<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 1999 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
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 (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
stock, without par value, outstanding at April 30, 1999 is 42,591,959.
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
1
<PAGE>
PROVIDENT FINANCIAL GROUP, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets .........................3
Consolidated Statements of Income ...................4
Consolidated Statements of Changes in
Shareholders' Equity ................................5
Consolidated Statements of Cash Flows ...............6
Notes to the Consolidated Financial Statements ......7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................28
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................28
SIGNATURE ..........................................................29
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
------------------------
<S> <C> <C>
ASSETS
Cash and Noninterest Bearing Deposits $217,462 $267,441
Federal Funds Sold and Reverse Repurchase Agreements 74,000 60,000
Trading Account Securities 29,473 50,333
Investment Securities Available for Sale
(amortized cost - $1,750,058 and $1,528,008) 1,723,954 1,514,153
Loans and Leases (Net of Unearned Income):
Commercial Lending:
Commercial and Financial 3,344,283 3,270,675
Mortgage 418,157 436,127
Construction 476,814 437,563
Lease Financing 204,898 243,722
Consumer Lending:
Instalment 703,583 621,357
Residential - Held for Sale 121,729 190,707
Lease Financing 668,158 423,354
------------------------
Total Loans and Leases 5,937,622 5,623,505
Reserve for Loan and Lease Losses (80,142) (75,907)
------------------------
Net Loans and Leases 5,857,480 5,547,598
Leased Equipment 157,382 167,006
Premises and Equipment 76,838 78,621
Other Assets 496,635 449,835
------------------------
$8,633,224 $8,134,987
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $680,737 $669,840
Interest Bearing 4,940,588 4,657,481
------------------------
Total Deposits 5,621,325 5,327,321
Short-Term Debt 1,122,892 807,503
Long-Term Debt 805,440 934,294
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 98,894 98,879
Accrued Interest and Other Liabilities 272,201 263,136
------------------------
Total Liabilities 7,920,752 7,431,133
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized,
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 43,383,979 and 43,345,149 Issued 12,817 12,805
Capital Surplus 225,702 224,745
Retained Earnings 514,001 489,751
Treasury Stock, 801,800 and 572,700 Shares (30,070) (21,425)
Accumulated Other Comprehensive Income (16,978) (9,022)
------------------------
Total Shareholders' Equity 712,472 703,854
------------------------
$8,633,224 $8,134,987
========================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------------------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases $131,582 $123,142
Interest on Investment Securities 24,588 23,157
Other Interest Income 1,305 887
--------------------
Total Interest Income 157,475 147,186
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 13,245 10,798
Time Deposits 41,923 43,888
--------------------
Total Interest on Deposits 55,168 54,686
Interest on Short-Term Debt 14,906 12,886
Interest on Long-Term Debt 12,471 10,772
Interest on Junior Subordinated Debentures 2,166 2,166
--------------------
Total Interest Expense 84,711 80,510
--------------------
Net Interest Income 72,764 66,676
Provision for Loan and Lease Losses 12,900 5,000
--------------------
Net Interest Income After Provision
for Loan and Lease Losses 59,864 61,676
Noninterest Income:
Service Charges on Deposit Accounts 7,264 6,412
Other Service Charges and Fees 13,447 14,958
Operating Lease Income 8,898 9,054
Gain on Sales of Loans and Leases 31,839 13,526
Security Gains (Losses) (7) 3,692
Other 3,126 2,063
--------------------
Total Noninterest Income 64,567 49,705
Noninterest Expense:
Salaries, Wages and Benefits 34,980 29,337
Depreciation on Operating Lease Equipment 4,725 5,282
Occupancy 4,208 3,807
Equipment Expense 5,302 4,231
Professional Fees 3,635 3,973
Charges and Fees 3,732 2,394
Other 15,715 15,607
--------------------
Total Noninterest Expense 72,297 64,631
Income Before Income Taxes 52,134 46,750
Applicable Income Taxes 18,379 16,090
--------------------
Net Income $33,755 $30,660
====================
Per Common Share:
Basic Earnings Per Share $.79 $.71
Diluted Earnings Per Share .76 .68
Cash Dividends Declared .22 .20
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands)
<CAPTION>
Retained
Earnings
Including
Reserve for Accumulated
Retirement Other
Preferred Common Capital of Capital Treasury Comprehensive Comprehensive
Stock Stock Surplus Securities Stock Income Total Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $7,000 $12,482 $196,617 $410,107 $- $135 $626,341
Net Income 30,660 30,660 $30,660
Dividends Paid on:
Preferred Stock (198) (198)
Common Stock (8,559) (8,559)
Exercise of Stock Options 220 17,365 17,585
Change in Unrealized
Gains (Losses) on
Marketable Securities (4,188) (4,188) (4,188)
Other 60 60
-------------------------------------------------------------------------------------
Balance at March 31, 1998 $7,000 $12,702 $213,982 $432,070 $- ($4,053) $661,701 $26,472
=====================================================================================
Balance at January 1, 1999 $7,000 $12,805 $224,745 $489,751 ($21,425) ($9,022) $703,854
Net Income 33,755 33,755 $33,755
Dividends Paid on:
Preferred Stock (216) (216)
Common Stock (9,289) (9,289)
Exercise of Stock Options 12 826 838
Purchase of Treasury Stock (8,645) (8,645)
Distribution of Contingent
Shares for Prior Year
Acquisition 131 131
Change in Unrealized
Gains (Losses) on
Marketable Securities (7,956) (7,956) (7,956)
-------------------------------------------------------------------------------------
Balance at March 31, 1999 $7,000 $12,817 $225,702 $514,001 ($30,070) ($16,978) $712,472 $25,799
=====================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Operating Activities:
Net Income $33,755 $30,660
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 12,900 5,000
Amortization of Goodwill 380 461
Other Amortization and Accretion (20,953) (21,067)
Depreciation of Leased Equipment and
Premises and Equipment 9,280 8,721
Realized Investment Security (Gains) Losses 7 (3,692)
Proceeds from Sale of Loans Held for Sale 562,920 284,142
Origination of Loans Held for Sale (522,609) (271,346)
Realized Gains on Residential Loans Held for Sale (20,373) (9,424)
Realized Gains on Sale of Other Loans and Leases (11,466) (4,102)
(Increase) Decrease in Trading Account Securities 20,860 (20,385)
Increase in Interest Receivable (1,240) (7,984)
Increase in Other Assets (45,940) (143,205)
Increase in Interest Payable 6,628 17,773
Increase (Decrease) in Other Liabilities 6,728 (32,111)
--------------------------
