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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, 2002 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of February 28, 2003, there were 48,787,190 shares of the
Registrant's Common Stock outstanding. The aggregate market value of the
Common Stock held by non-affiliates at June 30, 2002, was approximately
$776,037,000 (based upon non-affiliated holdings of 26,751,000 shares and a
market price of $29.01 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 ......................................... 5
ITEM 6. SELECTED FINANCIAL DATA ..................................... 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT OF FINANCIAL RESULTS ......................... 7
RESULTS OF OPERATIONS .................................... 8
FINANCIAL CONDITION ...................................... 21
OFF-BALANCE SHEET AND DERIVATIVE ARRANGEMENTS ............ 34
CAPITAL RESOURCES AND LIQUIDITY .......................... 38
CRITICAL ACCOUNTING POLICIES ............................. 41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 90
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 90
ITEM 11. EXECUTIVE COMPENSATION ...................................... 90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS .............. 90
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 90
ITEM 14. CONTROLS AND PROCEDURES ..................................... 90
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ................................................. 91
SIGNATURES ............................................................... 94
CERTIFICATIONS ........................................................... 95
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 obligation 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. At December 31, 2002,
Provident had total assets of $17.5 billion, loans and leases of $9.1
billion, deposits of $9.8 billion and shareholders' equity of $880 million.
Additionally, Provident services loans and leases for other entities
including $2.1 billion which have been securitized (off-balance sheet managed
assets); $3.0 billion which have been sold by a wholly-owned subsidiary
through the Fannie Mae DUS program as an approved seller/servicer; and $12.4
billion which have no recourse to Provident.
Provident's executive offices are located at One East Fourth Street,
Cincinnati, Ohio 45202 and its Investor Relations telephone number is (513)
345-7102 or (800) 851-9521. The Annual Report, on Form 10-K, is filed with
the Securities and Exchange Commission ("SEC"). Copies of this document and
all other SEC filings by Provident may be obtained, without charge, by
contacting Investor Relations. These reports may also be obtained via the
Internet at the web sites of Provident at http://www.providentbank.com, or
the SEC at http://www.sec.gov.
Provident has 78 full service branch banking centers located in Ohio,
Kentucky and southwestern Florida. Provident also provides commercial
financing, equipment leasing and mortgage lending at a national level with
commercial lending offices located in eleven states.
Provident conducts its banking operations through The Provident Bank. Major
business lines are 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 23 included in "Notes to
Consolidated Financial Statements" for details as to the types of financial
products and services offered by these business lines.
On March 5, 2003, Provident announced a restatement of its operating results
for years 1997 through 2001 and the interim periods for 2002. The restatement
was a result of unintentional errors in the accounting for nine auto lease
financing transactions originated between 1997 and 1999, and the return to
the balance sheet of the associated consumer auto leases which had been
previously accounted for as off-balance sheet. These errors were discovered
by Provident's finance staff in connection with the testing and installation
of a financial model that identified differences in income from that
originally recorded, compared with the income generated by the financial
model for auto lease transactions.
Subsequent to this announcement, Provident has determined that its auto
leases should be classified as operating leases instead of finance leases. As
a result, Provident will account for its auto lease portfolio as operating
leases resulting in the recognition of rental income and depreciation expense
rather than interest income as reported in earlier periods. Also, amounts
previously reported as direct financing leases and included in the loan
category, have been reclassified to leased equipment.
The results of these restatements are reflected in the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Management's
-1-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Discussion and Analysis of Financial Condition and Results of Operations, and
Selected Financial Data for all periods reported upon in this Form 10-K. See
Note 3 included in "Notes to Consolidated Financial Statements" for
additional information concerning the restatement.
At December 31, 2002, Provident and its subsidiaries employed approximately
3,300 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.
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 (the "BHC Act"), as
amended. Bank holding companies are required to file periodic reports with
and are subject to examination by the Federal Reserve. The BHC 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 BHC 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 BHC 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 BHC Act does not place territorial
restrictions on such nonbanking-related activities.
The Gramm-Leach-Bliley Act, which was enacted on November 12, 1999, 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
-2-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Financial Condition and Results of Operations - Liquidity" and Note 26
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 cash balances against
deposits, limiting the nature of loans and interest that may be charged
thereon, and restricting investments and other activities.
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, 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,
liquidity, 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 than 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, 2002, Provident and The Provident
Bank were deemed to be well capitalized for the above purposes. See Note 15
included in "Notes to Consolidated Financial Statements."
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-seven. For
information concerning rental obligations, see Note 7 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 except
for the following matters related to the restatement announced March 5, 2003.
On March 6, 6, 11, 26 and 31 and April 3, 2003, respectively, purported
class-actions were filed in the U.S. District Court for the Southern District
of Ohio by shareholders Waldbaum, Merzin, McKay, Nicci, Koot (as a Provident
Capital Trust holder) and Spitz, respectively against Provident, its
President, Robert L. Hoverson, its Chief Financial Officer, Christopher J.
Carey, and, in the Merzin, Koot, and Spitz cases, their predecessors in those
positions, on behalf of all purchasers of Provident securities from March 30,
1998 through March 5, 2003. These actions are based upon circumstances
involved in the restatement of earnings announced by Provident on March 5,
2003 and allege violations of federal securities laws by the defendants in
Provident's financial disclosures during the period from March 30, 1998
through March 5, 2003. They seek an unspecified amount of damages and, in the
cases filed by Waldbaum and McKay, reimbursement of all executive bonuses
received during that period.
On March 7 and 18, 2003, respectively, derivative actions were filed by the
Plumbers and Pipefitters Location 572 Pension Fund and shareholder Berg on
behalf of Provident versus Provident's directors in the same court. These
suits were also concerned with the restatement of earnings and allege that
the defendants breached fiduciary duties owed to Provident and are
responsible for the conditions that led to the restatement and its
consequences and sales of stock and other actions by certain officers and
directors and seek recovery from the defendants of an unspecified amount of
damages. A similar action was filed in the Court of Common Pleas of Hamilton
County, Ohio on March 26, 2003 by shareholder Weinstein against the directors
and two officers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None in the fourth quarter.
-4-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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.
2002 2001
------------------------------------- -------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
High Close $28.05 $29.51 $31.35 $29.97 $26.29 $35.09 $33.37 $37.38
Low Close 21.48 24.28 24.42 22.17 21.41 24.90 27.06 25.88
Period End Close 26.03 25.09 29.01 28.80 26.28 25.25 32.92 28.13
Cash Dividends .24 .24 .24 .24 .24 .24 .24 .24
At March 31, 2003, there were 4,942 holders of record and an additional
11,413 non-registered or "street name" holders of Provident's Common Stock.
Provident paid dividends on its Common Stock of $47.4 million and $47.1
million during 2002 and 2001, respectively, and $0.9 million on its Preferred
Stock for both years. Provident's quarterly dividend rate per share was $.24
for 2002 and 2001. 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 26
included in "Notes to Consolidated Financial Statements."
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
For Year Ended December 31,
(Dollars In Millions ------------------------------------------------------------
Except Per Share Amounts) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Earnings:
Total Interest Income $ 841 $ 973 $ 906 $ 680 $ 657
Total Interest Expense (526) (703) (662) (430) (403)
-------- -------- -------- -------- --------
Net Interest Income 315 270 244 250 254
Provision for Loan and Lease Losses (99) (216) (133) (46) (29)
Noninterest Income 805 757 660 537 279
Noninterest Expense (876) (813) (680) (544) (323)
-------- -------- -------- -------- --------
Income (Loss) Before Income Taxes 145 (2) 91 197 181
Applicable Income Taxes (50) 1 (34) (70) (63)
-------- -------- -------- -------- --------
Net Income (Loss) $ 95 $ (1) $ 57 $ 127 $ 118
======== ======== ======== ======== ========
Per Common Share Data:
Basic Earnings (Loss) $ 1.94 $ (0.04) $ 1.14 $ 2.66 $ 2.47
Diluted Earnings (Loss) 1.88 (0.04) 1.12 2.58 2.38
Dividends Paid .96 .96 .96 .88 .80
Book Value 17.91 16.15 18.79 17.89 16.30
Selected Balances at December 31:
Total Investment Securities 4,215 3,486 3,014 2,111 1,598
Total Loans and Leases 9,134 8,950 7,996 6,634 5,879
Reserve for Loan and Lease Losses 201 241 159 95 80
Leased Equipment 2,350 2,651 2,386 1,807 1,207
Total Assets 17,540 16,561 14,997 11,849 9,576
Noninterest Bearing Deposits 1,142 995 1,293 1,185 679
Interest Bearing Deposits 8,707 7,859 7,536 6,045 5,277
Long-Term Debt and Junior
Subordinated Debentures 4,294 4,532 4,353 2,515 1,764
Total Shareholders' Equity 880 802 924 877 777
Off-Balance Sheet Managed Assets 2,068 3,138 4,621 4,641 2,571
Other Statistical Information:
Return on Average Assets 0.58% -0.01% 0.42% 1.20% 1.29%
Return on Average Equity 11.27 (0.11) 6.32 16.20 15.45
Dividend Payout Ratio 50.64 n/m 84.43 32.36 32.19
Capital Ratios at December 31:
Total Equity to Total Assets 5.02% 4.84% 6.16% 7.40% 8.12%
Tier 1 Leverage Ratio 7.81 6.65 8.21 9.67 8.43
Tier 1 Capital to Risk-Weighted Assets 9.40 7.95 8.56 8.57 8.24
Total Risk-Based Capital to
Risk-Weighted Assets 11.43 10.71 10.60 10.82 10.85
Loan Quality Ratios at December 31:
Reserve for Loan and Lease Losses to
Total Loans and Leases 2.20% 2.69% 1.99% 1.43% 1.36%
Reserve for Loan and Lease Losses to
Nonaccrual Loans 120.80 136.35 165.71 170.98 178.09
Nonaccrual Loans to Total Loans
and Leases 1.82 1.98 1.20 0.84 0.77
Net Charge-Offs to Average Total
Loans and Leases 1.59 1.63 1.04 0.51 0.42
- --------------------
n/m - not meaningful
-6-
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 (the "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
loans and leases, 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.
RESTATEMENT OF FINANCIAL RESULTS
On March 5, 2003, Provident announced that it would restate its operating
results for the years 1997 through 2001 and the interim periods for 2002. The
restatement of previously reported operating results were attributed to
unintentional errors in the accounting for nine auto lease financing
transactions originated between 1997 and 1999. The errors that existed in the
accounting for these transactions were first discovered by internal finance
staff in connection with the testing and installation of a financial model
that identified differences in income that was originally recorded, compared
with the income generated by the financial model.
A review of the accounting for the nine transactions also concluded that none
of the transactions should have been reported as off-balance sheet leases.
The appropriate accounting was to report the transactions as on-balance sheet
leases with all assets and related liabilities included on the balance sheet.
Provident's audit committee, through legal counsel, engaged the accounting
firm of PricewaterhouseCoopers LLP on March 12, 2003 for the purpose of
conducting a review of the company's restatement. Provident's management
affirmed, based upon the review of its advisors, its prior conclusion that
the accounting errors that led to the restatement were unintentional.
However, another issue surfaced as a result of the independent review.
Provident has historically recorded its auto leases as direct finance leases.
This matches interest income with interest expense and is similar to how
Provident records all of its loans. Provident has now determined that its
auto leases do not meet the requirements for direct finance lease
classification under Financial Accounting Standards No. 13, titled
"Accounting for Leases."
Since 1994, an important factor Provident has relied upon in determining the
classification of its auto lease portfolio has been its residual value
insurance. In general, Provident has obtained residual value insurance for
its auto leases on a pool basis by year of origination. Its insurance is
commonly referred to as "capped" insurance. Provident has now determined that
this type of insurance coverage, while effective in removing residual risk,
does not result in direct finance lease classification for its auto leases.
As a result, Provident has reclassified all of the auto leases on its balance
sheet as operating leases and reported them as leased equipment, instead of
-7-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
finance leases, which were previously reported in the loan category. The
reclassification will affect auto leases originated from 1994 through 2002.
During this period, the company's auto lease originations totaled $4.7
billion and had a remaining balance of $2.1 billion at December 31, 2002.
Income to be recognized in future years, beginning with 2003, will be
increased by an aggregate amount substantially similar to the additional
restatement. In addition, this restatement has no impact on Provident's cash
flows.
The results of the restatement are reflected in the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, this Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Selected Financial Data for all periods reported upon in this Form 10-K. See
Note 3 included in "Notes to Consolidated Financial Statements" for
additional information concerning the restatement.
RESULTS OF OPERATIONS
Performance Summary
The following table summarizes three-year financial data for Provident, along
with calculated variances from the prior year:
Percentage
Year Ended December 31, Increase (Decrease)
(Dollars in Millions ----------------------------------------------------------
Except Per Share Data) 2002 2001 2000 2002/01 2001/00
- ---------------------------------------------------------------------------------------------------
Net Interest Income $ 315 $ 270 $ 244 17% 11%
Noninterest Income 805 757 660 6 15
Total Revenue 1,120 1,027 904 9 14
Provision for Loan and Lease Losses 99 216 133 (54) 62
Noninterest Expense 876 813 680 8 20
Net Income 95 (1) 57 - (102)
Total Loans and Leases 9,134 8,950 7,996 2 12
Leased Equipment 2,350 2,651 2,386 (11) 11
Total Assets 17,540 16,561 14,997 6 10
Total Off-Balance Sheet Managed Assets 2,068 3,138 4,621 (34) (32)
Total Deposits 9,849 8,854 8,829 11 0
Long-Term Debt and Junior
Subordinated Debentures 4,294 4,532 4,353 (5) 4
Stockholders' Equity 880 802 924 10 (13)
Per Common Share:
Book Value 17.91 16.15 18.79 11 (14)
Diluted Earnings (Loss) 1.88 (0.04) 1.12 - -
Ratio Analysis:
Net Interest Margin 2.41% 2.19% 2.40%
Return on Average Equity 11.27% -0.11% 6.32%
Return on Average Assets 0.58% -0.01% 0.42%
Average Equity to
Average Assets 5.12% 5.59% 6.70%
Dividend Payout to
Net Earnings 50.64% n/m 84.43%
- --------------------
n/m - not meaningful
Provident reported net income (loss) of $95.5 million, ($1.0) million and
$56.5 million for 2002, 2001 and 2000, respectively. Earnings (loss) per
diluted share was $1.88 for 2002, compared to ($0.04) for 2001 and $1.12 for
2000. Return on average equity was 11.27%, (0.11%) and 6.32% and return on
average assets was 0.58%, (0.01)% and 0.42% for the three years ended 2002,
2001 and 2000, respectively.
-8-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income and financial performance ratios improved for 2002 as compared to
2001 due primarily to lower credit charges. The provision for loan and lease
losses decreased $116.0 million, while other credit costs (included in
noninterest expense) representing charges for the write-down of foreclosed
property and leased equipment decreased $17.4 million. The higher than normal
provision and credit-related costs in 2001 were due primarily to the weakened
economy and the events of September 11, 2001. Although the economy remained
sluggish during 2002, credit-related volatility began to stabilize. As a
result of the improved loan quality outlook and the charge-off of several
loans and leases that had been part of the year-end 2001 loan loss reserve,
Provident lowered its loan loss reserve ratio from 2.69% to 2.20% during
2002.
The lower net income and financial performance ratios for 2001 as compared to
2000 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 its 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 1.99% to
2.69% during 2001.
A second reason for lower earnings in 2001 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. No gains were recognized from
securitization transactions during 2001 while $44 million was recognized
during 2000.
Revenue (net interest income plus noninterest income) increased 9% during
2002 over 2001 and 14% during 2001 over 2000. Net interest income increased
$45 million, or 17%, for 2002 compared to 2001, after increasing $27 million,
or 11%, in 2001 compared to 2000. Higher net interest income was primarily
the result of growth in the investment portfolio for 2002 and in the lending
portfolio for 2001. Noninterest income increased $49 million in 2002 while
increasing $96 million in 2001. The increase in noninterest income during
2002 and 2001 was primarily the result of an increase in leasing income in
both years. Gain on sales of loans and leases, a component of noninterest
income, was $15.7 million, $6.3 million and $44.9 million for 2002, 2001 and
2000, respectively. The increase for 2002 was primarily the result of gains
recognized from whole-loan sales (without recourse) of residential loans,
while the decrease for 2001 resulted from management's decision to
restructure securitizations as secure financings and thereby eliminate the
use of gain-on-sale accounting as was employed in 2000.
-9-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total noninterest expense was $876 million, $813 million and $680 million for
2002, 2001 and 2000, respectively. Included in 2000 is $39.3 million for
merger and restructuring charges related to the acquisition of Fidelity
Financial of Ohio and other post-merger business line restructurings. The
increase in noninterest expense during 2002 was primarily the result of three
activities. First, Provident is investing in businesses where strong growth
opportunities exist, including middle market commercial lending, middle
market equipment leasing and mortgage servicing. Also, significant
investments continue to be made within the credit and risk management
functions. Offsetting these increases were lower write-downs of foreclosed
properties and leased equipment. The increase in noninterest expense during
2001 was primarily the result of an increase in leasing expense. Noninterest
expense during 2001 was also impacted by activities of Red Capital Group,
which was acquired in the second half of 2000, and additional investments
being made within existing businesses where growth opportunities exist.
Total assets at December 31, 2002, 2001 and 2000 were $17.5 billion, $16.6
billion and $15.0 billion, respectively. Total assets increased during 2002
primarily as a result of an increase in investment securities, middle market
equipment lease financing and home equity loans. Partially offsetting these
increases were reductions in nonconforming residential loans, structured
finance loans, large equipment leases and auto leases. The fluctuations in
these loan and lease balances reflect management's decision to lower the risk
profile of its loan and lease portfolio. 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.
Nonperforming assets at December 31, 2002 decreased from year-end 2001, while
year-end 2001 significantly increased from year-end 2000. The ratio of
nonperforming assets to total assets was 1.04%, 1.19% and 0.70% as of
December 31, 2002, 2001 and 2000, respectively. The changes in nonperforming
asset levels and other asset quality indicators resulted in decisions to
lower the ratio of reserve for loan and lease losses to total loans and
leases by 49 basis points to 2.20% as of December 31, 2002, and increase the
ratio by 70 basis points to 2.69% as of year-end 2001.
Total deposits for 2002, 2001 and 2000 were $9.8 billion, $8.9 billion and
$8.8 billion, respectively. Commercial deposits increased 68% to $1.1 billion
during 2002 while retail deposits increased 16% to $5.6 billion during 2001.
Offsetting the increase in retail deposits was a decrease in securitization
trust deposits held as credit enhancements, which were released during 2001.
Shareholders' equity at December 31, 2002, 2001 and 2000 was $880 million,
$802 million and $924 million, respectively. The increase in shareholders'
equity during 2002 was due principally to earnings exceeding dividends paid
and an increase in the mark-to-market on investment securities. The decrease
in shareholders' equity during 2001 was primarily the result of the adoption
of the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and dividends
paid.
-10-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business Initiatives
During the past two years, Provident's profitability has been significantly
impacted by the downturn in the nation's economy and the resulting credit
deterioration of its lending portfolio. In order to compete effectively in
today's economy and grow shareholder value, Provident's goal is to become a
lower risk company engaged in achieving predictable and profitable long-term
earnings growth. Examples of how this goal is being achieved follows:
o Discontinued or De-emphasized Higher Risk Lending Products: Provident is
reducing or exiting businesses with higher credit risk and where the
benefits received do not justify the risks taken. Provident has
de-emphasized both its Structured Finance business unit and its
Nonconforming Residential Lending Portfolio. Structured Finance provided
senior debt to support leveraged financings including management buyouts,
recapitalizations, acquisitions and business expansions. While Provident
continues to originate nonconforming residential loans, these loans are no
longer being held, but are sold with no retained recourse (credit risk).
These loans are being sold to third-parties whereby Provident recognizes a
gain on the sale and sometimes ongoing loan servicing fees.
Lending businesses where originations have been significantly reduced
include Large Equipment Leasing and Auto Leasing business units. Large
Equipment Leasing is the financing of assets such as corporate and
commercial aircraft, construction, distribution, manufacturing and mining
equipment, as well as transportation equipment including trucks, tractors
and freight containers. Auto lease originations have also been
significantly reduced due to the overall complexity of the business and
its thin margins. Management believes that capital could be better
deployed elsewhere.
o Expansion of Lower Risk Lending Products: Funding formerly used in the
higher risk areas noted above is being re-deployed toward lending products
which have lower credit risk and less volatile earnings. Provident is
currently expanding its Regional Commercial Banking, Middle Market
Equipment Leasing, and Prime Home Equity business units. Each of these
business units are viewed by management as being areas of expertise for
Provident with lower risk profiles and where growth opportunities exist.
o Monitoring of Risk: Over the past year, Provident has significantly
enhanced its monitoring of risk within the company. The Credit and Risk
Management Group is responsible for establishing the framework for
managing and overseeing Provident's credit, operational and compliance
risks. Accomplishments within this area include improved and expanded
credit policies, implementation of an expanded risk rating system and
updated credit risk factors, as well as the addition of portfolio and
information specialists, retail analytics staff and centralized risk
management operation units. This has resulted in the timely resolution of
credit issues, improved credit quality and improved reporting, analysis
and forecasting of the credit quality of the lending portfolio.
-11-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Expansion of Fee Revenue Businesses: Provident is also investing in
businesses that generate fee income. These businesses provide Provident
with a steady stream of income, with lower risk, while utilizing lower
levels of capital. Businesses which fit this description include Red
Capital Group, Capstone and Mortgage Banking. Each of these businesses
provide a platform to generate fee income from originating, selling and
servicing of commercial and residential mortgage loans.
o Higher Concentration of Transaction Deposits: Stronger efforts are being
made to obtain low-cost transaction deposits. Included in these efforts is
the offering of a no fee deposit account product, improved service and
delivery processes, the use of "Vista", a state-of-the-art contact
management and relationship building software tool, in all branches,
increased training and enhanced incentive plans for branch associates,
expanded focus on commercial lending relationships to include their
deposit business, and improved internet banking capabilities.
Business Lines
The following table provides selected financial information by lines of
business for the past three years:
Percentage
Increase (Decrease)
-------------------
(Dollars in Millions) 2002 2001 2000 2002/01 2001/00
- ------------------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 366.7 $ 373.5 $ 301.1 (2)% 24 %
Retail Banking 636.2 566.9 506.5 12 12
Mortgage Banking 107.4 86.5 96.4 24 (10)
Corporate Center 10.8 - .2 - (100)
--------- ----------- ---------
$ 1,121.1 $ 1,026.9 $ 904.2 9 % 14 %
========= =========== =========
Net Income:
Commercial Banking $ 57.7 $ (0.8) $ 60.8 - % - %
Retail Banking 27.1 6.0 19.9 352 (70)
Mortgage Banking 9.5 (6.2) 2.7 - -
Corporate Center 1.2 - (26.9) - -
--------- ----------- ---------
$ 95.5 $ (1.0) $ 56.5 - % - %
========= =========== =========
Average Assets:
Commercial Banking $ 7,039 $ 6,896 $ 5,457 2 % 26 %
Retail Banking 4,694 4,389 3,618 7 21
Mortgage Banking 1,597 2,075 1,248 (23) 66
Corporate Center 3,208 2,688 3,042 19 (12)
--------- ----------- ---------
$ 16,538 $ 16,048 $ 13,365 3 % 20 %
========= =========== =========
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.
o Transfer Pricing: Provident utilizes a matched funded transfer pricing
methodology that in most cases 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.
