retail Banking has experienced strong growth in deposits during both
2001 and 2000. Retail deposits grew by 16% during 2001 and 12%
during 2000. Significant deposit growth during 2001 came from the
Ohio financial centers and internet banking products. Major
components of deposit growth during 2000 resulted from internet
deposit gathering initiatives and increased deposits at the Florida
financial centers. Provident plans to continue to enhance its
distribution of products and services via internet banking, ATM
machines and the TeleBank customer service call center.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. The net operating
loss for 2001 was $6.2 million as compared to net operating income
of $2.7 million for 2000. The loss for 2001 was driven by the
decision to change the structure of securitizations resulting in the
elimination of gain-on-sale accounting. This decision resulted in no
gain on sale of securitized loans being recognized during 2001 as
compared to pre-tax gains of $30.3 million being recognized during
2000. Partially offsetting the lack of gain on sales was an increase
in net interest income as loans originated during the first half of
2001 remained on the balance sheet.
-10-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Mortgage Banking is transitioning their business plan and
implementing strategic initiatives to reduce the business' risk
profile. Nonconforming loan originations have been sold on a
whole-loan basis to investors, with servicing retained. During 2001,
Mortgage Banking entered into an alliance with Home 1-2-3, a Florida
corporation which generates qualified leads for home mortgage loans
on a nationwide basis and sells them to lenders. Home 1-2-3 will
create immediate value for Mortgage Banking through lead generation
of loans, and long-term value by entry into the full-product line of
the retail mortgage market.
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. As loans remained on the balance sheet, additional provision
for loan losses was incurred. Provision for 2000 was $29.3 million,
compared to $3.9 million in 1999.
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 2001, 2000 and 1999, net interest income on a taxable
equivalent basis was $473.0 million, $388.1 million and $336.6 million,
respectively, which represented 68%, 60% and 55%, respectively, of
revenue (net interest income plus noninterest income). The ratio
increased in 2001 and 2000 as a result of Provident's decision to
change the structure of its securitization activity from loan sales to
secured financings beginning in the third quarter of 2000. 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 3.45%, 3.58%
and 3.80% for 2001, 2000 and 1999, respectively.
-11-
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,
-----------------------------------------------------------------------------------------
2001 2000 1999
------------------------- -------------------------- ---------------------------
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 $ 4,655 $ 352.4 7.57% $ 4,345 $ 411.4 9.47% $ 3,578 $ 311.6 8.71%
Mortgage 618 52.3 8.46 587 53.8 9.17 538 45.9 8.54
Construction 816 57.4 7.04 681 61.6 9.04 498 40.6 8.15
Lease Financing 1,020 107.6 10.55 406 48.7 12.00 289 28.6 9.92
Consumer Lending:
Installment 774 74.5 9.63 515 58.0 11.25 590 59.9 10.17
Residential 1,008 111.2 11.03 388 43.1 11.13 898 77.9 8.68
Lease Financing 1,233 122.4 9.93 641 62.3 9.72 626 51.6 8.24
------- ------- ------- ------- ------- -------
Total Loans/Leases 10,124 877.8 8.67 7,563 738.9 9.77 7,017 616.1 8.78
Investment Securities 3,200 208.4 6.51 3,217 227.8 7.08 1,755 110.0 6.26
Federal Funds Sold and
Reverse Repurchase
Agreements 92 4.2 4.59 23 1.5 6.51 24 1.3 5.46
Other Short-Term
Investments 297 16.8 5.66 30 2.8 9.28 62 3.3 5.35
------- ------- ------- ------- ------- -------
Total Earning Assets 13,713 1,107.2 8.07% 10,833 971.0 8.96% 8,858 730.7 8.25%
Cash and Noninterest
Bearing Deposits 255 241 244
Other Assets 1,057 1,071 768
------- ------- -------
Total Assets $15,025 $12,145 $ 9,870
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Deposits:
Demand Deposits $ 482 12.1 2.51% $ 370 9.9 2.68% $ 371 7.3 1.98%
Savings Deposits 1,548 56.5 3.65 1,379 68.5 4.97 1,335 51.7 3.88
Time Deposits 5,828 317.8 5.45 4,838 301.9 6.24 3,923 209.7 5.35
------- ------- ------- ------- ------- -------
Total Deposits 7,858 386.4 4.92 6,587 380.3 5.77 5,629 268.7 4.78
Short-Term Debt:
Federal Funds
Purchased and
Repurchase Agreements 1,153 46.8 4.06 1,161 71.1 6.13 981 49.5 5.04
Commercial Paper 229 9.0 3.92 203 12.3 6.04 210 10.2 4.87
Short-Term
Notes Payable 46 4.0 8.85 47 3.4 7.12 1 .1 4.83
------- ------- ------- ------- ------- -------
Total Short-Term Debt 1,428 59.8 4.19 1,411 86.8 6.15 1,192 59.8 5.01
Long-Term Debt 2,693 157.4 5.84 1,500 95.8 6.39 924 52.4 5.67
Junior Subordinated
Debentures 422 30.6 7.24 235 20.0 8.53 161 13.2 8.20
------- ------- ------- ------- ------- -------
Total Interest Bearing
Liabilities 12,401 634.2 5.11% 9,733 582.9 5.99% 7,906 394.1 4.99%
Noninterest Bearing
Deposits 1,220 1,215 869
Other Liabilities 429 247 272
Shareholders' Equity 975 950 823
------- ------- ------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $15,025 $12,145 $9,870
======= ======= ======
Net Interest Income $ 473.0 $ 388.1 $ 336.6
======== ======== ========
Net Interest Margin 3.45% 3.58% 3.80%
==== ==== ====
Net Interest Spread 2.96% 2.97% 3.26%
==== ==== ====
-12-
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,
------------------------------------------------
2001 Changes from 2000 Changes from
2000 Due to 1999 Due to
---------------------- ----------------------
(In Thousands) Volume Rate Volume Rate
- ----------------------------------------------------------------------------------
Interest Earned On:
Loans and Leases:
Corporate Lending:
Commercial $ 27,822 $ (86,848) $ 70,922 $ 28,883
Mortgage 2,757 (4,314) 4,384 3,521
Construction 10,925 (15,040) 16,113 4,802
Lease Financing 65,432 (6,547) 13,238 6,844
Consumer Lending:
Installment 25,877 (9,329) (7,978) 6,030
Residential 68,478 (396) (52,682) 17,895
Lease Financing 58,729 1,360 1,261 9,448
--------- --------- --------- ---------
Net Loans and Leases 260,020 (121,114) 45,258 77,423
Investment Securities (1,171) (18,182) 101,865 15,940
Federal Funds Sold and
Reverse Repurchase Agreements 3,309 (554) (49) 240
Short-Term Investments 15,514 (1,514) (2,170) 1,697
--------- --------- --------- ---------
Total 277,672 (141,364) 144,904 95,300
--------- --------- --------- ---------
Interest Paid On:
Demand Deposits 2,837 (663) (7) 2,594
Savings Deposits 7,691 (19,728) 1,764 15,014
Time Deposits 56,971 (41,079) 53,677 38,498
--------- --------- --------- ---------
Total Deposits 67,499 (61,470) 55,434 56,106
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements (519) (23,826) 10,003 11,681
Commercial Paper 1,392 (4,708) (314) 2,398
Short-Term Notes Payable (115) 794 3,252 48
--------- --------- --------- ---------
Total Short-Term Debt 758 (27,740) 12,941 14,127
Long-Term Debt 70,377 (8,814) 36,089 7,396
Junior Subordinated Debentures 13,944 (3,426) 6,278 555
--------- --------- --------- ---------
Total 152,578 (101,450) 110,742 78,184
--------- --------- --------- ---------
Net Interest Income $ 125,094 $ (39,914) $ 34,162 $ 17,116
========= ========= ========= =========
Noninterest Income
The following table details the components of noninterest income and
their change since 1999:
Percentage
Increase (Decrease)
--------------------
(Dollars in Thousands) 2001 2000 1999 '01/'00 '00/'99
- --------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 39,924 $ 35,138 $ 32,724 14% 7%
Loan Servicing Fees 43,146 50,335 29,362 (14) 71
Other Service Charges and Fees 57,554 53,205 41,316 8 29
Leasing Income 43,888 42,269 40,902 4 3
Warrant Gains 412 7,500 9,147 (95) (18)
Security Gains - 155 71 (100) 118
Other 35,144 20,661 20,273 70 2
-------- -------- --------
Noninterest Income Before Gain on
Sale of Loans and Leases 220,068 209,263 173,795 5 20
Gain on Sale of Loans and Leases:
Non-Cash - 34,447 83,055 (100) (59)
Cash 6,311 10,452 15,814 (40) (34)
-------- -------- --------
Total Noninterest Income $226,379 $254,162 $272,664 (11)% (7)%
======== ======== ========
-13-
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
$10.8 million (5%) during 2001 and $35.5 million (20%) during 2000.
Explanations for significant changes in noninterest income by category
follow:
o Service Charges on Deposit Accounts: Service charges on deposit
accounts increased in 2001 primarily as a result of pricing and
volume increases on corporate and consumer deposit accounts and
higher ATM interchange fees. The increase in 2000 was due primarily
to 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 134 ATMs have been
placed into service bringing the total number of Provident ATMs to
471.
o Loan Servicing Fees: Loan servicing fees decreased during 2001 due
primarily to decreases in servicing portfolios for residential
mortgages and auto leasing, which more than offset an increase from
Red Capital Group, a financing and loan servicer for multifamily and
health-care facilities, which was acquired in September of 2000. The
increased revenue in 2000 was primarily from increases in the
residential mortgage and auto leasing areas.
o Other Service Charges and Fees: Other service charges and fees
increased during 2001 due primarily to loan origination and other
fee income generated by Red Capital Group. Credit card fees and fee
income from Red Capital Group were the primary reasons for the
increase in revenue during 2000.
o Leasing Income: Leasing income increased during 2001 primarily as a
result of increases in revenues from auto securitization
transactions and the growth of Provident Commercial Group, a
national lessor of large equipment. The increase during 2000 was due
primarily to the growth of Provident Commercial Group.
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 $7.1
million in 2001 and $1.6 million in 2000.
o Other: The increase in other income during 2001 was due primarily to
increases in miscellaneous fees earned by Red Capital Group, income
from equity investments and income from trading account activity.
Other income remained stable during 2000 as an increase in income
from investments in partnerships offset a decrease in gains
recognized on the sale of equipment lease residuals.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Gain on Sales of Loans and Leases: Gain on sale of loans and leases
decreased $38.6 million and $54.0 million in 2001 and 2000,
respectively. The decreases in both years were the result of the
third quarter of 2000 decision to change the structure of
securitizations resulting in the elimination of gain-on-sale
accounting. The following table provides detail of the gain on sales
recognized during the past three years.
(In Thousands) 2001 2000 1999
- ------------------------------------------------------------------------------
Non-Cash Gains -- Loan and Lease Sales:
Nonconforming Residential Loan Securitizations $ - $30,291 $73,304
Prime Consumer Home Equity Securitizations - 4,156 5,758
Credit Card Loan Securitizations - - 3,993
------- ------- -------
- 34,447 83,055
------- ------- -------
Cash Gains -- Loan and Lease Sales:
Equipment Lease Securitizations - 9,083 13,164
Nonconforming Residential Whole Loan Sales 3,177 - 174
Conforming Residential Whole Loan Sales 1,544 729 1,911
Other Loan Sales 1,590 640 565
------- ------- -------
6,311 10,452 15,814
------- ------- -------
$ 6,311 $44,899 $98,869
======= ======= =======
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 in Note 16 included in "Notes to
Consolidated Financial Statements".
Noninterest Expense
The following table details the components of noninterest expense and
their change since 1999:
Percentage
Increase (Decrease)
--------------------
(Dollars in Thousands) 2001 2000 1999 '01/'00 '00/'99
- -----------------------------------------------------------------------------------------
Salaries, Wages and Benefits $201,715 $172,903 $153,397 17% 13%
Charges and Fees 34,024 23,280 15,679 46 49
Occupancy 22,605 20,631 18,951 10 9
Leasing Expense 52,548 26,636 23,076 97 15
Equipment Expense 25,234 26,045 24,614 (3) 6
Professional Fees 24,507 21,735 20,163 13 8
Other 76,665 62,379 66,910 23 (7)
-------- -------- --------
Noninterest Expense Before
Significant and Unusual Items 437,298 353,609 322,790 24 10
Merger and Restructuring Charges - 39,300 4,200 (100) 836
-------- -------- --------
Total Noninterest Expense $437,298 $392,909 $326,990 11% 20%
======== ======== ========
Noninterest expense before significant and unusual items increased
$83.7 million (24%) and $30.8 million (10%) during 2001 and 2000,
respectively. Components of noninterest expense, along with an
explanation as to their fluctuations, follow:
o Salaries, Wages and Benefits: Compensation increased in 2001 due to
increased commissions and staffing expenses associated with growth
in the Commercial Banking business line, primarily Red Capital
Group. The increase in 2000 was due primarily to newly acquired
businesses (Red Capital Group and Capstone Realty) within the
Commercial Banking business line.