Net Cash Provided By (Used In) Operating Activities 30,877 (166,559)
--------------------------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 186,261 711,677
Proceeds from Maturities and Prepayments 50,574 354,170
Purchases (404,482) (1,295,448)
Net Increase in Loans and Leases (364,637) (218,067)
Net (Increase) Decrease in Operating Lease Equipment 4,899 (10,467)
Net Increase in Premises and Equipment (2,772) (3,255)
--------------------------
Net Cash Used In Investing Activities (530,157) (461,390)
--------------------------
Financing Activities:
Net Increase in Deposits 294,004 257,006
Net Increase in Short-Term Debt 315,389 311,602
Principal Payments on Long-Term Debt (128,930) (25,755)
Proceeds From Issuance of Long-Term Debt 19 15,040
Cash Dividends Paid (9,505) (8,757)
Purchase of Treasury Stock (8,645) -
Proceeds from Exercise of Stock Options 838 17,585
Net Increase in Other Equity Items 131 60
--------------------------
Net Cash Provided By Financing Activities 463,301 566,781
--------------------------
Decrease in Cash and Cash Equivalents (35,979) (61,168)
Cash and Cash Equivalents at Beginning of Period 327,441 276,241
--------------------------
Cash and Cash Equivalents at End of Period $291,462 $215,073
==========================
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $78,082 $62,370
Income Taxes 13,260 -
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 531 567
Residual Interest in Securitized Assets Created from
the Sale of Loans (net of estimated credit losses) 36,746 14,464
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary to be in conformity with generally
accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary
for fair presentation. The results of operations for interim periods
are not necessarily indicative of the results to be expected for the
full year.
The consolidated financial statements include the accounts of
Provident Financial Group, Inc. and its subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions
have been eliminated. Certain reclassifications have been made to
conform to the current year presentation.
The financial statements presented herein should be read in
conjunction with the financial statements and notes thereto included
in Provident's 1998 annual report on Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share (in thousands except per share data):
Three Months Ended
March 31,
------------------
1999 1998
------------------
Basic:
Net Income $33,755 $30,660
Less Preferred Stock Dividends (216) (198)
-----------------
Income Available to Common Shareholders 33,539 30,462
Weighted-Average Common Shares Outstanding 42,651 42,615
-----------------
Basic Earnings Per Share $0.79 $0.71
=================
Diluted:
Net Income $33,755 $30,660
Weighted-Average Common Shares Outstanding 42,651 42,615
Assumed Conversion of:
Convertible Preferred Stock 988 988
Dilutive Stock Options (Treasury Stock Method) 778 1,219
-----------------
Dilutive Potential Common Shares 44,417 44,822
-----------------
Diluted Earnings Per Share $0.76 $0.68
=================
7
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SPECIAL CHARGES AND EXIT COSTS
In order to improve upon the efficiency of its operations, Provident
incurred pre-tax special charges and exit costs of $22 million during
the fourth quarter of 1998. This expense consisted of: 1) a
reengineering project, known as the Performance Optimization Project,
which is expected to enable Provident to undertake new revenue
generating initiatives without significantly increasing expenses, and
2) the discontinuance of operations of its MeritValu and Free Market
Partner business units.
No changes have been made to the original estimated special charges
and exit costs. All activity during the quarter related to cash
payments for severance benefits and professional fees.
Details of the special charges and exit costs follows (in millions):
<TABLE>
<CAPTION>
Severance Fixed Asset Exit Professional
Costs Write-Offs Costs Fees Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Special Charge $6 $6 $5 $5 $22
Utilization:
Cash (1) - (2) (3) (6)
Non-Cash - (6) (3) - (9)
-------------------------------------------------------
Balance as of December 31, 1998 5 - - 2 7
Cash Utilization (1) - - (1) (2)
-------------------------------------------------------
Balance as of March 31, 1999 $4 $- $- $1 $5
=======================================================
</TABLE>
NOTE 4. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
In 1996, Provident established Provident Capital Trust I. Capital
Trust issued $100 million of preferred Capital Securities to the
public and $3.1 million of common to Provident. Proceeds from the
issuance of the capital securities were invested in Provident's 8.60%
Junior Subordinated Debentures, due 2026. Provident fully guarantees
the Capital Securities. The sole assets (excluding interest receivable
on the Debentures, prepaid expenses and receivables) of Capital Trust
are the Debentures.
8
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. RESTRICTED ASSETS
During 1997 and 1998, Provident formed Provident Auto Leasing Company,
Provident Auto Rental Corporation 1998-1 and 1998-2, and Provident
Lease Receivables Corporation. Auto Leasing was created to avoid the
administrative difficulty and expense associated with retitling leased
vehicles in connection with the financing or transfer of beneficial
ownership of automobile and light duty trucks subject to leases. Auto
Rentals' purpose is limited to the securitization and sale of leased
vehicles to investors under sale-leaseback transactions. Lease
Receivables' function is limited to the sale of equipment leases while
retaining the servicing rights. Auto Leasing, Auto Rentals and Lease
Receivables are legal entities and each maintains books and records
with respect to its assets and liabilities. The assets of these
subsidiaries, totaling $815.0 million, are not available to secure
financing or otherwise satisfy claims of creditors of Provident or any
of its other subsidiaries.
NOTE 6. LINE OF BUSINESS REPORTING
Provident has identified three major lines of business. Selected line
of business information is included in the following table for the
three months ended March 31, 1999 and 1998 (in millions):
Provident Consumer
Commercial Banking Retail Banking Financial Services
------------------------------------------------------
1999 1998 1999 1998 1999 1998
------------------------------------------------------
Total Revenue $58.5 $56.9 $46.9 $39.8 $30.1 $14.8
Net Income $23.0 $22.1 $4.3 $2.6 $9.8 $3.1
Average Assets $4,142 $3,810 $1,601 $1,376 $623 $353
Other Total
-----------------------------------
1999 1998 1999 1998
-----------------------------------
Total Revenue $1.8 $4.9 $137.3 $116.4
Net Income $(3.3) $2.9 $33.8 $30.7
Average Assets $2,328 $1,823 $8,694 $7,362
Descriptions of these business lines along with variance analyses are
included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Lines".