-12-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Provision for Loan and Lease Losses: Business lines are charged for
provision based upon its level of net charge-offs as well as the size and
composition of its lending 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 balance sheet and income
statement items not related to the primary business lines, and gain/loss
on the sale of investment securities.
Business line descriptions and analyses follow:
o Commercial Banking provides a broad range of commercial banking and
commercial real estate products and services. Areas of focus and expertise
include regional middle market lending, equipment leasing and financing,
cash management, and loan servicing, transaction structuring and
commercial mortgage banking services for the multi-family housing
industry.
Net income for Commercial Banking for the years ending December 31, 2002,
2001 and 2000 was $57.7 million, ($0.8) and $60.8 million, respectively.
The fluctuation in net income can be primarily attributed to provision and
other credit-related charges. Commercial Banking performed well during the
first three quarters of 2000. Asset growth was strong and income benefited
from gains recognized from the securitization of equipment leases.
However, during the fourth quarter of 2000, Commercial Banking began to
feel the impact of a slowing economy. During that quarter, Commercial
Banking took several large charge-offs and placed additional loans on
nonaccrual which significantly reduced income. The condition of the
economy continued to decline during 2001 which was accentuated by the
impact of the events of September 11, 2001. The majority of the decline in
income during 2001 was related to credit write-offs and residual
impairments from loans and leases to the commercial airline industry. In
addition, net 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. Although the economy has not
recovered, credit related volatility declined during 2002. Commercial
Banking benefited from lower provision and other credit related charges
during 2002 as compared to 2001.
As a result of earnings volatility, management is repositioning this
business line so it can grow with a more predictable earnings pattern.
Management is de-emphasizing its higher credit risk areas of structured
finance lending and large equipment leasing while growing its lower credit
risk areas of middle market leasing and regional middle market commercial
lending units.
Provident is also investing in businesses that generate fee income. These
businesses provide a steady stream of income with reduced risk while
utilizing lower levels of capital. One such business, Red Capital Group,
provides a platform to generate fee income from originating, selling and
servicing commercial mortgage loans. Red Capital's revenue has increased
30% and net income has increased 40% in 2002 compared to 2001.
-13-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Retail Banking provides a variety of banking and investment products and
services to retail consumers and businesses. Services are delivered
through various delivery channels including Financial Centers, ATMs,
telephone and the internet. Primary operating areas include Consumer and
Small Business Banking, Home Equity Lending, and Provident Financial
Advisors.
Net income for Retail Banking was $27.1 million, $6.0 million and $19.9
million for the years ended December 31, 2002, 2001 and 2000,
respectively. Net income increased during 2002 primarily as a result of
increased net interest income on deposits and lower provision for loan and
lease losses. The lower provision was due to slower loan growth and a
lower level of loan loss reserves as compared to 2001. The decrease in net
income for 2001 was related primarily to higher loan loss provision and
lower gain on sales of loans revenue. The higher provision was due to
higher loan growth and a higher level of loan loss reserves as compared to
2000.
Loans and auto leases for Retail Banking were flat during 2002 and
increased 19% during 2001. An increase in home equity loans was offset by
a decrease in auto leases during 2002. Both home equity loans and auto
leases increased in 2001. Retail Banking is expanding its home equity
product line to lower the overall risk profile of its lending portfolio.
Auto leasing is being de-emphasized as it is a complex business with thin
margins.
Retail Banking has experienced growth in deposits during both 2002 and
2001. Average retail deposits grew by 7% during 2002 and 14% during 2001.
Deposit growth in 2002 came primarily from growth in transaction accounts.
Overall, the growth during 2002 was slower than 2001 because of less
aggressive pricing on retail certificates of deposit. Provident plans to
further enhance its distribution system to improve customer acquisition
and market penetration.
o Mortgage Banking offers traditional and non-traditional residential
mortgage loans to consumers, and also provides fee-based loan processing,
loan warehousing and servicing for third party originators. Loans are
originated through retail and broker channels and are sold on a whole-loan
basis. Whole-loan sales refer to the transfer of credit risk along with
the payment stream of the loan. Primary operating areas include Mortgage
Services, Warehouse Lending Services and the National Servicing Center.
Net income for 2002 was $9.5 million as compared to a net loss of $6.2
million for 2001 and net income of $2.7 million for 2000. Net income for
2002 rose primarily from increased activity in warehouse lending
production, the sub-servicing portfolio, and whole-loan sales. Loans
serviced for others increased from $0.4 billion at December 31, 2001 to
$5.1 billion at December 31, 2002 as Mortgage Banking added significant
levels of servicing portfolios during 2002. Gains of $13.7 million were
recognized from nonconforming residential whole-loan sales during 2002
compared to $3.2 million during 2001. The net loss reported 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 sales 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.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Mortgage Banking, in following the overall company strategy of risk
reduction, continues to implement strategic initiatives to reduce the
business' risk profile. Nonconforming loan originations have been sold to
investors on a whole-loan basis. Mortgage Banking has also developed new
businesses to create a diverse array of product offerings in the mortgage
market. Mortgage Banking is continuing with its strategy of building
national mortgage alliances in order to generate qualified leads for home
mortgage loans on a nationwide basis and sell them to investors.
Related Party Transactions
Provident, in its normal course of business, has had transactions with its
directors, officers, principal shareholders and affiliates including American
Financial Group, Inc. and its subsidiaries. All such transactions are on
terms no less favorable to Provident than those which could be obtained with
non-affiliated parties. These transactions include the leasing of its
corporate headquarters and additional office space, insurance coverage,
record retention services, guard services, extensions of credit, and
maintaining investments of commercial paper, repurchase agreements and
deposit accounts. For details concerning these transactions, see Note 24 of
the "Notes to Consolidated Financial Statements."
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 a principal source of income for Provident. In
2002, 2001 and 2000, net interest income on a taxable equivalent basis was
$315.7 million, $270.6 million and $243.7 million, respectively.
Net interest margin represents net interest income as a percentage of average
interest earning assets. The net interest margin was 2.41%, 2.19% and 2.40%
for 2002, 2001 and 2000, respectively.
-15-
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%. Nonaccrual loans
are included in the loans and lease categories.
Year Ended December 31,
--------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ---------------------------- -----------------------------
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 $ 4,312 $ 273.4 6.34% $ 4,655 $ 377.2 8.10% $ 4,345 $ 426.7 9.82%
Mortgage 909 56.5 6.22 864 69.2 8.02 667 61.1 9.17
Construction 546 24.6 4.51 570 40.5 7.10 601 54.3 9.03
Lease Financing 1,199 109.9 9.16 958 92.4 9.65 378 37.5 9.92
Consumer Lending:
Installment 1,054 65.4 6.21 774 68.7 8.87 515 51.6 10.02
Residential 737 70.6 9.59 1,008 99.9 9.91 388 42.3 10.90
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Loans/Leases 8,757 600.4 6.86 8,829 747.9 8.47 6,894 673.5 9.77
Investment Securities 3,882 217.7 5.61 3,158 204.5 6.47 3,217 227.8 7.08
Federal Funds Sold and
Reverse Repurchase
Agreements 125 3.4 2.71 92 4.2 4.59 23 1.5 6.51
Other Short-Term
Investments 341 20.0 5.85 297 16.8 5.66 30 2.8 9.28
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Earning Assets 13,105 841.5 6.42% 12,376 973.4 7.86% 10,164 905.6 8.91%
Cash and Noninterest
Bearing Deposits 255 255 241
Leased Equipment 2,477 2,491 2,040
Other Assets 701 926 920
-------- -------- --------
Total Assets $ 16,538 $ 16,048 $ 13,365
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Deposits:
Demand Deposits $ 696 9.8 1.40% $ 484 12.1 2.50% $ 370 9.9 2.68%
Savings Deposits 1,472 29.0 1.97 1,548 56.5 3.65 1,379 68.5 4.97
Time Deposits 6,134 223.4 3.64 5,828 317.8 5.45 4,838 301.9 6.24
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Deposits 8,302 262.2 3.16 7,860 386.4 4.92 6,587 380.3 5.77
Short-Term Debt:
Federal Funds
Purchased and
Repurchase Agreements 1,182 30.3 2.56 1,156 46.8 4.05 1,208 74.5 6.17
Commercial Paper 280 5.3 1.91 229 9.0 3.92 203 12.3 6.04
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Short-Term Debt 1,462 35.6 2.44 1,385 55.8 4.03 1,411 86.8 6.15
Long-Term Debt 3,990 204.7 5.13 3,877 230.1 5.93 2,789 174.8 6.27
Junior Subordinated
Debentures 451 23.3 5.16 422 30.5 7.24 235 20.0 8.53
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest Bearing
Liabilities 14,205 525.8 3.70% 13,544 702.8 5.19% 11,022 661.9 6.01%
Noninterest Bearing
Deposits 945 1,220 1,215
Other Liabilities 541 387 233
Shareholders' Equity 847 897 895
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Liabilities and
Shareholders' Equity $ 16,538 $ 16,048 $ 13,365
======== ======== ========
Net Interest Income $ 315.7 $ 270.6 $ 243.7
======= ======= =======
Net Interest Margin 2.41% 2.19% 2.40%
==== ==== ====
Net Interest Spread 2.72% 2.67% 2.90%
==== ==== ====
-16-
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,
------------------------------------------------
2002 Changes from 2001 Changes from
2001 Due to 2000 Due to
---------------------- ----------------------
(In Thousands) Volume Rate Volume Rate
- ----------------------------------------------------------------------------------
Interest Earned On:
Loans and Leases:
Corporate Lending:
Commercial $ (26,271) $ (77,508) $ 28,921 $ (78,502)
Mortgage 3,449 (16,189) 16,463 (8,364)
Construction (1,681) (14,192) (2,684) (11,087)
Lease Financing 22,311 (4,845) 55,989 (1,064)
Consumer Lending:
Installment 20,724 (23,977) 23,526 (6,504)
Residential (26,138) (3,179) 61,856 (4,179)
--------- --------- --------- ---------
Net Loans and Leases (7,606) (139,890) 184,071 (109,700)
Investment Securities 42,933 (29,647) (4,109) (19,239)
Federal Funds Sold and
Reverse Repurchase Agreements 1,217 (2,068) 3,309 (554)
Short-Term Investments 2,529 594 15,514 (1,514)
--------- --------- --------- ---------
Total 39,073 (171,011) 198,785 (131,007)
--------- --------- --------- ---------
Interest Paid On:
Demand Deposits 4,136 (6,441) 2,882 (708)
Savings Deposits (2,643) (24,864) 7,691 (19,727)
Time Deposits 15,968 (110,354) 56,971 (41,079)
--------- --------- --------- ---------
Total Deposits 17,461 (141,659) 67,544 (61,514)
Short-Term Debt:
Federal Funds Purchased
and Repurchase Agreements 1,016 (17,567) (3,107) (24,555)
Commercial Paper 1,695 (5,321) 1,392 (4,708)
--------- --------- --------- ---------
Total Short-Term Debt 2,711 (22,888) (1,715) (29,263)
Long-Term Debt 6,560 (31,879) 64,954 (9,654)
Junior Subordinated Debentures 1,974 (9,251) 13,944 (3,426)
--------- --------- --------- ---------
Total 28,706 (205,677) 144,727 (103,857)
--------- --------- --------- ---------
Net Interest Income $ 10,367 $ 34,666 $ 54,058 $ (27,150)
========= ========= ========= =========
Noninterest Income
The following table details the components of noninterest income and their
change since 2000:
Percentage
Increase (Decrease)
--------------------
(Dollars in Thousands) 2002 2001 2000 2002/01 2001/00
- --------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 45,184 $ 39,924 $ 35,138 13% 14%
Loan Servicing Fees 33,835 33,026 37,849 2 (13)
Commercial Mortgage Banking Revenue 25,354 29,490 5,674 (14) 420
Other Service Charges and Fees 48,563 38,833 49,108 25 (21)
Leasing Income 605,887 584,065 461,209 4 27
Gain on Sales of Loans and Leases:
Non-Cash - - 34,447 - (100)
Cash 15,691 6,311 10,452 149 (40)
Warrant Gains 8,186 412 7,500 1,887 (95)
Security Gains 2,596 - 155 - (100)
Other 20,196 24,375 19,084 (17) 28
-------- -------- --------
Total Noninterest Income $805,492 $756,436 $660,616 7% 15%
======== ======== ========
-17-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Explanations for significant changes in noninterest income by category
follow:
o Service Charges on Deposit Accounts: Increases in overdraft fees and
service charges on corporate deposit accounts were the primary reasons for
the increase in service charges on deposit accounts in 2002. The increase
in 2001 was primarily the result of pricing and volume increases on
corporate and consumer deposit accounts and higher ATM interchange fees.
o Loan Servicing Fees: Loan servicing fees were stable during 2002 as
decreases in fees from servicing securitized residential mortgage and
credit card portfolios were offset by increases in fees from servicing
multi-family loans by Red Capital Group and residential mortgage loans by
Mortgage Banking. Loan servicing fees decreased during 2001 due primarily
to a decrease in fees from warehouse lending and the servicing of
securitized residential mortgages, which more than offset an increase in
the servicing of multi-family loans. Total loans serviced for others at
December 31, 2002, 2001 and 2000 were $17.5 billion, $12.5 billion and
$10.1 billion.
o Commercial Mortgage Banking Fees: A decrease in commercial mortgage
banking fees from Red Capital Group was the primary reason for the
decrease in 2002. The increase in 2001 was due primarily to an increase in
fees from Red Capital Group, which was acquired in September of 2000.
o Other Service Charges and Fees: Other service charges and fees increased
during 2002 due primarily to an increase in other fee income generated
from Mortgage Banking and funds management fees, more than offsetting a
decrease in credit card fees. Other service charges and fees decreased
during 2001 due primarily to decreases in credit card fees, funds
management fees and other miscellaneous fees.
o Leasing Income: Leasing income increased during 2002 and 2001 due
primarily to increases in income from auto leases. Income from auto leases
increased $26 million during 2002 and $123 million during 2001 and
accounted for more than 92% of leasing income during 2002, 2001 and 2000.
Income from auto leasing has increased primarily because of the increase
in size of the auto lease portfolio since 1999.
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 totaled $8.2 million for 2002 as
compared to $0.4 million and $7.5 million for years 2001 and 2000,
respectively.
-18-
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 sales of loans and leases
increased $9.4 million in 2002, due primarily to gains recognized from the
sale of nonconforming residential mortgage loans on a whole-loan basis, a
strategy that Provident implemented during the third quarter of 2001. The
$38.6 million decrease in 2001 was a 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) 2002 2001 2000
------------------------------------------------------------------------------
Non-Cash Gains -- Loan and Lease Sales:
Nonconforming Residential Loan Securitizations $ - $ - $30,291
Prime Consumer Home Equity Securitizations - - 4,156
------- ------- -------
- - 34,447
------- ------- -------
Cash Gains -- Loan and Lease Sales:
Equipment Lease Securitizations - - 9,083
Nonconforming Residential Whole-Loan Sales 13,698 3,177 -
Conforming Residential Whole-Loan Sales 712 1,544 729
Other Loan Sales 1,281 1,590 640
------- ------- -------
15,691 6,311 10,452
------- ------- -------
$15,691 $ 6,311 $44,899
======= ======= =======
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 - Off-Balance Sheet and Derivative
Arrangements" and in Note 20 included in "Notes to Consolidated Financial
Statements."
o Other: The decrease in other income during 2002 was due primarily to a
decrease in income from equity investments. The increase in 2001 was due
primarily to increases in income from equity investments and trading
account activity.
Noninterest Expense
The following table details the components of noninterest expense and their
change since 2000:
Percentage
Increase (Decrease)
------------------
(Dollars in Thousands) 2002 2001 2000 2002/01 2001/00
- ---------------------------------------------------------------------------------------
Salaries, Wages and Benefits $233,178 $201,715 $172,903 16% 17%
Charges and Fees 30,531 31,888 22,099 (4) 44
Occupancy 23,637 22,605 20,631 5 10
Leasing Expense 416,508 402,372 300,711 4 34
Equipment Expense 24,345 25,234 26,045 (4) (3)
Professional Fees 25,990 24,507 21,735 6 13
Minority Interest Expense 7,069 - - - -
Merger and Restructuring Charges - - 39,300 - (100)
Other 114,770 104,663 76,977 10 36
-------- -------- --------
Total Noninterest Expense $876,028 $812,984 $680,401 8% 20%
======== ======== ========
-19-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Components of noninterest expense, along with an explanation as to their
fluctuations, follow:
o Salaries, Wages and Benefits: Compensation increased in 2002 due primarily
to increased staffing and incentive pay in areas where opportunities for
growth exist, such as middle market commercial lending, middle market
equipment leasing and mortgage servicing. Expense also increased within
the Credit and Risk Management Group as staff was added to better monitor
and control the overall risk of Provident, particularly credit risk within
the lending portfolio. Compensation increased in 2001 due to increased
commissions and staffing expenses associated with growth in the Commercial
Banking business line, primarily Red Capital Group.
o Charges and Fees: Charges and fees decreased in 2002 as the decrease in
goodwill amortization expense more than offset the increase in expenses
related to credit risk transfer transactions. Charges and fees increased
in 2001 due primarily to expenses related to credit risk transfer
transactions. Details concerning goodwill amortization and credit transfer
transactions are provided in Notes 7 and 21, respectively, included in
"Notes to Consolidated Financial Statements."
o Occupancy: Increases in depreciation expense, guard services and utilities
were the primary reasons for higher occupancy expense in 2002. An increase
in rent expense, reflecting the geographic expansion of Commercial
Banking, was the primary reason for higher occupancy expense in 2001.
o Leasing Expense: An increase in depreciation expense was the primary
reason for the increase in leasing expense for both 2002 and 2001.
Depreciation on auto leases is the primary component of depreciation
expense. Depreciation expense has increased primarily because of the
increase in size of the auto lease portfolio since 1999. Included in lease
expense was a $20 million write-down in residual values related to
aircraft leases that occurred in the third quarter of 2001 and a $5.7
million impairment charge on uninsured auto lease residual values in the
fourth quarter of 2001. The deterioration in residual values of aircraft
was a result of the terrorist actions of September 11, 2001 and its
financial impact on the airline industry.
o Equipment Expense: Equipment expense decreased in 2002 due primarily to a
reduction in depreciation expense. The decrease in equipment expense in
2001 was due primarily to reductions in maintenance and equipment rental
expenses.
o Professional Fees: Professional fees increased in both 2002 and 2001 due
primarily to legal, consulting and other professional fees related to loan
collections.
o Minority Interest Expense: Minority interest expense relates to dividends
payable on $165 million of Preferred Stock of PFGI Capital Corporation, a
real estate investment trust that was formed late in the second quarter of
2002. The dividends are payable at an annualized rate of 7.75%. Additional
information on minority interest may be found on Note 13 of "Notes to
Consolidated Financial Statements."
-20-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
o Other: Larger expenses included within other noninterest expense include
marketing ($11.0 million, $9.2 million and $9.1 million in 2002, 2001, and
2000, respectively), travel ($8.9 million, $9.0 million and $8.2 million
in 2002, 2001 and 2000, respectively), franchise taxes ($7.0 million, $8.5
million and $8.1 million in 2002, 2001 and 2000, respectively), data
processing expense ($7.8 million, $5.6 million and $5.7 million in 2002,
2001 and 2000, respectively), insurance expense ($13.1 million, $10.4
million and $8.3 million in 2002, 2001 and 2000, respectively), and the
write-down in value of repossessed aircraft ($4.0 million in 2001).
FINANCIAL CONDITION
Short-Term Investments and Investment Securities
As of December 31, 2002 and 2001, federal funds sold and reverse repurchase
agreements outstanding were $188.9 million and $123.0 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, 2002 and 2001, Provident held $127.8 million and $101.2,
respectively, in trading account securities. Provident trades investment
securities with the intention of recognizing short-term profits. These
securities are carried at fair value with realized and unrealized gains and
losses reported in other noninterest income.
Provident classified $436.9 million and $217.9 million of loans as held for
sale at December 31, 2002 and 2001, respectively. At year-end 2002, these
loans consisted of $344.8 million of multifamily loans, $82.5 million of
nonconforming residential mortgage loans and $9.6 million of conforming
residential mortgage loans. The multifamily loans are either insured by the
Federal Housing Association or subject to purchase contracts from Fannie Mae
or Freddie Mac. 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 $4.2 billion and $3.5 billion as of December 31, 2002 and
2001, respectively. U.S. government agency mortgage-backed securities
accounted for the majority of the increase.