-15-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Charges and Fees: Charges and fees increased in 2001 due primarily
to expenses related to credit risk transfer transactions. Details
concerning these transactions are provided in Note 18 included in
"Notes to Consolidated Financial Statements". Increased amortization
expense of goodwill associated with the acquisitions of OHSL
Financial Corp., Capstone Realty Advisors and Red Capital Group, was
the primary reason for the increase in charges and fees during 2000.
o Occupancy: An increase in rent expense, reflecting the geographic
expansion of Commercial Banking in both 2001 and 2000, was the
primary reason for higher occupancy expense.
o Leasing Expense: The increase during 2001 is attributable to a $20
million write-down in residual values related to aircraft leases.
The deterioration in residual values of aircraft is the result of
the terrorist actions of September 11 and its financial impact on
the airline industry. The growth of Provident Commercial Group was
the primary reason for the increase in expense during 2000.
Provident mitigates its exposure to losses on the sale of autos at
the termination of their lease agreements by acquiring residual
insurance coverage.
o Equipment Expense: Equipment expense decreased slightly in 2001 due
primarily to reductions in maintenance and equipment rental
expenses. During 2000, equipment expense increased due to higher
depreciation expense combined with higher maintenance charges.
o Professional Fees: Professional fees increased in 2001 due primarily
to legal, consulting and other professional fees related to loan
collections. The increase during 2000 was a result of higher legal
fees, primarily associated with the origination and collection of
loans, and other miscellaneous professional fees.
o Other: Larger expenses included within other noninterest expense
include marketing ($9.2 million in 2001 and 1999 and $9.1 million in
2000), travel ($9.0 million, $8.2 million and $7.6 million in 2001,
2000 and 1999, respectively), franchise taxes ($8.5 million, $8.1
million and $8.8 million in 2001, 2000 and 1999, respectively), and
the write-down in value of repossessed aircraft ($4.0 million in
2001).
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. Merger
and restructuring charges of $4.2 million were recorded during the
first quarter of 1999 for Fidelity Financial's acquisition of
Glenway Financial Corporation.
-16-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION ANALYSIS
Short-Term Investments and Investment Securities
As of December 31, 2001 and 2000, federal funds sold and reverse
repurchase agreements outstanding were $123.0 million and $83.0
million, respectively. 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, 2001 and 2000, Provident held $101.2 million and
$41.9, 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 $217.9 million and $206.2 million of loans as held
for sale at December 31, 2001 and 2000, respectively. At year-end 2001,
these loans consisted of $177.9 million of multifamily loans and $40.0
million of nonconforming residential mortgage loans. The multifamily
loans are generally insured by either the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation or the Federal
Housing Administration. These loans are usually outstanding for sixty
days or less. Activities related to the multifamily loans held for sale
are part of the operations of Red Capital Group. Nonconforming
residential mortgage loans are being sold on a whole-loan basis. This
is part of an initiative started during 2001 to reduce the risk profile
of the Mortgage Banking business line.
Investment securities purchased with the intention of being held for
indefinite periods of time are classified as available for sale. These
securities totaled $3.6 billion and $3.0 billion as of December 31,
2001 and 2000, respectively. U.S. government agency mortgage-backed
securities accounted for the majority of the increase, as funds
obtained from debt borrowings and the sale of private mortgage-backed
securities and other debt securities were deployed into investment
securities with higher credit quality, increased liquidity and an
improved interest rate risk profile.
-17
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) 2001 2000 1999
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 302,912 $ 326,721 $ 240,991
State and Political Subdivisions 3,185 3,317 1,897
Mortgage-Backed Securities 2,700,620 1,938,546 1,470,270
Asset-Backed Securities - 44,257 104,700
Other Securities 576,874 728,363 369,920
---------- ---------- ----------
Total Securities $3,583,591 $3,041,204 $2,187,778
========== ========== ==========
Market Value at December 31,
------------------------------------
(In Thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 306,556 $ 325,457 $ 233,148
State and Political Subdivisions 3,199 3,301 1,880
Mortgage-Backed Securities 2,673,174 1,915,602 1,408,567
Asset-Backed Securities - 42,061 99,753
Other Securities 576,119 727,200 367,689
---------- ---------- ----------
Total Securities $3,559,048 $3,013,621 $2,111,037
========== ========== ==========
The following table shows the December 31, 2001 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 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 $ 170,088 5.61% $ 746 3.36%
Due after 1 through 5 years 132,078 5.08 - -
---------- ---- -------- ----
Total $ 302,166 5.38% $ 746 3.36%
========== ==== ======== ====
State and Political Subdivisions:
Due after 5 through 10 years $ 1,684 5.91% $ - -%
Due after 10 years 1,501 7.66 - -
---------- ---- -------- ----
Total $ 3,185 6.73% $ - -%
========== ==== ======== ====
Mortgage-Backed Securities:
Due in one year or less $ 173,481 7.21% $ 2,092 2.19%
Due after 1 through 5 years 1,703,940 7.41 74,470 4.14
Due after 5 through 10 years 584,603 6.60 28,810 5.06
Due after 10 years 133,224 7.17 - -
---------- ---- -------- ----
Total $2,595,248 7.20% $105,372 4.35%
========== ==== ======== ====
Other Securities:
Due in one year or less $ - -% $ 50 7.71%
Due after 1 through 5 years 73,170 9.29 162,323 2.93
Due after 5 through 10 years 250 6.75 188,735 3.09
Due after 10 years 140,471 - 11,875 4.35
---------- ---- -------- ----
Total $ 213,891 9.28% $362,983 3.06%
========== ==== ======== ====
-18-
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, 2001 and 2000, total on-balance sheet loans and
leases were $10.5 billion and $9.1 billion, respectively. Provident had
an additional $4.1 billion and $5.8 billion of off-balance sheet loans
and leases as of year-end 2001 and 2000, respectively. Due to the third
quarter of 2000 decision to structure and account for future
securitizations as secured financings rather than loan sales,
on-balance sheet loans and leases have increased, while off-balance
sheet loans and leases have declined. Also contributing to the higher
on-balance sheet loan and lease balance was the purchase of
approximately $500 million of equipment leases during the second
quarter of 2001. 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) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------
Dollar:
Corporate Lending:
Commercial $ 4,540.1 $ 4,580.2 $ 3,990.9 $ 3,277.9 $ 2,737.1
Mortgage 640.2 632.8 576.6 546.5 582.2
Construction 827.7 801.2 559.8 450.6 314.4
Lease Financing 1,188.3 607.5 391.5 243.7 340.3
Consumer Lending:
Installment 913.3 580.1 476.5 650.1 656.8
Residential 922.7 835.5 653.7 710.3 674.6
Lease Financing 1,463.7 1,039.6 361.9 423.4 442.8
----------- ---------- ---------- ---------- ----------
Total Loans and Leases $ 10,496.0 $ 9,076.9 $ 7,010.9 $ 6,302.5 $ 5,748.2
=========== ========== ========== ========== ==========
Percentage:
Corporate Lending:
Commercial 43.3% 50.4% 56.9% 52.0% 47.6%
Mortgage 6.1 7.0 8.2 8.7 10.1
Construction 7.9 8.8 8.0 7.1 5.5
Lease Financing 11.3 6.7 5.6 3.9 5.9
Consumer Lending:
Installment 8.7 6.4 6.8 10.3 11.4
Residential 8.8 9.2 9.3 11.3 11.8
Lease Financing 13.9 11.5 5.2 6.7 7.7
----------- ---------- ---------- ---------- ----------
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
=========== ========== ========== ========== ==========
-19-
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, 2001, including loan amounts
on which interest is not being accrued:
Amount on
(Dollars in Millions) Amount Percentage Nonaccrual
- ------------------------------------------------------------------------
Manufacturing $ 825.7 18.2% $ 14.5
Service Industries 718.3 15.8 21.8
Real Estate Operators / Investment 444.2 9.8 4.9
Finance / Insurance 395.3 8.7 37.2
Retail Trade 353.5 7.8 2.8
Transportation / Utilities (1) 289.8 6.4 9.7
Wholesale Trade 270.6 6.0 2.1
Construction 207.7 4.6 10.6
Automobile Dealers 93.3 2.0 1.4
Other 941.7 20.7 11.7
---------- ----- --------
$ 4,540.1 100.0% $ 116.7
========== ===== ========
(1) Includes $54.1 million of commercial airline industry loans.
At December 31, 2001, Provident had loans and leases of $241 million to
the commercial airline industry, including $54 million of commercial
loans and $187 million of finance and operating leases. As the tragic
events of September 11, 2001 had a significant financial impact upon
the airline industry and the value of aircraft, Provident recorded $81
million of credit costs and other expenses of which $66 million were
related to secured commercial airline loans and leases.
At December 31, 2001, Provident had approximately $861 million of
commercial loans that are shared national credit loans. Generally,
shared national credit loans are loans that have a principal balance of
at least $20 million and involve three or more supervised financial
institutions. In an on-going effort to diversify its portfolio, the
shared national credit loans in which Provident participates are
distributed across nine industry types, with the largest industry
concentration (manufacturing) accounting for approximately 31% of its
total shared national credit loans. The average outstanding balance of
a shared national credit loan was $4.9 million.
The following table shows the composition of commercial mortgage and
construction loans by property type at December 31, 2001:
Commercial Commercial Amount on
(Dollars in Millions) Mortgage Construction Total Percentage Nonaccrual
- ------------------------------------------------------------------------------------------
Residential Development $ 118.5 $ 178.9 $ 297.4 20.3% $ 1.7
Shopping / Retail 84.3 149.1 233.4 15.9 .1
Office / Warehouse 101.9 127.9 229.8 15.6 .2
Apartments 101.5 84.6 186.1 12.7 .7
Land 37.5 39.7 77.2 5.3 .7
Healthcare Facilities 60.9 14.7 75.6 5.1 -
Hotel / Motel / Restaurants 27.5 47.1 74.6 5.1 .1
Industrial Plants 10.7 17.5 28.2 1.9 -
Auto Sales and Service 9.3 .9 10.2 0.7 -
Churches 7.8 2.0 9.8 0.7 -
Other Commercial Properties 80.3 165.3 245.6 16.7 1.1
-------- ---------- -------- ----- ------
$ 640.2 $ 827.7 $1,467.9 100.0% $ 4.6
======== ========== ======== ===== ======
-20-
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, 2001 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 $ 1,588.1 $ 2,343.5 $ 608.5 $ 4,540.1
Commercial Construction 251.1 440.4 136.2 827.7
Residential Construction - - 0.9 0.9
---------- ---------- -------- ----------
Total $ 1,839.2 $ 2,783.9 $ 745.6 $ 5,368.7
========== ========== ======== ==========
Loans Due After One Year:
At predetermined interest rates $ 641.8
At floating interest rates 2,887.7
The following table shows the composition of the installment loan
category by loan type at December 31, 2001:
(Dollars in Millions) Amount Percentage
- -----------------------------------------------------------------------
Home Equity $688.8 75.4%
Indirect Installment 141.4 15.5
Direct Installment 63.6 7.0
Other Consumer Loans 19.5 2.1
------ -----
$913.3 100.0%
====== =====
Credit Risk Management
Provident provides for credit loss reserves for both its outstandings
and unfunded commitments. Discussion and analysis of the reserves as
well as the overall credit quality of the off-balance sheet lending
portfolio is provided in Note 16 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 from current outstandings and potential usage of unfunded
commitments. 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.
Unfavorable business conditions and difficulties experienced by the
airline industry have caused Provident to take large loan loss
provisions during the past two years. Late in the fourth quarter of
2000, Provident placed three large loans, totaling $52 million, on
nonaccrual status. Additionally, several large commercial loan
charge-offs were recorded at that time. Nonaccrual loans and
charge-offs increased during 2001 as the economic climate continued to
deteriorate, particularly with regard to the airline industry. During
2001, Provident recorded charge-offs, write-downs and additional
provision of $66 million on commercial airline loans and leases.
Another $15 million of provision was recorded within industries other
than commercial airlines that was related to September 11. Based on
-21-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident's analyses of the lending portfolio, deterioration of asset
quality indicators as well as the uncertain economic environment,
Provident recorded additional provision to raise its loan loss reserve
to total loans ratio to 2.29% during 2001.
