The relationship of Cincinnati's three largest hometown banks can be seen on the downtown skyline.
The corporate headquarters building of Fifth Third Bancorp stands the tallest, followed by the home office of Star Banc Corp. and then Provident Bancorp Inc.
That - much like the sum of each bank's assets, operations and profits - has been the landscape for years.
But size can be deceiving.
Gradually during the past year, investors discovered that they could no longer brush aside No. 3 Provident, which has quietly caught Wall Street's eye by expanding into new lines of business that are expected to boost the bank's profits substantially.
Those factors are largely why Provident has provided investors a total return of 70.56 percent on its shares during the past 12 months, according to SNL Securities Inc., a Charlottesville, Va.-based research company.
That compares with a return of 87.47 percent that Star provided its investors and a 67.05 percent return that Fifth Third yielded for its shareholders. The average return - including payment of dividends - for 421 publicly traded U.S. banks was 50.46 percent during the same period, according to SNL.
Provident's management was so bullish on the company's prospects that it offered investors a 3-for-2 stock split twice last year and raised Provident's cash dividend 29 percent amid record profits in 1996.
''They've added a new dimension to the company that clearly makes their growth prospects much brighter than two years ago,'' said Joe Duwan of Keefe, Bruyette & Woods Inc. in New York. ''That's why the Street is taking a look at the company.''
Specifically, Provident has restructured its franchise. No longer just a standard regional commercial bank, it has evolved into a national consumer and commercial finance company that has found a niche in new businesses expected to yield above-average growth.
And Provident is using an entrepreneurial approach to boost its customer base, increase revenue and profits and offer investors higher returns.
The bank has done that with a new consumer finance company that sells so-called ''non-conforming'' home loans - money for borrowers with less-than-shining credit histories. It has expanded its small-leasing business, and it started an electronic payment processing operation that offers rebates to consumers and has plenty of revenue-generating opportunities.
In addition, Provident increased its deposit base, offers more consumers more loans by expanding into markets such as Florida and has plans to buy more banks in such growing areas.
The strategy is a major shift from three years ago when Provident faced limited growth potential beyond its core Tristate base, experienced pricing pressures on loans and deposit products in Ohio's hypercompetitive banking market and saw its deposit growth eroding.
''We are evolving into a niche financial services company nationwide,'' said Allen L. Davis, Provident's president and chief executive officer. ''In fact, we are moving so rapidly in that direction we'll be asking our shareholders to approve changing our name to Provident Financial Group.''
That corporate name change, which Provident likely will propose at its annual meeting in May, would reflect a refocused franchise - one that plans to grow into untapped markets, reducing its dependence on a single competitive region of Ohio, Kentucky and Indiana.
Key initiatives
Though Provident's financial performance and stock price have been strong, management was concerned about the future.
So after a thorough review of the entire company, Provident decided that it needed to expand into new markets. It established three initiatives to reach its goals:
Provident Consumer Financial Services, a mortgage loan unit, was built from scratch 18 months ago. The business, which primarily makes above-market-rate mortgages to high-credit-risk borrowers, has grown to 100 employees, increased mortgage loan volume from $31 million in 1995 to $360 million last year and is estimated to hit $800 million in loans this year.
The business, which distributes its products through mortgage bankers nationally, sold mortgages in 32 states last year and has plans to expand to 40 states this year. It also added a pretax profit of $25 million to Provident Bancorp's 1996 earnings, which came in at $81.2 million, or $1.94 a share.
Provident invested $31 million to buy Cincinnati-based Information Leasing Corp. and an affiliated leasing service company in November, a deal that will allow the bank to boost its leasing business portfolio to almost $1 billion.
More important, the deal allowed Provident to expand its small-business leasing to 38 states, giving it more opportunity to grow revenue.
MeritValu Program, an online multiple-merchant frequent-shopper rewards program, represents a new dimension in the fast growing electronic payment business. The program allows consumers to earn rebates and spend them like cash on goods and services at participating stores.
Since launching the program locally in August, Provident has signed up 70 merchants and has about 70,000 consumer cards.
Provident generates revenue several ways when the card is used. For example, it collects a processing fee on each transaction; and it can earn marketing and consulting fees from retailers by providing them data such as information on consumers' spending patterns.
Cutting costs
At the same time, Provident has restructured its retail banking unit - a key part of any bank's business - to cut costs by making non-profitable customers pay their own way through fees. But it also is finding ways to reward good customers through incentives.
Provident in February began charging a $3 fee to customers who have payroll checks electronically deposited if they use tellers for other deposits. The fee, which would affect 10,000 customers in Provident's Group Banking Program, is designed to encourage customers to use automated teller machines.
And beginning Tuesday, Provident will streamline its 22 varieties of checking accounts into five, and seven types of savings accounts into three. The changes, which will affect all of Provident's 150,000 individual checking and savings account customers, are designed to simplify options for consumers and reduce bank expenses.
One of the new checking accounts, for instance, will offer customers unlimited free checking, as long as they don't make deposits at a teller window. Customers who select that account will be charged $3 for each transaction at the teller window. Already, 1,000 of Provident's customers have requested the new checking account.
Provident's move follows a trend by U.S. banks to cut costs by pushing electronic banking.
''We're going to provide services in a way where we don't incur losses,'' Mr. Davis said. ''Our job is to put customers in accounts where we make money but also provide customers options and allow them to do their banking the way they want.''
Analysts are generally approving of the changes Provident has made, and some argue that the moves make the company an even more attractive takeover candidate. Provident management clearly says the bank isn't for sale, and it has a desire to remain independent.
Mr. Davis said he has been informed by investment bankers that other financial companies are interested in what Provident is doing, interested in some of the businesses the bank has created and curious about its expansion plans.
Mr. Davis said his job is to build Provident's franchise value and let the market appraise the company. His goal: boost share earnings 20 percent annually during the next three to five years.
Provident, which for years has been been rumored as a takeover candidate, would now be an expensive acquisition for almost any bank because of its growth, said Fred Cummings, an analyst at McDonald & Co. Securities Inc. in Cleveland.
A suitor would need the blessing of Cincinnati financier Carl H. Lindner, whose family directly and indirectly controls about 60 percent of the company's stock. Provident has a market capitalization of $1.5 billion, according to Bloomberg Business News, but a suitor likely would have to pay much more.
Mr. Cummings said Provident has several options.
The bank's fundamental business would ensure investors above-
average returns, Mr. Cummings said, yet the company would be attractive to others because of its new mortgage unit and MeritValu.
''They are in firm control of their own destiny,'' he said.
Mr. Cummings' only concern about Provident is how its non-conforming mortgage business might fare if the economy experiences a major downturn. He said Wall Street is bullish on that business because it provides a return on equity of about 25 percent, compared with 10-15 percent for other lines of business such as auto loans.
But, he said, if investors' become fearful that Provident could suffer big charge-offs for problem loans, the market's view of the bank could change.
'Not a loss business'
Mr. Davis argues that Provident's non-conforming mortgage business is secure because the bank requires borrowers to put up collateral in excess of the loan amount, reducing the bank's risk.
''This is a delinquency business, not a loss business,'' he said.
Mr. Duwan of Keefe Bruyette said Provident's mortgage-finance unit has enormous potential - so much so that he thinks it could become a $3 billion business in annual originations.
''This business is much less price competitive than Provident's other lending businesses, risk is appropriately priced, there is geographic diversity, and it has high liquidity through securitization,'' Mr. Duwan said.
Securitization allows a bank to convert loans or other assets into marketable securities for sale to investors.