-21-
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) 2002 2001 2000
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 310,244 $ 302,912 $ 326,721
State and Political Subdivisions 1,838 3,185 3,317
Mortgage-Backed Securities 3,240,192 2,700,620 1,938,546
Asset-Backed Securities - - 44,257
Other Securities 606,237 503,884 728,363
---------- ---------- ----------
Total Securities $4,158,511 $3,510,601 $3,041,204
========== ========== ==========
Market Value at December 31,
------------------------------------
(In Thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------
U.S. Treasury and Federal Agency Debentures $ 316,143 $ 306,556 $ 325,457
State and Political Subdivisions 1,875 3,199 3,301
Mortgage-Backed Securities 3,291,512 2,673,174 1,915,602
Asset-Backed Securities - - 42,061
Other Securities 605,708 503,129 727,200
---------- ---------- ----------
Total Securities $4,215,238 $3,486,058 $3,013,621
========== ========== ==========
The following table shows the December 31, 2002 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 amortized cost and effective yields weighted for the
scheduled maturity of each security. 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 $ 110,331 4.94% $ 749 1.67%
Due after 1 through 5 years 199,164 4.78 - -
---------- ---- -------- ----
Total $ 309,495 4.83% $ 749 1.67%
========== ==== ======== ====
State and Political Subdivisions:
Due after 5 through 10 years $ 403 5.91% $ - -%
Due after 10 years 1,435 7.66 - -
---------- ---- -------- ----
Total $ 1,838 7.28% $ - -%
========== ==== ======== ====
Mortgage-Backed Securities:
Due in one year or less $ 125,569 6.43% $ 59 2.28%
Due after 1 through 5 years 2,855,012 6.23 112,601 3.33
Due after 5 through 10 years 85,800 6.03 18,457 3.52
Due after 10 years 42,694 6.80 - -
---------- ---- -------- ----
Total $3,109,075 6.24% $131,117 3.36%
========== ==== ======== ====
Other Securities:
Due in one year or less $ - -% $ 54,567 1.08%
Due after 1 through 5 years 250 6.75 195,928 1.08
Due after 5 through 10 years - - 246,837 1.76
Due after 10 years 108,655 - - -
---------- ---- -------- ----
Total $ 108,905 6.75% $497,332 1.42%
========== ==== ======== ====
-22-
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, 2002 and 2001, total on-balance sheet loans and leases
were $9.1 billion and $9.0 billion, respectively. Provident had an additional
$2.1 billion and $3.1 billion of off-balance sheet loans and leases as of
year-end 2002 and 2001, respectively. As a result of recent earnings
volatility, management has re-evaluated the risk/reward relationships of its
lending portfolio. During the second half of 2001, Provident implemented a
whole-loan sale strategy for its nonconforming residential loans. Also,
management has decided to de-emphasize its structured finance lending and
large equipment leasing while placing a greater focus on its regional middle
market commercial lending and middle market equipment leasing. As a result of
these actions, Provident's lending portfolio has a lower concentration of
residential loans, higher concentrations of middle market corporate leases,
and a lower risk profile of commercial loans. 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) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------
Dollar:
Corporate Lending:
Commercial $ 4,482.4 $ 4,540.1 $ 4,580.2 $ 3,990.9 $ 3,278.0
Mortgage 960.6 939.8 823.5 576.6 546.5
Construction 510.3 528.0 610.5 559.8 450.6
Lease Financing 1,273.9 1,106.1 566.1 376.6 243.7
Consumer Lending:
Installment 1,306.8 913.4 580.1 476.5 650.1
Residential 599.8 922.7 835.5 653.7 710.3
---------- ---------- ---------- ---------- ----------
Total Loans and Leases $ 9,133.8 $ 8,950.1 $ 7,995.9 $ 6,634.1 $ 5,879.2
========== ========== ========== ========== ==========
Percentage:
Corporate Lending:
Commercial 49.1% 50.7% 57.3% 60.1% 55.7%
Mortgage 10.5 10.5 10.3 8.7 9.3
Construction 5.6 5.9 7.6 8.4 7.7
Lease Financing 13.9 12.4 7.1 5.7 4.1
Consumer Lending:
Installment 14.3 10.2 7.3 7.2 11.1
Residential 6.6 10.3 10.4 9.9 12.1
---------- ---------- ---------- ---------- ----------
Total Loans and Leases 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
-23-
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, 2002, including loan amounts on which interest
is not being accrued:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- ----------------------------------------------------------------------------------
Mortgage Warehousing Lines $ 639.7 14 $ 3.5
Real Estate Operators/Developers/General Contractors 541.2 12 0.8
Transportation 209.1 5 0.7
Banking and Finance 200.9 4 6.0
Healthcare 193.5 4 0.6
Retailing 171.9 4 5.9
Tourism and Entertainment 155.0 3 0.4
Metals 150.4 3 12.0
Machinery and Equipment 146.2 3 11.4
Eating and Drinking Establishments 129.3 3 4.0
Automobile Dealers 129.1 3 -
Business Services 127.1 3 14.2
Commercial Aviation Related (1) 118.3 3 24.1
Construction 117.5 3 3.3
Financial Services 105.9 2 0.1
Technology 87.3 2 3.0
Automotive Services/Parts 79.4 2 0.1
Plastics, Ceramics, Rubber and Other Products 68.3 2 3.0
Other (includes 20 industry types) 1,112.3 25 6.7
---------- --- -------
Total $ 4,482.4 100 $ 99.8
========== === =======
(1) Includes $27 million of loans related to the commercial airline industry, and
aircraft used in private, charter and corporate markets.
Mortgage warehousing lines increased significantly in the fourth quarter to
$640 million, reflecting Provident's continuing shift to origination and sale
activity in its mortgage business, as well as a surge in fourth quarter
volume. All loans are underwritten to Provident and secondary market
standards as part of Provident's control processes related to this activity.
At December 31, 2002, Provident had loans and leases of $178 million to
commercial airline carriers, including $27 million of commercial loans and
$151 million of finance and operating leases. As the events of September 11,
2001 have had a significant financial impact upon the airline industry and
the resale value of aircraft, Provident recorded credit costs and other
expenses of $34 million and $66 million during 2002 and 2001, respectively,
which were related to secured commercial airline loans and leases.
At December 31, 2002, Provident had approximately $802 million of commercial
loans that are to borrowers who have shared national credit loans. Generally,
shared national credit loans are loans that have a commitment amount 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
thirty-two industry types, with the largest industry concentration (real
estate) accounting for approximately 13% of its total shared national credit
loans. The real estate category is comprised of loans to borrowers with
different risks characteristics, including single family home developers,
commercial property owner/operators, and commercial realtors and property
managers. The average outstanding balance of a shared national credit loan
was $3.8 million.
-24-
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 commercial mortgage and
construction loans by property type at December 31, 2002:
Commercial Commercial Amount on
(Dollars in Millions) Mortgage Construction Total Percentage Nonaccrual
- ---------------------------------------------------------------------------------------------
Residential Development $ 142.0 $ 107.9 $ 249.9 17.0% $ 6.6
Shopping / Retail 138.6 105.5 244.1 16.6 -
Office / Warehouse 153.7 85.3 239.0 16.3 2.9
Apartments 135.6 50.2 185.8 12.6 2.0
Healthcare Facilities 118.0 6.5 124.5 8.5 -
Hotel / Motel 97.1 9.2 106.3 7.2 .1
Land 45.2 45.0 90.2 6.1 .6
Industrial Plants 18.9 10.2 29.1 2.0 -
Other Commercial Properties 111.5 90.5 202.0 13.7 1.3
------- ------- -------- ----- ------
$ 960.6 $ 510.3 $1,470.9 100.0% $ 13.5
======= ======= ======== ===== ======
As of December 31, 2002, Provident had $1.3 billion in commercial lease
financing. These leases were comprised of $1.1 billion of small and middle
market equipment leases and $0.2 billion of large equipment leases.
Commercial and real estate construction loans outstanding at December 31,
2002 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 $1,886.7 $2,116.6 $479.1 $4,482.4
Commercial Construction 213.2 263.9 33.2 510.3
Residential Construction - - 0.2 0.2
-------- -------- ------ --------
Total $2,099.9 $2,380.5 $512.5 $4,992.9
======== ======== ====== ========
Loans Due After One Year:
At predetermined interest rates $ 312.4
At floating interest rates 2,580.6
The following table shows the composition of the installment loan category by
loan type at December 31, 2002:
(Dollars in Millions) Amount Percentage
- ----------------------------------------------------------------------
Home Equity $1,110.7 85.0%
Indirect Installment 120.3 9.2
Direct Installment 60.1 4.6
Other Consumer Loans 15.7 1.2
-------- -----
$1,306.8 100.0%
======== =====
Credit Risk Management
Over the past year, Provident has significantly enhanced its Credit and Risk
Management function through additional experienced staff, new processes and
enhanced information and analytics. Provident's new tactics include a
strategic approach to the portfolio, balanced with valuing our key
relationship customers. Clear business and portfolio strategies allow for
focused marketing of new accounts, and aggressive management of both
non-strategic portfolios and problem loans.
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A significant change in the portfolio composition has and will continue to
occur as a result of these strategic decisions. Risk and return, volatility
and portfolio suitability have all been important considerations in this
change. These initiatives include de-emphasizing the structured finance
lending as well as originating the nonconforming residential loans only for
sale on a whole-loan basis. Regional middle market commercial lending, middle
market leasing and prime home equity loans are businesses which management
believes can be grown while generating more predictable future earnings
streams.
Enhanced processes have improved our understanding of publicly-identified
exit portfolios and the value of our continuing businesses and relationships.
More active use of an independent Special Assets Division, a revamped
internal Portfolio Risk Review unit, and an expanded Credit Officer network
allow Provident to ensure independent oversight and improved communication of
issues and problems throughout the portfolio. In addition, Credit and Risk
Management is responsible for the establishment and oversight of Provident's
credit risk policies addressing underwriting standards, internal lending
limits and methodologies for monitoring credit risk within the various loan
and lease portfolios. Changes to these policies enhance Provident's initial
and ongoing risk management and monitoring capabilities.
Provident has expanded and improved its analytical and reporting capacity,
which in turn has improved the timeliness and value of portfolio information.
Loans and leases are primarily monitored by closely following changes and
trends in risk characteristics. The characteristics are analyzed using
various techniques; including, credit scoring models for consumer and small
business loans and leases and risk ratings for larger commercial, commercial
mortgage and commercial construction loans. These risk ratings are assigned
based upon individual credit analysis and are aggregated for reporting to
senior management on a regular basis. These same analytics serve as the basis
for refining the rating system, and establishing portfolio wide targets and
caution levels. Early trends and thresholds trigger changes in strategy and
tactics including the use of secondary market alternatives to liquidate and
mitigate problem exposures and portfolio segments.
Provident maintains a reserve for loan and lease losses to absorb losses from
current outstandings and potential usage of 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 20 of the "Notes to
Consolidated Financial Statements." The following paragraphs provide
information concerning its on-balance sheet credit portfolio and unused
commitments.
The reserve for loan and lease losses 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.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The adequacy of the reserve for loan and lease losses is monitored on a
regular basis and reflects 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, specific industry
trends, loan concentrations, evaluation of specific loss estimates for all
significant problem loans, payment histories, collateral valuations, historic
charge-off and recovery experience, estimates of charge-offs for the upcoming
year and other pertinent information. Based upon the analyses, Provident
lowered its loan loss reserve to total loans by 49 basis points to 2.20%
during 2002 after raising the reserve ratio by 70 basis points in 2001.
Unfavorable business conditions and difficulties experienced by the airline
industry have caused Provident to take large loan loss provisions during the
past three 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 for industries other than
commercial airlines that were related to the events of September 11, 2001.
During 2002, Provident recorded an additional $34 million of credit costs
related to the airline industry. Although the economy remained sluggish
during 2002, credit-related volatility began to stabilize. Corporate
nonaccrual loans have declined $11.9 million since year-end 2001.
The reserve methodology considers potential losses in the commercial airline
portfolio as well as all other loan and lease types. Risks in the commercial
airline portfolio arise from principal reliance on borrower credit quality
and secondarily on equipment value. Based upon previous peak outstandings,
the majority of commercial airline loans and leases are to borrowers
considered to have better credit quality. Even within this segment, shorter
maturities have left Provident exposed to residual equipment values resulting
in modest charge-offs. Most of the prior charge-offs and valuation
adjustments dealt with transactions related to borrowers with weaker credit
quality, which exposed Provident to weaker equipment values. However, future
events could occur that may negatively impact our assessment of borrowers'
credit quality and equipment values leading to higher reserves and potential
future losses.
-27-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows selected information relating to Provident's
reserve for loan and lease losses:
December 31,
----------------------------------------------------
(In Thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------
Reserve for Loan and Lease
Losses at Beginning of Period $241,143 $159,118 $ 95,181 $ 80,179 $ 75,669
Provision Charged to Expense 99,549 215,545 133,477 46,110 29,348
Acquired Reserves - 10,003 2,377 1,263 -
Loans and Leases Charged Off:
Corporate Lending:
Commercial 81,371 105,711 63,497 25,145 14,403
Mortgage 183 844 96 247 3
Construction 850 - - - -
Lease Financing 48,501 26,622 2,892 6,736 5,173
Consumer Lending:
Installment 7,727 7,557 7,535 10,159 12,856
Residential 27,229 14,846 8,022 759 900
-------- -------- -------- -------- --------
Total Charge-Offs 165,861 155,580 82,042 43,046 33,335
-------- -------- -------- -------- --------
Recoveries:
Corporate Lending:
Commercial 10,274 2,675 3,406 2,742 836
Mortgage 137 8 20 42 1,344
Construction 21 - - - -
Lease Financing 9,821 3,068 1,290 3,102 226
Consumer Lending:
Installment 4,615 4,990 5,282 4,523 5,901
Residential 1,352 1,316 127 266 190
-------- -------- -------- -------- --------
Total Recoveries 26,220 12,057 10,125 10,675 8,497
-------- -------- -------- -------- --------
Net Loans and Leases
Charged Off 139,641 143,523 71,917 32,371 24,838
-------- -------- -------- -------- --------
Reserve for Loan and Lease
Losses at End of Period $201,051 $241,143 $159,118 $ 95,181 $ 80,179
======== ======== ======== ======== ========
On a percentage basis, the following table provides annual net charge-offs to
average total loans and leases by category:
December 31,
------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------
Corporate Lending:
Commercial 1.65% 2.21% 1.38% .63% .43%
Mortgage .01 .10 .01 .04 (.24)
Construction .15 - - - -
Lease Financing 3.23 2.46 .42 1.29 1.56
Consumer Lending:
Installment .30 .33 .44 .96 .98
Residential 3.51 1.34 2.04 .05 .09
---- ---- ---- --- ---
Net Charge-Offs to Average
Total Loans and Leases 1.59% 1.63% 1.04% .51% .42%
==== ==== ==== === ===
Explanation as to significant changes in charge-offs between 2000 and 2002
follows:
o Commercial: Net charge-offs to average loans were 1.65%, 2.21% and 1.38%
for 2002, 2001 and 2000, respectively. The decrease in charge-offs in 2002
was due primarily to a decrease in net charge-offs in the structured
finance area, which is being de-emphasized. 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
-28-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 3.23%,
2.46% and 0.42% for 2002, 2001 and 2000, respectively. The increase in the
net charge-off percentage during 2001 to 2002 was due primarily to an
increase in charge-offs related to aircraft exposures.
o Installment: Net charge-offs to average loans were .30%, .33% and .44% for
2002, 2001 and 2000, respectively. The decrease in the charge-offs for
2000 as compared to 1999 was a result of lower charge-offs in home equity
and credit card loans. The reduction in home equity charge-offs was due to
continued focus on credit quality standards on the origination of these
loans and improved technology of collection systems.
o Residential: Net charge-offs to average loans were 3.51%, 1.34% and 2.04%
for 2002, 2001 and 2000, respectively. The increase in charge-offs for
2002 was due primarily to the $9.1 million charge-off taken in conjunction
with the sale of $27 million of nonperforming residential mortgage loans
that took place during the second quarter of 2002. 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.
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 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) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------
Corporate Lending:
Commercial $132,286 $168,248 $107,713 $ 73,992 $ 53,624
Mortgage 12,337 5,837 8,291 4,645 5,428
Construction 5,393 7,430 5,622 2,192 3,556
Lease Financing 28,690 26,303 13,407 4,344 3,928
-------- -------- -------- -------- --------
178,706 207,818 135,033 85,173 66,536
Consumer Lending:
Installment 1,490 5,696 9,089 8,245 11,003
Residential 20,855 27,629 14,996 1,763 2,640
-------- -------- -------- -------- --------
22,345 33,325 24,085 10,008 13,643
-------- -------- -------- -------- --------
$201,051 $241,143 $159,118 $ 95,181 $ 80,179
======== ======== ======== ======== ========
The changes in the corporate lending reserves and their distribution between
2001 and 2002 resulted from numerous factors, including: (1) the anticipated
use of the reserves established as of December 31, 2001 to absorb potential
charge-offs in the commercial portfolio stemming from the commercial airline
industry as well as several unrelated potential charge-offs in other
industries; (2) the implementation of an enhanced commercial-related reserve
methodology; and (3) the transfer of several commercial construction loans to
commercial mortgage loan status. Additionally, the reserves related to
consumer lending declined due to the sale of higher risk assets.
-29-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The reserve levels are tested under various scenarios, primarily reflecting
different portfolio migration and roll rates. The rates used reflect those
experienced during periods of varied economic conditions. As would be
expected, the results indicate additional provision may be required to
maintain adequate reserves if the downside scenarios were to materialize.
The following table presents a summary of various indicators of credit
quality:
December 31,
--------------------------------------------------------
(Dollars In Thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $ 99,805 $116,663 $ 74,401 $ 43,452 $ 34,544
Mortgage 11,783 1,929 1,712 3,003 933
Construction 1,746 2,699 - 216 -
Lease Financing 4,008 7,986 6,503 1,309 4,002
-------- -------- -------- -------- --------
117,342 129,277 82,616 47,980 39,479
Consumer Lending:
Installment - - - 48 38
Residential 49,091 47,579 13,404 7,640 5,504
-------- -------- -------- -------- --------
49,091 47,579 13,404 7,688 5,542
-------- -------- -------- -------- --------
Total Nonaccrual Loans 166,433 176,856 96,020 55,668 45,021
Other Nonperforming Assets 15,780 20,907 8,805 3,870 2,767
-------- -------- -------- -------- --------
Total Nonperforming Assets $182,213 $197,763 $104,825 $ 59,538 $ 47,788
======== ======== ======== ======== ========
Loans 90 Days Past Due -
Still Accruing $ 29,918 $ 30,326 $ 28,203 $ 14,943 $ 10,356
Loan and Lease Loss Reserve to:
Total Loans and Leases 2.20% 2.69% 1.99% 1.43% 1.36%
Nonaccrual Loans 120.80 136.35 165.71 170.98 178.09
Nonperforming Assets 110.34 121.94 151.79 159.87 167.78
Nonaccrual Loans to
Total Loans and Leases 1.82 1.98 1.20 .84 .77
Nonperforming Assets to:
Total Loans, Leases and
Other Nonperforming Assets 1.99 2.20 1.31 .90 .81
Total Assets 1.04 1.19 .70 .50 .50
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 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 from income. 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 2002 with respect to these
loans and leases was $1.7 million compared to $16.2 million that would have
been recognized had the loans and leases remained current in accordance with
their original terms.
-30-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and leases that have been placed on nonaccrual status are further
evaluated for potential losses based upon review and discussion among Credit,
Portfolio Risk Review, lending officers, collection associates, and senior
management. Factors considered include the market value of collateral
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, 2002 were $166.4 million. In addition, $73.1
million of performing loans were being closely monitored due to possible
credit problems.
Nonaccrual loans decreased $10.4 million and other nonperforming assets
decreased $5.1 million during 2002 while nonaccrual loans increased $80.8
million and other nonperforming assets increased $12.1 million during 2001.
The following table shows the progression of nonaccrual loans and other
nonperforming assets during these time periods:
Corporate Lending
------------------------------------ Consumer Total Other Total
Real Lease Residential Nonaccrual Nonperforming Nonperforming
(In Thousands) Commercial Estate Financing Mortgages Loans Assets Assets
- -------------------------------------------------------------------------------------------------------------------
Balance at
January 1, 2001 $ 74,401 $ 1,712 $ 6,503 $ 13,404 $ 96,020 $ 8,805 $ 104,825
Additions 197,149 4,224 19,912 57,525 278,810 2,026 280,836
Payments / Sales (43,218) (464) (3,872) (2,966) (50,520) (5,722) (56,242)
Charge-Offs (97,352) (844) (14,557) (12,257) (125,010) (6,646) (131,656)
Transfers to Other
Nonperforming Assets (14,317) - - (8,127) (22,444) 22,444 -
--------- --------- --------- --------- --------- --------- ---------
Balance at
December 31, 2001 116,663 4,628 7,986 47,579 176,856 20,907 197,763
Additions 108,021 12,147 15,757 75,133 211,058 4,012 215,070
Payments / Sales (51,503) (2,023) (5,136) (27,376) (86,038) (20,345) (106,383)
Charge-Offs (73,076) (1,033) (14,599) (23,055) (111,763) (4,481) (116,244)
Transfers to Other
Nonperforming Assets (300) (190) - (23,190) (23,680) 23,680 -
Write-Downs - - - - - (7,993) (7,993)
--------- --------- --------- --------- --------- --------- ---------
Balance at
December 31, 2002 $ 99,805 $ 13,529 $ 4,008 $ 49,091 $ 166,433 $ 15,780 $ 182,213
========= ========= ========= ========= ========= ========= =========
Credit Outlook and Operating Implications
In 2001, Provident's total credit costs (loan loss provision and aircraft
lease residual write-offs) increased 76% or $102 million over the prior
year's amount. These higher credit costs had a materially unfavorable impact
on net income. To address asset quality issues and related credit costs that
arose during 2001, management worked to improve its internal credit processes
and resolve asset quality concerns in its loan and lease portfolios. Credit
costs declined substantially in 2002. However, if credit costs should
substantially increase again, this could impact Provident's ability to
maintain the payment of its quarterly dividend rate at current levels.
Noninterest Earning Assets
Leased equipment includes the leasing of automobiles to consumers and
equipment to commercial customers. As of December 31, 2002 and 2001, the cost
of automobiles, net of depreciation, was $2.1 billion and $2.4 billion,
respectively, and the cost of equipment, net of depreciation, was $266
million for both years. The decrease in auto leases is reflective of
management's decision to provide fewer resources to this business due to its
overall complexity and thin margin.
-31-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Goodwill totaled $83 million and $81 million as of December 31, 2002 and
2001, respectively. 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 No. 141, "Business Combinations," and Statement 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. These rules became effective as of January 1, 2002 for
Provident. Additional information on goodwill and other intangibles is
provided in Note 8 of the "Notes to Consolidated Financial Statements."
Other assets increased $41 million during 2002 and decreased $244 million
during 2001. The increase in 2002 was primarily due to an increase in
mortgage servicing rights and an increase in the amount of market value
adjustments recorded in relation to Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The decrease in 2001 was due primarily to the decrease in
receivables from securitization trusts.
Deposits
Deposits increased $995 million and $25 million during 2002 and 2001,
respectively. During 2002, commercial deposits increased 68% to $1.1 billion
at December 31, 2002 from $637 million at December 31, 2001. 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 in deposits from securitization trusts held at Provident. The
following table presents a summary of period end deposit balances:
December 31,
------------------------
(In Millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Noninterest Bearing Deposits of Securitization Trusts $ 48 $ 27 $ 496
Other Noninterest Bearing Deposits 1,094 968 797
Interest Bearing Demand Deposits 1,017 523 464
Savings Deposits 1,460 1,544 1,458
Certificates of Deposit Less than $100,000 2,621 2,551 2,239
Certificates of Deposit of $100,000 or More 3,609 3,241 3,375
------ ------ ------
$9,849 $8,854 $8,829
====== ====== ======
At December 31, 2002, maturities on certificates of deposit of $100,000 or
more were as follows (in millions):
3 months or less $ 255
Over 3 through 6 months 213
Over 6 through 12 months 228
Over 12 months 2,913
------
Total $3,609
======
Included in certificates of deposit of $100,000 or more at December 31, 2002,
2001 and 2000 were brokered deposits of $2.7 billion, $2.0 billion and $2.2
billion, respectively.
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2002, Provident had
$1.4 billion of brokered callable certificates of deposit.
Borrowed Funds
Borrowed funds are an important component of total funds necessary to support
earning assets. In 2002, short-term debt increased $40 million (2%) while
long-term debt decreased $239 million (6%). An increase in commercial paper
borrowing was the primary reason for the increase in short-term debt.
Payments on medium-term notes and debt issued as secured financings were the
primary reasons for the decrease in long-term debt. In 2001, short-term debt
increased $1.2 billion (195%) and long-term debt increased $57 million (1%).
Increases in federal funds purchased and repurchase agreements were the
primary reasons for the increase in short-term debt. 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.
Minority Interest
During June 2002, Provident and its consolidated subsidiary, PFGI Capital
Corporation ("PFGI Capital"), issued 6.6 million of equity units ("PRIDES")
to outside investors for $165 million. The Bank owns all of the $165 million
of Common Stock of PFGI Capital. The principal business objective of PFGI
Capital is to hold and manage commercial mortgage loan assets and other
authorized investments acquired from the Bank that will generate net income
for distribution to its stockholders. PFGI Capital has elected to be treated
as a real estate investment trust ("REIT") for federal income tax purposes.