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
Provident publishes forward-looking statements relating to such
matters as anticipated financial performance, business prospects, new
banking and financial service products, Year 2000 issues and similar
matters. The Private Securities Litigation Reform Act of 1995 provides
a safe harbor for forward-looking statements. Provident notes that a
variety of factors could cause its actual results and experiences to
differ materially from the anticipated results or other expectations
expressed in its forward-looking statements. These risks and
uncertainties include, without limitation, changes in interest rates,
developments in the economies served by Provident, deterioration in
general economic conditions which would adversely affect borrowers,
adverse developments in the markets for securitized loans, changes in
anticipated credit quality trends, the ability to achieve the results
anticipated from the Performance Optimization Project, changes in
accounting, tax or regulatory practices, or requirements and other
factors noted in conjunction with forward looking statements. In
addition, borrowers could suffer unanticipated losses without regard
to general economic conditions. The result of these and other factors
could cause a difference from expectations of the level of defaults
and a change in the risk characteristics of the loan and lease
portfolio and a change in the provision for loan and lease losses.
Forward-looking statements speak only as of the date made. Provident
undertakes no obligations to update any forward-looking statements to
reflect events or circumstances arising after the date on which they
are made.
Results of Operations
Summary
The following table summarizes earnings components, earnings per share
and key financial ratios (dollars in thousands except per share data):
Three Months Ended
March 31,
---------------------------
1999 1998 % Change
---------------------------
Net Interest Income $72,764 $66,676 9%
Noninterest Income 64,567 49,705 30
Total Revenue 137,331 116,381 18
Provision for Loan
and Lease Losses 12,900 5,000 158
Noninterest Expense 72,297 64,631 12
Net Income 33,755 30,660 10
Diluted Earnings per Share 0.76 0.68 12
Return on Average Equity 18.62 19.06
Return on Average Assets 1.55 1.67
Efficiency Ratio 52.62 57.30
10
<PAGE>
Earnings per share increased 12% to $.76 during the current quarter,
versus $.68 reported in 1998. The increase in earnings per share was
due to strong revenue growth evidenced by a 32% increase in managed
assets and continued emphasis on expense control.
Total revenue (net interest income plus noninterest income) increased
18% during 1999 over the comparable period in 1998. Net interest
income increased by $6.1 million, or 9% as a result of strong growth
in the lending portfolio. Noninterest income increased $14.9 million,
or 30%, primarily due to gains recognized on loan and lease sales and
loan servicing fees.
Total average assets for the first quarter of 1999 grew $1.3 billion,
or 18%, as compared to the first quarter of 1998. The increase was
primarily in the lending portfolio, which experienced a growth of
approximately $800 million in average assets during this time period.
In addition, loans and leases, which had been sold with servicing
retained, increased from $1.6 billion at March 31, 1998 to $3.6
billion at March 31, 1999.
Noninterest expense was $72.3 million for the first quarter of 1999 as
compared to $64.6 million for the same period in 1998. The ratio of
noninterest expense to tax equivalent revenue ("efficiency ratio") was
52.62% for the first three months of 1999 compared to 57.30% for the
first three months of 1998. For purposes of calculating the efficiency
ratio, tax equivalent revenue excludes security gains or losses.
The improvement in the efficiency ratio was a result of higher
revenues and increased control of expenses. During 1998, management
took specific steps to slow the growth of expenses. First, a
reengineering project, referred to as the Performance Optimization
Project ("POP"), was initiated with areas being identified where
productivity could be improved. Implementation of the POP process
began at the end of 1998 with cost savings expected to occur during
1999 and the first half of the year 2000. Second, those business units
where the prospect for future revenue growth did not justify current
operating losses were terminated. Operating expenses (noninterest
expense less unusual and significant expenses) reported in the first
quarter of 1999 decreased $1.6 million from that reported in the
fourth quarter of 1998.
11
<PAGE>
Business Lines
Provident has identified three major lines of business. The following
table summarizes total revenue, net income and average assets by these
lines for the three months ending March 31, 1999 and 1998 (dollars in
millions):
1999 1998 Change
------------------------
Total Revenue:
Commercial Banking $58.5 $56.9 3%
Retail Banking 46.9 39.8 18
Provident Consumer Financial Services 30.1 14.8 103
Other 1.8 4.9 (63)
------------------------
$137.3 $116.4 18
========================
Net Income:
Commercial Banking $23.0 $22.1 4%
Retail Banking 4.3 2.6 65
Provident Consumer Financial Services 9.8 3.1 216
Other (3.3) 2.9 (214)
-----------------------
$33.8 $30.7 10
=======================
Average Assets:
Commercial Banking $4,142 $3,810 9%
Retail Banking 1,601 1,376 16
Provident Consumer Financial Services 623 353 76
Other 2,328 1,823 28
------------------------
$8,694 $7,362 18
========================
Business line descriptions and fluctuation analysis follows:
- - Commercial Banking provides lending products and services to its
commercial customers. This business line includes all of the
commercial business units as reported in the 1998 Form 10-K.
Commercial Banking constitutes 68% of the profitability of
Provident. Net income and average assets increased 4% and 9%,
respectively, over the first quarter of 1998. Total revenue (net
interest income plus noninterest income) for 1999 benefited from
strong loan growth. In addition, 1999 revenue included a cash gain
of $6.9 million from the securitization and sale of equipment
leases, while 1998 revenue included $8.0 million of gains recognized
from the sale of stock and stock warrants. These equity instruments
had been acquired as part of the lending fee structure established
with customers. Currently, Provident expects to securitize leases
every other quarter, while the sale and recognition of gains from
stock and stock warrants related to its Structured Finance business
unit is less predictable in nature. Expenses grew 12% due primarily
to the start-up of Provident Capital Funding, a fee based originator
for unaffiliated loan syndicators, and expansion into the
Indianapolis, Phoenix and San Francisco markets.