The following table shows selected information relating to Provident's
reserve for loan and lease losses:
December 31,
----------------------------------------------------
(In Thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------
Reserve for Loan and Lease
Losses at Beginning of Period $154,300 $ 94,045 $ 78,867 $ 74,615 $ 68,961
Provision Charged to Expense 225,748 131,281 48,417 31,597 45,119
Acquired Reserves 10,003 2,377 1,263 - 1,814
Loans and Leases Charged Off:
Corporate Lending:
Commercial 105,711 63,497 25,145 14,403 17,286
Mortgage 844 96 247 3 1,505
Construction - - - - -
Lease Financing 26,622 2,892 6,736 5,173 1,367
Consumer Lending:
Installment 7,557 7,535 10,159 12,856 24,065
Residential 14,846 8,022 759 900 1,175
Lease Financing 10,464 5,136 4,244 3,855 6,009
-------- -------- -------- -------- --------
Total Charge-Offs 166,044 87,178 47,290 37,190 51,407
-------- -------- -------- -------- --------
Recoveries:
Corporate Lending:
Commercial 2,675 3,406 2,742 836 1,055
Mortgage 8 20 42 1,344 915
Construction - - - - -
Lease Financing 3,068 1,290 3,102 226 306
Consumer Lending:
Installment 4,990 5,282 4,523 5,901 5,766
Residential 1,316 127 266 190 177
Lease Financing 4,589 3,650 2,113 1,348 1,909
-------- -------- -------- -------- --------
Total Recoveries 16,646 13,775 12,788 9,845 10,128
-------- -------- -------- -------- --------
Net Loans and Leases
Charged Off 149,398 73,403 34,502 27,345 41,279
-------- -------- -------- -------- --------
Reserve for Loan and Lease
Losses at End of Period $240,653 $154,300 $ 94,045 $ 78,867 $ 74,615
======== ======== ======== ======== ========
On a percentage basis, the following table provides annual net
charge-offs to average total loans and leases by category:
December 31,
-------------------------------------
2001 2000 1999 1998 1997
-------------------------------------
Corporate Lending:
Commercial 2.21% 1.38% .63% .43% .63%
Mortgage .14 .01 .04 (.24) .10
Construction - - - - -
Lease Financing 2.31 .39 1.26 1.56 .40
Consumer Lending:
Installment .33 .44 .96 .98 2.17
Residential (1) 1.34 2.04 .05 .09 .13
Lease Financing .48 .23 .34 .49 .67
---- ---- ---- ---- ----
Net Charge-Offs to Average
Total Loans and Leases 1.48% .97% .49% .43% .69%
==== ==== ==== ==== ====
(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.
-22-
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 1999 and
2001 follows:
o Commercial: Net charge-offs to average loans were 2.21%, 1.38% and
.63% for 2001, 2000 and 1999, respectively. The increase in
charge-offs for 2001 was due primarily to the overall deterioration
in the economy, particularly in the airline industry. The increase
in charge-offs in 2000 was due primarily to the decline in asset
quality indicators combined with the uncertain economic environment.
o Commercial Lease Financings: Net charge-offs to average leases were
2.31%, .39% and 1.26% for 2001, 2000 and 1999, respectively. The
increase in the charge-off percentage from 2000 to 2001 was due
primarily to an increase in net charge-offs related to the airline
industry from Provident Commercial Group, Provident's large ticket
equipment leasing company. 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.
o Installment: Net charge-offs to average loans were .33%, .44% and
.96% for 2001, 2000 and 1999, respectively. The decrease in the
charge-offs for 2000 as compared to 1999 was a result of lower
charge-offs in home equity and on balance sheet 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 1.34%, 2.04% and
.05% for 2001, 2000 and 1999, respectively. The increase in
charge-offs for 2001 and 2000 was a result of nonconforming
residential loans originated during the second half of 2000 and the
first half of 2001 being kept on the balance sheet. Also, a
significant portion of the increase in charge-offs for 2000 was due
to a one-time charge-off of $3.2 million related to a new regulatory
policy regarding retail classifications that became effective on
December 31, 2000. The net charge-off ratio excluding this one-time
charge-off was 1.22%.
o Consumer Lease Financings: Net charge-offs to average leases were
.48%, .23% and .34% for 2001, 2000 and 1999, respectively. The
generally lower levels of charge-offs of auto leases since 1998
reflect the implementation of risk based pricing that has resulted
in higher quality originations.
-23-
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) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------
Corporate Lending:
Commercial $156,993 $ 99,917 $ 70,722 $ 50,919 $ 41,227
Mortgage 5,447 7,691 4,440 5,154 5,897
Construction 6,933 5,215 2,095 3,377 3,413
Lease Financing 24,544 12,437 4,152 3,730 5,815
-------- -------- -------- -------- --------
193,917 125,260 81,409 63,180 56,352
Consumer Lending:
Installment 5,315 8,431 7,881 10,448 11,696
Residential 25,781 13,911 1,685 2,507 2,288
Lease Financing 15,640 6,698 3,070 2,732 4,279
-------- -------- -------- -------- --------
46,736 29,040 12,636 15,687 18,263
-------- -------- -------- -------- --------
$240,653 $154,300 $ 94,045 $ 78,867 $ 74,615
======== ======== ======== ======== ========
The following table presents a summary of various indicators of credit
quality:
December 31,
--------------------------------------------------------
(Dollars In Thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual Loans:
Corporate Lending:
Commercial $116,663 $ 74,401 $ 43,452 $ 34,544 $ 37,800
Mortgage 1,929 1,712 3,003 933 335
Construction 2,699 - 216 - 27
Lease Financing 7,986 6,503 1,309 4,002 4,798
-------- -------- -------- -------- --------
129,277 82,616 47,980 39,479 42,960
Consumer Lending:
Installment - - 48 38 -
Residential 47,579 13,404 7,640 5,504 4,482
Lease Financing - - - - -
-------- -------- -------- -------- --------
47,579 13,404 7,688 5,542 4,482
-------- -------- -------- -------- --------
Total Nonaccrual Loans 176,856 96,020 55,668 45,021 47,442
Other Real Estate and
Equipment Owned 20,907 8,805 3,870 2,767 12,440
-------- -------- -------- -------- --------
Total Nonperforming Assets $197,763 $104,825 $ 59,538 $ 47,788 $ 59,882
======== ======== ======== ======== ========
Loans 90 Days Past Due -
Still Accruing $ 31,219 $ 28,780 $ 15,769 $ 10,661 $ 9,985
Loan and Lease Loss Reserve as
a Percent of:
Total Loans and Leases 2.29% 1.70% 1.34% 1.25% 1.30%
Nonaccrual Loans 136.07 160.70 168.94 175.18 157.28
Nonperforming Assets 121.69 147.20 157.96 165.04 124.60
Nonaccrual Loans as a Percent
of Total Loans and Leases 1.68 1.06 .79 .71 .83
Nonperforming Assets as a
Percent of:
Total Loans, Leases and Other
Real Estate and Equipment 1.88 1.15 .85 .76 1.04
Total Assets 1.26 .76 .56 .53 .75
-24-
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 2001 with respect to these loans and leases was $.3 million
compared to $12.2 million that would have been recognized had the loans
and leases remained current in accordance with their original terms.
Nonaccrual loans increased $80.8 million during 2001. The increase was
composed of $278.8 million of additions to nonaccrual loans, $50.5
million of payments on nonaccrual loans, $125.0 million of nonaccrual
loans charged off and $22.5 million transferred to other real estate
and equipment owned. Other real estate and equipment owned increased
$12.1 million during 2001. Activity in other real estate and equipment
owned included $24.5 million of additions from foreclosed properties
and equipment, $6.7 million of charge-offs on property and equipment
and $5.7 million of sales and payments on properties. The increase in
nonaccrual commercial loans was due primarily to the deteriorating
economic environment, particularly the airline industry. The increase
in nonaccrual residential mortgage loans is due to residential loans
remaining on the balance sheet rather than being securitized and sold.
Originations since July 2001 are being sold on a whole-loan basis.
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.
Management's determination of the adequacy of the loan loss 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.
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 senior management on a regular basis.
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, collection associates, and
senior management. Factors 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, 2001 were $176.9 million. In addition, $66.9 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 loss estimates associated with securitized assets are
provided for separately from the reserve for loan and lease losses. For
more information on credit exposures on securitized assets, see Note 16
of the "Notes to Consolidated Financial Statements".
Credit Outlook and Operating Implications
In 2001, Provident's total credit costs (loan loss provision and
aircraft lease residual write-offs) increased 87% or $114 million over
the prior year's amount. These higher credit costs had a materially
unfavorable impact on net income. Management expects credit costs to
decline substantially in 2002. To address asset quality issues and
related credit costs that arose during 2001, management is working to
improve its internal credit processes and resolve asset quality
concerns in its loan and lease portfolios. However, if credit costs do
not substantially decline, this could impact Provident's ability to
maintain the payment of its quarterly dividend rate at current levels.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Earning Assets
Leased equipment decreased $29 million or 14%, during 2001 after an
increase of $44 million, or 26%, during 2000. Both the decrease in 2001
and the increase in 2000 was primarily the result of activity within
Provident Commercial Group.
Receivables from securitization trusts were $26 million and $417
million as of December 31, 2001 and 2000, respectively. Provident had
provided for credit enhancements to its securitizations structured as
sales in the form of reserve accounts. The reserve accounts had been
maintained 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 have been absorbed directly into
these reserve accounts. Provident estimates the amount of all credit
losses based upon loan credit grades, collateral, market conditions and
other pertinent factors. Receivables from securitization trusts are
shown net of these loss estimates. The decrease in receivables from
securitization trusts is a result of the reserve accounts on the
nonconforming residential loan securitizations being released. Credit
enhancements on these securitizations now are in the form of an
unfunded demand note backed by a AAA rated standby letter of credit.
Actual losses, which have been reserved for, are submitted on a monthly
basis to Provident by the trustee. Should Provident fail to reimburse
the trustee for these monthly losses, the letter of credit can be drawn
upon. There are no conditions that can accelerate this monthly process.
Other assets increased $129 million and $60 million during 2001 and
2000, respectively. The increase in 2001 was due primarily to an
increase in servicer advances on sold loans, and a receivable resulting
from the sale of an investment security that did not settle until the
first week of January. The increase in 2000 was primarily the result of
an increase in capitalized servicing assets. The value of capitalized
servicing rights are recorded 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.
Included in other assets is goodwill and other intangible assets
totaling $82 million and $18 million, respectively, as of December 31,
2001. Goodwill represents the excess of the purchase price over net
identifiable tangible and intangible assets acquired in a purchase
business combination. During 2001, the Financial Accounting Standards
Board issued Statement of Accounting Standards No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets".
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other
intangible assets continue to be amortized over their useful lives.
Provident will apply the new rules beginning in 2002. Application of
the nonamortization provisions of the Statement is expected to result
in an increase in net income of $2.9 million, or six cents per share,
-27-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
per year. Provident will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January
1, 2002. Provident cannot predict what effect the results of these
tests will have on its earnings and financial position.
Deposits
Deposits increased $25 million and $1.6 billion during 2001 and 2000,
respectively. During 2001, retail deposits increased 16% to $5.6
billion at December 31, 2001 from $4.8 billion at December 31, 2000,
with significant contribution from internet deposit-gathering
initiatives. Offsetting this increase was a $469 million decrease of
deposits from securitization trusts held at Provident. The increase in
deposits in 2000 was primarily attributable to the growth in
certificates of deposit. The following table presents a summary of
period end deposit balances:
December 31,
------------------------
(In Millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Noninterest Bearing Deposits of Securitization Trusts $ 27 $ 496 $ 426
Other Noninterest Bearing Deposits 968 797 759
Interest Bearing Demand Deposits 523 464 397
Savings Deposits 1,544 1,458 1,351
Certificates of Deposit Less than $100,000 2,551 2,239 1,952
Certificates of Deposit of $100,000 or More 3,241 3,375 2,345
------ ------ ------
$8,854 $8,829 $7,230
====== ====== ======
At December 31, 2001, maturities on certificates of deposit of $100,000
or more were as follows (in millions):
3 months or less $ 288
Over 3 through 6 months 185
Over 6 through 12 months 366
Over 12 months 2,402
------
Total $3,241
======
Included in certificates of deposit of $100,000 or more at December 31,
2001, 2000 and 1999 were brokered deposits of $2.0 billion, $2.2
billion and $1.6 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, 2001, Provident had $1.6 billion of brokered
callable certificates of deposit.
-28-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Borrowed Funds
Borrowed funds are an important component of total funds necessary to
support earning assets. In 2001, short-term debt increased $1.3 billion
(206%) and long-term debt increased $167 million (6%). Increases in
federal funds purchased and repurchase agreements were the primary
reasons for the increase in short-term debt. Securitizations
consummated since the third quarter of 2000 have been structured to
account for the transactions as secured financings. The primary reason
for the increase in long-term debt was an increase in debt issued as
secured financings.
During the first quarter of 2001, Provident established Provident
Capital Trust IV. Capital Trust IV 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 9.45% junior subordinated
debentures due 2031.
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.
Noninterest Bearing Liabilities
Accrued interest and other liabilities increased $255 million, or 86%,
during 2001 due primarily to the adoption of the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
For further details concerning SFAS No. 133, see Note 17 of the Notes
to Consolidated Financial Statements.