Each PRIDES is comprised of two components - a 3-year forward purchase
commitment ("Purchase Contract") and PFGI Capital Preferred Stock. Each
Purchase Contract obligates the holder to buy, on August 17, 2005, for $25, a
number of newly issued shares of Provident Common Stock equal to the
"settlement rate." The PRIDES qualify as Tier 1 Capital for regulatory
capital purposes. Additional information concerning the PRIDES instruments is
provided in Note 13 of the "Notes to Consolidated Financial Statements."
-33-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other Noninterest Bearing Liabilities
Accrued interest and other liabilities decreased $56 million, or 12%, during
2002 after increasing $236 million, or 94%, during 2001. The decrease during
2002 was due primarily to a reduction in the amount of market value
adjustments recorded in relation to Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The increase during 2001 was due primarily to the adoption of
the provisions of Statement 133. For further details concerning Statement
133, see Note 21 of "Notes to Consolidated Financial Statements."
OFF-BALANCE SHEET AND DERIVATIVE ARRANGEMENTS
Asset Securitization Activity
From 1996 through the second quarter of 2000, the structure of some of
Provident's securitizations resulted in the transactions being accounted for
as sales through the use of special purpose entities. 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. During the third quarter of 2000, management decided to
structure all future securitizations as secured financings thereby
eliminating the use of gain-on-sale accounting and leaving all debt on the
balance sheet. 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, as compared to transactions accounted for as sales, 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.
The securitization and sale of loans and leases from 1996 through the first
half of 2000 continues to impact the current presentation of Provident's
financial condition, results of operations and off-balance sheet market
risks. The following discusses this impact on the Consolidated Statements of
Income and Consolidated Balance Sheets.
Impact on Consolidated Statements of Income: During 2000, gains were
recognized from the securitization and sale of loans and leases. No such
gains were recognized during 2002 and 2001. The following table provides a
summary of principal securitized and gains recognized:
2000
-----------------------
(In Thousands) Principal Gain
- ---------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $1,030,000 $ 30,291
Prime Home Equity 158,598 4,156
---------- ----------
Total Non-Cash Gains 1,188,598 34,447
Cash Gains - Equipment Leases 223,705 9,083
---------- ----------
Total Securitization Sales $1,412,303 $ 43,530
========== ==========
-34-
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 and prime home
equity 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.
Provident retains the servicing of the loans and leases it securitizes. 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 contributed to
the generation of approximately $9 million in loan servicing fees during
2002.
Impact on Consolidated Balance Sheets: Securitized loans and leases that have
been treated as sales have been removed from the balance sheet. The following
table provides a summary of the outstanding balances of these off-balance
sheet managed assets:
December 31,
------------------------------------
(In Thousands) 2002 2001 2000
- ----------------------------------------------------------------
Nonconforming Residential $1,779,127 $2,627,332 $3,625,033
Prime Home Equity 194,775 303,527 471,873
Equipment Leases 94,408 207,131 359,457
Credit Card - - 165,000
---------- ---------- ----------
$2,068,310 $3,137,990 $4,621,363
========== ========== ==========
In connection with the sale of these loans and leases, Provident recorded
RISAs, established credit enhancing collateral accounts and has issued an
unfunded secured demand note. As noted earlier, RISAs represent the rights to
future cash flows arising after the investors of the securitization trusts
have received the return for which they contracted. RISAs are subordinate to
investors of the securitization trust with its value subject to prepayment
risks, interest rate risks and, in certain cases, credit risks on the
transferred assets. As of December 31, 2002, Provident had RISAs totaling
$121.5 million.
Provident has provided collateral to its securitizations structured as sales
in the form of cash, loans and an unfunded secured demand note. The
collateral is 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. As of
December 31, 2002, collateral consisted of $57.4 million of cash, $5.1
million of loans and a secured demand note that could be drawn up to $270
million. Provident had reserves of $20.9 million as of year-end 2002 to
offset future losses. Nonconforming residential RISAs net of its loss
reserves totaled $93.3 million. Information concerning the credit quality of
the managed loans, cash flows of the securitization trust and valuation
analyses of the RISAs, may be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting
Policies" and Note 20 included in "Notes to Consolidated Financial
Statements."
-35-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
New Accounting Pronouncement: In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" that addresses consolidation by business enterprises of
variable interest entities (VIEs). Under this Interpretation, special purpose
entities (SPEs) having certain attributes will now be consolidated where, in
the past, they have not. The Interpretation does not impact qualifying
special purpose entities (QSPEs), as described in Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and other SPEs with similar characteristics.
As management has determined that the SPEs used in the securitization of its
nonconforming residential, prime home equities and equipment leases have the
characteristics of a QSPE, these securitization entities will continue to be
excluded from consolidation.
Fannie Mae DUS Program
Red Mortgage Capital, Inc. ("Red Mortgage"), a member of Red Capital Group,
is an approved Fannie Mae Delegated Underwriting and Servicing ("DUS")
mortgage lender. Under the Fannie Mae DUS program, Red Mortgage underwrites,
funds and sells mortgage loans on multifamily rental projects. Red Mortgage
then services these mortgage loans on Fannie Mae's behalf. Participation in
the Fannie Mae DUS program requires Red Mortgage to share the risk of loan
losses with Fannie Mae. The substance of this loss sharing arrangement is
that Red Mortgage and Fannie Mae split losses with one-third of all losses
assumed by Red Mortgage and two-thirds of all losses assumed by Fannie Mae.
Red Mortgage services multifamily mortgage loans under the DUS program with
outstanding principal balances aggregating approximately $3.0 billion at
December 31, 2002. At December 31, 2002, no DUS loans in Red Mortgage's loan
servicing portfolio were in default. Red Mortgage has established reserves of
approximately $8.7 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 Mortgage's portfolio of DUS loans. The employees and management
team of Red Mortgage have originated and serviced the existing Fannie Mae DUS
loan servicing portfolio since 1995 without any charge-offs relating to the
DUS loans.
Interest Rate Swaps and Caps
At December 31, 2002, Provident held $3.8 billion in interest rate swaps on
which it receives payments at fixed interest rates while making payments at
variable interest rates. These instruments are used primarily as a hedge to
offset time deposit accounts and debt where Provident must pay interest at
fixed rates. As funds received on these interest rate swaps match the fixed
rate payments required of the time deposits and debt, these derivatives
-36-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
essentially convert long-term fixed rate instruments into shorter repricing
instruments.
Provident also had $2.2 billion in interest rate swaps that it receives
payments at floating interest rates while making payments at fixed interest
rates. The primary use of these instruments is for off-balance sheet
securitizations. Provident is required to pay investors of these
securitizations interest at a floating rate, however, many of the underlying
loans pay interest to Provident at fixed or longer-term adjustable rates. The
use of these interest rate swaps allows Provident to offset the floating
interest rate payments to the investors with floating interest rates payments
received from the interest rate swaps. The fixed or longer-term adjustable
interest rate payments received from the underlying loans are used to offset
the fixed rate interest payments required on these interest rate swaps.
Provident has approximately $2.75 billion in purchased interest rate caps.
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
amounts. Risks involved in these purchased interest rate caps have been
mitigated by selling $2.75 billion in interest rate caps.
The fair value of these interest rate swaps and caps are recorded on the
consolidated balance sheet as either other assets (derivatives with a
positive fair value) or as other liabilities (derivatives with a negative
fair value) as prescribed by Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." For
further details concerning Provident's interest rate swaps and caps, see Note
21 of "Notes to Consolidated Financial Statements."
Forward Delivery Commitments
Provident enters into forward delivery contracts for the future delivery of
commercial real estate and residential mortgage loans at a specified interest
rate to reduce the interest rate risk associated with loans held for sale. As
of December 31, 2002, Provident had $172 million in forward delivery
contracts.
Credit Risk Transfer Instruments
In order to mitigate credit risk within the auto lease portfolio, Provident
has entered into credit risk transfer arrangements during 2001 and 2000.
Under the 2001 transaction, Provident transferred 97 1/2% of the credit risk
on an auto lease portfolio, while retaining a 2 1/2% first-loss position.
Under the 2000 transaction, Provident transferred 98% of the credit risk on
an 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, 2002, the remaining unpaid auto lease
balances on the 2001 and 2000 transactions were $0.4 billion and $1.0
billion, respectively.
-37-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Credit Commitments, Standby Letters of Credit and Guarantees
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. As of December 31, 2002 and
2001, credit commitments totaled $2.9 billion and $2.2 billion, respectively.
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. Provident had $274 million and $193 million in standby letters of
credit as of December 31, 2002 and 2001, respectively.
Provident (Parent) has issued a guarantee for a subsidiary to assist in its
business activities. This guarantee was made to Fannie Mae for the benefit of
Red Mortgage Capital, Inc. Red Mortgage is an approved Fannie Mae Delegated
Underwriting and Servicing (DUS) mortgage lender. Participation in the Fannie
Mae DUS program requires Red Mortgage to share the risk of loan losses with
Fannie Mae. For Red Mortgage to participate in the loss sharing agreement,
the Parent provided a guarantee to Fannie Mae that it would fulfill all
payments required of Red Mortgage under the loss sharing arrangement and for
servicing advances of these loans if Red Mortgage fails to meet its
obligations. The guarantee will continue until such time as the loss sharing
agreement is amended or that Red Mortgage no longer participates in the
Fannie Mae DUS program. No liability is carried on the Parent's balance sheet
for this guarantee as a liability has been established for estimated losses
on Red Mortgage's balance sheet. Additional information concerning the Fannie
Mae DUS program may be found under "Management Discussion and Analysis of
Financial Condition and Results of Operations - Fannie Mae DUS Program."
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Total stockholders' equity at December 31, 2002 and 2001 was $880 million and
$802 million, respectively. The change in the equity balance relates
primarily to net income exceeding dividends by $47 million and an increase in
the market value of investment securities of $53 million, (net of deferred
taxes).
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 2003 are
estimated to be approximately $30 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.
-38-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table of ratios is important for an analysis of capital
adequacy:
Year Ended December 31,
------------------------
2002 2001 2000
------------------------
Average Shareholders' Equity to Average Assets 5.12% 5.59% 6.70%
Average Tangible Shareholders' Equity to
Average Tangible Assets 4.55 5.00 6.11
Period End Shareholders' Equity to Period End Assets 5.02 4.84 6.16
Period End Tangible Shareholders' Equity to
Period End Tangible Assets 4.49 4.26 5.72
Dividend Payout to Net Earnings 50.64 n/m 84.43
Tier 1 Capital to Risk-Weighted Assets 9.40 7.95 8.56
Total Risk-Based Capital To Risk-Weighted Assets 11.43 10.71 10.60
Tier 1 Leverage Ratio 7.81 6.65 8.21
- --------------------
n/m - not meaningful
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items. Provident is required 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. These
guidelines further define "well-capitalized" levels for Tier 1, total
risk-based capital, and leverage ratio purposes at 6%, 10% and 5%,
respectively. Provident has consistently maintained regulatory capital ratios
at or above the well-capitalized standards. For further detail on capital
ratios, see Note 15 of the "Notes to Consolidated Financial Statements."
As noted in earlier sections of this report, during the second quarter of
2002, Provident issued $165 million of PRIDES in connection with the
formation of PFGI Capital. These equity units qualify as Tier 1 Capital in
Provident's calculation of regulatory capital ratios.
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. Management forecasts that the largest
liquidity needs during 2003 will come from growth in the lending portfolio,
maturing of retail and brokered certificates of deposit, and scheduled
principal payments on long-term debt. Provident has a variety of sources to
meet these liquidity demands. First, management expects to issue new
certificates of deposit along with renewing many of its maturing certificates
of deposit. Management also projects growth within retail transactional
deposits. Additional sources of liquidity include the secured financing of
commercial and consumer loans and leases, whole-loan sales of nonconforming
residential loans and the availability to borrow both short-term and
long-term funds.
-39-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table represents Provident's estimated contractual obligations,
excluding short-term obligations, at December 31, 2002:
Less Than From 1 to From 3 to More Than
(In Millions) 1 Year 3 Years 5 Years 5 Years Total
- -----------------------------------------------------------------------------------
Certificates of Deposit $ 1,499 $ 1,676 $ 1,289 $ 1,766 $ 6,230
Long-Term Debt 445 1,736 831 831 3,843
Junior Subordinated Debentures - - - 451 451
Rental Obligations 16 26 19 44 105
------- ------- ------- ------- -------
$ 1,960 $ 3,438 $ 2,139 $ 3,092 $10,629
======= ======= ======= ======= =======
Consistent with Provident's contingent funding plan, management monitors the
potential impact of changes in its corporate ratings on existing and new
business transactions. Ratings related liquidity events may include reduced
availability of short-term federal funds, reduced availability to the surety
bond market that supports the bank's Public Funds program and other
commitments provided to third parties in related business transactions. If
such ratings events are anticipated, management will take actions to enhance
balance sheet liquidity positions to meet liquidity needs. Such actions to
enhance liquidity positions were taken in connection with Provident's March
5, 2003 announcement related to the restatement of its earnings. In
anticipation of potential ratings downgrades, management took actions to
enhance liquidity positions, including issuance of additional brokered
certificates of deposits. Additional term liquidity reduces reliance on
short-term funding and increases the availability of collateral in the
investment portfolio. Management will continue to monitor events as the need
may arise for further liquidity enhancements in the future.
The parent company's primary liquidity needs during 2003 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
$45 million, $15 million and $37 million in 2002, 2001 and 2000,
respectively. The amount of dividends available for payment in 2003 by The
Provident Bank, Provident's banking subsidiary, is approximately $30.2
million, plus 2003 net income. It is unlikely, however, that the Bank would
pay annual dividends to the parent company that exceeds $60 million.
The parent company also received interest payments of $25.4 million, $24.9
million and $13.2 million for the years ended December 31, 2002, 2001 and
2000, respectively, from its subsidiaries. These interest payments were
primarily the result of $249.5 million of subordinated debt loaned to the
Bank. The subordinated debt matures during 2009 and 2010. Management believes
that dividends and interest payments from the Bank will be sufficient to meet
the parent company's liquidity requirements in 2003.
At December 31, 2002, the parent company had $170 million in general purpose
lines of credit with unaffiliated banks. The principal purpose of these lines
was to provide a backup facility for its commercial paper program. In July
2002, the parent company issued $75 million of long-term senior notes to
improve its overall liquidity position. Proceeds from these notes have
provided sufficient incremental liquidity to meet its short-term obligations
and have eliminated the primary use of the lines. The lines were not renewed
at their March 27, 2003 expiration date. The lines of credit had not been
drawn upon during the past three years.
-40-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Note 1 to the "Notes to Consolidated Financial Statements" lists significant
accounting policies used in the development and presentation of Provident's
financial statements. However, four of these accounting policies are
considered to be critical due to the level of sensitivity and subjectivity of
their underlying accounting estimates. These critical accounting policies
concern the adequacy of the reserve for loan and lease losses; the valuation
of retained interest in securitized assets (RISAs) and securitized credit
enhancements; the valuation of mortgage servicing assets; and the valuation
of derivatives.
Reserve for Loan and Lease Losses: Provident maintains a reserve to absorb
potential loan and lease losses inherent in its lending portfolio.
Management's determination of the adequacy of the loan loss reserve is based
on an assessment of the potential 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. Management
evaluates numerous factors including the credit quality of the current loan
portfolio, the trend in the loan portfolio's risk ratings, current economic
conditions, specific industry trends, 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 relevant
information.
Loans and leases that have been placed on classified and/or nonaccrual status
are further evaluated for potential losses based upon review and discussion
among Credit, Portfolio Risk Review, lending officers, 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.
Additional loss estimates associated with securitized assets and loans sold
under the Fannie Mae DUS Program are provided for separately from the reserve
for loan and lease losses. For more information on credit exposures on these
off-balance sheet assets, see "Management Discussion and Analysis of
Financial Condition and Results of Operations - Off-Balance Sheet and
Derivative Arrangements" and Note 20 of the "Notes to Consolidated Financial
Statements."
RISAs and Securitized Credit Enhancements: Prior to July 2000, Provident
structured its securitization transactions as sales. As such, Provident
retained (a) future cash flows of the underlying loans, net of payments due
to investors of the securitization trust, servicing fees and other fees
(RISAs), (b) servicing rights on the loans and leases, and (c) credit
enhancement accounts used to absorb credit losses on the loans securitized.
Gain or loss on the sale of the loans depended in part 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. However, quotes are generally not available
-41-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for assets retained, so Provident estimates the fair value based on key
assumptions, including prepayment speeds, credit losses, forward yield
curves, and discount rates commensurate with the risks involved.
Provident monitors the valuation of the RISAs on a monthly basis. The
valuation centers primarily around two estimates, total life-time credit
losses and the constant prepayment rate (CPR). During the current year, both
of these factors have trended upward which has had an unfavorable impact on
the nonconforming residential RISA valuation. Additionally, the CPR has also
been impacted by management's decision to accelerate the liquidation of other
real estate associated with the securitized nonconforming residential
portfolio. Provident models a CPR range from 26% to 35% with the actual CPR
currently running at 30%. If the CPR stays at its current level, management
estimates that there would be sufficient cash flows to absorb lifetime losses
up to 6.3%. If the CPR rises to 35%, there would be sufficient cash flows to
absorb lifetime losses up to 5.4%. Cumulative incurred losses through
December 31, 2002 are 3.6%, with estimated total lifetime losses expected to
be 5.6%. On a worst case basis, management currently estimates that lifetime
losses should not exceed 6.1% assuming real estate values remain relatively
stable. From an earnings sensitivity standpoint, above certain loss
thresholds, 5 basis points in losses represent a $1.8 million unfavorable
after-tax impact. Should both the estimated life-time credit losses and CPR
continue to rise, impairment of the RISA value could occur. Future period
cash flow realizations may differ from current projections as a result of
timing differences in credit related charge-offs in any given period.
Although these variances may not change the life-time loss assumptions, they
may result in temporary negative cash flows and the possibility of a charge
to earnings. At December 31, 2002, management believes the current carrying
value of the RISA asset is properly stated. Additional sensitivity analyses
is provided in Note 20 of the "Notes to Consolidated Financial Statements."
Valuation of Mortgage Servicing Rights: Provident recognizes the rights to
service mortgage loans it does not own but services for others within Other
Assets of its balance sheets. Mortgage servicing assets are carried at the
lower of the initial carrying value, adjusted for amortization, or estimated
fair value. Estimated fair value is based on projected discounted cash flows
which takes into consideration estimated servicing fees, prepayment speeds,
discount rates, earnings on deposit of escrow funds and other assumptions.
These estimates have a significant impact on the valuation of the mortgage
servicing assets. Mortgage servicing rights are tested quarterly to verify
the market value equals or exceeds its carrying value.
Valuation of Derivatives: In accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," Provident carries the fair value of derivative
instruments on its consolidated balance sheets with changes in value recorded
in the income statement or as other comprehensive income. Although the value
of the derivatives are determined using third-party valuations, these
valuations use discounted cash flow modeling techniques, which require the
use of assumptions concerning the amount and timing of future cash flows.
These estimates have a significant impact on the valuation of the
derivatives.
-42-
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 is
assigned to the Asset Liability Committee (ALCO). The main component 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 to the natural balance sheet hedges, ALCO utilizes derivative
instruments to manage interest rate risk on and off its balance sheet.
Interest rate swaps and caps are the most widely used tools to manage
interest rate risk.
Provident uses an earnings simulation model to analyze net interest income
sensitivity to movements in interest rates. The model evaluates the effect of
changes in interest rates on net interest income by running various interest
rate scenarios up and down from a flat rate scenario. As a basis for
strategic interest rate risk management, the ALCO group regularly analyzes
the impact of four to six additional interest rate scenarios on net interest
income in addition to the standard scenarios used for policy measurement.
These rate scenarios are established by ALCO and incorporate changes to the
slope of the yield curve. The balance sheet assumptions, including loan
growth, funding mix, and prepayment speeds primarily on mortgage related
products, are adjusted for each rate scenario. Market-based prepayment speeds
are incorporated into the analysis, particularly for mortgage related
products, including investment portfolio securities. Faster prepayments
during low interest rate environments such as the current levels negatively
impact interest rate margins due to lower reinvestment yields.
Provident's policy limit stipulates that the negative impact on net interest
income from a +/-200 basis points, 12 month gradual parallel ramp rate
scenario as compared to the flat rate scenario cannot exceed 10 percent over
the next 12 month period. These tests are performed on a monthly basis, and
the results are presented to the Board of Directors. Based on the results of
the simulation model, net interest income would change by the following over
the next 12-month period:
2002 2001
------------------
100 Basis Points Decrease (3.92%) 0.24%
100 Basis Points Increase 0.55% (0.33%)
200 Basis Points Decrease n/a n/a
200 Basis Points Increase (0.52%) (0.74%)
Due to the current low interest rate environment, nothing beyond a 100 basis
point decrease was simulated for 2002.
Although classified as leased equipment, Provident continues to include auto
leases in its interest sensitivity analysis.
ALCO regularly incorporates discussions and analyses of market risk embedded
in off-balance sheet activities as well as on non-interest income items such
as loan sale premiums. ALCO actively monitors the impact of related market
risk since these premiums are sensitive to changes in interest rates.
-43-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
All transaction accounts are regularly analyzed for embedded market risk.
These accounts are evaluated with respect to their repricing characteristics
as well as their expected average lives. Provident offers a diverse set of
managed transaction accounts including some that reprice according to a third
party index and some with managed rates. ALCO actively monitors the
behavioral characteristics of these products. Although indexed account rates
move parallel to movements in short term rates, managed account rates adjust
slower and at smaller increments due to the competitive environment. During
the current low rate environment, such price rigidities negatively impact
interest rate margins in the short run; however, the long-term profitability
and liquidity characteristics of these accounts are very attractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ........................ 45
Financial Statements:
Provident Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets .......................................... 46
Consolidated Statements of Income .................................... 47
Consolidated Statements of Changes in Shareholders' Equity ........... 48
Consolidated Statements of Cash Flows ................................ 49
Notes to Consolidated Financial Statements ........................... 50
Supplementary Data:
Quarterly Consolidated Results of Operations (unaudited) ................. 89
-44-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the
Company's management. 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, 2002 and
2001, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States.
As discussed in Note 3 to the consolidated financial statements, Provident
Financial Group, Inc. has restated previously issued 2000 and 2001
consolidated financial statements.
As discussed in Note 8 to the consolidated financial statements, in 2002
Provident Financial Group, Inc. changed its method of accounting for goodwill
in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
April 11, 2003
-45-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2001
As Restated
(Dollars in Thousands) 2002 See Note 3
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 351,994 $ 378,257
Federal Funds Sold and Reverse Repurchase Agreements 188,925 122,966
Trading Account Securities 127,848 101,156
Loans Held for Sale 436,884 217,914
Investment Securities Available for Sale
(amortized cost - $4,158,511 and $3,510,601) 4,215,238 3,486,058
Loans and Leases:
Corporate Lending:
Commercial 4,482,373 4,540,088
Mortgage 960,636 939,824
Construction 510,331 528,008
Lease Financing 1,273,901 1,106,144
Consumer Lending:
Installment 1,306,761 913,312
Residential 599,793 922,747
------------ ------------
Total Loans and Leases 9,133,795 8,950,123
Reserve for Loan and Lease Losses (201,051) (241,143)
------------ ------------
Net Loans and Leases 8,932,744 8,708,980
Leased Equipment 2,350,356 2,651,394
Premises and Equipment 101,513 103,085
Goodwill 82,651 80,649
Other Assets 751,856 710,372
------------ ------------
TOTAL ASSETS $ 17,540,009 $ 16,560,831
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,141,990 $ 994,978
Interest Bearing 8,706,989 7,859,272
------------ ------------
Total Deposits 9,848,979 8,854,250
Short-Term Debt 1,925,005 1,885,309
Long-Term Debt 3,842,657 4,081,414
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 451,074 450,759
Minority Interest 160,966 -
Accrued Interest and Other Liabilities 430,957 487,266
------------ ------------
Total Liabilities 16,659,638 15,758,998
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized:
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 48,760,462 and 49,205,897 Issued 14,454 14,587
Capital Surplus 298,025 322,024
Retained Earnings 604,013 556,918
Accumulated Other Comprehensive Loss (43,121) (98,696)
------------ ------------
Total Shareholders' Equity 880,371 801,833
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,540,009 $ 16,560,831
============ ============
See notes to consolidated financial statements.