12
<PAGE>
- - Retail Banking provides consumer lending, deposit accounts, trust,
brokerage and investment products and services to its customers.
This business line includes both the Consumer Lending and Consumer
Banking business units as reported in the 1998 Form 10-K. Total
revenue increased 18% over the first quarter of 1998. The increased
revenues were driven by robust growth in auto lease originations, as
Provident expanded regionally. Direct and indirect instalment loans
experienced a significant improvement in credit quality as net
charge-offs declined from 1.06% in 1998 to .74% in 1999. Total
retail deposits grew by 4% with significant contribution coming from
the Florida franchise. Total managed loans and leases for Retail
Banking grew approximately $740 million, or 40%, since March 31,
1998. Additional factors that contributed to higher net income in
1999 include loan servicing, brokerage, fund management and trust
fees. Combined, these revenues increased approximately $2 million
during 1999 as compared to the first quarter in 1998.
- - Provident Consumer Financial Services originates conforming and
nonconforming residential loans to consumers and short-term
financing to mortgage originators and brokers. Net income for
Consumer Financial Services increased $6.7 million during the first
quarter of 1999 as compared to the same quarter in 1998. The higher
net income was primarily the result of strong nonconforming loan
production during 1999 coupled with a strong demand for mortgage
securities in the secondary market. Due to industry consolidation,
the competitive environment in the nonconforming mortgage arena has
improved, resulting in more rational pricing. This consolidation has
allowed Provident to expand its volume during 1999. During the first
quarter of 1999, Consumer Financial Services securitized and sold
nonconforming loans totaling $515 million resulting in the
recognition of a $19.3 million gain, a gain to loans sold ratio of
3.75%. During the first quarter of 1998, $200 million of loans were
securitized and sold resulting in a $7.9 million gain, a gain to
loans sold ratio of 3.93%. The ratio of gain to loans sold was 2.60%
on the $350 million sold in the fourth quarter of 1998. Revenues also
increased due to growth in loan servicing fees from $0.6 million in
1998 to $4.0 million in 1999. Operating expenses increased during
1999 due primarily to increased staffing associated with the higher
volume of loans being generated and serviced by this business unit.
Other includes income and expenses not allocated to the primary
business lines, interest on the investment portfolio and gain on the
sale of certain assets, primarily investment securities.
13
<PAGE>
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 represents the largest
source of income for Provident. During the first quarter of 1999 and
1998, net interest income on a tax equivalent basis was $72.8 million
and $66.8 million, respectively, which represented approximately 52%
and 57% of total revenue (net interest income plus noninterest
income). The decrease in this ratio is due primarily to the larger
gain on the sale of loans and leases resulting in higher noninterest
income (gain on loan sales and loan servicing fees).
Net interest income on a tax equivalent basis increased approximately
$6.0 million for the first three months of 1999 over the comparable
period in 1998. An $8.9 million increase caused by volume changes more
than offset a $2.9 million decrease caused by rate changes. Volume
changes are caused by changes in the average balances of interest
earning assets and interest bearing liabilities. The net interest
margin was 3.78% for the first three months of 1999 as compared to
4.01% for the comparable period in 1998. The decrease in the margin
for the first quarter of 1999 was a result of strong earning asset
growth combined with an increase in market funding and a small decline
in earning asset spreads.
The following table provides an analysis of consolidated average
balances, average rates and interest yields. 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 loan balances are included in the average balances for
loans and leases. Fees included in interest and fees on loans and
leases during the first quarters of 1999 and 1998 were $4.8 million
and $4.2 million, respectively.
14
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
March 31, 1999 March 31, 1998
----------------------------------
Average Average Average Average
Balance Rate Balance Rate
----------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Assets:
Loans and Leases:
Commercial Lending:
Commercial and Financial $3,298 8.56% $2,849 9.26%
Mortgage 427 8.68 452 9.31
Construction 458 8.02 311 8.90
Lease Financing 267 10.45 343 11.75
---------------------------------
Total Commercial Lending 4,450 8.63 3,955 9.45
Consumer Lending:
Residential 399 9.18 227 10.31
Installment 664 10.09 626 10.63
Lease Financing 546 8.44 454 7.87
---------------------------------
Total Consumer Lending 1,609 9.31 1,307 9.62
---------------------------------
Total Loans and Leases 6,059 8.81 5,262 9.49
Investment Securities 1,656 6.03 1,425 6.61
Trading Account Securities 75 5.42 37 5.49
Federal Funds Sold and Reverse
Repurchase Agreements 26 4.81 29 5.48
---------------------------------
Total Earning Assets 7,816 8.17 6,753 8.85
Cash and Noninterest Bearing Deposits 231 187
Other Assets 647 422
------ ------
Total Assets $8,694 $7,362
====== ======
Liabilities and Shareholders' Equity:
Deposits:
Demand Deposits $268 1.86 $269 2.17
Savings Deposits 1,337 3.64 916 4.15
Time Deposits 3,147 5.40 3,098 5.74
---------------------------------
Total Deposits 4,752 4.71 4,283 5.18
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,061 4.66 720 5.40
Commercial Paper 230 4.76 231 5.75
Short-Term Notes Payable 1 4.45 2 6.75
---------------------------------
Total Short-Term Debt 1,292 4.68 953 5.49
Long-Term Debt 911 5.55 681 6.41
Junior Subordinated Debentures 99 8.88 99 8.89
---------------------------------
Total Interest Bearing Liabilities 7,054 4.87 6,016 5.43
Noninterest Bearing Deposits 594 528
Other Liabilities 321 174
Shareholders' Equity 725 644
------ ------
Total Liabilities and Shareholders' Equity $8,694 $7,362
====== ======
Net Interest Spread 3.30% 3.42%
===== =====
Net Interest Margin 3.78% 4.01%
===== =====
</TABLE>
15
<PAGE>
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses was $12.9 million and $5.0