ASSET SECURITIZATION ACTIVITY
From 1996 through the second quarter of 2000, the structure of many of
Provident's securitizations resulted in the transactions being
accounted for 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 experienced problems and consequently, the market penalized
all companies using gain-on-sale accounting. Although gain-on-sale
accounting is in compliance with accounting principles generally
accepted in the United States, the investment community clearly
signaled its dissatisfaction with this accounting method and management
believed this sentiment had been factored into Provident's stock price.
Additionally, newly issued 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. See Note 15 of the Notes to Consolidated
-29-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Statements for further details of the revised regulatory
rules.
As a result of these factors, Provident decided that securitizations
during the third quarter of 2000 and thereafter would be structured as
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, on a comparative basis, cause reported earnings from
securitized assets to be lower in the initial periods 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
causes Provident's earnings to be lower over the short term.
Securitizations which were treated as sales have made 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 securitized and gains recognized
for the various types of securitization structures during the past
three years:
2001 2000 1999
------------------- -------------------- --------------------
(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
Prime Home Equity - - 158,598 4,156 169,999 5,758
Credit Card - - - - 230,000 3,993
--------- ---- ---------- ------- ---------- -------
- - 1,188,598 34,447 2,730,046 83,055
Cash Gains:
Equipment Leases - - 223,705 9,083 223,764 13,164
Non-Recognition of Gains:
Automobile Leases - n/a - n/a 858,815 n/a
Warehouse Lending - n/a - n/a 251,200 n/a
--------- ---- ---------- ------- ---------- -------
- n/a - n/a 1,110,015 n/a
--------- ---- ---------- ------- ---------- -------
Total Sales $ - $ - $1,412,303 $43,530 $4,063,825 $96,219
========= ==== ========== ======= ========== =======
Structured as
Secured Financings:
Nonconforming Residential $ 182,699 n/a $532,341 n/a $ - n/a
Prime Home Equity 114,908 n/a 170,052 n/a - n/a
Equipment Leases - n/a 128,101 n/a - n/a
Automobile Leases 287,121 n/a 451,732 n/a - n/a
--------- ---- ---------- ------- ---------- -------
Total Secured Financings $ 584,728 n/a $1,282,226 n/a $ - n/a
========= ==== ========== ======= ========== =======
-30-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. No RISAs have been recorded
since June 2000.
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 of automobile leases results in the recognition of
operating lease income or expense. Under the structure of the
securitization of the automobile leases, Provident enters into a
sale-leaseback arrangement with the investors. Lease payments paid by
Provident to the investor may be more or less than that received by
Provident from the consumer. Credit losses are accrued at an annual
rate of 50 basis points. The difference in the 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, 2001, 2000 and 1999, net operating lease income
recognized on these automobile lease securitizations was $5.6 million,
$3.8 million and $8.4 million, respectively.
Underlying assumptions used in the initial determination of future cash
flows on the loan and lease portfolios accounted for as sales follow:
Nonconforming Prime Equipment
Residential Home Equity Leasing
-------------------------------------
Assumptions Used:
Prepayment Speed:
Initial Rate 12.36% 10.00% n/a
Peak Rate 32.84% 30.00% n/a
Calculated Weighted Average
Life of the Loan Portfolios 2.6 Years 2.1 Years n/a
Estimated Credit Losses:
Annual Basis 1.09% 0.20% 1.00%
Percentage of Original Balance 2.94% 0.42% 1.97%
Discount Rate 11.88% 10.63% 9.29%
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 are made when
necessary.
-31-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provident retained the servicing of the loans and leases it securitized
and the servicing on the majority of loans it sells on a whole loan
basis. 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 $43.1
million, $50.3 million and $29.4 million in loan servicing fees during
2001, 2000 and 1999, respectively.
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) 2001 2000 1999
- -----------------------------------------------------------------------
Nonconforming Residential $2,627,332 $3,625,033 $3,393,179
Auto Leases 980,314 1,134,844 1,366,598
Prime Home Equity 303,527 471,873 398,882
Equipment Leases 207,131 359,457 298,161
Credit Card - 165,000 230,000
Warehouse - - 251,200
---------- ---------- ----------
$4,118,304 $5,756,207 $5,938,020
========== ========== ==========
Provident has been originating nonconforming residential loans since
1995. Major characteristics of these nonconforming loans include: 54%
with an "A" credit grade and 32% with a "B" credit grade; 71% with full
documentation; 69% have prepayment penalties; 97% are secured by first
mortgages; 92% are owner occupied; and, on average, have a 77%
loan-to-value ratio.
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 assets may be found in Note 16 of the "Notes to Consolidated
Financial Statements".
FANNIE MAE DUS PROGRAM
Red Capital Group, which was acquired by Provident in September of
2000, is an approved Fannie Mae Delegated Underwriting and Servicing
("DUS") mortgage lender. Under the Fannie Mae DUS program, Red Capital
underwrites, funds and sells mortgage loans on multifamily rental
projects. Red Capital then services these mortgage loans on Fannie
Mae's behalf. Participation in the Fannie Mae DUS program requires Red
Capital to share the risk of losses with Fannie Mae. Red Capital's
share of any losses is limited to 20% of the original principal balance
of each loan. The substance of the loss sharing is that Red Capital
assumes the initial loss up to 5% of the unpaid principal balance,
after which Red Capital and Fannie Mae split additional losses 25% to
Red Capital and 75% to Fannie Mae until such additional losses total
20% of the unpaid principal balance. From that point, losses are split
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
10% to Red Capital and 90% to Fannie Mae with the total loss to Red
Capital capped at 20% of the original principal balance of the loan.
Red Capital services multifamily mortgage loans under the DUS program
with outstanding principal balances aggregating approximately $2.5
billion at December 31, 2001. At December 31, 2001, no DUS loans in Red
Capital's loan servicing portfolio were delinquent or in default. Red
Capital has established reserves of approximately $7.8 million for
possible losses under this program. The reserve is determined by
evaluating pools of homogenous loans and includes information based
upon industry and historical loss experience, as well as each project's
recent operating performance. Management believes the reserve is
maintained at a level that adequately provides for the inherent losses
within Red Capital's portfolio of DUS loans. The employees and
management team of Red Capital have originated and serviced the
existing Fannie Mae DUS loan servicing portfolio since 1995 without any
losses relating to the DUS loans.
CAPITAL RESOURCES
Total stockholders' equity at December 31, 2001 and 2000 was $893
million and $991 million, respectively. The decrease in stockholders'
equity during 2001 was primarily the result of the adoption of the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and dividends exceeding net income.
The dividend payout to net income ratio was 205.76%, 64.85% and 27.14%
for 2001, 2000 and 1999, 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
2002 are estimated to be approximately $37 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.
-33-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $201.3 million of long-term debt is due to be repaid
during 2002.
The parent company's primary liquidity needs during 2002 will be the
payment of dividends to its preferred and common shareholders, funds
for activity of the commercial paper operations and interest payments
on junior subordinated debentures. The major source of liquidity for
the parent company is dividends and interest paid to it by its
subsidiaries. Provident received dividends of $15 million, $37 million
and $60 million in 2001, 2000 and 1999, respectively. The amount of
dividends available for payment in 2002 by The Provident Bank,
Provident's banking subsidiary, is approximately $46.6 million, plus
2002 net income. It is unlikely, however, that The Provident Bank would
pay annual dividends to the parent company that exceeded $60 million.
Management believes that dividends available from The Provident Bank
will be sufficient to meet the parent company's liquidity requirements
in 2002. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Credit Outlook and Operating
Implications" and Note 22 included in "Notes to Consolidated Financial
Statements".
At December 31, 2001, the parent company had $200 million in general
purpose lines of credit with unaffiliated banks. These lines, which
expire March 28, 2002, are renewable on an annual basis. Management
anticipates that these lines will be renewed. As of March 26, 2002,
these lines had not been used.
-34-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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 funding.
Borrowing through the Federal Home Loan Bank and offering short and
medium term deposits via brokerage investors are part of this strategy.
Asset securitizations treated as secured financings 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.
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 derivatives
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 derivatives 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.
-35-
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.
2001 2000
- -----------------------------------------------------------------------
100 Basis Points Decrease 0.7% 1.2%
100 Basis Points Increase (1.1) (1.4)
150 Basis Points Decrease (1) 0.8 n/a
200 Basis Points Decrease (1) n/a 2.5
200 Basis Points Increase (2.5) (3.7)
(1) Due to market conditions, the 200 basis points decrease was
restricted to 150 basis points for 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
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) ........... 73
-36-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Provident Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of
Provident Financial Group, Inc. and subsidiaries as of December 31,
2001 and 2000, 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, 2001. 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. 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, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
January 16, 2002
-37-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
(Dollars in Thousands) 2001 2000
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 378,257 $ 286,051
Federal Funds Sold and Reverse Repurchase Agreements 122,966 82,977
Trading Account Securities 101,156 41,949
Loans Held for Sale 217,914 206,168
Investment Securities Available for Sale
(amortized cost - $3,583,591 and $3,041,204) 3,559,048 3,013,621
Loans and Leases:
Corporate Lending:
Commercial 4,540,088 4,580,215
Mortgage 640,175 632,801
Construction 827,657 801,211
Lease Financing 1,188,319 607,478
Consumer Lending:
Installment 913,312 580,046
Residential 922,747 835,510
Lease Financing 1,463,658 1,039,645
------------ ------------
Total Loans and Leases 10,495,956 9,076,906
Reserve for Loan and Lease Losses (240,653) (154,300)
------------ ------------
Net Loans and Leases 10,255,303 8,922,606
Leased Equipment 185,863 215,227
Premises and Equipment 103,085 103,919
Receivables from Securitization Trusts 26,203 417,420
Other Assets 696,749 567,447
------------ ------------
TOTAL ASSETS $ 15,646,544 $ 13,857,385
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 994,978 $ 1,293,396
Interest Bearing 7,859,272 7,535,714
------------ ------------
Total Deposits 8,854,250 8,829,110
Short-Term Debt 1,958,299 639,023
Long-Term Debt 2,941,165 2,774,493
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 450,759 329,239
Accrued Interest and Other Liabilities 549,481 294,737
------------ ------------
Total Liabilities 14,753,954 12,866,602
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, 49,205,897 and 48,814,463 Issued 14,587 14,469
Capital Surplus 322,024 314,895
Retained Earnings 647,675 672,348
Accumulated Other Comprehensive Loss (98,696) (17,929)
------------ ------------
Total Shareholders' Equity 892,590 990,783
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,646,544 $ 13,857,385
============ ============
See notes to consolidated financial statements.
-38-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------
(In Thousands, Except Per Share Data) 2001 2000 1999
- ------------------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $ 877,879 $ 738,974 $ 616,233
Interest on Investment Securities 208,300 227,701 109,894
Other Interest Income 21,061 4,306 4,588
---------- ---------- ----------
Total Interest Income 1,107,240 970,981 730,715
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 68,559 78,421 59,057
Time Deposits 317,810 301,918 209,743
---------- ---------- ----------
Total Interest on Deposits 386,369 380,339 268,800
Interest on Short-Term Debt 59,815 86,797 59,729
Interest on Long-Term Debt 157,402 95,839 52,354
Interest on Junior Subordinated Debentures 30,551 20,033 13,200
---------- ---------- ----------
Total Interest Expense 634,137 583,008 394,083
---------- ---------- ----------
Net Interest Income 473,103 387,973 336,632
Provision for Loan and Lease Losses 225,748 131,281 48,417
---------- ---------- ----------
Net Interest Income After Provision for
Loan and Lease Losses 247,355 256,692 288,215
Noninterest Income:
Service Charges on Deposit Accounts 39,924 35,138 32,724
Loan Servicing Fees 43,146 50,335 29,362
Other Service Charges and Fees 57,554 53,205 41,316
Leasing Income 43,888 42,269 40,902
Gain on Sales of Loans and Leases - Non-Cash - 34,447 83,055
Gain on Sales of Loans and Leases - Cash 6,311 10,452 15,814
Warrant Gains 412 7,500 9,147
Security Gains - 155 71
Other 35,144 20,661 20,273
---------- ---------- ----------
Total Noninterest Income 226,379 254,162 272,664
Noninterest Expenses:
Salaries, Wages and Benefits 201,715 172,903 153,397
Charges and Fees 34,024 23,280 15,679
Occupancy 22,605 20,631 18,951
Leasing Expense 52,548 26,636 23,076
Equipment Expense 25,234 26,045 24,614
Professional Fees 24,507 21,735 20,163
Merger and Restructuring Charges - 39,300 4,200
Other 76,665 62,379 66,910
---------- ---------- ----------
Total Noninterest Expenses 437,298 392,909 326,990
---------- ---------- ----------
Income Before Income Taxes 36,436 117,945 233,889
Applicable Income Taxes 13,107 44,331 82,940
---------- ---------- ----------
Net Income $ 23,329 $ 73,614 $ 150,949
========== ========== ==========
Basic Earnings Per Common Share $ .46 $ 1.49 $ 3.18
Diluted Earnings Per Common Share .46 1.46 3.08
See notes to consolidated financial statements.