-46-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------
2001 2000
As Restated As Restated
(In Thousands, Except Per Share Data) 2002 See Note 3 See Note 3
- --------------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $ 600,460 $ 747,930 $ 673,561
Interest on Investment Securities 217,595 204,304 227,701
Other Interest Income 23,333 21,061 4,306
--------- --------- ---------
Total Interest Income 841,388 973,295 905,568
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 38,748 68,559 78,421
Time Deposits 223,424 317,810 301,918
--------- --------- ---------
Total Interest on Deposits 262,172 386,369 380,339
Interest on Short-Term Debt 35,642 55,819 86,797
Interest on Long-Term Debt 204,742 230,061 174,761
Interest on Junior Subordinated Debentures 23,274 30,551 20,033
--------- --------- ---------
Total Interest Expense 525,830 702,800 661,930
--------- --------- ---------
Net Interest Income 315,558 270,495 243,638
Provision for Loan and Lease Losses 99,549 215,545 133,477
--------- --------- ---------
Net Interest Income After Provision for
Loan and Lease Losses 216,009 54,950 110,161
Noninterest Income:
Service Charges on Deposit Accounts 45,184 39,924 35,138
Loan Servicing Fees 33,835 33,026 37,849
Commercial Mortgage Banking Revenue 25,354 29,490 5,674
Other Service Charges and Fees 48,563 38,833 49,108
Leasing Income 605,887 584,065 461,209
Non-Cash Gain on Sales of Loans and Leases - - 34,447
Cash Gain on Sales of Loans and Leases 15,691 6,311 10,452
Warrant Gains 8,186 412 7,500
Security Gains 2,596 - 155
Other 20,196 24,375 19,084
--------- --------- ---------
Total Noninterest Income 805,492 756,436 660,616
Noninterest Expense:
Salaries, Wages and Benefits 233,178 201,715 172,903
Charges and Fees 30,531 31,888 22,099
Occupancy 23,637 22,605 20,631
Leasing Expense 416,508 402,372 300,711
Equipment Expense 24,345 25,234 26,045
Professional Fees 25,990 24,507 21,735
Minority Interest Expense 7,069 - -
Merger and Restructuring Charges - - 39,300
Other 114,770 104,663 76,977
--------- --------- ---------
Total Noninterest Expenses 876,028 812,984 680,401
--------- --------- ---------
Income (Loss) Before Income Taxes 145,473 (1,598) 90,376
Applicable Income Taxes 50,022 (595) 33,835
--------- --------- ---------
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
========= ========= =========
Basic Earnings (Loss) Per Common Share $ 1.94 $ (.04) $ 1.14
Diluted Earnings (Loss) Per Common Share 1.88 (.04) 1.12
Cash Dividends Paid Per Common Share .96 .96 .96
See notes to consolidated financial statements.
-47-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained Accumulated
Earnings Other
(In Thousands, Preferred Common Capital As Restated Comprehensive
Except Per Share Data) Stock Shares Stock Surplus See Note 3 Loss, Net Total
- ------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000
as Previously Reported $ 7,000 48,619 $ 14,410 $ 308,237 $ 646,472 $ (49,897) $ 926,222
Accumulative Adjustment for
Restatement of Prior Years (49,352) (49,352)
------- ------ -------- --------- --------- --------- ---------
Balance at January 1, 2000
as Restated 7,000 48,619 14,410 308,237 597,120 (49,897) 876,870
Net Income 56,541 56,541
Change in Unrealized
Gains (Losses) on
Marketable Securities 31,968 31,968
---------
Comprehensive Income 88,509
Cash Dividends Declared on:
Common Stock ($.96/share) (46,789) (46,789)
Preferred Stock ($13.50/share) (949) (949)
Principal Payments on Loans/
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,469 1,469
Exercise of Stock Options and
Accompanying Tax Benefits 195 59 3,842 3,901
Deferred Compensation
Tax Adjustment 567 567
------- ------ -------- --------- --------- --------- ---------
Balance at December 31, 2000 7,000 48,814 14,469 314,895 605,923 (17,929) 924,358
Net Loss (1,003) (1,003)
Other Comprehensive
Income, Net of Tax:
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
Change in Unrealized
Gains (Losses) on:
Hedging Instruments (54,411) (54,411)
Marketable Securities 1,976 1,976
---------
Total Comprehensive Loss (81,770)
Cash Dividends Declared on:
Common Stock ($.96/share) (47,053) (47,053)
Preferred Stock ($13.50/share) (949) (949)
Exercise of Stock Options and
Accompanying Tax Benefits 375 113 6,477 6,590
Distribution of Contingent
Shares for Prior Year
Acquisition 28 8 822 830
Stock Purchased and Cancelled (11) (3) (243) (246)
Other 73 73
------- ------ -------- --------- --------- --------- ---------
Balance at December 31, 2001 7,000 49,206 14,587 322,024 556,918 (98,696) 801,833
Net Income 95,451 95,451
Other Comprehensive
Income, Net of Tax:
Change in Unrealized
Gains (Losses) on:
Hedging Instruments 2,813 2,813
Marketable Securities 52,762 52,762
---------
Total Comprehensive Income 151,026
Cash Dividends Declared on:
Common Stock ($.96/share) (47,385) (47,385)
Preferred Stock ($13.50/share) (949) (949)
Exercise of Stock Options and
Accompanying Tax Benefits 336 101 5,200 5,301
Benefit Plan Assets in
Provident Stock (781) (234) (22,258) (22) (22,514)
Costs and Present Value of
Contract Payments of
PRIDES Securities (6,917) (6,917)
Stock Purchased and Cancelled (1) (24) (24)
------- ------ -------- --------- --------- --------- ---------
Balance at December 31, 2002 $ 7,000 48,760 $ 14,454 $ 298,025 $ 604,013 $ (43,121) $ 880,371
======= ====== ======== ========= ========= ========= =========
See notes to consolidated financial statements.
-48-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
2001 2000
As Restated As Restated
(In Thousands) 2002 See Note 3 See Note 3
- --------------------------------------------------------------------------------------------------
Operating Activities:
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Provision for Loan and Lease Losses 99,549 215,545 133,477
Amortization of Goodwill - 4,317 3,718
Other Amortization and Accretion 26,654 83 (28,158)
Depreciation of Leased Equipment 419,438 387,235 296,997
Depreciation of Premises and Equipment 22,088 22,482 21,743
Tax Benefit Received from Exercise of Stock Options 1,069 2,706 513
Realized Investment Security Gains (2,596) - (155)
Proceeds From Sale of Loans Held for Sale 3,065,139 2,825,184 1,049,470
Origination of Loans Held for Sale (3,270,407) (2,834,074) (1,192,804)
Realized Gains on Loans Held for Sale (13,702) (2,856) (30,607)
(Increase) Decrease in Trading Account Securities (11,368) (59,207) 32,767
(Increase) Decrease in Interest Receivable 1,171 4,402 (23,635)
Increase in Other Assets (5,711) (144,760) (4,699)
Increase (Decrease) in Interest Payable (4,745) (4,099) 22,209
Deferred Income Taxes 24,957 (11,915) 10,808
Increase (Decrease) in Other Liabilities (65,135) 57,596 (70,616)
----------- ----------- -----------
Net Cash Provided by Operating Activities 381,852 461,636 277,569
----------- ----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,423,825 2,264,759 2,229,586
Proceeds from Maturities and Prepayments 1,282,271 1,120,965 485,028
Purchases (3,346,950) (3,833,511) (2,885,170)
(Increase) Decrease in Receivables Due
From Securitization Trusts (962) 466,268 (91,134)
Net Increase in Loans and Leases (320,208) (1,085,819) (1,874,728)
Net Increase in Leased Equipment (118,400) (652,695) (875,601)
Net Increase in Premises and Equipment (20,516) (21,648) (23,863)
Acquisitions - - (129,190)
----------- ----------- -----------
Net Cash Used in Investing Activities (1,100,940) (1,741,681) (3,165,072)
----------- ----------- -----------
Financing Activities:
Net Increase in Deposits 882,968 43,254 1,529,122
Net Increase (Decrease) in Short-Term Debt 39,696 1,246,286 (436,107)
Principal Payments on Long-Term Debt (366,959) (259,041) (587,307)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 86,239 426,032 2,416,214
Proceeds from Issuance of Minority Interest 160,966 - -
Cash Dividends Paid (48,334) (48,002) (47,738)
Repurchase of Common Stock (24) (246) -
Proceeds from Exercise of Stock Options 4,232 3,884 3,388
Net Increase in Other Equity Items - 73 2,816
----------- ----------- -----------
Net Cash Provided by Financing Activities 758,784 1,412,240 2,880,388
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 39,696 132,195 (7,115)
Cash and Cash Equivalents at Beginning of Period 501,223 369,028 376,143
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 540,919 $ 501,223 $ 369,028
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 464,821 $ 634,239 $ 560,801
Income Taxes 6,318 20,044 58,883
Non-Cash Activity:
Transfer of Loans and Premises and Equipment
to Other Real Estate 23,680 22,444 14,365
Residual Interest in Securitized Assets
Created from the Sale of Loans - - 106,098
See notes to consolidated financial statements.
-49-
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 accounting and reporting policies of Provident
conform with accounting principles generally accepted in the United States.
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.
The consolidated financial statements include the accounts of Provident and
its subsidiaries. Investments in companies in which Provident has significant
influence over operating and financing decisions (principally defined as
owning a voting or economic interest of 20% to 50%) are accounted for by the
equity method of accounting.
Special purpose entities (SPEs) have been formed for many of Provident's
securitization transactions. These SPEs are not operating entities, have no
employees, and have a limited life. The basic SPE structure involves
Provident transferring loans or leases to the SPE. The SPE funds the purchase
of these assets by issuing debt securities to investors. The legal documents
governing the SPE transactions describe how the cash earned on the assets
held in the SPE must be allocated to the investors and other parties that
have rights to these cash flows. SPEs can be structured to be bankruptcy
remote, thereby insulating investors from the impact of the creditors of
other entities, including the seller of the assets. SPEs are critical to the
functioning of several significant markets, including, asset-backed
securities, mortgage-backed securities and commercial paper markets.
Generally, Provident's securitization transactions from 1996 through the
second quarter of 2000 involved loans and equipment leases being transferred
to SPEs. Loans and equipment leases sold to these SPEs are no longer recorded
on Provident's balance sheet and the SPEs are not consolidated. Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," provides
specific criteria for determining when an SPE meets the definition of a
qualifying special-purpose entity (QSPE). Provident's nonconforming
residential, prime home equity and equipment lease transactions meet the
applicable QSPE criteria under Statement 140 and are not consolidated on
Provident's balance sheet.
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.
-50-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 estimated lives of the related loans using the interest
method. Any premium or discount applicable to specific loans purchased is
amortized over the remaining lives of such loans using the interest method.
Loans are generally placed on nonaccrual status when the payment of principal
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.
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
-51-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 potential 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 characteristics related to the reserve factors 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 the characteristics related to the reserve factors
while consumer loans 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 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.
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.
Generally, when Provident structured its mortgage related 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.
-52-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASED EQUIPMENT: Rental income for leased equipment is recognized on a
straight-line basis as scheduled. Related depreciation expense is recorded on
the straight line basis over the life of the lease based upon the estimated
residual value. On a periodic basis, a review is undertaken to determine if
the leased equipment is impaired. An impairment loss is recognized if the
carrying amount of the leased equipment is not recoverable and exceeds its
fair value. The carrying amount of the leased equipment is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to result from the
lease payments and the eventual disposition of the assets. Auto lease
receivables are written off in the month the leases reach 120 days past due
while equipment leases are written off when deemed uncollectible.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
depreciation and amortization that are computed principally on the
straight-line method over the estimated useful lives of the assets.
GOODWILL: Goodwill is the excess of the purchase price over net identifiable
tangible and intangible assets acquired in a purchase business combination.
Provident adopted the provisions of Statement of Financial Accounting
Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002. 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 determined to have limited lives continue
to be amortized over their useful lives.
MORTGAGE SERVICING ASSETS: Provident recognizes the rights to service
mortgage loans it does not own but services for others within Other Assets of
its balance sheets. Mortgage servicing assets may be recognized (1) when
mortgage loans are sold with servicing retained or (2) when mortgage loan
servicing is purchased. When mortgage loans are sold, the carrying value of
the loans is allocated between the loans sold and servicing assets retained
based on the relative fair values of each. Mortgage servicing assets, when
purchased, are initially recorded at cost. Mortgage servicing assets are
carried at the lower of the initial carrying value, adjusted for
amortization, or estimated fair value.
EQUITY INVESTMENTS: Provident invests in low income housing partnerships,
equity funds and directly in equity securities, which are collectively
referred to herein as equity investments. Equity investments, which are
reported within Investment Securities Available for Sale and Other Assets,
are carried at estimated fair value with changes in fair value recognized in
other noninterest income. The fair value of publicly traded investments are
determined using quoted market prices less liquidity discounts. Liquidity
discounts take into account the fact that Provident may not immediately
realize such market prices due to regulatory, corporate and contractual sales
restrictions. The estimated fair value of equity investments that are not
publicly traded approximates cost including other than temporary valuation
adjustments considered appropriate by management. As of December 31, 2002 and
2001, Provident held equity investments with a carrying value of $72.1
million and $79.4 million, respectively.
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
-53-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. At December 31, 2002 and 2001, the carrying value of other real
estate and equipment owned was $15.8 million and $20.9 million, respectively.
STOCK-BASED COMPENSATION: Statement 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.
For the years reported, Provident has elected to continue its accounting in
accordance with Accounting Principles Board ("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.
For purposes of providing the pro forma disclosures required under Statement
123, the fair value of stock options granted in 2002, 2001 and 2000 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
subjective assumptions including the expected stock price volatility.
The following weighted-average assumptions were used in the option pricing
model for 2002, 2001 and 2000 respectively: risk-free interest rates of
4.50%, 4.72% and 6.13%; dividend yields of 3.50%, 3.00% and 3.00%; volatility
factors of the expected market price of Provident's Common Stock of 29.1%,
28.8% and 26.9% 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 2002, 2001 and 2000 was $5.89, $8.35 and $8.78, respectively.
No compensation cost has been recognized for stock option grants. Had
compensation cost been expensed for stock option awards based on the fair
values at grant dates, Provident's net income and earnings per share would
have been as follows:
Year Ended December 31,
-------------------------------------
(In Thousands, Except Per Share Data) 2002 2001 2000
- ---------------------------------------------------------------------------------------
Net Income as Reported $ 95,451 $ (1,003) $ 56,541
Less Total Stock-Based Compensation Determined
under Fair Value Based Methods, Net of Related
Tax Effects (9,662) (7,181) (5,289)
---------- --------- ----------
Pro-forma Net Income $ 85,789 $ (8,184) $ 51,252
========== ========= ==========
Earnings Per Share:
Basic - As Reported $ 1.94 $ (0.04) $ 1.14
Basic - Pro Forma 1.74 (0.19) 1.03
Diluted - As Reported 1.88 (0.04) 1.12
Diluted - Pro Forma 1.72 (0.19) 1.03
As of January 1, 2003, Provident adopted the provisions of Statement 123.
Under these rules, compensation expense will be recognized over the vesting
period equal to the fair value of stock-based compensation as of the date of
grant. As Provident has elected to use the Prospective Method of expense
recognition according to the transition rules of Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," the
adoption of Statement 123 applies only to options granted after December 31,
2002. Options granted prior to January 1, 2003 will continue to be accounted
for under APB 25.
-54-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, on January 1,
2001. Statement 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 21
provides additional detail on the accounting for derivative instruments and
hedging activities held by Provident.
NOTE 2 - ACCOUNTING PRONOUNCEMENTS EFFECTIVE FOR FUTURE PERIODS:
- --------------------------------------------------------------------
In June 2001, Statement No. 143, "Accounting for Asset Retirement
Obligations" was issued. Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The adoption of Statement 143, which becomes effective
January 1, 2003, is not expected to have a material impact on Provident's
financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment No. 13, and
Technical Corrections." Under Statement 4, all gains and losses from
extinguishment of debt were required to be aggregated and classified as an
extraordinary item, net of related income tax effect. As a result of the
elimination of Statement 4, gains and losses from extinguishment of debt will
be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30. Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those
that are unusual or infrequent or that meet the criteria for classification
of an extraordinary item. Additionally, Statement 13 is amended to require
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The adoption of
Statement 145, which becomes effective January 1, 2003, is not expected to
have a material impact on Provident's results of operations or financial
condition.
-55-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2002, Statement No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" was issued. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue 94-3.
Statement 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The adoption of Statement 146, which becomes
effective January 1, 2003, is not expected to have a material impact on
Provident's results of operations or financial condition.
In October 2002, the Financial Accounting Standards Board issued Statement
No. 147, "Acquisitions of Certain Financial Institutions an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9." Statement 147
provides guidance on the accounting for the acquisition of a financial
institution and applies to all acquisitions except those between two or more
mutual enterprises. The excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as a
business combination represents goodwill and will no longer be amortized, but
rather, be subject to impairment tests as prescribed by Statement No. 142,
"Goodwill and Other Intangible Assets." Statement 147, which became effective
on October 1, 2002, did not have a material impact on Provident's results of
operations or financial condition.
In December 2002, Statement No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," was issued. Statement 148 amends Statement No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to Statement 123's fair value based method of
accounting for stock-based employee compensation. Statement 148 also amends
the disclosure provisions of Statement 123 and APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While
Statement 148 does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that
compensation using the fair value method of Statement 123 or the intrinsic
value method of APB Opinion No. 25. Provident elected to adopt the provisions
of Statement 123 using the Prospective Method of expense recognition
according to the transition rules of Statement 148. The full-year 2003 impact
on net income and diluted earnings per share are estimated to be $1.4 million
and $.02, respectively, for options granted after December 31, 2002. Note 1
provides pro forma information had Statement 123 been adopted for earlier
periods.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
This Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
-56-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Others," which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The provisions of this
Interpretation is not expected to have a material impact on Provident's
results of operations or financial condition.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" that
addresses consolidation by business enterprises of variable interest entities
(VIEs). Under this Interpretation, special purpose entities (SPEs) having
certain attributes will now be consolidated where, in the past, they have
not. The Interpretation does not impact qualifying special purpose entities
(QSPEs), as described in Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," and other
SPEs with similar characteristics. As management has determined that the SPEs
used in the securitization of its nonconforming residential, prime home
equities and equipment leases have the characteristics of a QSPE, these
securitization entities will continue to be excluded from consolidation.
NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS:
- ----------------------------------------------------------------
On March 5, 2003, Provident announced that it would restate its annual
financial statements for the years 1997 through 2001 and the interim periods
for 2002. The restated financial statements reflect both the correction of an
error that resulted in an overstatement of operating results and the return
to the balance sheet of consumer auto leases which, as a result of nine
financing transactions, had been previously accounted for as off-balance
sheet.
The restatement of previously reported operating results was a result of
unintentional errors in the accounting for nine auto lease financing
transactions originated between 1997 and 1999. These errors were first
discovered by Provident in connection with the testing and installation of a
financial model that identified differences in income that was previously
recorded, compared with income generated by the financial model. The original
amortization model was designed to match revenue and expense in an operating
lease framework.
Provident has also determined that its auto leases do not meet the
requirements for direct finance lease classification under Financial
Accounting Standards No. 13, titled "Accounting for Leases." Provident has
reclassified all of the auto leases on its balance sheet as operating leases
and reported them as leased equipment, instead of finance leases, which were
previously reported in the loan category. The reclassification will affect
auto leases originated from 1994 through 2002. During this period,
Provident's auto lease originations totaled $4.7 billion and had a remaining
balance of $2.1 billion at December 31, 2002. Income to be recognized in
future years, beginning with 2003, will be increased by an aggregate amount
substantially similar to the additional restatement. In addition, this
restatement has no impact on Provident's cash flows.