million for the first quarter of 1999 and 1998, respectively. The
increase in the provision was the result of growth of the lending
portfolio and higher net charge-offs, primarily in the commercial loan
and lease financing areas. Provision expense for the first quarter of
1999 was provided for at this greater level in order to maintain the
ratio of reserve for loan and lease losses to total loans and leases
at 1.35%, the same as reported at December 31, 1998.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios (dollars in thousands):
Three Months Ended
March 31,
------------------
1999 1998
------------------
Balance at Beginning of Period $75,907 $71,980
Provision for Loan and Lease Losses 12,900 5,000
Loans and Leases Charged Off (10,995) (7,009)
Recoveries 2,330 2,866
------------------
Balance at End of Period $80,142 $72,837
==================
Reserve for Loan and Lease Losses
as a Percent of:
Nonperforming Loans 169.85% 138.10%
Nonperforming Assets 161.53% 124.96%
Total Loans and Leases 1.35% 1.38%
The following table presents the distribution of net loan charge-offs
by loan type for the three-month periods ended March 31, 1999 and 1998
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
----------------------------------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
Offs (annualize) Offs Offs (annualize) Offs
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Lending:
Commercial and Financial $4,444 0.54% 51.3% $410 0.06% 9.9%
Mortgage - - - - - -
Construction - - - - - -
Lease Financing 1,364 2.04 15.7 421 0.49 10.2
------ --------------- -----
Net Commercial Lending 5,808 0.52 67.0 831 0.08 20.1
Consumer Lending:
Residential 139 0.14 1.6 118 0.21 2.8
Installment 2,371 1.43 27.4 1,995 1.28 48.2
Lease Financing 347 0.25 4.0 1,199 1.06 28.9
------ --------------- -----
Net Consumer Lending 2,857 0.71 33.0 3,312 1.01 79.9
------ --------------- -----
Net Charge-Off's $8,665 0.58 100.0 $4,143 0.32 100.0
====== =============== =====
</TABLE>
16
<PAGE>
Nonperforming Assets
Nonperforming assets at March 31, 1999 were $49.6 million compared to
$45.3 million and $58.3 million as of December 31, 1998 and March 31,
1998, respectively. The composition of nonperforming assets over the
past five quarters is provided in the following table (dollars in
thousands).
<TABLE>
<CAPTION>
1999 1998
------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans:
Commercial Lending:
Commercial and Financial $33,210 $34,544 $20,719 $42,413 $32,746
Mortgage 335 335 335 335 335
Construction - - - - -
Lease Financing 7,162 4,002 10,732 11,862 7,046
-----------------------------------------------
Total Commercial Lending 40,707 38,881 31,786 54,610 40,127
Consumer Lending:
Installment - - - - -
Residential 4,900 3,692 3,674 3,314 3,287
Lease Financing - - - - -
-----------------------------------------------
Total Consumer Lending 4,900 3,692 3,674 3,314 3,287
-----------------------------------------------
Total Nonaccrual Loans 45,607 42,573 35,460 57,924 43,414
Renegotiated Loans 1,577 - 8,950 9,196 9,327
-----------------------------------------------
Total Nonperforming Loans 47,184 42,573 44,410 67,120 52,741
Other Real Estate 2,430 2,735 2,211 3,321 5,546
-----------------------------------------------
Total Nonperforming Assets $49,614 $45,308 $46,621 $70,441 $58,287
===============================================
Loans 90 Days Past Due
Still Accruing $12,364 $9,219 $13,443 $10,058 $17,109
Nonperforming Loans to
Total Loans and Leases 0.79% 0.76% 0.78% 1.20% 1.00%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 0.84% 0.81% 0.82% 1.26% 1.11%
Total Assets 0.57% 0.56% 0.56% 0.90% 0.76%
</TABLE>
Changes within nonperforming assets for 1999 include $16.5 million in
additions, $7.2 million in payments and loans returned to accrual and
the $5.0 million in charge-offs.
17
<PAGE>
Noninterest Income
The following table details the components of noninterest income and
their change for the first quarters of 1999 and 1998 (dollars in
thousands):
Three Months Ended
March 31,
------------------ Pctg
1999 1998 Change
----------------------------
Service Charges on Deposit Accounts $7,264 $6,412 13.3%
Other Service Charges and Fees 13,447 14,958 (10.1)
Operating Lease Income 8,898 9,054 (1.7)
Gain on Sales of Loans and Leases 31,839 13,526 135.4
Security Gains (Losses) (7) 3,692 (100.2)
Other 3,126 2,063 51.5
-----------------
Total Noninterest Income $64,567 $49,705 29.9
=================
Noninterest income for the first quarter of 1999 increased by $14.9
million, or 30%, from the prior year first quarter. Explanations for
significant changes in noninterest income by category follow:
- - Service charges on deposit accounts increased $0.9 million due
primarily from pricing and volume increases of corporate and
personal demand deposit accounts. Also ATM surcharges have increased
due to the placement of ATMs in Wal-mart and Sam's Club stores.
- - Other service charges and fees decreased $1.5 million as the first
quarter of 1998 included gains on the sale of stock and stock
warrants of commercial loan customers which had been received as
part of the loan fee structure. Offsetting this decrease was an
increase in loan servicing fees principally resulting from the 1998
nonconforming and warehouse lending loan sales and the auto sale-
leaseback transactions.
18
<PAGE>
- - Gain on sales of loans and leases increased $18.3 million during the
first quarter of 1999 as compared to the first quarter of 1998. The
following table provides detail of the gain on sales recognized
during the first quarters of 1999 and 1998 (in thousands):
Three Months Ended
March 31,
------------------
1999 1998
------------------
Gain/(Loss) Based on Cash Received:
Equipment Lease Securitization $6,914 $-
Equipment Lease Residuals 2,642 230
Auto Lease Sales and Terminations 1,925 623
Conforming Residential Loan Sales
Servicing Released 873 634
Nonconforming Whole Loan Sales 141 169
Credit Card Whole Loan Sales - 3,238
Other Loan Sales 20 781
Gain/(Loss) Based on Retained Interest
in Securitized Asset Received:
Nonconforming Loan Securitizations 19,324 7,851
-----------------
$31,839 $13,526
=================
During the first quarter of 1999, $116 million of equipment leases,
originated or acquired by the Information Leasing Corporation unit,
were securitized and sold. This sale generated a cash gain of $6.9
million. During the first quarter of 1998, $38 million of credit
cards receivables were sold servicing released resulting in a cash
gain of $3.2 million.