-39-
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, 1999 $ 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 ($13.50/share) (949) (949)
Principal Payments on Loans/
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,469 1,469
Exercise of Stock Options and
Accompanying Tax Benefits 59 3,842 3,901
Deferred Compensation
Tax Adjustment 567 567
------- -------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 7,000 14,469 314,895 672,348 - (17,929) 990,783
Net Income 23,329 23,329
Other Comprehensive
Income, Net of Tax:
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
Change in Unrealized
Gains (Losses) on:
Hedging Instruments (54,411) (54,411)
Marketable Securities 1,976 1,976
---------
Total Comprehensive Income (57,438)
Cash Dividends Declared on:
Common Stock ($.96/share) (47,053) (47,053)
Preferred Stock ($13.50/share) (949) (949)
Exercise of Stock Options and
Accompanying Tax Benefits 113 6,477 6,590
Distribution of Contingent
Shares for Prior Year
Acquisition 8 822 830
Stock Repurchased and Cancelled (3) (243) (246)
Deferred Compensation
Tax Adjustment 73 73
------- -------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 $ 7,000 $ 14,587 $ 322,024 $ 647,675 $ - $ (98,696) $ 892,590
======= ======== ========= ========= ========= ========= =========
See notes to consolidated financial statements.
-40-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
(In Thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 23,329 $ 73,614 $ 150,949
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 225,748 131,281 48,417
Amortization of Goodwill 4,484 3,871 2,371
Other Amortization and Accretion (84) (28,311) (18,925)
Depreciation of Leased Equipment
and Premises and Equipment 47,577 48,379 44,119
Tax Benefit Received from Exercise of Stock Options 2,706 513 1,613
Realized Investment Security Gains - (155) (71)
Proceeds From Sale of Loans Held for Sale 2,825,184 1,049,470 2,483,213
Origination of Loans Held for Sale (2,834,074) (1,192,804) (2,460,853)
Realized Gains on Loans Held for Sale (2,856) (30,607) (75,389)
(Increase) Decrease in Trading Account Securities (59,207) 32,767 15,737
(Increase) Decrease in Interest Receivable 4,402 (23,635) (18,460)
Increase in Other Assets (131,264) (2,654) (48,084)
Increase (Decrease) in Interest Payable (4,099) 22,209 (2,640)
Deferred Income Taxes 857 20,001 18,861
Increase (Decrease) in Other Liabilities 63,310 (20,560) (44,888)
----------- ----------- -----------
Net Cash Provided by Operating Activities 166,013 83,379 95,970
----------- ----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 2,264,759 2,229,586 427,275
Proceeds from Maturities and Prepayments 1,120,965 485,028 259,415
Purchases (3,906,501) (2,885,170) (814,706)
(Increase) Decrease in Receivables Due
From Securitization Trusts 466,268 (91,134) (250,326)
Net Increase in Loans and Leases (1,556,527) (2,580,382) (876,813)
Net (Increase) Decrease in Operating Lease Equipment 4,269 (70,605) (27,327)
Net Increase in Premises and Equipment (21,648) (23,863) (27,140)
Acquisitions - (129,190) 791
----------- ----------- -----------
Net Cash Used in Investing Activities (1,628,415) (3,065,730) (1,308,831)
----------- ----------- -----------
Financing Activities:
Net Increase (Decrease) in Deposits of
Securitization Trusts (468,500) 69,470 294,843
Net Increase in Deposits 511,754 1,459,652 787,862
Net Increase (Decrease) in Short-Term Debt 1,319,276 (436,107) 204,928
Principal Payments on Long-Term Debt (149,674) (492,459) (232,974)
Proceeds from Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 426,032 2,416,214 225,435
Cash Dividends Paid (48,002) (47,738) (40,970)
Repurchase of Common Stock (246) - (8,645)
Proceeds from Exercise of Stock Options 3,884 3,388 3,074
Net Increase in Other Equity Items 73 2,816 481
----------- ----------- -----------
Net Cash Provided by Financing Activities 1,594,597 2,975,236 1,234,034
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 132,195 (7,115) 21,173
Cash and Cash Equivalents at Beginning of Period 369,028 376,143 354,970
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 501,223 $ 369,028 $ 376,143
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 634,239 $ 560,801 $ 396,093
Income Taxes 20,044 58,883 47,120
Non-Cash Activity:
Transfer of Loans and Premises and Equipment
to Other Real Estate 22,910 14,365 5,470
Stock Issued in Purchase-Accounting Acquisitions - - 54,209
Residual Interest in Securitized Assets
Created from the Sale of Loans - 106,098 220,566
See notes to consolidated financial statements.
-41-
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. 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.
REVERSE REPURCHASE AGREEMENTS AND REPURCHASE AGREEMENTS: Securities
purchased under agreements to resell ("reverse repurchase agreements")
and securities sold under agreements to repurchase ("repurchase
agreements") are treated as collateralized financing transactions and
are recorded at the amounts at which the securities were acquired or
sold plus accrued interest. Securities, generally U.S. government,
federal agency and agency mortgage-backed securities, pledged as
collateral under these financing arrangements cannot be sold or
repledged by the secured party. The fair value of collateral either
received from or provided to a third party is continually monitored by
Provident.
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. 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
-42-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. Income on
impaired loans is generally recognized 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.
RESERVE FOR LOAN AND LEASE LOSSES: The reserve for loan and lease
losses is maintained at a level necessary to absorb losses in the
lending portfolio. 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.
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.
Loans and leases reviewed on an individual basis include large
non-homogeneous credits where their internal credit rating is at or
below a predetermined classification. Corporate loans and leases not
individually reviewed are segmented by their internal risk rating while
consumer loans and leases are segmented by retail product. Analyses are
performed on each segment of the portfolio based upon trends in
delinquencies, charge-offs, economic factors and business strategies.
Adequacy factors are adjusted based on any changes in expected losses
in the segment.
Provident considers a corporate 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.
-43-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOAN AND LEASE SECURITIZATIONS: Provident has securitized loans and
leases it originated or purchased. Securitizations have provided
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, on a comparative
basis, cause reported earnings from securitized loans to be lower in
the initial periods 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.
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) reserve accounts used to absorb credit losses on the loans
securitized. Gain or loss on the sale of the loans depended 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 AND EQUIPMENT: Other real estate and equipment
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 and
equipment. However, in no case is the carrying value of other real
estate and equipment greater than fair value.
CAPITALIZED SERVICING RIGHTS: 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.
-44-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER INTANGIBLES: The excess of the purchase price over
net identifiable tangible and intangible assets acquired in a purchase
business combination (goodwill) is included in other assets. Goodwill
related to acquisitions has been amortized over varying periods not
exceeding 25 years.
STOCK-BASED COMPENSATION: Statement of Accounting Standards ("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.
DERIVATIVE FINANCIAL INSTRUMENTS: Provident employs derivatives such as
interest rate swaps, caps and floors 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.
Provident adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, on January
1, 2001. SFAS No. 133 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. Note 17 provides additional
detail on the accounting for derivative instruments and on derivative
instruments held by Provident.
-45-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING PRONOUNCEMENTS EFFECTIVE FOR FUTURE PERIODS: In June 2001,
the Financial Accounting Standards Board issued SFAS No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible
assets continue to be amortized over their useful lives.
Provident will apply the new rules on accounting for goodwill and other
intangible assets beginning in 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net
income of $2.9 million, or six cents per share, per year. During 2002,
Provident will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002.
Provident cannot predict what effect the results of these tests will
have on its earnings and financial position.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued. This SFAS requires entities to record the fair
value of a liability for an asset retirement obligation in the period
in which it is incurred. This SFAS is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged.
Provident expects to adopt SFAS No. 143 as of January 1, 2003 and it
does not expect that the adoption of the SFAS will have a significant
impact on its financial position and results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" becomes effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. This SFAS addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations" for a disposal of
a segment of a business. Provident expects to adopt SFAS 144 as of
January 1, 2002 and it does not expect that the adoption of the SFAS
will have a significant impact on its financial position and results of
operations.
-46-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
- --------------------------------------------------------------------------------------------
2001:
U.S. Treasury and Federal Agency
Debentures $ 302,912 $ 4,046 $ (402) $ 306,556
State and Political Subdivisions 3,185 28 (14) 3,199
Mortgage-Backed Securities 2,700,620 10,544 (37,990) 2,673,174
Other Securities 576,874 10 (765) 576,119
----------- ----------- ----------- -----------
$ 3,583,591 $ 14,628 $ (39,171) $ 3,559,048
=========== =========== =========== ===========
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
=========== =========== =========== ===========
Investment securities with a carrying value of approximately $1.9
billion and $1.3 billion at December 31, 2001 and 2000, 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 2001, 2000 and 1999 gross gains of $10.3 million, $4.2 million and
$.5 million and gross losses of $10.3 million, $4.0 million and $.4
million, respectively, were realized on the sale of securities
available for sale.
Mortgage-backed securities are shown below based on their estimated
average lives at December 31, 2001. 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 $ 346,457 $ 351,170
Due after 1 through 5 years 2,145,981 2,146,277
Due after 5 through 10 years 804,082 791,684
Due after 10 years 287,071 269,917
---------- ----------
Total $3,583,591 $3,559,048
========== ==========
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.
-47-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 11 years.
Rentals receivable at December 31, 2001 and 2000 include $118 million
and $109 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 $112 million and $127 million in total at December 31,
2001 and 2000, 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:
2001 2000
-------------------------- --------------------------
(In Thousands) Commercial Consumer Commercial Consumer
- -----------------------------------------------------------------------------------
Rentals Receivable $ 1,233,491 $ 996,225 $ 581,166 $ 725,038
Leases in Process 15,961 2,398 15,003 3,717
Estimated Residual Value
of Leased Assets 199,938 725,233 180,153 524,635
----------- ----------- ----------- -----------
1,449,390 1,723,856 776,322 1,253,390
Less: Unearned Income (261,071) (260,198) (168,844) (213,745)
----------- ----------- ----------- -----------
Net Investment in
Lease Financing $ 1,188,319 $ 1,463,658 $ 607,478 $ 1,039,645
=========== =========== =========== ===========
The following is a schedule by year of future minimum lease payments to
be received on lease financing for the next five years as of December
31, 2001:
(In Thousands) Commercial Consumer
- -----------------------------------------------------------------------
2002 $ 429,548 $ 280,088
2003 306,974 261,344
2004 192,543 222,425
2005 113,420 153,604
2006 61,239 67,143
Thereafter 129,767 11,621
---------- ---------
Total $1,233,491 $ 996,225
========== =========
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 9 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 $67.8 million and $67.4 million as of
December 31, 2001 and 2000, respectively. The future gross minimum
rentals, by year, under noncancelable leases for the rental of leased
equipment are $30.7 million for 2002; $24.4 million for 2003; $19.8
million for 2004; $11.1 million for 2005; $6.6 million for 2006 and
$8.9 million thereafter.
-48-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $980
million and $1,135 million as of December 31, 2001 and 2000,
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) 2001 2000 1999
- -------------------------------------------------------------------------
Balance at Beginning of Period $ 154,300 $ 94,045 $ 78,867
Provision for Loan and Lease Losses
Charged to Earnings 225,748 131,281 48,417
Acquired Reserves 10,003 2,377 1,263
Recoveries Credited to the Reserve 16,646 13,775 12,788
--------- --------- ---------
406,697 241,478 141,335
Losses Charged to the Reserve (166,044) (87,178) (47,290)
--------- --------- ---------
Balance at End of Period $ 240,653 $ 154,300 $ 94,045
========= ========= =========
The following table shows Provident's investment in impaired loans as
defined under SFAS No. 114 as amended by SFAS No. 118:
(In Thousands) 2001 2000
- -----------------------------------------------------------------------
Impaired Loans Requiring a Valuation Allowance of
$18.8 Million in 2001 and $8.1 Million in 2000 $64,245 $29,161
Impaired Loans Not Requiring a Valuation Allowance - -
------- -------
Total Impaired Loans $64,245 $29,161
======= =======
Average Balance of Impaired Loans for the Year $52,367 $38,000
Interest income recognized on impaired loans during 2001 or 2000 was $0
and $.2 million, respectively. The valuation allowance recorded on
impaired loans is included in the reserve for loan losses.
Loans and leases on nonaccrual status at December 31, 2001, 2000 and
1999 were $176.9 million, $96.0 million and $55.7 million,
respectively. Loans renegotiated to provide a reduction or deferral of
interest or principal were $0 at December 31, 2001 and 2000 and $1.5
million at December 31, 1999.
-49-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PREMISES AND EQUIPMENT:
- --------------------------------
The following is a summary of premises and equipment at December 31:
(In Thousands) 2001 2000
- -----------------------------------------------------------------------
Land $ 11,921 $ 11,779
Buildings 40,802 38,772
Leasehold Improvements 17,889 16,827
Furniture and Fixtures 163,101 148,196
--------- ---------
233,713 215,574
Less Depreciation and Amortization (130,628) (111,655)
--------- ---------
Total $ 103,085 $ 103,919
========= =========
Rent expense for all bank premises and equipment leases was $15.1
million, $14.1 million and $12.9 million in 2001, 2000 and 1999,
respectively. The future gross minimum rentals, by year, under
noncancelable leases for the rental of premises and equipment are $14.1
million in 2002, $13.2 million in 2003, $12.1 million in 2004, $10.1
million in 2005, $9.2 million in 2006 and $28.3 million thereafter.