-57-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reconcile the effects of the restatement for the years
ended December 31, 2001, and 2000, the first three quarters of 2002 and all
quarters of 2001. The effects of the restatement on the Consolidated
Statements of Operations are as follows:
Year Ended
December 31,
--------------------------
(In Thousands, Except Per Share Data) 2001 2000
- ----------------------------------------------------------------------
Total Interest Income:
Prior to Restatement $ 1,103,244 $ 970,981
Subsequent to Restatement 973,295 905,568
Total Interest Expense:
Prior to Restatement 630,141 583,008
Subsequent to Restatement 702,800 661,930
Net Interest Income:
Prior to Restatement 473,103 387,973
Subsequent to Restatement 270,495 243,638
Provision for Loan and Lease Losses:
Prior to Restatement 225,748 131,281
Subsequent to Restatement 215,545 133,477
Total Noninterest Income:
Prior to Restatement 226,379 254,162
Subsequent to Restatement 756,436 660,616
Total Noninterest Expense:
Prior to Restatement 437,298 392,909
Subsequent to Restatement 812,984 680,401
Net Income (Loss):
Prior to Restatement 23,329 73,614
Subsequent to Restatement (1,003) 56,541
Diluted Earnings (Loss) Per Common Share:
Prior to Restatement 0.46 1.46
Subsequent to Restatement (0.04) 1.12
Quarter Ended (Unaudited)
----------------------------------
September 30, June 30, March 31,
(In Thousands, Except Per Share Data) 2002 2002 2002
- --------------------------------------------------------------------------
Total Interest Income:
Prior to Restatement $239,715 $242,494 $244,362
Subsequent to Restatement 208,250 211,331 213,416
Total Interest Expense:
Prior to Restatement 114,427 116,101 117,951
Subsequent to Restatement 130,624 132,603 135,121
Net Interest Income:
Prior to Restatement 125,288 126,393 126,411
Subsequent to Restatement 77,626 78,728 78,295
Provision for Loan and Lease Losses:
Prior to Restatement 25,100 33,119 23,990
Subsequent to Restatement 23,532 33,575 24,205
Total Noninterest Income:
Prior to Restatement 59,909 65,316 53,584
Subsequent to Restatement 196,397 204,578 194,230
Total Noninterest Expense:
Prior to Restatement 113,981 113,501 113,543
Subsequent to Restatement 214,079 214,637 214,612
Net Income (Loss):
Prior to Restatement 30,436 29,759 27,388
Subsequent to Restatement 24,036 23,170 21,616
Diluted Earnings (Loss) Per Common Share:
Prior to Restatement 0.60 0.58 0.54
Subsequent to Restatement 0.47 0.46 0.43
-58-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended (Unaudited)
---------------------------------------------------
December 31, September 30, June 30, March 31,
(In Thousands, Except Per Share Data) 2001 2001 2001 2001
- ---------------------------------------------------------------------------------------------
Total Interest Income:
Prior to Restatement $ 256,146 $ 280,061 $ 282,019 $ 285,018
Subsequent to Restatement 221,768 245,459 250,450 255,618
Total Interest Expense:
Prior to Restatement 131,231 156,389 166,380 176,141
Subsequent to Restatement 148,894 174,336 184,606 194,964
Net Interest Income:
Prior to Restatement 124,915 123,672 115,639 108,877
Subsequent to Restatement 72,874 71,123 65,844 60,654
Provision for Loan and Lease Losses:
Prior to Restatement 111,151 66,010 24,900 23,687
Subsequent to Restatement 108,787 60,886 23,548 22,324
Total Noninterest Income:
Prior to Restatement 51,521 57,103 64,383 53,372
Subsequent to Restatement 195,712 192,917 193,534 174,273
Total Noninterest Expense:
Prior to Restatement 110,077 125,863 105,902 95,456
Subsequent to Restatement 218,399 222,476 194,701 177,408
Net Income (Loss):
Prior to Restatement (28,891) (7,435) 31,852 27,803
Subsequent to Restatement (37,519) (12,782) 26,632 22,666
Diluted Earnings (Loss) Per Common Share:
Prior to Restatement (0.59) (0.16) 0.63 0.55
Subsequent to Restatement (0.77) (0.27) 0.53 0.45
The effects of the restatement on the Consolidated Balance sheets are as follows:
(Unaudited)
---------------------------------------- December 31,
September 30, June 30, March 31, -------------------------
(In Thousands) 2002 2002 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Total Loans and Leases:
Prior to Restatement $10,425,250 $10,219,359 $10,158,640 $10,495,956 $ 9,076,906
Subsequent to Restatement 8,999,430 8,740,060 8,650,866 8,950,123 7,995,906
Reserve for Loan and Lease Losses:
Prior to Restatement 201,056 211,262 240,663 240,653 154,300
Subsequent to Restatement 205,073 215,119 243,099 241,143 159,118
Leased Equipment:
Prior to Restatement 179,195 166,515 178,393 185,863 215,227
Subsequent to Restatement 2,397,967 2,479,125 2,559,580 2,651,394 2,385,934
Total Assets:
Prior to Restatement 16,237,999 15,673,874 15,358,476 15,573,554 13,857,385
Subsequent to Restatement 17,097,115 16,575,333 16,305,291 16,560,831 14,996,847
Long-Term Debt:
Prior to Restatement 2,977,236 2,914,945 2,881,313 2,941,165 2,774,493
Subsequent to Restatement 4,017,644 3,976,155 3,962,991 4,081,414 4,024,109
Total Shareholders' Equity:
Prior to Restatement 964,833 948,201 922,545 892,590 990,783
Subsequent to Restatement 855,316 845,081 826,014 801,833 924,358
The results of the restatement are reflected in the Consolidated Financial
Statements and Notes to Consolidated Financial Statements for all periods
reported upon.
-59-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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
- --------------------------------------------------------------------------------------------
2002:
U.S. Treasury and Federal Agency
Debentures $ 310,244 $ 5,974 $ (75) $ 316,143
State and Political Subdivisions 1,838 40 (3) 1,875
Mortgage-Backed Securities 3,240,192 70,043 (18,723) 3,291,512
Other Securities 606,237 10 (539) 605,708
----------- ----------- ----------- -----------
$ 4,158,511 $ 76,067 $ (19,340) $ 4,215,238
=========== =========== =========== ===========
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 503,884 10 (765) 503,129
----------- ----------- ----------- -----------
$ 3,510,601 $ 14,628 $ (39,171) $ 3,486,058
=========== =========== =========== ===========
Investment securities with a carrying value of approximately $2.6 billion and
$1.9 billion at December 31, 2002 and 2001, respectively, were pledged as
collateral to secure public and trust deposits, repurchase agreements,
extensions of credit by the Federal Home Loan Bank, interest rate derivatives
and for other purposes.
In 2002, 2001 and 2000 gross gains of $9.2 million, $10.3 million and $4.2
million and gross losses of $6.6 million, $10.3 million and $4.0 million,
respectively, were realized on the sale of securities available for sale.
Securities are shown below based on their estimated average lives at December
31, 2002. 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 $ 291,275 $ 294,507
Due after 1 through 5 years 3,362,955 3,433,104
Due after 5 through 10 years 351,497 351,641
Due after 10 years 152,784 135,986
---------- ----------
Total $4,158,511 $4,215,238
========== ==========
NOTE 5 - 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. At the expiration of a lease, the leased
property is sold or another lease agreement is initiated.
-60-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Financing: Lease financing includes the leasing of transportation,
manufacturing, construction, communication, data processing and office
equipment. These leases are classified as direct financing leases, with
expiration dates over the next 1 to 9 years. Rentals receivable at December
31, 2002 and 2001 include $81 million and $118 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 $110 million and $112 million in total at
December 31, 2002 and 2001, respectively.
The components of the net investment in lease financing at December 31 were
as follows:
(In Thousands) 2002 2001
- ---------------------------------------------------------------
Rentals Receivable $ 1,322,470 $ 1,172,818
Leases in Process - 15,961
Estimated Residual Values 171,482 167,005
----------- -----------
1,493,952 1,355,784
Less: Unearned Income (220,051) (249,640)
----------- -----------
Net Investment in Lease Financing $ 1,273,901 $ 1,106,144
=========== ===========
Future minimum lease payments, by year, to be received on lease financing are
$477.1 million for 2003; $341.6 million for 2004; $207.0 million for 2005;
$112.9 million for 2006; $65.2 million for 2007 and $118.6 million
thereafter.
Leased Equipment: Leased equipment includes assets which are subject to
operating leases. Operating leases are comprised of transportation equipment,
manufacturing equipment, data processing and office equipment to commercial
clients and vehicles, some of which are accounted for as assets under a
capital lease.
Provident, utilizing its auto leases, has entered into sale-leaseback
transactions. At December 31, 2002 and 2001, respectively, approximately $1.5
billion and $1.7 billion of auto leases which were utilized in these
transactions were outstanding and represent assets under capital leases
included in Leased Equipment.
A summary of leased equipment at December 31 follows:
(In Thousands) 2002 2001
- -------------------------------------------------------------------------
Costs of Automobiles $ 2,905,969 $ 3,059,187
Accumulated Depreciation - Automobiles (821,710) (673,799)
----------- -----------
Carrying Value of Automobile Leases 2,084,259 2,385,388
----------- -----------
Costs of Equipment 366,982 367,431
Accumulated Depreciation - Equipment (100,885) (101,425)
----------- -----------
Carrying Value of Equipment Leases 266,097 266,006
----------- -----------
Total Carrying Value of Leased Equipment $ 2,350,356 $ 2,651,394
=========== ===========
-61-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The future gross minimum rentals, by year, under noncancelable leases for the
rental of leased equipment follows:
Automobile Equipment
(In Thousands) Leases Leases
- --------------------------------------------------------
2003 $ 431,405 $ 56,184
2004 346,681 46,136
2005 237,221 30,869
2006 122,312 15,878
2007 38,294 6,105
Thereafter 4,003 3,930
---------- --------
Total $1,179,916 $159,102
========== ========
In 2002, 2001 and 2000, respectively, Provident incurred impairment charges
of $1.9 million, $5.7 million and $1.3 million on uninsured auto residuals.
Impairment is determined on an individual unit basis. Since 1994, except for
a five-month period during 1998, when it self-insured, Provident has
maintained insurance on its auto lease residuals in amounts necessary to
effectively remove residual risk.
NOTE 6 - 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) 2002 2001 2000
- -------------------------------------------------------------------------
Balance at Beginning of Period $ 241,143 $ 159,118 $ 95,181
Provision for Loan and Lease Losses
Charged to Earnings 99,549 215,545 133,477
Acquired Reserves - 10,003 2,377
Recoveries Credited to the Reserve 26,220 12,057 10,125
--------- --------- ---------
366,912 396,723 241,160
Losses Charged to the Reserve (165,861) (155,580) (82,042)
--------- --------- ---------
Balance at End of Period $ 201,051 $ 241,143 $ 159,118
========= ========= =========
The following table shows Provident's investment in impaired loans as defined
under Statement 114 as amended by Statement 118:
(In Thousands) 2002 2001
- ------------------------------------------------------------------------
Impaired Loans Requiring a Valuation Allowance of
$29.4 Million in 2002 and $18.2 Million in 2001 $ 91,053 $ 64,245
Impaired Loans Not Requiring a Valuation Allowance 8,272 -
-------- --------
Total Impaired Loans $ 99,325 $ 64,245
======== ========
Average Balance of Impaired Loans for the Year $102,241 $ 52,367
======== ========
The increase in impaired loans partially reflects the implementation of more
conservative criteria to identify impaired loans. The largest impaired loan
relates to the commercial airline industry. The remaining impaired loans are
distributed among 19 industries. Impaired loans are reviewed on an individual
basis to estimate potential future losses. Given the circumstances as of
December 31, 2002, reserves established for impaired loans are believed to be
sufficient to absorb future potential losses.
Interest income recognized on impaired loans during 2002 or 2001 was $0.2
million and $0, respectively. The valuation allowance recorded on impaired
loans is included in the reserve for loan losses.
-62-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and leases on nonaccrual status at December 31, 2002, 2001 and 2000
were $166.4 million, $176.9 million and $96.0 million, respectively. Loans
and leases which were ninety days or more past due and still accruing totaled
$29.9 million, $30.3 million and $28.2 million at December 31, 2002, 2001 and
2000, respectively. No loans or leases had been renegotiated to provide a
reduction or deferral of interest or principal as of December 31, 2002, 2001
and 2000.
NOTE 7 - PREMISES AND EQUIPMENT:
- --------------------------------
The following is a summary of premises and equipment at December 31:
(In Thousands) 2002 2001
- -----------------------------------------------------------
Land $ 11,921 $ 11,921
Buildings 40,698 40,802
Leasehold Improvements 19,092 17,889
Furniture and Fixtures 179,016 163,101
--------- ---------
250,727 233,713
Less Depreciation and Amortization (149,214) (130,628)
--------- ---------
Total $ 101,513 $ 103,085
========= =========
Rent expense for all bank premises and equipment leases was $15.2 million,
$15.1 million and $14.1 million in 2002, 2001 and 2000, respectively. The
future gross minimum rentals, by year, under noncancelable leases for the
rental of premises and equipment are $16.1 million in 2003, $14.1 million in
2004, $12.1 million in 2005, $10.5 million in 2006, $8.9 million in 2007 and
$43.6 million thereafter.
NOTE 8 GOODWILL AND OTHER INTANGIBLE ASSETS:
- ----------------------------------------------
Provident adopted the provisions of Statements of Financial Accounting
Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002. 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 Statement
142. Other intangible assets determined to have limited lives continue to be
amortized over their useful lives. Management performed a transitional
impairment test on its goodwill assets as of January 1, 2002 and determined
that no impairment existed as of that date.
-63-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of adopting Statement 142, Provident did not incur any goodwill
amortization during 2002, whereas during prior years, Provident recorded
goodwill amortization. The following table provides net income and earnings
per share for the years ended December 31, 2001 and 2000 on a pro forma basis
excluding goodwill amortization.
Year Ended December 31,
-----------------------
(In Thousands, Except Per Share Amounts) 2001 2000
--------------------------------------------------------------------------
Net Income (Loss):
As Reported $(1,003) $56,541
Add Back: After-Tax Goodwill Amortization 2,806 2,417
------- -------
Pro-Forma Net Income $ 1,803 $58,958
======= =======
Basic Earnings (Loss) Per Common Share:
As Reported $ (0.04) $ 1.14
Add Back: After-Tax Goodwill Amortization 0.06 0.05
------- -------
Pro-Forma Basic Earnings Per Common Share $ 0.02 $ 1.19
======= =======
Diluted Earnings (Loss) Per Common Share:
As Reported $ (0.04) $ 1.12
Add Back: After-Tax Goodwill Amortization 0.06 0.05
------- -------
Pro-Forma Diluted Earnings Per Common Share $ 0.02 $ 1.17
======= =======
Changes in the carrying amount of goodwill by business line for the years
ended December 31, 2002 and 2001, are as follows:
Commercial Retail
(In Thousands) Banking Banking Total
- ------------------------------------------------------------------------------
Balance at January 1, 2001 $ 40,899 $ 43,060 $ 83,959
Goodwill Recorded as a Result of Contingent
Consideration being Recognized 1,007 - 1,007
Amortization of Goodwill (2,081) (2,236) (4,317)
-------- -------- --------
Balance at December 31, 2001 39,825 40,824 80,649
Goodwill Acquired During the Year - 189 189
Goodwill Recorded as a Result of Contingent
Consideration being Recognized 1,594 219 1,813
-------- -------- --------
Balance at December 31, 2002 $ 41,419 $ 41,232 $ 82,651
======== ======== ========
As all of Provident's other intangible assets have been determined to have
limited lives, these assets have continued to be amortized as in the past.
Intangible assets, along with accumulated amortization, is provided below:
Gross Net
Carrying Accumulated Carrying
(In Thousands) Value Amortization Value
- ---------------------------------------------------------------------------------
Non-Contractual Customer Relationships $21,996 $ 7,837 $14,159
Purchased Core Deposits 1,429 1,072 357
------- ------- -------
Balance at December 31, 2002 $23,425 $ 8,909 $14,516
======= ======= =======
Amortization of intangible assets was $4.7 million, $3.4 million and $0.9
million for the years ended December 31, 2002, 2001 and 2000. The estimated
amortization of intangible assets for the next five years is $4.7 million for
2003; $4.4 million for 2004; $3.3 million for 2005; $1.5 million for 2006;
and $0.2 million for 2007.
-64-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - MORTGAGE SERVICING ASSETS:
- ------------------------------------
Provident recognizes the rights to service mortgage loans it does not own but
services for others within Other Assets of its balance sheet. Mortgage
servicing assets may be recognized (1) when mortgage loans are sold with
servicing retained or (2) when mortgage loan servicing is purchased. When
mortgage loans are sold, the carrying value of the loans is allocated between
the loans sold and servicing assets retained based on the relative fair
values of each. Mortgage servicing assets, when purchased, are initially
recorded at cost. Mortgage servicing assets are carried at the lower of the
initial carrying value, adjusted for amortization, or estimated fair value.
Mortgage servicing assets are evaluated for impairment based on the fair
value of those assets, using a desegregated approach. The fair value of the
mortgage servicing assets is determined by estimating the present value of
future net cash flows, taking into consideration loan prepayments speeds,
discount rates, servicing costs and other economic factors.
Changes in the carrying value of mortgage servicing assets follows:
December 31,
----------------------
(In Thousands) 2002 2001
- -------------------------------------------------------
Balance at Beginning of Period $ 84,267 $ 76,649
Additions 44,957 16,821
Amortization (17,534) (9,203)
Impairment Charges - -
--------- ---------
Balance at End of Period $ 111,690 $ 84,267
========= =========
As of December 31, 2002, mortgage servicing assets relating to commercial
real estate loans and residential loans totaled $61.0 million and $50.7
million, respectively. Total mortgage loans serviced for others included $6.5
billion on commercial real estate property and $7.1 billion on residential
property as of at December 31, 2002. No impairment charges were incurred on
the commercial real estate servicing assets as most of the underlying loans
have lockout and prepayment penalties generally ranging from 5 to 9 years.
Regarding the residential servicing rights, no impairment charges were
recognized as the majority of the servicing assets were acquired under the
current interest rate environment.
NOTE 10 - SHORT-TERM DEBT:
- --------------------------
Short-term debt was as follows:
(Dollars in Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------
Year End Balance:
Federal Funds Purchased and Repurchase Agreements $1,653,736 $1,644,738 $ 451,933
Commercial Paper 271,269 240,571 187,090
Weighted Average Interest Rate at Year End:
Federal Funds Purchased and Repurchase Agreements 1.98% 2.28% 5.99%
Commercial Paper 1.49 1.67 6.02
Maximum Amount Outstanding at Any Month End:
Federal Funds Purchased and Repurchase Agreements $1,701,716 $1,925,001 $1,821,278
Commercial Paper 310,029 273,898 209,393
-65-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LONG-TERM DEBT: Long-term debt consisted of the following:
December 31,
Stated Effective Maturity ----------------------
(Dollars in Thousands) Rate (1) Rate (2) Date 2002 2001
- --------------------------------------------------------------------------------------------------
Provident (Parent Company):
Fixed Rate Senior 8.38% 4.19% 2032 $ 75,000 $ -
Miscellaneous Notes Various Various Various 239 359
---------- ----------
75,239 359
---------- ----------
Subsidiaries:
$1.5 Billion Bank Notes Program:
Fixed Rate Senior n/a n/a n/a - 99,892
Notes Payable to
Federal Home Loan Bank:
Fixed Rate 5.84 5.84 2009 253,076 253,210
Fixed Rate 5.98 5.98 2010 420,000 420,000
Fixed Rate Various Various Various 55,589 57,915
Subordinated Notes:
Fixed Rate 7.13 2.38 2003 74,998 74,986
Fixed Rate 6.38 2.11 2004 99,932 99,867
Secured Debt Financings:
Secured by Auto Leases (3) 6.00 6.00 2003 125,354 152,909
Secured by Auto Leases (3) 5.62 5.62 2003 42,325 49,644
Secured by Auto Leases (3) 5.77 .71 2004 55,029 69,884
Secured by Auto Leases (3) 5.06 5.06 2004 244,585 273,792
Secured by Auto Leases (3) 5.97 5.97 2005 24,515 29,496
Secured by Auto Leases (3) 6.09 6.09 2005 130,263 143,232
Secured by Auto Leases (3) 6.39 6.39 2006 474,504 520,672
Secured by Auto Leases (3) 5.39 5.39 2007 26,700 29,775
Secured by Auto Leases (3) 6.84 6.84 2007 388,869 430,141
Secured by Auto Leases (3) 5.13 7.33 2007 249,020 287,158
Secured by Residential Properties 1.78 3.11 2005 986,536 985,456
Secured by Equipment Leases 7.27 7.27 2005 43,073 83,665
Miscellaneous Notes Various Various Various 73,050 19,361
---------- ----------
3,767,418 4,081,055
---------- ----------
Total $3,842,657 $4,081,414
========== ==========
(1) Stated rate reflects interest rate on notes as of December 31, 2002.
(2) Effective rate reflects interest rate paid as of December 31, 2002 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.
(3) Capital lease obligations incurred under sale-leaseback arrangement.
During the third quarter of 2002, Provident issued $75 million of senior
unsecured notes. These notes mature on July 15, 2032, however, they may be
called in whole or in part at any time on or after July 15, 2007.
The notes payable to the Federal Home Loan Bank are collateralized by
investment securities and residential loans with a book value of $1.5
billion. They are subordinated to the claims of depositors and other
creditors of Provident and are not insured by the FDIC.
At December 31, 2002, $175 million of subordinated notes were outstanding.
For regulatory capital purposes, $20 million of these notes qualify as Tier 2
capital as of year-end 2002. These notes are subordinated to the claims of
depositors and other creditors of Provident and are not insured by the FDIC.
Many of Provident's securitizations of loans and leases have been structured
to account for the transactions as secured financings. In connection with
these transactions, Provident has pledged $1.6 billion in auto leases, $1.1
billion in residential and home equity loans, $212 million in cash and $68
million in equipment leases.
-66-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002, scheduled principal payments on long-term debt for
the following five years were as follows:
(In Thousands) 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------
Provident (Parent Company) $ 120 $ 119 $ - $ - $ -
Subsidiaries 445,278 501,795 1,234,571 347,034 484,098
NOTE 12 - 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 2002 2001
- ------------------------------------------------------------------------------
November 1996 Issuance 8.60% 8.55% 12/01/26 $ 99,003 $ 99,066
June 1999 Issuance 8.75% 3.13% 06/30/29 121,522 121,391
November 2000 Issuance 10.25% 4.49% 12/31/30 109,257 109,141
March 2001 Issuance 9.45% 4.77% 03/30/31 121,292 121,161
-------- --------
Total $451,074 $450,759
======== ========
(1) Effective rate reflects interest rate paid as of December 31, 2002 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 13 - MINORITY INTEREST:
- ----------------------------
During June 2002, Provident and its consolidated subsidiary, PFGI Capital
Corporation ("PFGI Capital"), issued 6.6 million equity units ("PRIDES") to
outside investors for $165 million. The Provident Bank (the "Bank"),
Provident's most significant subsidiary, owns all of the $165 million of
Common Stock of PFGI Capital. The principal business objective of PFGI
Capital is to hold and manage commercial mortgage loan assets and other
authorized investments acquired from the Bank that will generate net income
for distribution to its stockholders. PFGI Capital has elected to be treated
as a real estate investment trust ("REIT") for federal income tax purposes.
Each PRIDES has a stated amount of $25 per unit and is comprised of two
components - a 3-year forward purchase commitment ("Purchase Contract") and
PFGI Capital Preferred Stock.
Each Purchase Contract obligates the holder to buy, on August 17, 2005, for
$25, a number of newly issued shares of Provident Common Stock equal to the
"settlement rate." The settlement rate will be calculated as follows:
o if the market value of Provident Common Stock is equal to or greater than
the $29.0598, the settlement rate will be 0.8603;
o if the market value of Provident Common Stock is between $29.0598 and
$24.42, the settlement rate will be equal to the $25 stated amount divided
by the applicable market value; and
o if the applicable market value is less than or equal to $24.42, the
settlement rate will be 1.0238.
-67-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"Applicable market value" is defined as the average of the closing price per
share of Provident Common Stock on each of the twenty consecutive trading
days ending on the fifth trading day immediately preceding August 17, 2005.
The following table illustrates how the settlement rate impacts the total
number of shares of Provident Common Stock that will be issued under the
Purchase Contract and the calculated price per share:
Applicable Market Value Less Than Greater Than
of Provident Common Stock $24.42 $25.00 $28.00 $29.0598
- ---------------------------------------------------------------------------------------------
Settlement Rate (25.00/24.42) (25.00/25.00) (25.00/28.00) (25.00/29.0598)
1.0238 1.0000 0.8929 0.8603
Total Purchased Contracts
Outstanding 6,600,000 6,600,000 6,600,000 6,600,000
------------ ------------ ------------ -------------
Shares of Provident
Common Stock Purchased 6,757,080 6,600,000 5,893,140 5,677,980
============ ============ ============ =============
Total Proceeds Received
From PFGI Preferred
Stock Issuance $165,000,000 $165,000,000 $165,000,000 $ 165,000,000
Shares of Provident
Common Stock Purchased 6,757,080 6,600,000 5,893,140 5,677,980
------------ ------------ ------------ -------------
Price Paid Per Share of
Provident Common Stock $ 24.42 $ 25.00 $ 28.00 $ 29.06
============ ============ ============ =============
Under the Purchase Contract, Provident will also make quarterly contract
adjustment payments to the PRIDES holders at the rate of 1.25% of the stated
amount per year. The present value of this obligation has been recorded as a
liability and as a reduction to shareholders' equity.