Nonconforming residential loans, originated or acquired by the
Provident Consumer Financial Services business line, have been
securitized and sold on a quarterly basis since 1996. Major
characteristics of these nonconforming loans include: 85% with "B"
credit grade or better; 65% with full documentation and 10% to 15%
with reduced documentation; 65% have prepayment penalties; 95% are
secured by first mortgages; 90% are owner occupied; and, on average,
have a 75% loan-to-value ratio. Total loans securitized and sold
were $515 million and $200 million in the first quarter of 1999 and
1998, respectively. Under these types of sales, gains or losses are
determined based on a present value calculation of future cash
flows, using the cash-out methodology, of the underlying loans, net
of interest payments to security holders, loan loss and prepayment
assumptions and normal servicing revenue. Interest income is
recognized throughout the life of the securitization at the rate
that the future cash flows have been discounted.
19
<PAGE>
The present value of these net cash flows, referred to as retained
interest in securitized assets ("RISA"), are included with
investment securities on the consolidated balance sheets. Components
of the RISA and the underlying assumptions follow:
Nonconforming Prime
Residential Home Equity
--------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $408,646 $25,933
Less:
Estimated Credit Loss (75,741) (1,761)
Servicing and Insurance Expense (38,707) (3,807)
Discount to Present Value (53,746) (3,027)
-----------------------
Carrying Value of Retained Interest in
Securitized Assets $240,452 $17,338
=======================
<TABLE>
<CAPTION>
Nonconforming Residential Prime Home Equity
--------------------------------- -----------------
First Quarter Weighted Weighted
1999 Average Average
Transaction (All Transactions) (All Transactions)
---------------------------------------------------
<S> <C> <C> <C>
Assumptions Used:
Prepayment Speed (initial) 12.70% 11.20% 11.45%
Prepayment Speed (levels up to) 35.00 31.00 25.65
Estimated Credit Losses:
Annual Basis 1.10 1.07 0.20
Percentage of Original Balance 2.70 3.15 0.41
Discount Rate 12.00 11.74 9.58
</TABLE>
The average life, using a 35% prepayment assumption, of the
nonconforming mortgage portfolio underlying the first quarter 1999
transaction is approximately 2.4 years.
Management makes estimates and assumptions when recording noncash
loan sale gains. However, management believes it is making
conservative assumptions as to anticipated prepayment speeds and
credit losses. No assurance can be given that the level of loan
originations and acquisitions, along with a favorable interest rate
market, will continue to permit the recognition of such gains on
sales of loans in the future. No assurance can be given that
Provident will be able to securitize and sell such loans at levels
previously experienced. Provident's ability to securitize and sell
such loans is mainly dependent upon outside factors over which
Provident has no control, such as interest levels, the condition of
markets for securitized loans, general market conditions and similar
factors.
20
<PAGE>
Noninterest Expense
The following table details the components of noninterest expense and
their change for the first quarters of 1999 and 1998 (dollars in
thousands):
Three Months Ended
March 31,
----------------- Pctg
1999 1998 Change
--------------------------
Salaries, Wages and Benefits $34,980 $29,337 19.2%
Depreciation on Operating Lease Equipment 4,725 5,282 (10.5)
Occupancy 4,208 3,807 10.5
Equipment Expense 5,302 4,231 25.3
Professional Fees 3,635 3,973 (8.5)
Charges and Fees 3,732 2,394 55.9
Other 15,715 15,607 0.7
-----------------
Total Noninterest Expense $72,297 $64,631 11.9
=================
Noninterest expense for the first quarter of 1999 increased by $7.7
million, or 12%, from the prior year first quarter. Explanations for
significant changes in noninterest income by category follow:
- - Salaries, wages and benefits increased $5.6 million during the first
quarter of 1999 as compared to the first quarter of 1998. The
increase was due primarily to increased staffing of the Provident
Consumer Financial Services business line, including the warehouse
lending and loan servicing units. Total full-time equivalents
remained flat as this increase was offset by reduced staffing in
retail banking and discontinued businesses.
- - Depreciation on operating leased equipment decrease $0.6 million
primarily as a result of the securitization and sale of operating
leases which had been originated by the Information Leasing
Corporation unit.
- - Equipment expense increased $1.1 million during the current period
due to higher depreciation expense primarily in technology areas,
branches and Provident Consumer Financial Services.
- - Charges and fees increased $1.3 million for the first quarter of
1999 due principally to higher loan origination costs and credit
card processing.
- - Significant items within other noninterest expense for the first
quarter of 1999 include data processing expense of $2.8 million,
marketing expense of $1.9 million and franchise tax expense of $1.7
million.
21
<PAGE>
Financial Condition
Short-Term Investments and Investment Securities
Federal funds sold and reverse repurchase agreements increased $14.0
million since December 31, 1998. The amount of federal funds sold
changes daily as cash is managed to meet reserve requirements and
customer needs. After funds have been allocated to meet lending and
investment requirements, any remainder is placed in overnight federal
funds.
Trading account securities are purchased 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. Trading account securities decreased $20.9 million
since year-end 1998.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $209.8 million during 1999 as a
result of the redeployment of available funds.
Loans and Leases
As of March 31, 1999 total loans and leases were $5.9 billion compared
to $5.6 billion at December 31, 1998. During 1999, $515.0 million of
nonconforming residential loans and $115.8 million of commercial lease
financings were securitized and sold. As a result of loans and leases
being sold with servicing retained, total managed loans and leases not
reflected on the balance sheet grew from $3.2 million at December 31,
1998 to $3.6 billion at March 31, 1999.