NOTE 6 - SHORT-TERM DEBT:
- -------------------------
Short-term debt was as follows:
(Dollars in Thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $1,643,238 $ 443,073 $ 774,551
Commercial Paper 240,571 187,090 201,784
Short Term Notes 74,490 8,860 1,500
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 2.28% 5.97% 4.35%
Commercial Paper 1.67 6.02 5.09
Short Term Notes 9.13 6.90 4.52
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $1,923,501 $1,819,778 $1,261,003
Commercial Paper 273,898 209,393 229,058
Short Term Notes 74,490 177,560 1,500
At December 31, 2001, Provident had $200 million in general purpose
lines of credit with unaffiliated banks. These lines, which expire
March 28, 2002, are renewable on an annual basis. As of January 16,
2002, these lines had not been used.
-50-
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 2001 2000
- --------------------------------------------------------------------------------------------------
Provident (Parent Company):
Miscellaneous Notes Various Various Various $ 359 $ 1,245
Subsidiaries:
$1.5 Billion Bank Notes Program:
Fixed Rate Senior 8.50% 8.75% 2002 99,892 99,789
Fixed Rate Senior n/a n/a n/a - 12,500
Notes Payable to
Federal Home Loan Bank:
Fixed Rate 5.84 5.84 2009 253,210 253,336
Fixed Rate 5.98 5.98 2010 420,000 420,000
Fixed Rate Various Various Various 57,915 64,681
Subordinated Notes:
Floating Rate n/a n/a n/a - 24,750
Fixed Rate 7.13 2.84 2003 74,986 74,975
Fixed Rate 6.38 2.79 2004 99,867 99,802
Secured Debt Financings:
Secured by Auto Leases 5.76 1.25 2004 69,884 83,777
Secured by Auto Leases 6.04 6.04 2005 29,496 33,328
Secured by Auto Leases 5.35 5.35 2007 29,775 32,511
Secured by Auto Leases 5.89 9.34 2007 430,141 458,360
Secured by Auto Leases 2.22 4.46 2007 287,158 -
Secured by Residential Properties 6.98 3.32 2005 985,456 981,840
Secured by Equipment Leases 7.27 7.27 2005 83,665 126,915
Miscellaneous Notes Various Various Various 19,361 6,684
---------- ----------
2,940,806 2,773,248
---------- ----------
Total $2,941,165 $2,774,493
========== ==========
(1) Stated rate reflects interest rate on notes as of December 31, 2001.
(2) Effective rate reflects interest rate paid as of December 31, 2001 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 notes are not
secured nor does the FDIC insure them. At December 31, 2001, $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 $1.3
billion. They are subordinated to the claims of depositors and other
creditors of Provident and are not insured by the FDIC.
At December 31, 2001, $175 million of subordinated notes were
outstanding. A percentage of 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.
In the third quarter of 2000, Provident decided to change the structure
of its securitizations resulting in the elimination of gain-on-sale
accounting. Securitizations of loans and leases since this time have
been structured to account for the transactions as secured financings.
This type of securitization structure results in cash being received to
fund future loan and lease originations and debt being recorded. In
connection with these transactions, Provident has pledged $1 billion in
residential and home equity loans, $895 million in auto leases and $83
million in equipment leases.
-51-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2001, scheduled principal payments on long-term debt
for the following five years were as follows:
(In Thousands) 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------
Provident (Parent Company) $ 120 $ 120 $ 119 $ - $ -
Subsidiaries 201,146 162,420 216,535 1,061,949 57,518
NOTE 8 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
- -----------------------------------------------------------------------
SUBORDINATED DEBENTURES:
- ------------------------
Wholly-owned subsidiary trusts of Provident have issued $462.5 million
of preferred securities and, in turn, purchased $462.5 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 either Tier 1
or Tier 2 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 2001 2000
- ------------------------------------------------------------------------------
November 1996 Issuance 8.60% 8.67% 12/01/26 $ 99,066 $ 99,004
June 1999 Issuance 8.75% 3.23% 06/30/29 121,391 121,259
November 2000 Issuance 10.25% 4.64% 12/31/30 109,141 108,976
March 2001 Issuance 9.45% 4.85% 03/30/31 121,161 -
-------- --------
Total $450,759 $329,239
======== ========
(1) Effective rate reflects interest rate paid as of December 31, 2001 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) 2001 2000 1999
- -----------------------------------------------------------------------
Current:
Federal $11,704 $22,681 $62,108
State 546 1,649 1,971
------- ------- -------
12,250 24,330 64,079
Deferred 857 20,001 18,861
------- ------- -------
Total $13,107 $44,331 $82,940
======= ======= =======
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting
and taxable income. The reconciliation between income tax expense and
the amount computed by applying the statutory federal income tax rate
was as follows:
(In Thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Tax at Statutory Rate (35%) $ 12,754 $ 41,280 $ 79,133
State Income Tax, Net of Federal Tax Benefit 355 1,072 1,281
Tax Effect of:
Non-Deductible Amortization of Goodwill 1,257 1,273 529
Tax Credits (1,113) (1,063) (779)
Other - Net (146) 1,769 2,776
-------- -------- --------
Applicable Income Taxes $ 13,107 $ 44,331 $ 82,940
======== ======== ========
-52-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001, for income tax purposes, Provident had a federal
net operating loss carryforward of $103.0 million available, which
expires in the year 2021.
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) 2001 2000 1999
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Excess Lease and Partnership Income $192,142 $147,821 $137,916
Securitizations 58,433 34,752 15,410
Deferred Loan Costs 30,485 26,600 11,094
Other 19,225 13,599 14,071
-------- -------- --------
Total Deferred Tax Liabilities 300,285 222,772 178,491
-------- -------- --------
Deferred Tax Assets:
Reserve for Loan and Lease Losses 87,769 57,957 39,989
Unrealized Loss on Investment Securities 53,150 9,654 26,843
Deferred Compensation 9,210 7,555 6,596
Federal Net Operating Loss Carryforward 36,044 - -
Other 24,335 15,190 9,837
-------- -------- --------
Total Deferred Tax Assets 210,508 90,356 83,265
-------- -------- --------
Net Deferred Tax Liabilities $ 89,777 $132,416 $ 95,226
======== ======== ========
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 was 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 was being amortized over a 20 year period. As the
-53-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Oak Hills have been included
in the consolidated financial statements from the date of acquisition
only.
NOTE 11 - 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. All cash outlays have been paid.
NOTE 12 - 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 $4.1 million, $5.9 million and $8.8
million for 2001, 2000 and 1999, 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 $1.5 million, $1.4 million and $1.2
million for this retirement plan for 2001, 2000 and 1999, respectively.
-54-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident's LH Plan provides medical coverage as well as life insurance
benefits to eligible retirees. Provident pays the entire cost for
retirees who retired 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 $0 for
2001 and 2000 and $1.7 million for 1999.
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 12.3 million options available for grant. The options are to
be granted, with exercise prices at 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 following table summarizes option activity for the three years
ended December 31, 2001:
2001 2000 1999
-------------------- -------------------- --------------------
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 $28.84 5,480,365 $30.00 4,205,113 $27.52 3,747,888
Acquired - - - - 9.16 12,616
Granted 29.17 1,407,432 27.29 2,079,600 37.78 761,285
Exercised 10.37 (374,567) 17.27 (196,130) 14.46 (219,682)
Canceled 30.82 (369,871) 35.30 (608,218) 27.37 (96,994)
--------- --------- ---------
Outstanding at
End of Year $29.92 6,143,359 $28.84 5,480,365 $30.00 4,205,113
========= ========= =========
-55-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001, 2000 and 1999, there were 2,825,462, 2,396,315
and 2,159,150 options exercisable, respectively, having a weighted
average option price per share of $28.61, $24.26 and $22.04,
respectively. The following table summarizes information about stock
options outstanding at December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- --------------------------------------------------------------------------------------
$ 7.95 - $12.00 256,115 0.9 $ 9.73 256,115 $ 9.73
$12.01 - $18.00 519,184 3.1 14.61 519,184 14.61
$18.01 - $27.00 1,596,005 7.1 25.26 724,955 24.52
$27.01 - $40.00 2,827,720 8.0 31.80 683,081 34.59
$40.01 - $54.47 944,335 6.0 46.08 642,127 45.69
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 2001, 2000 and 1999
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 2001, 2000 and 1999 respectively: risk-free interest
rates of 4.72%, 6.13% and 5.36%; dividend yields of 3.00%, 3.00% and
3.50%; volatility factors of the expected market price of Provident's
Common Stock of 28.8%, 26.9% and 24.4% 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 2001, 2000 and 1999
was $8.35, $8.78 and $9.17, 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) 2001 2000 1999
- -----------------------------------------------------------------------
Pro-forma Net Income $17,294 $67,049 $146,142
Pro-forma Earnings Per Share:
Basic 0.33 1.36 3.08
Diluted 0.33 1.33 2.98
-56-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY:
- -------------------------------
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, 2001 and 2000, 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.
On January 1, 2001, Provident recorded an after-tax transitional loss
of $28.3 million in connection with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". A
description of SFAS No. 133 is provided in Note 1. The transitional
loss was recorded in accumulated other comprehensive income (loss) of
shareholders' equity of which a summary of activity follows:
(In Thousands) 2001 2000
- -------------------------------------------------------------------------------------
Accumulated Unrealized Losses on Securities Available
for Sale at January 1, Net of Tax $(17,929) $(49,897)
Net Unrealized Gains for the Period, Net of Tax Expense
of $1,064 in 2001 and $17,268 in 2000 1,976 32,069
Reclassification Adjustment for Gains Included in Net Income,
Net of Tax Expense of $54 in 2000 - (101)
-------- --------
Effect on Other Comprehensive Income (Loss) for the Year 1,976 31,968
-------- --------
Accumulated Unrealized Losses on Securities Available
for Sale at December 31, Net of Tax $(15,953) $(17,929)
======== ========
Accumulated Unrealized Gains on Derivatives Used in Cash
Flow Hedging Relationships at January 1, Net of Tax $ - $ -
Cumulative Effect of Change in Accounting Principle, Net of
Tax Benefit of $15,256 in 2001 (28,332) -
Net Unrealized Losses for the Period, Net of Tax Benefit
of $48,648 in 2001 (90,347) -
Reclassification Adjustment for Losses Included in Net Income,
Net of Tax Benefit of $19,350 in 2001 35,936 -
-------- --------
Effect on Other Comprehensive Income (Loss) for the Year (82,743) -
-------- --------
Accumulated Unrealized Losses on Derivatives Used in Cash
Flow Hedging Relationships at December 31, Net of Tax $(82,743) $ -
======== ========
Accumulated Other Comprehensive Income (Loss) at
January 1, Net of Tax $(17,929) $(49,897)
Other Comprehensive Income (Loss), Net of Tax (80,767) 31,968
-------- --------
Accumulated Other Comprehensive Income (Loss) at
December 31, Net of Tax $(98,696) $(17,929)
======== ========
-57-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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) 2001 2000 1999
- ----------------------------------------------------------------------------------------
Basic:
Net Income $ 23,329 $ 73,614 $ 150,949
Less Preferred Stock Dividends (949) (949) (870)
--------- --------- ---------
Income Available to Common Shareholders 22,380 72,665 150,079
Weighted-Average Common Shares Outstanding 49,011 48,744 47,187
--------- --------- ---------
Basic Earnings Per Share $ 0.46 $ 1.49 $ 3.18
========= ========= =========
Diluted:
Net Income $ 23,329 $ 73,614 $ 150,949
Weighted-Average Common Shares Outstanding 49,011 48,744 47,187
Assumed Conversion of:
Convertible Preferred Stock 988 988 988
Dilutive Stock Options (Treasury Stock Method) 550 608 843
--------- --------- ---------
Dilutive Potential Common Shares 50,549 50,340 49,018
--------- --------- ---------
Diluted Earnings Per Share $ 0.46 $ 1.46 $ 3.08
========= ========= =========
NOTE 15 - 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, 2001, Provident and
Provident Bank meet all capital requirements to which it is subject.
As of December 31, 2001, 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.
-58-
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:
2001 2000
------------------- -------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------
Tier 1 Capital (to Average Assets):
Provident (Consolidated) $1,212,150 7.87% $1,242,389 9.56%
The Provident Bank 1,029,159 6.74 983,031 7.64
Tier 1 Capital (to Risk-Weighted Assets):
Provident (Consolidated) 1,212,150 8.86 1,242,389 9.18
The Provident Bank 1,029,159 7.59 983,031 7.32
Total Risk-Based Capital
(to Risk-Weighted Assets):
Provident (Consolidated) 1,560,691 11.41 1,502,512 11.10
The Provident Bank 1,504,974 11.11 1,491,476 11.10
Federal banking agencies have adopted revised regulatory capital rules
regarding the treatment of certain recourse obligations, direct credit
substitutes and residual interests in asset securitizations.