The PFGI Capital Preferred Stock has a liquidation preference of $25 and an
initial non-cumulative dividend rate of 7.75%. Under certain regulatory
circumstances, the PFGI Capital Preferred Stock will be automatically
exchanged for the Bank Preferred Stock.
Concurrent with the fulfillment of the Purchase Contract, Provident has
engaged a remarketing agent to remarket the PFGI Capital Preferred Stock on
behalf of the holders, at which time the PFGI Capital Preferred Stock is
permanently detached from the Purchase Contract. Once the Purchase Contract
is fulfilled, there will be two separate and distinct securities outstanding:
PFGI Capital Preferred Stock and Provident Common Stock. The number of common
shares to be issued will be from 5,677,980 to 6,757,080, depending on the
market value of the Common Stock. The proceeds received from the remarketing
will be used by the holders of PFGI Capital Preferred Stock to fulfill their
commitment under the terms of the Purchase Contract. Provident intends to use
such proceeds for the redemption of the remarketed PFGI Capital Preferred
Stock ninety days after the remarketing.
NOTE 14 - 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, 2002 and 2001, 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.
-68-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2001, Provident recorded an after-tax transitional loss of
$28.3 million in connection with the adoption of Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." A description
of Statement 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) 2002 2001
- -------------------------------------------------------------------------------------
Accumulated Unrealized Losses on Securities Available
for Sale at January 1, Net of Tax $(15,953) $(17,929)
Net Unrealized Gains for the Period, Net of Tax Expense
of $29,319 in 2002 and $1,064 in 2001 54,449 1,976
Reclassification Adjustment for Gains Included in Net Income,
Net of Tax Expense of $909 in 2002 (1,687) -
-------- --------
Effect on Other Comprehensive Income (Loss) for the Year 52,762 1,976
-------- --------
Accumulated Unrealized Gains (Losses) on Securities Available
for Sale at December 31, Net of Tax $ 36,809 $(15,953)
======== ========
Accumulated Unrealized Losses on Derivatives Used in Cash
Flow Hedging Relationships at January 1, Net of Tax $(82,743) $ -
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 $13,117 in 2002 and $48,648 in 2001 (24,360) (90,347)
Reclassification Adjustment for Losses Included in Net Income,
Net of Tax Benefit of $14,632 in 2002 and $19,350 in 2001 27,173 35,936
-------- --------
Effect on Other Comprehensive Income (Loss) for the Year 2,813 (82,743)
-------- --------
Accumulated Unrealized Losses on Derivatives Used in Cash
Flow Hedging Relationships at December 31, Net of Tax $(79,930) $(82,743)
======== ========
Accumulated Other Comprehensive Income (Loss) at
January 1, Net of Tax $(98,696) $(17,929)
Other Comprehensive Income (Loss), Net of Tax 55,575 (80,767)
-------- --------
Accumulated Other Comprehensive Income (Loss) at
December 31, Net of Tax $(43,121) $(98,696)
======== ========
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 the 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 the 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, 2002, Provident and the Bank meet all capital requirements to
which it is subject.
-69-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002, Provident and the Bank's capital ratios were
categorized as "well capitalized" for regulatory purposes. To be categorized
as well capitalized, Provident and the 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.
The following table presents Provident and the Bank's regulatory capital
information at December 31:
2002 2001
--------------------------------------------------------
Provident Provident
(Dollars in Thousands) Provident Bank Provident Bank
- -------------------------------------------------------------------------------------------
Tier 1 Capital $ 1,337,160 $ 1,151,078 $ 1,091,141 $ 938,402
Average Assets 17,113,302 16,990,504 16,414,480 16,287,008
Tier 1 Leverage Ratio 7.81% 6.77% 6.65% 5.76%
Tier 1 Capital $ 1,337,160 $ 1,151,078 $ 1,091,141 $ 938,402
Risk-Weighted Assets 14,221,099 14,055,619 13,727,270 13,597,229
Tier 1 Capital Ratio 9.40% 8.19% 7.95% 6.90%
Total Risk-Based Capital $ 1,625,263 $ 1,596,938 $ 1,470,511 $ 1,414,786
Risk-Weighted Assets 14,221,099 14,055,619 13,727,270 13,597,229
Total Risk-Based Capital Ratio 11.43% 11.36% 10.71% 10.40%
Provident's Tier 1 capital is comprised of total shareholders' equity plus
qualifying minority interest and junior subordinated debentures, less
unrealized gains and losses within accumulated other comprehensive loss,
intangible assets, and a valuation related to mortgage servicing rights.
Total risk-based capital consists of Tier 1 capital plus qualifying reserves
for loan and lease losses, qualifying subordinated debentures and junior
subordinated debentures which did not qualify for Tier 1 treatment.
For purposes of computing the leverage ratio, average assets represents
average assets for the fourth quarter less assets not qualifying for total
risk-based capital including intangibles and non-qualifying mortgage
servicing assets and reserve for loan and lease losses.
NOTE 16 - BENEFIT PLANS:
- -------------------------
Provident has a Retirement Plan for the benefit of its employees. Included
under this plan is a Profit Sharing Plan and a Personal Investment Election
Plan ("PIE Plan"). Provident also maintains a Deferred Compensation Plan
("DCP") and stock option plans.
The Profit Sharing Plan 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
contributed approximately $4.6 million for 2002. Contributions of $4.1
million and $5.9 million were made to an Employee Stock Ownership Plan
("ESOP") for 2001 and 2000, respectively. The Profit Sharing Plan, which
replaced the ESOP, differs from the ESOP in that participants may diversify
contributions, which were formerly in Provident Stock, to other kinds of
investments. In addition, participants may diversify up to 25% of their
year-end 2002 ESOP balance each year into other investment options.
-70-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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% (15% beginning in 2003) 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 $1.7
million, $1.5 million and $1.4 million for this retirement plan for 2002,
2001 and 2000, respectively.
The DCP permits participants, selected by the Compensation Committee of the
Board of Directors, to defer compensation in a manner that aligns their
interests with those of Provident shareholders through the investment of
deferred compensation in Provident Common Stock. The DCP allows participants
to postpone the receipt of 5% to 50% of compensation until retirement.
Amounts deferred are invested in a Bank Stock Account or a Self-Directed
Account. Provident will credit the 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
$195,000 for 2002 and $0 for both 2001 and 2000.
Provident has Employee Stock Option Plans, an Advisory Directors' Stock
Option Plan and Outside Directors' Stock Option Plans. During 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 Plans authorized the issuance
of 427,500 and 193,750 options, respectively. As of December 31, 2002, the
number of options remaining available for future issuance under all of the
stock option plans is 2.5 million.
The following table summarizes option activity for the three years ended
December 31, 2002:
2002 2001 2000
-------------------- --------------------- --------------------
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 $29.92 6,143,359 $28.84 5,480,365 $30.00 4,205,113
Granted 23.08 1,660,200 29.17 1,407,432 27.29 2,079,600
Exercised 12.59 (336,295) 10.37 (374,567) 17.27 (196,130)
Canceled 30.33 (340,029) 30.82 (369,871) 35.30 (608,218)
--------- --------- ----------
Outstanding at
End of Year $29.12 7,127,235 $29.92 6,143,359 $28.84 5,480,365
========= ========= =========
-71-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002, 2001 and 2000, there were 3,297,934, 2,825,462 and
2,396,315 options exercisable, respectively, having a weighted average option
price per share of $31.27, $28.61 and $24.26, respectively. The following
table summarizes information about stock options outstanding at December 31,
2002:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
--------------------------------------------------------------------------------------
$10.45 - $12.00 33,488 0.2 $10.87 33,488 $10.87
$12.01 - $18.00 451,872 2.1 14.74 451,872 14.74
$18.01 - $27.00 2,982,890 7.7 23.93 889,027 24.84
$27.01 - $40.00 2,741,470 7.1 31.68 1,121,297 33.24
$40.01 - $54.47 917,515 5.0 46.10 802,250 45.79
No compensation cost has been recognized for stock option grants. Pro forma
net income and earnings per share information is provided in Note 1 as if
compensation cost had been determined for stock awards based on the fair
values at grant dates.
Beginning with the first quarter of 2003, Provident has elected to adopt the
provisions of Statement No. 123, "Accounting for Stock-Based Compensation"
using the Prospective Method of expense recognition according to the
transition rules of Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Under Statement 123, compensation
expense is recognized over the vesting period equal to the fair value of
stock-based compensation as of the date of grant. The full-year 2003 impact
on net income and diluted earnings per share are estimated to be $1.4 million
and $.02, respectively, for options granted after December 31, 2002.
NOTE 17 - MERGERS AND RESTRUCTURING CHARGES:
- ----------------------------------------------
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 facilities.
Provident paid $129 million for the net assets with $11 million of goodwill.
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.
-72-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 18 - INCOME TAXES:
- -----------------------
The composition of income tax expense follows:
(In Thousands) 2002 2001 2000
- ------------------------------------------------
Current:
Federal $ 2,686 $ (50) $ 346
State 24,786 11,704 22,681
-------- -------- --------
27,472 11,654 23,027
Deferred 22,550 (12,249) 10,808
-------- -------- --------
Total $ 50,022 $ (595) $ 33,835
======== ======== ========
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) 2002 2001 2000
- -------------------------------------------------------------------------------
Tax at Statutory Rate (35%) $ 50,915 $ (557) $ 31,631
State Income Tax, Net of Federal Tax Benefit 1,746 (32) 225
Tax Effect of:
Non-Taxable Interest Income (3,388) (512) (289)
Non-Deductible Amortization of Goodwill - 1,257 1,273
Tax Credits (2,638) (1,113) (1,063)
Other - Net 3,387 362 2,058
-------- -------- --------
Applicable Income Taxes $ 50,022 $ (595) $ 33,835
======== ======== ========
At December 31, 2002, for income tax purposes, Provident had a federal net
operating loss carryforward of $312.8 million available, which $167.9 million
and $144.9 million expires in the years 2021 and 2022, respectively.
-73-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Provident's deferred tax liabilities and assets as of December
31 are as follows:
(In Thousands) 2002 2001 2000
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Excess Lease and Partnership Income $194,679 $143,267 $112,052
Securitizations 109,585 58,433 34,752
Deferred Loan Costs 23,308 30,485 26,600
Other 23,829 19,225 13,599
-------- -------- --------
Total Deferred Tax Liabilities 351,401 251,410 187,003
-------- -------- --------
Deferred Tax Assets:
Federal Net Operating Loss Carryforward 109,482 36,044 -
Reserve for Loan and Lease Losses 94,462 87,769 57,957
Unrealized Loss on Investment Securities 23,414 53,150 9,654
Deferred Compensation 10,808 9,210 7,555
Other 20,020 24,335 15,190
-------- -------- --------
Total Deferred Tax Assets 258,186 210,508 90,356
-------- -------- --------
Net Deferred Tax Liabilities $ 93,215 $ 40,902 $ 96,647
======== ======== ========
NOTE 19 - EARNINGS PER SHARE:
- -----------------------------
Basic earnings per share is calculated by dividing net income, less dividend
requirements on convertible preferred stock, by the weighted average number
of common shares outstanding for the period. Diluted earnings per share takes
into consideration the pro forma dilution assuming the convertible preferred
shares and the in-the-money outstanding stock options were converted or
exercised into common shares. It also takes into consideration the dilutive
impact of shares held in benefit plans and of forward purchase contracts
required to be settled in Provident Stock. Net income is not adjusted for
preferred dividend requirements.
Stock options to purchase approximately 4.6 million, 5.1 million and 2.0
million shares of Common Stock were outstanding at December 31, 2002, 2001
and 2000, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was not in-the-money
and, therefore, the effect would be anti-dilutive. The PRIDES units were not
included in the computation of dilutive earnings per share as these
instruments had no dilutive impact.
-74-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted earnings
per common share:
Year Ended December 31,
--------------------------------
(In Thousands Except Per Share Data) 2002 2001 2000
- -------------------------------------------------------------------------------
Basic:
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
Less Preferred Stock Dividends (949) (949) (949)
-------- -------- --------
Income Available to Common Shareholders 94,502 (1,952) 55,592
Weighted-Average Common Shares Outstanding 48,806 49,011 48,744
-------- -------- --------
Basic Earnings (Loss) Per Share $ 1.94 $ (0.04) $ 1.14
======== ======== ========
Diluted:
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
Less Preferred Stock Dividends (1) n/a (949) n/a
-------- -------- --------
95,451 (1,952) 56,541
Weighted-Average Common Shares Outstanding 48,806 49,011 48,744
Benefit Plans Common Shares 497 - -
Assumed Conversion of:
Convertible Preferred Stock (1) 988 n/a 988
Dilutive Stock Options (1) 452 n/a 608
-------- -------- --------
Dilutive Potential Common Shares 50,743 49,011 50,340
-------- -------- --------
Diluted Earnings (Loss) Per Share $ 1.88 $ (0.04) $ 1.12
======== ======== ========
(1) The conversion of preferred securities and stock options were not included in the
diluted earnings (loss) per share calculation for 2001 as these are anti-dilutive.
NOTE 20 - 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 Provident sold $1.4 billion of loans and equipment leases in
securitization transactions resulting in the recognition of $43.5 million in
gains. 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.
Securitization transactions that have been accounted for as sales have
resulted in loans and leases being removed from the balance sheet. The
following table provides a summary of the outstanding balances of these
off-balance sheet loans and leases:
December 31,
-----------------------
(In Thousands) 2002 2001
- ---------------------------------------------------
Nonconforming Residential $1,779,127 $2,627,332
Prime Home Equity 194,775 303,527
Equipment Leases 94,408 207,131
---------- ----------
$2,068,310 $3,137,990
========== ==========
-75-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RISA balances have been established for nonconforming residential loans and
prime home equity loans. No RISAs have been established for equipment leases
as cash gains were recognized at the time of securitization. Components of
the nonconforming residential and prime home equity RISAs, which are included
within Investment Securities on the balance sheet, as of December 31, 2002
follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- --------------------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 161,259 $13,677
Less:
Estimated Credit Loss (6,960) -
Servicing and Insurance Expense (21,105) (2,597)
Discount to Present Value (21,177) (1,555)
--------- -------
Carrying Value of RISA $ 112,017 (1) $ 9,525
========= =======
(1) Carrying value of Retained Interest in Securitized Assets, net of all loss
reserves, was $93.3 million at December 31, 2002.
Provident had provided for credit enhancements to its securitizations
structured as sales in the form of cash, loans and an unfunded secured demand
note. The credit enhancements 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. Provident had reserves of $20.9 million as of year-end
2002 to offset future losses. Estimated credit losses are based upon loan
credit grades, collateral, market conditions and other pertinent factors.
Detail of the credit enhancements along with their loss reserves are provided
below as of December 31, 2002:
Type of Credit Value of Credit Loss
(In Thousands) Enhancements Enhancements Reserves
- ---------------------------------------------------------------------------------------------
Nonconforming Residential (1) Unfunded Demand Deposit/Loans $ 275,075 $18,756
Prime Home Equity Cash 27,080 502
Equipment Leases Cash 30,352 1,672
--------- -------
$ 332,507 $20,930
========= =======
(1) During the fourth quarter of 2001, Provident reached an agreement with
the securitization insurer to release the cash accounts for the
nonconforming residential loan securitizations and substitute an unfunded
secured demand note backed by a AAA rated standby letter of credit.
Actual losses 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.
-76-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Various economic assumptions are used in the measurement of RISAs and loss
estimates. The following key assumptions were used as of the date of the
securitization during 2000:
Nonconforming Prime Equipment
Residential Home Equity Leasing
---------------------------------------------------
Prepayment Speed:
Initial Rate 13.73% 10.00% n/a
Peak Rate 35.00% 30.00% n/a
Weighted Average Life (in years) 2.4 2.1 n/a
Estimated Credit Losses:
Annual Basis 1.14% 0.20% 1.00%
Percentage of Original Balance 2.84% 0.47% 2.00%
Discount Rate 12.00% 12.00% 8.00%
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, 2002:
Nonconforming Prime Equipment
(Dollars in Millions) Residential Home Equity Leasing
- ----------------------------------------------------------------------------------------------
Peak Prepayment Speed Assumption (Annual Rate)(1) 30% CPR 30% CPR n/a
Impact on Fair Value of 10% Adverse Change $ (17.6) $ (1.4) n/a
Impact on Fair Value of 20% Adverse Change $ (35.2) $ (2.6) n/a
Estimated Credit Loss Assumption(1)
(Percentage of Original Balance) 4.83% 0.20% 6.00%
Impact on Fair Value of 10% Adverse Change $ (6.5) $ (0.1) $(0.4)
Impact on Fair Value of 20% Adverse Change $ (12.9) $ (0.2) $(0.8)
RISA Discount Rate(1) 12.00% 10.89% n/a
Impact on Fair Value of 10% Adverse Change $ (3.0) $ (0.2) n/a
Impact on Fair Value of 20% Adverse Change $ (5.9) $ (0.4) 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) 2002 2001 2000
- -------------------------------------------------------------------------------------
Proceeds From New Securitizations $ - $ - $1,412,303
Cash Flows Received from Interests Retained 175,828 193,357 130,720
Servicing Fees Received 14,384 21,766 24,450
Prepayment and Late Fees Received 11,941 17,662 13,365
Net Servicing Advances (58,535) (61,749) (44,246)
-77-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents quantitative information about delinquencies,
net credit losses and components of securitized and portfolio loans and
leases:
2002 2001
---------------------------------------------- --------------------------------------------
Middle Market Middle Market
Nonconforming Prime Home Equipment Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases Residential Equity Leases
- --------------------------------------------------------------------------------------------------------------------------
Average Assets:
Securitized and Sold $ 2,190,684 $ 246,163 $ 150,562 $ 3,086,984 $ 383,157 $ 276,895
Portfolio 808,822 853,860 957,835 993,436 510,812 671,951
----------- ----------- ----------- ----------- --------- -----------
Total Managed Assets $ 2,999,506 $ 1,100,023 $ 1,108,397 $ 4,080,420 $ 893,969 $ 948,846
=========== =========== =========== =========== ========= ===========
Year-End Assets:
Securitized and Sold $ 1,779,127 $ 194,775 $ 94,408 $ 2,627,332 $ 303,527 $ 207,131
Portfolio 657,204 1,110,728 1,046,640 918,458 688,798 844,096
----------- ----------- ----------- ----------- --------- -----------
Total Managed Assets $ 2,436,331 $ 1,305,503 $ 1,141,048 $ 3,545,790 $ 992,325 $ 1,051,227
=========== =========== =========== =========== ========= ===========
Net Charge-Offs:
Total Managed Assets $ 131,462 $ 3,422 $ 20,184 $ 63,651 $ 2,816 $ 17,430
=========== =========== =========== =========== ========= ===========
Net Charge-Offs to
Average Assets:
Total Managed Assets 4.38% 0.31% 1.82% 1.56% 0.31% 1.84%
=========== =========== =========== =========== ========= ===========
90 Days or More
Delinquencies to
Year-End Assets:
Total Managed Assets 17.85% 0.19% 0.38% 13.85% 0.21% 1.17%
=========== =========== =========== =========== ========= ===========
NOTE 21 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
- ---------------------------------------------------------
Provident uses derivative instruments to manage its interest rate risk. These
instruments include interest rate swaps and interest rate caps. In addition,
forward delivery commitments are entered 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 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, 2002, Provident had bilateral collateral agreements in place
with its counterparties, against which Provident has pledged investment
securities with a carrying value of $50 million as collateral. There were no
past due amounts on any instruments as of December 31, 2002. Provident has
never experienced a credit loss related to these instruments.
Provident adopted the provisions of Statements of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 2001. Pursuant to Statement 133, derivatives are
carried at fair value and are recorded within Other Assets or Accrued
Interest and Other Liabilities in the balance sheets. The accounting for the
-78-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 Statement 133 or for the years ended December 31, 2002 and
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 2014.
Upon the adoption of Statement 133 and for the year ended December 31, 2001,
Provident recorded reductions of $28.3 million and $54.4 million,
respectively, and for the year ended December 31, 2002, Provident recorded a
gain of $2.8 million in accumulated other comprehensive income. No gain or
loss was recognized at the time of adoption or for the full years of 2002 and
2001 as a result of ineffective cash flow hedges. During the next twelve
months, management expects to reclassify $51.6 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.
-79-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the notional amount of the interest rate derivatives at December
31 is as follows:
Interest Rate Swaps
------------------- Interest Rate Caps
Receive Pay ------------------
(In Millions) Fixed Fixed Purchased Sold
- --------------------------------------------------------------------------
At December 31, 2002:
Off-Balance Sheet Securitizations $ 139 $1,265 $1,736 $1,736
Certificates of Deposit 2,812 - - -
Long-Term / Subordinated Debt 838 622 1,010 1,010
Premium Index Deposits - 195 - -
Loans - 51 - -
For Customers' Purposes - 37 13 -
------ ------ ------ ------
Totals $3,789 $2,170 $2,759 $2,746
====== ====== ====== ======
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
====== ====== ====== ======
Summary information with respect to the interest rate derivatives used to
manage Provident's interest rate sensitivity at December 31, 2002 follows:
Interest Rate Swaps
------------------- Interest Rate Caps
Receive Pay -------------------
(Dollars in Millions) Fixed Fixed Purchased Sold
- -----------------------------------------------------------------------------
Notional Amount $ 3,789 $ 2,170 $ 2,759 $ 2,746
Positive Fair Value Adjustment 161 - 29 -
Negative Fair Value Adjustment (1) (152) - (29)
Weighted Average:
Receive Rate 5.86% 1.50% n/a n/a
Pay Rate 1.75% 5.96% n/a n/a
Strike Rate n/a n/a 8.97% 8.97%
Life (in years) 10.5 6.4 12.2 12.3
The expected notional maturities of Provident's interest rate derivative
portfolio at December 31, 2002 are as follows:
Interest Rate Swaps
------------------- Interest Rate Caps
Receive Pay -------------------
(In Millions) Fixed Fixed Purchased Sold Total
- --------------------------------------------------------------------------
Less than 1 Year $ 387 $ 178 $ - $ - $ 565
From 1 to 5 Years 1,084 432 13 - 1,529
From 5 to 10 Years 627 1,354 - - 1,981
From 10 to 15 Years 717 191 2,746 2,746 6,400
More than 15 Years 974 15 - - 989
------- ------- ------- ------ -------
Total $ 3,789 $ 2,170 $ 2,759 $2,746 $11,464
======= ======= ======= ====== =======
Provident also enters into forward delivery contracts for the future delivery
of commercial real estate and residential mortgage loans at a specified
interest rate to reduce the interest rate risk associated with loans held for
sale. As of December 31, 2002, Provident had $172 million in forward delivery
contracts.
-80-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - CREDIT RISK TRANSFER INSTRUMENTS, CREDIT COMMITMENTS AND GUARANTEES:
- ------------------------------------------------------------------------------
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 an auto lease portfolio, while retaining a 2 1/2%
first-loss position. Under the 2000 transaction, Provident transferred 98% of
the credit risk on an 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, 2002, the remaining unpaid auto lease
balances on the 2001 and 2000 credit risk transfer transactions were $0.4
billion and $1.0 billion, respectively.
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.