The following table shows the composition of the commercial and
financial loan category by industry type at March 31, 1999 (dollars in
millions):
Amount on
Type Amount % Nonaccrual
- ----------------------------------------------------------------------
Manufacturing $725.4 22 $8.3
Service Industries 630.3 19 3.4
Real Estate Operators/Investment 393.8 12 1.2
Retail Trade 274.1 8 10.5
Wholesale Trade 273.3 8 2.6
Finance & Insurance 240.2 7 2.6
Transportation/Utilities 179.5 5 0.7
Construction 126.5 4 0.1
Automobile Dealers 119.8 4 -
Residential Warehouse Lending 38.3 1 0.8
Other (1) 343.1 10 3.0
--------------------------
Total $3,344.3 100 $33.2
==========================
22
<PAGE>
The composition of the commercial mortgage and construction loan
categories by property type at March 31, 1999 is shown in the
following table (dollars in millions):
Amount on
Type Amount % Nonaccrual
- --------------------------- -------------------------
Office/Warehouse $209.1 23 $-
Shopping/Retail 190.4 21 0.3
Residential Development 164.9 18 -
Apartments 127.8 14 -
Land 28.0 3 -
Auto Sales and Service 27.8 3 -
Hotels/Motels 18.5 2 -
Churches 14.4 2 -
Industrial Plants 14.0 2 -
Health Facilities 6.3 1 -
Other Commercial Properties 93.8 11 -
------------------------
Total $895.0 100 $0.3
========================
Borrowed Funds
Short-term debt increased $315.4 million, or 39%, to $1.1 billion
during the first three months of 1999. The increase was due primarily
to the purchase of term federal funds. The federal funds purchased
were used primarily to fund loans prior to their securitization.
Long-term debt decreased $128.9 million, or 14%, during the first
quarter of 1999. The decrease is primarily attributable to the
maturity of a $100 million Federal Home Loan Bank advance.
Capital Resources and Adequacy
Total shareholders' equity at March 31, 1999 was $712.5 million
compared to $703.9 million at December 31, 1998. The change in the
equity balance primarily relates to net income exceeding dividends by
$24.3 million, treasury stock purchases of $8.6 million and a decrease
in the market value of investment securities of $8.0 million (net of
deferred income taxes).
The quarterly common dividend rate was increased from $.20 per share
to $.22 per share beginning with the first quarter of 1999. It is
Provident's intention to pay annual dividends of approximately 30% of
net income.
In August 1998, Provident announced that it would purchase up to 1
million shares, or approximately 2.3%, of its common stock. The
purchases are to be made from time-to-time in open market or in
privately negotiated transactions at the discretion of management.
Shares purchased pursuant to the buy-back program will be used to fund
various company benefit plans and for other corporate purposes. As of
March 31, 1999, Provident had purchased 801,800 shares.
23
<PAGE>
The following table of ratios is important for the analysis of capital
adequacy:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------------------------
<S> <C> <C>
Average Shareholders' Equity to Average Assets 8.34% 8.73%
Dividend Payout to Net Earnings 28.16 30.72
Tier 1 Leverage Ratio 9.14 9.00
Tier 1 Capital to Risk-Weighted Assets 8.59 8.55
Total Risk-Based Capital To Risk-Weighted Assets 10.81 11.15
</TABLE>
Capital expenditures planned by Provident for building improvements
and furniture and equipment in 1999 are currently estimated to be
approximately $21 million. Included in this amount are projected
capital expenditures for the purchase of data processing hardware and
software, facility renovations, branch additions/renovations and ATMs.
Through March 31, 1999, approximately $3 million of these expenditures
had been made.
Stock Options
Options to purchase 645,125 shares of Provident Common Stock were
granted during the first three months of 1999. The options have
exercise prices ranging from $34.32 to $38.25.
Off-Balance Sheet Financial Agreements
In the normal course of business, Provident uses various financial
instruments with off-balance sheet risk to manage its interest rate
risk and to meet the financing needs of its customers. At March 31,
1999, these off-balance sheet instruments consisted of standby letters
of credit of $133 million, commitments to extend credit of $2.5
billion and interest rate swaps with a notional amount of $2.3
billion.
Liquidity
Adequate liquidity is necessary to meet the borrowing needs and
deposit withdrawal requirements of customers as well as to satisfy
liabilities, fund operations and support asset growth. Provident has a
number of sources to provide for liquidity needs. First, liquidity
needs can be met by the liquid assets on its balance sheet such as
cash, deposits with other banks, federal funds sold and trading
account securities. Additional sources of liquidity include the sale
of investment securities and the sale of commercial and consumer loans
and leases. Another source for providing liquidity is the generation
of new deposits. Provident may also borrow both short-term and long-
term funds. Provident has an additional $687.5 million available for
borrowing under a $1 billion bank notes program. Approximately $21
million of long-term debt is due to be repaid during the remainder of
1999.
24
<PAGE>
The major source of liquidity for Provident on a parent-only basis
("the Parent") is dividends paid to it by its subsidiaries. Pursuant
to Federal Reserve and state banking regulations, the maximum amount
available for dividend distribution to the Parent at March 31, 1999 by
its banking subsidiaries was approximately $210.8 million. The Parent
has not received any dividends from its subsidiaries during the first
three months of 1999.
At March 31, 1999 the Parent had not drawn any of its $200 million in
general purpose lines of credit with unaffiliated banks. Additionally
the Parent had approximately $204.7 million in cash, interest earning
deposits and federal funds sold to meet its liquidity needs.
Market Risk Management
The responsibility of monitoring and managing market and liquidity
risk is assigned to the Asset Liability Committee ("ALCO"). The main
source of market risk is the risk of loss in the value of financial
instruments that may result from the changes in interest rates. ALCO
is bound to guidelines stated in the relevant policies approved by the
Board of Directors.
In addition to the natural balance sheet hedges ALCO utilizes off-
balance sheet instruments to manage interest rate risk. Interest rate
swaps are the most widely used tools to manage interest rate risk.
Provident has used off-balance sheet tools effectively for a number of
years and believes it has developed the appropriate expertise and
knowledge to achieve a sound interest rate risk management process.
Provident uses an earnings simulation model to analyze net interest
income sensitivity to movements in interest rates. Given an
instantaneous and permanent change in the pricing of all interest rate
sensitive assets, liabilities and off-balance sheet financial
agreements, net interest income would change by the following over the
next 12-month period: 1.53% for a 100 basis point decrease; 2.95% for
a 200 basis point decrease; (3.06%) for a 100 basis increase; and
(6.27%) for a 200 basis point increase. . The effects of these
interest rate fluctuations are considered worst case scenarios, as the
analysis does not give consideration to any management of the new
interest rate environment. These tests are performed on a monthly
basis and the results are presented to the Board of Directors.
25
<PAGE>
Year 2000 Compliance
The Year 2000 Issue arose because many existing computer programs use
only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results before, during and
after January 1, 2000.