Requirements of the revised rules include (1) deducting from Tier 1
capital the amount of credit-enhancing interest-only strips (a type of
residual interests) that exceeds 25% of Tier 1 capital; (2) requiring a
dollar in risk-based capital for each dollar of residual interests not
deducted from Tier 1 capital, except those qualifying under the
ratings-based approach; and (3) requiring that the gross-up treatment
of assets sold with recourse, along with the low-level recourse rule,
be applied to direct credit substitutes. The revised rules become
effective on January 1, 2002, for new residual interests related to
transactions that settle after December 31, 2001. For transactions
settled before January 1, 2002, application of the new capital
treatment to the residuals created will be delayed until December 31,
2002.
Management believes that the revised rules will apply to its
securitization transactions structured as sales and utilizing gain on
sale accounting. However, the impact of the revised rules have been
significantly reduced due to Provident's third quarter of 2000 decision
to structure future securitizations in the form of secured financings
rather than sales. As of December 31, 2001, Provident's credit
enhancing interest-only strips do not exceed 25% of Tier I capital.
Therefore, the most adverse implications of the revised rules will not
apply. Management does not believe that the revised rules will prevent
Provident from being classified as well capitalized.
-59-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - ASSET SECURITIZATION SALES:
- -------------------------------------
Since June 2000, Provident has structured its securitization
transactions as secured financings. Prior to this time, the structure
of many of its securitizations resulted in the transactions being
treated as sales. During 2000 and 1999, Provident sold $1.4 billion and
$3.0 billion, respectively, of loans and leases in securitization
transactions. A summary of gains recognized on these sales follows:
(In Thousands) 2001 2000 1999
- -----------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential Loans $ - $30,291 $73,304
Prime Home Equity Loans - 4,156 5,758
Credit Card Loans - - 3,993
--- ------- -------
- 34,447 83,055
Cash Gains - Equipment Leases - 9,083 13,164
--- ------- -------
Total Gains $ - $43,530 $96,219
=== ======= =======
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 risks, interest rate risks and credit risks (1996 and 1997
securitizations only) on the transferred assets. Components of the
RISAs, which are included within investment securities on the balance
sheet, follow:
December 31, 2001 December 31, 2000
--------------------------- ---------------------------
Nonconforming Prime Nonconforming Prime
(In Thousands) Residential Home Equity Residential Home Equity
- ----------------------------------------------------------------------------------------------
Estimated Cash Flows of Underlying
Loans, Net of Payments to
Certificate Holders $ 224,703 $ 14,709 $ 402,122 $ 29,117
Less:
Estimated Credit Loss (6,356) (227) (6,045) (275)
Servicing and Insurance Expense (24,918) (1,584) (46,650) (4,026)
Discount to Present Value (19,721) (1,953) (47,324) (1,892)
--------- --------- --------- ---------
Carrying Value of RISA $ 173,708 $ 10,945 $ 302,103 $ 22,924
========= ========= ========= =========
Provident had provided for credit enhancements to its securitizations
structured as sales in the form of reserve accounts. The reserve
accounts are maintained 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 these
reserve accounts. Provident estimates the amount of all credit losses
based upon loan credit grades, collateral, market conditions and other
pertinent factors. Reserve accounts that are held at Provident are
classified as Receivables from Securitization Trusts and do not earn
interest. Reserve accounts that earn interest are recorded as
investment securities.
-60-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2001, Provident reached an agreement with
the securitization insurer to release the reserve accounts for the
nonconforming residential loan securitizations and substitute an
unfunded demand note backed by a AAA rated standby letter of credit.
Actual losses, which have been reserved for, are submitted on a monthly
basis to Provident by the trustee. Should Provident fail to reimburse
the trustee for these monthly losses, the letter of credit can be drawn
upon. There are no conditions that can accelerate this monthly process.
At December 31, the reserve accounts, along with recorded loss
estimates, were as follows:
December 31, 2001 December 31, 2000
---------------------- ----------------------
Reserve Loss Reserve Loss
(In Thousands) Accounts Estimates Accounts Estimates
- --------------------------------------------------------------------------------------
Nonconforming Residential Loans (1) $ - $ (75,051) $ 467,413 $(100,224)
Equipment Leases 60,700 (2,204) 61,972 (12,249)
Prime Home Equity Loans (1) 27,436 (1,233) 29,450 (1,171)
Credit Card - - 29,700 -
--------- --------- --------- ---------
$ 88,136 $ (78,488) $ 588,535 $(113,644)
========= ========= ========= =========
(1) Total loss estimates, including those contained within the RISAs, are $81.4 million
for nonconforming residential loans and $1.5 million for prime home equity loans as
of December 31, 2001.
Various economic assumptions are used in the measurement of RISAs and
loss estimates. 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
----------------------- ----------------------- ---------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Prepayment Speed:
Initial Rate n/a 13.73% 13.41% n/a 10.00% 10.00% n/a n/a n/a
Peak Rate n/a 35.00% 35.00% n/a 30.00% 30.00% n/a n/a n/a
Weighted Average
Life (in years) n/a 2.4 2.4 n/a 2.1 2.1 n/a n/a n/a
Estimated Credit
Losses:
Annual Basis n/a 1.14% 1.10% n/a 0.20% 0.20% n/a 1.00% 1.00%
Percentage of
Original Balance n/a 2.84% 2.70% n/a 0.47% 0.40% n/a 2.00% 2.00%
Discount Rate n/a 12.00% 12.00% n/a 12.00% 12.00% n/a 8.00% 8.00%
-61-
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
loss estimates as of December 31, 2001:
Nonconforming Prime Equipment
(Dollars in Millions) Residential Home Equity Leasing
- ---------------------------------------------------------------------------------------------
Peak Prepayment Speed Assumption (Annual Rate)(1) 26% CPR 30% CPR n/a
Impact on Fair Value of 10% Adverse Change $ (9.6) $ (2.8) n/a
Impact on Fair Value of 20% Adverse Change $ (19.3) $ (5.2) n/a
Estimated Credit Loss Assumption(1)
(Percentage of Original Balance) 3.98% 0.19% 3.69%
Impact on Fair Value of 10% Adverse Change $ (12.4) $ (0.1) $ (2.3)
Impact on Fair Value of 20% Adverse Change $ (24.7) $ (0.3) $ (4.5)
RISA Discount Rate(1) 12.00% 10.09% n/a
Impact on Fair Value of 10% Adverse Change $ (6.9) $ (0.5) n/a
Impact on Fair Value of 20% Adverse Change $ (13.6) $ (1.0) 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 loss estimates 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) 2001 2000 1999
- ---------------------------------------------------------------------------------------
Proceeds From New Securitizations $ - $ 1,412,303 $ 2,723,810
Cash Flows Received from Interests Retained 193,357 130,720 88,490
Servicing Fees Received 21,766 24,450 14,815
Prepayment and Late Fees Received 17,662 13,365 8,345
Net Servicing Advances (61,749) (44,246) (28,050)
The following table presents quantitative information about
delinquencies, net credit losses and components of securitized and
portfolio loans and leases:
2001 2000
--------------------------------------- ---------------------------------------
Small to Small to
Mid Ticket Mid Ticket
Nonconforming Prime Home Equipment Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases Residential Equity Leases
- -----------------------------------------------------------------------------------------------------------
Average Assets:
Securitized and Sold $3,086,984 $ 383,157 $ 276,895 $3,665,639 $ 452,213 $ 383,804
Portfolio 993,436 510,812 733,716 345,397 160,187 177,728
---------- ---------- ---------- ---------- ---------- ----------
Total Managed Assets $4,080,420 $ 893,969 $1,010,611 $4,011,036 $ 612,400 $ 561,532
========== ========== ========== ========== ========== ==========
Year-End Assets:
Securitized and Sold $2,627,332 $ 303,527 $ 207,131 $3,625,033 $ 471,873 $ 359,457
Portfolio 918,458 688,798 926,271 781,861 238,162 325,281
---------- ---------- ---------- ---------- ---------- ----------
Total Managed Assets $3,545,790 $ 992,325 $1,133,402 $4,406,894 $ 710,035 $ 684,738
========== ========== ========== ========== ========== ==========
Net Charge-Offs:
Total Managed Assets $ 63,651 $ 2,816 $ 17,430 $ 31,582 $ 1,406 $ 9,096
========== ========== ========== ========== ========== ==========
Net Charge-Offs to
Average Assets:
Total Managed Assets 1.56% 0.31% 1.72% 0.79% 0.23% 1.62%
========== ========== ========== ========== ========== ==========
90 Days or More
Delinquencies to
Year-End Assets:
Total Managed Assets 13.85% 0.21% 1.08% 7.78% 0.16% 1.82%
========== ========== ========== ========== ========== ==========
-62-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
- --------------------------------------------------------
Provident uses derivative instruments to manage its interest rate risk.
These instruments include interest rate swaps, interest rate caps and
interest rate floors. In addition, forward delivery commitments are
entered by Red Mortgage Capital, Inc. to assist with the issuance of
mortgage-backed securities.
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.
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, 2001, Provident had
bilateral collateral agreements in place with its counterparties,
against which Provident has pledged investment securities with a
carrying value of $138 million as collateral. There were no past due
amounts on any instruments as of December 31, 2001. Provident has never
experienced a credit loss related to these instruments.
As discussed in Note 1, Provident adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. SFAS No. 133 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.
-63-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hedging Strategy: Provident uses interest rate swaps to
assist in the management of its interest rate risk. The interest rate
swaps effectively modify Provident's exposure to interest risk by
converting fixed rate liabilities, generally time deposits and
long-term debt, to a floating rate. These interest rate swaps involve
the receipt of fixed rate amounts in exchange for floating rate
interest payments over the life of the agreements without an exchange
of the underlying principal amounts.
As the changes in fair value of the hedged items offset the changes in
fair value of the derivatives, no material gain or loss was recognized
at the time of adoption of SFAS No. 133 or for the year ended December
31, 2001.
Cash Flow Hedging Strategy: Provident has also entered into interest
rate swap agreements to reduce the impact of interest rate changes on
future interest payments of on and off-balance sheet financing. These
interest rate swaps convert floating rate debt to a fixed rate basis.
These interest rate swaps have generally been used to hedge interest
payments involving floating rate debt and off-balance sheet
securitization transactions with maturities up to December 2012.
Upon the adoption of SFAS No. 133 and for the year ended December 31,
2001, Provident recorded reductions in accumulated other comprehensive
income of $28.3 million and $54.4 million, respectively. No gain or
loss was recognized at the time of adoption or for the full year of
2001 as a result of ineffective cash flow hedges. During the next
twelve months, management expects to reclassify $29.8 million of net
losses on derivative instruments from accumulated other comprehensive
income to earnings which it believes will be offset by improved cash
flows of the hedged items associated with these derivative instruments.
Management's expectation is that the net effect of the hedging
transactions will result in no material impact on the Statement of
Income over the next twelve months.
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, 2001:
Off-Balance Sheet Securitizations $ 270 $2,317 $1,944 $1,944 $ -
Certificates of Deposit 2,472 - - - -
Long-Term / Subordinated Debt 718 547 1,010 1,010 -
Premium Index Deposits - 195 - - -
Loans - 45 - - -
For Customers' Purposes - - 48 - -
------ ------ ------ ------ ------
Totals $3,460 $3,104 $3,002 $2,954 $ -
====== ====== ====== ====== ======
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
====== ====== ====== ====== ======
-64-
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, 2001
follows:
Interest Rate Swaps
------------------- Interest Rate Caps
Receive Pay --------------------
(Dollars in Millions) Fixed Fixed Purchased Sold
- -----------------------------------------------------------------------
Notional Amount $ 3,460 $ 3,104 $ 3,002 $ 2,954
Gross Unrealized Gains 57 - 85 -
Gross Unrealized Losses (74) (116) - (85)
Weighted Average:
Receive Rate 6.55% 2.02% n/a n/a
Pay Rate 2.23% 5.92% n/a n/a
Strike Rate n/a n/a 8.97% 8.97%
Life (in years) 11.9 6.3 13.0 13.2
The expected notional maturities of Provident's interest rate
derivative portfolio at December 31, 2001 are as follows:
Interest Rate Swaps
------------------- Interest Rate Caps
Receive Pay -------------------
(In Millions) Fixed Fixed Purchased Sold Total
- -------------------------------------------------------------------------
Less than 1 Year $ - $ 260 $ 48 $ - $ 308
From 1 to 5 Years 1,033 756 - - 1,789
From 5 to 10 Years 566 1,753 - - 2,319
From 10 to 15 Years 794 335 2,954 2,954 7,037
More than 15 Years 1,067 - - - 1,067
------- ------- ------- ------- -------
Total $ 3,460 $ 3,104 $ 3,002 $ 2,954 $12,520
======= ======= ======= ======= =======
NOTE 18 - CREDIT RISK TRANSFER INSTRUMENTS, CREDIT COMMITMENTS AND
- -----------------------------------------------------------------------
STANDBY LETTERS OF CREDIT:
- --------------------------
During 2001 and 2000, Provident entered into credit risk transfer
transactions. Under the 2001 transaction, Provident transferred 97 1/2%
of the credit risk on a $.9 billion auto lease portfolio, while
retaining a 2 1/2% first-loss position. Under the 2000 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 these transactions, Provident was able to lower its credit
concentration in auto leasing while reducing its regulatory capital
requirements. As of December 31, 2001, the credit risk on $2.3 billion
of on and off-balance sheet auto leases has been transferred from
Provident.