A standby letter of credit is an irrevocable guarantee whereby Provident
guarantees the performance of a customer to a third party in a borrowing
arrangement. They 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. Generally, Provident issues standby letters of credit for terms
from six months to three years.
Provident's commitments to extend credit and letters of credit which are not
reflected in the balance sheet at December 31 are as follows:
(In Millions) 2002 2001
- ----------------------------------------------
Commitments to Extend Credit $2,887 $2,153
Standby Letters of Credit 274 193
Commercial Letters of Credit 11 -
-81-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident (Parent) has issued a guarantee for a subsidiary to assist in its
business activities. This guarantee was made to Fannie Mae for the benefit of
Red Mortgage Capital, Inc. Red Mortgage is an approved Fannie Mae Delegated
Underwriting and Servicing (DUS) mortgage lender. Under the Fannie Mae DUS
program, Red Mortgage underwrites, funds and sells mortgage loans on
multifamily rental projects. Red Mortgage then services these mortgage loans
on Fannie Mae's behalf. Participation in the Fannie Mae DUS program requires
Red Mortgage to share the risk of loan losses with Fannie Mae. Under the loss
sharing arrangement, Red Mortgage and Fannie Mae split losses with one-third
of all losses assumed by Red Mortgage and two-thirds of all losses assumed by
Fannie Mae. For Red Mortgage to participate in the loss sharing agreement,
the Parent provided a guarantee to Fannie Mae that it would fulfill all
payments required of Red Mortgage under the loss sharing arrangement and for
servicing advances of these loans if Red Mortgage fails to meet its
obligations. As of December 31, 2002, Red Mortgage serviced loans with
outstanding principal balances aggregating $3.0 billion under the DUS
program. The guarantee will continue until such time as the loss sharing
agreement is amended or that Red Mortgage no longer participates in the
Fannie Mae DUS program. No liability is carried on the Parent's balance sheet
for this guarantee as a liability has been established for estimated losses
on Red Mortgage's balance sheet.
NOTE 23 - 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 loans and leases, 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 and risk of
its lending portfolio. Activity-based costing is used to allocate expenses
for centrally provided services.
-82-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed income statements and total assets are provided below for
Provident's three major lines of business for the past three years. Corporate
Center represents income and expenses not related to the major business
lines, and gain/loss on the sale of investment securities.
Commercial Retail Mortgage Corporate
(In Millions) Banking Banking Banking Center Total
- -----------------------------------------------------------------------------------------
Year Ended December 31, 2002:
Net Interest Income $ 216.7 $ 32.6 $ 66.3 $ - $ 315.6
Provision for Loan Losses (62.0) (8.0) (20.6) (9.0) (99.6)
Noninterest Income 150.0 603.6 41.1 10.8 805.5
Noninterest Expense (216.9) (586.8) (72.3) - (876.0)
Income Taxes (30.1) (14.3) (5.0) (.6) (50.0)
-------- -------- -------- -------- ---------
Net Income $ 57.7 $ 27.1 $ 9.5 $ 1.2 $ 95.5
======== ======== ======== ======== =========
Total Assets $ 7,554 $ 4,854 $ 1,646 $ 3,486 $ 17,540
======== ======== ======== ======== =========
Year Ended December 31, 2001:
Net Interest Income $ 206.7 $ 3.4 $ 60.4 $ - $ 270.5
Provision for Loan Losses (155.9) (27.9) (31.7) - (215.5)
Noninterest Income 166.8 563.5 26.1 - 756.4
Noninterest Expense (218.9) (529.4) (64.7) - (813.0)
Income Taxes .5 (3.6) 3.7 - .6
-------- -------- -------- -------- ---------
Net Income $ (0.8) $ 6.0 $ (6.2) $ - $ (1.0)
======== ======== ======== ======== =========
Total Assets $ 7,115 $ 4,785 $ 1,799 $ 2,862 $ 16,561
======== ======== ======== ======== =========
Year Ended December 31, 2000:
Net Interest Income $ 186.4 $ 20.2 $ 37.0 $ - $ 243.6
Provision for Loan Losses (79.2) (25.0) (29.3) - (133.5)
Noninterest Income 114.7 486.3 59.4 .2 660.6
Noninterest Expense (127.9) (450.2) (63.0) (39.3) (680.4)
Income Taxes (33.2) (11.4) (1.4) 12.2 (33.8)
-------- -------- -------- -------- ---------
Net Income $ 60.8 $ 19.9 $ 2.7 $ (26.9) $ 56.5
======== ======== ======== ======== =========
Total Assets $ 6,242 $ 4,161 $ 1,824 $ 2,770 $ 14,997
======== ======== ======== ======== =========
NOTE 24 - TRANSACTIONS WITH AFFILIATES:
- ---------------------------------------
At December 31, 2002, Carl H. Lindner, Jr., 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 44% of
Provident's Common Stock at year-end 2002. Provident leases its home office
space and other office space from a trust, for the benefit of a subsidiary of
American Financial Group. Rentals and renovations charged by American
Financial Group and affiliates for the years ended December 31, 2002, 2001
and 2000 amounted to $3.8 million, $3.1 million and $3.0 million,
respectively. Provident paid $612,000, $0 and $0 to a subsidiary of American
Financial Group for insurance coverage during 2002, 2001, and 2000,
respectively. Payments of $114,000, $28,000 and $0 were made to American
Financial Group and affiliates for record retention services for the years
ended December 31, 2002, 2001 and 2000, respectively. Approximately $100,000
was also paid to American Financial Group for guard services in each of the
past three years.
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 $25.6 million and $42.8 million at
-83-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001, respectively. During 2002, new loans and leases
aggregating $2.6 million were made to such parties and loans and leases
aggregating $19.8 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, 2002 and 2001, these persons held
Provident's commercial paper amounting to $17.3 million and $17.5 million,
respectively. Additionally, repurchase agreements in the amount of $5.8
million and $7.7 million had been sold to these persons at December 31, 2002
and 2001, respectively. All of these transactions were at market interest
rates.
NOTE 25 - 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.
2002 2001
-------------------------------------------------------
Carrying Fair Carrying Fair
(In Thousands) Value Value Value Value
- --------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 540,919 $ 540,919 $ 501,223 $ 501,223
Trading Account Securities 127,848 127,848 101,156 101,156
Loans Held for Sale 436,884 436,884 217,914 217,914
Investment Securities 4,215,238 4,215,238 3,486,058 3,486,058
Loans and Leases 9,133,795 9,184,892 8,950,123 8,992,407
Less: Reserve for Losses (201,051) - (241,143) -
--------- --------- --------- ---------
Net Loans and Leases 8,932,744 9,184,892 8,708,980 8,992,407
Financial Liabilities:
Deposits 9,848,979 9,818,970 8,854,250 8,867,237
Short-Term Debt 1,925,005 1,925,005 1,885,309 1,885,309
Long-Term Debt and Junior
Subordinated Debentures 4,293,731 4,447,041 4,532,173 4,745,430
Derivative Instruments:
Interest Rate Swaps 7,985 7,985 (132,664) (132,664)
Interest Rate Caps - - - -
Interest Rate Floors - - - -
The following methods and assumptions were used by Provident in estimating
its fair value disclosures for financial instruments:
o Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
o 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 are valued using discounted cash
-84-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flow techniques. Significant assumptions used in the valuation are
presented in Note 20.
o 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.
o 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.
o Short-term debt: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
o 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.
o Derivative instruments: The fair value of derivative instruments has been
recognized as either assets or liabilities in the balance sheet in
accordance to Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The fair value of derivative instruments is based
upon current market quotes.
NOTE 26 - ADDITIONAL INFORMATION:
- ---------------------------------
LEGAL MATTERS: Provident and its subsidiaries are not parties to any pending
legal proceedings other than routine litigation incidental to their business
except for the following matters related to the restatement announced March
5, 2003.
On March 6, 6, 11, 26 and 31 and April 3, 2003, respectively, purported
class-actions were filed in the U.S. District Court for the Southern District
of Ohio by shareholders Waldbaum, Merzin, McKay, Nicci, Koot (as a Provident
Capital Trust holder) and Spitz, respectively against Provident, its
President, Robert L. Hoverson, its Chief Financial Officer, Christopher J.
Carey, and, in the Merzin, Koot, and Spitz cases, their predecessors in those
positions, on behalf of all purchasers of Provident securities from March 30,
1998 through March 5, 2003. These actions are based upon circumstances
involved in the restatement of earnings announced by Provident on March 5,
2003 and allege violations of federal securities laws by the defendants in
Provident's financial disclosures during the period from March 30, 1998
through March 5, 2003. They seek an unspecified amount of damages and, in the
cases filed by Waldbaum and McKay, reimbursement of all executive bonuses
received during that period.
-85-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7 and 18, 2003, respectively, derivative actions were filed by the
Plumbers and Pipefitters Location 572 Pension Fund and shareholder Berg on
behalf of Provident versus Provident's directors in the same court. These
suits were also concerned with the restatement of earnings and allege that
the defendants breached fiduciary duties owed to Provident and are
responsible for the conditions that led to the restatement and its
consequences and sales of stock and other actions by certain officers and
directors and seek recovery from the defendants of an unspecified amount of
damages. A similar action was filed in the Court of Common Pleas of Hamilton
County, Ohio on March 26, 2003 by shareholder Weinstein against the directors
and two officers.
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, 2002, was approximately $57.8 million.
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, 2002 and 2001
follow (in thousands):
December 31,
-------------------
Subsidiary 2002 2001
- -----------------------------------------------------------------------
Provident Auto Rental LLC 1999-1 $723,901 $801,373
Provident Auto Leasing Company 617,371 717,239
Provident Auto Rental LLC 2000-1 350,500 374,242
Provident Auto Rental LLC 2001-1 314,339 345,432
Provident Auto Rental Company LLC 1998-2 152,986 171,112
Provident Auto Rental LLC 2000-2 150,401 159,537
Provident Auto Rental Company LLC 1998-1 141,300 157,498
Provident Lease Receivables Company LLC 115,460 193,139
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 2003 by the Bank
to the parent company is approximately $30.2 million, plus 2003 net income.
Pursuant to Federal Reserve and State regulations, the maximum amount
available to be loaned to affiliates (as defined), including its Parent, by
the Bank, was approximately $165.1 million to any single affiliate, and
$330.2 million to all affiliates combined of which $43.6 million was loaned
at December 31, 2002.
-86-
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) 2002 2001
- -------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents $ 243,000 $ 157,168
Trading Account Securities 10,470 -
Investment Securities Available for Sale 299,024 315,018
Investment in Subsidiaries:
Banking 1,056,278 948,949
Non-Banking 18,287 18,782
Accounts Receivable from Banking Subsidiaries 18,552 -
Other Assets 103,222 99,005
---------- ----------
TOTAL ASSETS $1,748,833 $1,538,922
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts Payable to Banking Subsidiaries $ - $ 12,459
Other Accounts Payable and Accrued Expenses 56,575 18,636
Commercial Paper 271,269 240,571
Long-Term Debt and
Junior Subordinated Debentures 540,618 465,423
---------- ----------
Total Liabilities 868,462 737,089
Shareholders' Equity 880,371 801,833
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,748,833 $1,538,922
========== ==========
STATEMENTS OF INCOME (PARENT ONLY)
Year Ended December 31,
-------------------------------
(In Thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
Income:
Dividends from Banking Subsidiaries $ 45,000 $ 15,000 $ 37,000
Interest Income from Banking Subsidiaries 25,394 24,944 13,232
Other Interest Income 1,261 1,469 4,951
Noninterest Income 1,080 7,492 5,712
-------- -------- --------
72,735 48,905 60,895
Expenses:
Interest Expense 32,125 40,762 34,795
Noninterest Expense 1,705 2,842 2,668
-------- -------- --------
33,830 43,604 37,463
-------- -------- --------
Income Before Taxes and Equity in Undistributed
Net Income of Subsidiaries 38,905 5,301 23,432
Applicable Income Tax Credits 5,571 7,936 6,624
-------- -------- --------
Income Before Equity in Undistributed Net Income
of Subsidiaries 44,476 13,237 30,056
Equity in Undistributed Net Income of Subsidiaries 50,975 (14,240) 26,485
-------- -------- --------
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
======== ======== ========
-87-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT ONLY)
Year Ended December 31,
-----------------------------------
(In Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------
Operating Activities:
Net Income (Loss) $ 95,451 $ (1,003) $ 56,541
Adjustment to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Equity in Undistributed Net Income
of Subsidiaries (50,975) 14,240 (26,485)
Amortization and Accretion 453 1,066 805
Tax Benefit Received from Exercise
of Stock Options 1,069 2,706 513
Realized Investment Security (Gains) Losses 11 (72) 493
(Increase) Decrease in Interest Receivable (48) 177 39
(Increase) Decrease in Other Assets (22,754) 3,783 (40,026)
Increase (Decrease) in Interest Payable 1,163 (261) 76
Increase (Decrease) in Other Liabilities (15,584) (20,821) 10,193
--------- --------- ---------
Net Cash Provided by (Used In)
Operating Activities 8,786 (185) 2,149
--------- --------- ---------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 24,159 19,379 129,648
Proceeds from Maturities and Prepayments 11,664 15,234 87,358
Purchases (19,883) (50,671) (330,583)
--------- --------- ---------
Net Cash Provided by (Used In)
Investing Activities 15,940 (16,058) (113,577)
--------- --------- ---------
Financing Activities:
Net Increase (Decrease) in Commercial Paper 30,698 53,481 (14,694)
Principal Payments on Long-Term Debt (120) (391) (74,764)
Proceeds from Issuance of Long-Term Debt and
Junior Subordinated Debentures 75,000 124,432 186,706
Cash Dividends Paid (48,334) (48,002) (47,738)
Repurchase of Common Stock (24) (246) -
Proceeds from Exercise of Stock Options 4,232 3,884 3,388
Contribution to Subsidiaries (346) (54,986) (3,480)
Net Increase in Other Equity Items - 903 2,816
--------- --------- ---------
Net Cash Provided by Financing Activities 61,106 79,075 52,234
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 85,832 62,832 (59,194)
Cash and Cash Equivalents at Beginning of Year 157,168 94,336 153,530
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 243,000 $ 157,168 $ 94,336
========= ========= =========
-88-
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, 2002.
As Restated, See Note 3
-----------------------------------
Fourth Third Second First
(In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
2002:
Total Interest Income $ 208,391 $ 208,250 $ 211,331 $ 213,416
Total Interest Expense (127,482) (130,624) (132,603) (135,121)
--------- --------- --------- ---------
Net Interest Income 80,909 77,626 78,728 78,295
Provision for Loan and Lease Losses (18,237) (23,532) (33,575) (24,205)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 62,672 54,094 45,153 54,090
Noninterest Income 210,287 196,397 204,578 194,230
Noninterest Expense (232,700) (214,079) (214,637) (214,612)
--------- --------- --------- ---------
Income Before Income Taxes 40,259 36,412 35,094 33,708
Applicable Income Taxes (13,630) (12,376) (11,924) (12,092)
--------- --------- --------- ---------
Net Income $ 26,629 $ 24,036 $ 23,170 $ 21,616
========= ========= ========= =========
Net Earnings Per Common Share:
Basic $ .54 $ .49 $ .47 $ .43
Diluted .52 .47 .46 .43
Cash Dividends .24 .24 .24 .24
As Restated, See Note 3
------------------------------------------------
Fourth Third Second First
2001: Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
Total Interest Income $ 221,768 $ 245,459 $ 250,450 $ 255,618
Total Interest Expense (148,894) (174,336) (184,606) (194,964)
--------- --------- --------- ---------
Net Interest Income 72,874 71,123 65,844 60,654
Provision for Loan and Lease Losses (108,787) (60,886) (23,548) (22,324)
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses (35,913) 10,237 42,296 38,330
Noninterest Income 195,712 192,917 193,534 174,273
Noninterest Expense (218,399) (222,476) (194,701) (177,408)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes (58,600) (19,322) 41,129 35,195
Applicable Income Taxes 21,081 6,540 (14,497) (12,529)
--------- --------- --------- ---------
Net Income (Loss) $ (37,519) $ (12,782) $ 26,632 $ 22,666
========= ========= ========= =========
Net Earnings (Loss) Per Common Share:
Basic $ (.77) $ (.27) $ .54 $ .46
Diluted (.77) (.27) .53 .45
Cash Dividends .24 .24 .24 .24
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.
-89-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
PART III
Items 10 through 13 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, 2002:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
An evaluation was performed under the supervision and with the participation
of management, including the principal executive and financial officers, of
the effectiveness of the design and operation of Provident's disclosure
controls and procedures within 90 days prior to the filing of this Form 10-K.
Based on that evaluation, management, including the principal executive and
financial officers, concluded that Provident's disclosure controls and
procedures were effective with no significant weaknesses noted except that
Provident's disclosure controls and procedures did not detect until early
2003 certain unintentional errors that had occurred in the accounting and
classification of auto lease transactions. This weakness has been addressed
and the financial statements and related financial information included in
this Form 10-K have been appropriately revised. There have been no
significant changes in Provident's internal controls or in other factors that
could significantly affect these internal controls after the date of their
evaluation. Provident is reviewing its disclosure controls and procedures in
all areas involving financial models previously established for lease and
other transactions to improve the ability of its disclosure controls and
procedures to detect such problems of the nature discovered in early 2003.
Provident's Audit Committee engaged PricewaterhouseCoopers LLP, which is not
the auditor of Provident's financial statements, to undertake a review of its
internal controls. PricewaterhouseCoopers is to provide an assessment of
Provident's existing internal controls in certain areas. The scope of this
review is currently being determined.
-90-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. See Index to Financial Statements on page 44 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.
4.1 Instruments defining the Provident has no outstanding
rights of security issue of indebtedness exceeding
holders 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 Form
relating to Series D, 10-K for 1995.
Non-Voting Convertible
Preferred Stock
10.1 Junior Subordinated Incorporated by reference to
Indenture, dated as of Exhibit 4.1 on Form 8-K dated
November 27, 1996, between November 27, 1996.
Provident and the Bank
of New York, as Indenture
Trustee
10.2 Amended and Restated Incorporated by reference to
Declaration of Trust of Exhibit 4.3 on Form 8-K dated
Provident Capital Trust I, November 27, 1996.
dated as of November 27,
1996
10.3 Form of Guarantee Agreement Incorporated by reference to
entered into by Provident registration statement number
and The Bank of New York, 333-20769.
as Guarantee Trustee
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PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
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 1992 Advisory Incorporated by reference to Form
Directors' Stock Option Plan 8-K filed October 22, 1992, and
(As amended)(1) Form S-8 (File No. 33-62707).
10.7 Provident 1992 Outside Incorporated by reference to Form
Directors' Stock Option S-8 (File No. 33-51230).
Plan(1)
10.8 Provident Restricted Incorporated by reference to Form
Stock Plan(1) S-2 (File No. 33-44641).
10.9 Registration of Preferred Incorporated by reference to Form
Capital Securities, between S-3 (File No. 333-80231).
Provident Capital Trust II,
Provident and Chase
Manhattan Bank
10.10 Agreement and Plan of Incorporated by reference to Form
Reorganization between S-4 (File No. 333-88723).
Provident and Fidelity
Financial of Ohio, Inc.
10.11 Registration of Preferred Incorporated by reference to Form
Capital Securities of S-3 as amended by Form S-3/A File
Provident Capital Trust No. 333-93603).
III and IV
10.12 Registration of Glenway Incorporated by reference to Form
Financial Corporation 1990 S-8 (File No. 333-96503) and Form
Stock Option and Incentive S-8 (File No. 333-55698).
Plan, Fidelity Federal Savings
Bank 1992 Stock Incentive
Plan, Fidelity Financial of
Ohio, Inc. 1997 Stock Option
Plan, and OHSL Financial Corp.
1992 Stock Option and
Incentive Plan
10.13 Separation agreement between Incorporated by reference to Form
Provident and Philip R. Myers Form 10-Q for the second quarter
(1) of 2001.
10.14 Provident Dividend Incorporated by reference to Form
Reinvestment Plan S-3 (File No. 333-67754).
10.15 Employment agreement between Incorporated by reference to Form
Provident and James L. Gertie 8-K (File No. 02672034).
(1)
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PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Number Exhibit Description Filing Status
------ ------------------- -------------
10.16 Employment agreement between Filed herewith.
Provident and Christopher J.
Carey(1)
10.17 Employment agreement between Filed herewith.
Provident and James R.
Whitaker(1)
10.18 Provident 1988 Stock Option Filed herewith.
Plan (As amended)(1)
10.19 Provident 1996 Non-Executive Filed herewith.
Officer Stock Option Plan
(As amended)(1)
10.20 Provident 1997 Stock Option Filed herewith.
Plan (As amended)(1)
10.21 Provident 2000 Stock Option Filed herewith.
Plan (As amended)(1)
10.22 Provident Deferred Filed herewith.
Compensation Plan (As
Amended)(1)
10.23 Provident 2002 Outside Filed herewith.
Directors Stock Option Plan(1)
10.24 Provident Outside Directors Filed herewith.
Deferred Compensation Plan
(As Amended)(1)
10.25 Provident Supplemental Filed herewith.
Executive Retirement Plan
(As Amended)(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 March 5, 2003.
-93-
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
April 11, 2003
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 April 11, 2003
- ----------------------- (Principal Executive Officer)
Robert L. Hoverson
/s/Jack M. Cook Director April 11, 2003
- -----------------------
Jack M. Cook
/s/Thomas D. Grote, Jr. Director April 11, 2003
- -----------------------
Thomas D. Grote, Jr.
/s/Joseph A. Pedoto Director April 11, 2003
- -----------------------
Joseph A. Pedoto
/s/Sidney A. Peerless Director April 11, 2003
- -----------------------
Sidney A. Peerless
/s/Joseph A. Steger Director April 11, 2003
- -----------------------
Joseph A. Steger
/s/Christopher J. Carey Executive Vice President April 11, 2003
- ------------------------ and Chief Financial Officer
Christopher J. Carey
-94-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Robert L. Hoverson, the principal executive officer of Provident Financial
Group, Inc. ("Provident"), certify that:
1. I have reviewed this annual report on Form 10-K of Provident;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 10, 2003 /s/Robert L. Hoverson
---------------------
Robert L. Hoverson
Chief Executive Officer
(Principal Executive Officer)
-95-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Christopher J. Carey, the principal financial officer of Provident
Financial Group, Inc. ("Provident"), certify that:
1. I have reviewed this annual report on Form 10-K of Provident;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 10, 2003 /s/Christopher J. Carey
-----------------------
Christopher J. Carey
Chief Financial Officer
(Principal Financial Officer)
-96-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of
the Annual Report of Provident Financial Group, Inc. ("Provident") on Form
10-K for the period ending December 31, 2002 (the "Report"), I, Robert L.
Hoverson, Chief Executive Officer of Provident, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Provident.
/s/Robert L. Hoverson
- ---------------------
Robert L. Hoverson
Chief Executive Officer
April 10, 2003
-97-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of
the Annual Report of Provident Financial Group, Inc. ("Provident") on Form
10-K for the period ending December 31, 2002 (the "Report"), I, Christopher
J. Carey, Chief Financial Officer of Provident, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Provident.
/s/Christopher J. Carey
- -----------------------
Christopher J. Carey
Chief Financial Officer
April 10, 2003
-98-