Commitments to extend credit are financial instruments in which
Provident agrees to provide financing to customers based on
predetermined terms and conditions. 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.
-65-
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) 2001 2000
- -----------------------------------------------------------------------
Commitments to Extend Credit $2,153 $2,519
Standby Letters of Credit 193 213
NOTE 19 - 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.
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.
-66-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(In Millions) 2001 2000 1999
- -----------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 347.2 $ 291.3 $ 251.5
Retail Banking 265.8 254.2 232.3
Mortgage Banking 86.5 96.4 125.4
Corporate Center - .2 .1
--------- --------- --------
$ 699.5 $ 642.1 $ 609.3
========= ========= ========
Net Income:
Commercial Banking $ - $ 60.8 $ 69.8
Retail Banking 29.5 37.0 44.1
Mortgage Banking (6.2) 2.7 39.7
Corporate Center - .1 -
Merger and Restructuring Charges - (27.0) (2.7)
--------- --------- --------
$ 23.3 $ 73.6 $ 150.9
========= ========= ========
Average Assets:
Commercial Banking $ 6,936 $ 5,458 $ 4,553
Retail Banking 3,323 2,397 1,746
Mortgage Banking 2,075 1,248 647
Corporate Center 2,691 3,042 2,924
--------- --------- --------
$ 15,025 $ 12,145 $ 9,870
========= ========= ========
NOTE 20 - TRANSACTIONS WITH AFFILIATES:
- ---------------------------------------
At December 31, 2001, Carl H. Lindner, members of his immediate family
and trusts for their benefit, owned 44% of American Financial Group's
Common Stock. This group, along with Carl H. Lindner's siblings and
entities controlled by them, or established for their benefit, owned
46% of Provident's Common Stock at year-end 2001. 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, 2001, 2000 and 1999 amounted to $3.1 million, $3.0 million and $2.5
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 $42.8 million and
$42.5 million at December 31, 2001 and 2000, respectively. During 2001,
new loans and leases aggregating $22.5 million were made to such
parties and loans and leases aggregating $22.2 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, 2001 and 2000, these persons held Provident's commercial paper
amounting to $17.5 million and $16.7 million, respectively.
Additionally, repurchase agreements in the amount of $7.7 million and
$12.8 million had been sold to these persons at December 31, 2001 and
2000, respectively. All of these transactions were at market interest
rates.
-67-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - 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.
2001 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
(In Thousands) Value Value Value Value
- --------------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 501,223 $ 501,223 $ 369,028 $ 369,028
Trading Account Securities 101,156 101,156 41,949 41,949
Loans Held for Sale 217,914 217,914 206,168 206,168
Investment Securities 3,559,048 3,559,048 3,013,621 3,013,621
Loans and Leases 10,495,956 10,581,971 9,076,906 9,094,744
Less: Reserve for Losses (240,653) - (154,300) -
---------- ---------- --------- ---------
Net Loans and Leases 10,255,303 10,581,971 8,922,606 9,094,744
Financial Liabilities:
Deposits 8,854,250 8,867,237 8,829,110 8,772,651
Short-Term Debt 1,958,299 1,958,299 639,023 639,023
Long-Term Debt and Junior
Subordinated Debentures 3,391,924 3,309,106 3,103,732 3,132,238
Derivative Instruments:
Interest Rate Swaps (132,664) (132,664) - (63,785)
Interest Rate Caps - - - (2,523)
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 16.
-68-
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.
Derivative instruments: For 2001, the fair value of derivative
instruments has been recognized as either assets or liabilities
in the balance sheet in accordance to SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". For 2000, the
fair value of derivative instruments was not recognized in the
balance sheet. The fair value of derivative instruments is based
upon current market quotes.
NOTE 22 - 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, 2001, was approximately $62.6 million.
-69-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER REAL ESTATE AND EQUIPMENT OWNED: At December 31, 2001 and 2000,
the carrying value of other real estate and equipment owned was $20.9
million and $8.8 million, respectively.
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, 2001 and
2000 follow (in thousands):
December 31,
---------------------
Subsidiary 2001 2000
- -----------------------------------------------------------------------
Provident Auto Leasing Company $546,686 $376,631
Provident Auto Rental LLC 2000-1 374,242 381,754
Provident Auto Rental LLC 2001-1 345,432 -
Provident Auto Rental LLC 1999-1 202,473 174,763
Provident Lease Receivables Company LLC 193,139 233,566
Provident Auto Rental LLC 2000-2 159,537 24,236
Provident Auto Rental Company LLC 1998-2 41,306 34,556
Provident Auto Rental Company LLC 1998-1 37,330 31,291
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. The amount of dividends available for
payment in 2002 by The Provident Bank to the parent company is
approximately $46.6 million, plus 2002 net income. Pursuant to Federal
Reserve and State regulations, the maximum amount available to be
loaned to affiliates (as defined), including its Parent, by Provident
Bank, was approximately $166.3 million to any single affiliate, and
$332.6 million to all affiliates combined of which $60.8 million was
loaned at December 31, 2001.
-70-
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) 2001 2000
- -------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents $ 157,168 $ 94,336
Investment Securities Available for Sale 315,018 299,323
Investment in Subsidiaries:
Banking 1,039,706 1,062,679
Non-Banking 18,782 11,613
Other Assets 99,005 103,022
---------- ----------
TOTAL ASSETS $1,629,679 $1,570,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable to Banking Subsidiaries $ 12,459 $ 28,214
Other Accounts Payable and Accrued Expenses 18,636 23,963
Commercial Paper 240,571 187,090
Long-Term Debt and
Junior Subordinated Debentures 465,423 340,923
---------- ----------
Total Liabilities 737,089 580,190
Shareholders' Equity 892,590 990,783
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,629,679 $1,570,973
========== ==========
STATEMENTS OF INCOME (PARENT ONLY)
Year Ended December 31,
------------------------------
(In Thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------
Income:
Dividends from Banking Subsidiaries $ 15,000 $ 37,000 $ 60,000
Interest Income from Banking Subsidiaries 24,944 13,232 8,869
Other Interest Income 1,469 4,951 5,504
Noninterest Income 7,492 5,712 1,976
-------- -------- --------
48,905 60,895 76,349
Expenses:
Interest Expense 40,762 34,795 24,934
Noninterest Expense 2,842 2,668 3,030
-------- -------- --------
43,604 37,463 27,964
-------- -------- --------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiaries 5,301 23,432 48,385
Applicable Income Tax Credits 7,936 6,624 4,439
-------- -------- --------
Income Before Equity in Undistributed Net Income
of Subsidiaries 13,237 30,056 52,824
Equity in Undistributed Net Income of Subsidiaries 10,092 43,558 98,125
-------- -------- --------
Net Income $ 23,329 $ 73,614 $150,949
======== ======== ========
-71-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
Year Ended December 31,
-----------------------------------
(In Thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 23,329 $ 73,614 $ 150,949
Adjustment to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Net Income from Subsidiaries (25,092) (80,558) (158,125)
Cash Dividends Received From Subsidiaries 15,000 37,000 60,000
Amortization of Goodwill and Other 1,066 805 799
Tax Benefit Received from Exercise
of Stock Options 2,706 513 1,613
Realized Investment Security (Gains) Losses (72) 493 (63)
(Increase) Decrease in Interest Receivable 177 39 (1,913)
(Increase) Decrease in Other Assets 3,783 (40,026) 18,352
Increase (Decrease) in Interest Payable (261) 76 (129)
Increase (Decrease) in Other Liabilities (20,821) 10,193 4,410
--------- --------- ---------
Net Cash Provided by (Used In)
Operating Activities (185) 2,149 75,893
--------- --------- ---------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 19,379 129,648 115,829
Proceeds from Maturities and Prepayments 15,234 87,358 17,996
Purchases (50,671) (330,583) (171,683)
--------- --------- ---------
Net Cash Used In Investing Activities (16,058) (113,577) (37,858)
--------- --------- ---------
Financing Activities:
Net Increase (Decrease) in Commercial Paper 53,481 (14,694) (43,507)
Principal Payments on Long-Term Debt (391) (74,764) (914)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 124,432 186,706 124,984
Cash Dividends Paid (48,002) (47,738) (40,970)
Repurchase of Common Stock (246) - (8,645)
Proceeds from Exercise of Stock Options 3,884 3,388 3,074
Contribution to Subsidiaries (54,986) (3,480) (112,478)
Net Increase in Other Equity Items 903 2,816 481
--------- --------- ---------
Net Cash Provided by (Used In)
Financing Activities 79,075 52,234 (77,975)
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 62,832 (59,194) (39,940)
Cash and Cash Equivalents at Beginning of Year 94,336 153,530 193,470
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 157,168 $ 94,336 $ 153,530
========= ========= =========
-72-
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, 2001.
Fourth Third Second First
(In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
2001:
Total Interest Income $ 257,856 $ 281,477 $ 282,889 $ 285,018
Total Interest Expense (132,941) (157,805) (167,250) (176,141)
--------- --------- --------- ---------
Net Interest Income 124,915 123,672 115,639 108,877
Provision for Loan and Lease Losses (111,151) (66,010) (24,900) (23,687)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 13,764 57,662 90,739 85,190
Noninterest Income 51,521 57,103 64,383 53,372
Noninterest Expense (110,077) (125,863) (105,902) (95,456)
--------- --------- --------- ---------
Income Before Income Taxes (44,792) (11,098) 49,220 43,106
Applicable Income Taxes 15,901 3,663 (17,368) (15,303)
--------- --------- --------- ---------
Net Income $ (28,891) $ (7,435) $ 31,852 $ 27,803
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ (.59) $ (.16) $ .65 $ .56
Diluted (1) (.59) (.16) .63 .55
Cash Dividends .24 .24 .24 .24
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
(1) The quarterly diluted earnings per share numbers for the fourth and third
quarters of 2001 have been changed from that previously reported [(.57) and (.15),
respectively] due to the GAAP requirement that diluted earnings per share cannot
exceed basic earnings per share. Year-to-date earnings per share were not changed
as this requirement did not alter previously reported numbers.
Quarterly earnings per share numbers do not necessarily add to the
year-to-date amounts due to the treasury stock method of calculating
earnings per share and to rounding.
-73-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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, 2001:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 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.
-74-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
4.1 Instruments defining the Provident has no outstanding
rights of security issue of indebtedness
holders 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).
-75-
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 and Form S-8 (File No. 333-
Plan, Fidelity Federal 55698).
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
(as amended)(1)
10.15 Provident Deferred Incorporated by reference to
Compensation Plan (As Form 10-K for 2000.
Amended)(1)
-76-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
10.16 Provident 1997 Stock Incorporated by reference to
Option Plan(1) Form S-8 (File No. 333-28393)
and Form S-8 (File No. 333-
61142).
10.17 Provident 1996 Non- Incorporated by reference to
Executive Officer Stock Form S-8 (File No. 333-16983).
Option Plan(1)
10.18 Separation agreement Incorporated by reference to
between Provident Financial Form 10-Q for the second
and Philip R. Myers(1) quarter of 2001.
10.19 Provident Dividend Incorporated by reference to
Reinvestment Plan Form S-3 (File No. 333-67754).
10.20 Provident 2002 Outside Filed herewith.
Directors Stock Option
Plan(1)
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 (Items 5 and 7) filed on January 3, 2002.
-77-
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
February 21, 2002
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 February 21, 2002
- ----------------------- (Principal Executive Officer)
Robert L. Hoverson
/s/Jack M. Cook Director February 21, 2002
- -----------------------
Jack M. Cook
/s/Thomas D. Grote, Jr. Director February 21, 2002
- -----------------------
Thomas D. Grote, Jr.
/s/Philip R. Myers Director February 21, 2002
- -----------------------
Philip R. Myers
/s/Joseph A. Pedoto Director February 21, 2002
- -----------------------
Joseph A. Pedoto
/s/Sidney A. Peerless Director February 21, 2002
- -----------------------
Sidney A. Peerless
/s/Joseph A. Steger Director February 21, 2002
- -----------------------
Joseph A. Steger
/s/Christopher J. Carey Executive Vice President February 21, 2002
- ----------------------- and Chief Financial Officer
Christopher J. Carey
-78-