Provident has been actively addressing the Year 2000 issue since 1996
as it could result in an interruption in certain normal business
activities or operations. Such interruptions could materially affect
Provident's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 issue,
including third party vendors and customers, Provident is unable to
determine at this time whether Year 2000 failures will significantly
affect Provident's results of operations, liquidity and financial
condition. Steps taken by Provident are expected to significantly
reduce the level of uncertainty about the Year 2000 issues. It is
management's estimate that it will cost a total of $10 million to
correct all of its application systems. Since inception, Provident has
expensed $8.2 million for the correction of this problem. The
following summarizes its Year 2000 readiness.
Mainframe Applications: Provident has completed the Year 2000 code
remediation and implemented the changes into production. Additionally,
all third-party upgrades required to ensure Year 2000 compliance have
been installed. Provident has performed future date testing at an
application level throughout the conversion and upgrade process. In
addition an integrated systems Millennium Verification Test was
executed offsite in the fourth quarter of 1998. Provident has
established a logical partition (LPAR) to allow for continued
production verification tests that include third-party and corporate
customer interfaces.
PC Applications: Provident has established a Year 2000 PC test lab for
verification of PC software applications, spreadsheets and databases.
As of March 31, 1999, 87% of the software has been tested to ensure
Year 2000 compliance.
Environmental/Embedded Systems: Provident has solicited, and received
from vendors, the Year 2000 compliance information on its
environmental and other embedded systems. To assist in testing these
systems within the various facilities owned or leased, Provident has
secured the services of an outside provider. This project is currently
on target to meet a June, 1999 deadline.
Third Party Interdependencies: Provident has solicited, and continues
to monitor, the readiness of all third party interdependencies.
Testing has been completed with all of our interdependencies including
our main interface, the Federal Reserve Bank, to verify our ACH, wire
and daily cash settlement activity.
26
<PAGE>
Vendors/Customers: Letters and questionnaires have been sent out to
significant vendors and borrowers of Provident. Both vendor and
customer responses will be actively monitored and updated throughout
1999.
Contingency Plans: Year 2000 business resumption contingency plans
have been developed and documented. These plans are designed to focus
on Provident's processes for achieving Year 2000 readiness with the
assumption that all business processes, functions and applications
will fail during the Year 2000 date change. These plans define
processes and comprehensive procedures covering company-wide
contingency strategies, financial business center sales and services,
and individual business units necessary to assuring continuity or
resumption of business operations in the event of Year 2000
disruptions. Master listings of external dependencies and interfaces
including corporate customers, vendors, service providers,
infrastructure and information sources are provided for within these
plans.
27
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk Management".
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed:
Exhibit 27.1 - Financial Data Schedule for March 31, 1999
Exhibit 27.2 - Restated Financial Data Schedule for
March 31, 1998
(b) Reports on Form 8-K:
A Form 8-K was filed January 28, 1999 reporting under Item 5 -
Other Events.
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Provident Financial Group, Inc.
Registrant
Date: May 17, 1999 \s\ Christopher J. Carey
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-Q for March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 217,462
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 74,000
<TRADING-ASSETS> 29,473
<INVESTMENTS-HELD-FOR-SALE> 1,723,954
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,937,622
<ALLOWANCE> 80,142
<TOTAL-ASSETS> 8,633,224
<DEPOSITS> 5,621,325
<SHORT-TERM> 1,122,892
<LIABILITIES-OTHER> 371,095
<LONG-TERM> 805,440
0
7,000
<COMMON> 12,817
<OTHER-SE> 692,655
<TOTAL-LIABILITIES-AND-EQUITY> 8,633,224
<INTEREST-LOAN> 131,582
<INTEREST-INVEST> 24,588
<INTEREST-OTHER> 1,305
<INTEREST-TOTAL> 157,475
<INTEREST-DEPOSIT> 55,168
<INTEREST-EXPENSE> 84,711
<INTEREST-INCOME-NET> 72,764
<LOAN-LOSSES> 12,900
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 72,297
<INCOME-PRETAX> 52,134
<INCOME-PRE-EXTRAORDINARY> 33,755
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,755
<EPS-PRIMARY> .79
<EPS-DILUTED> .76
<YIELD-ACTUAL> 3.78
<LOANS-NON> 45,607
<LOANS-PAST> 12,364
<LOANS-TROUBLED> 1,577
<LOANS-PROBLEM> 66,996
<ALLOWANCE-OPEN> 75,907
<CHARGE-OFFS> 10,995
<RECOVERIES> 2,330
<ALLOWANCE-CLOSE> 80,142
<ALLOWANCE-DOMESTIC> 80,142
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-Q for September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 215,073
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 20,385
<INVESTMENTS-HELD-FOR-SALE> 1,631,035
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,265,159
<ALLOWANCE> 72,837
<TOTAL-ASSETS> 7,683,595
<DEPOSITS> 4,953,304
<SHORT-TERM> 1,117,727
<LIABILITIES-OTHER> 273,365
<LONG-TERM> 677,498
0
7,000
<COMMON> 12,702
<OTHER-SE> 641,999
<TOTAL-LIABILITIES-AND-EQUITY> 7,683,595
<INTEREST-LOAN> 123,142
<INTEREST-INVEST> 23,157
<INTEREST-OTHER> 887
<INTEREST-TOTAL> 147,186
<INTEREST-DEPOSIT> 54,686
<INTEREST-EXPENSE> 80,510
<INTEREST-INCOME-NET> 66,676
<LOAN-LOSSES> 5,000
<SECURITIES-GAINS> 3,692
<EXPENSE-OTHER> 64,631
<INCOME-PRETAX> 46,750
<INCOME-PRE-EXTRAORDINARY> 30,660
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,660
<EPS-PRIMARY> .71
<EPS-DILUTED> .68
<YIELD-ACTUAL> 4.01
<LOANS-NON> 43,414
<LOANS-PAST> 17,109
<LOANS-TROUBLED> 9,327
<LOANS-PROBLEM> 33,331
<ALLOWANCE-OPEN> 71,980
<CHARGE-OFFS> 7,009
<RECOVERIES> 2,866
<ALLOWANCE-CLOSE> 72,837
<ALLOWANCE-DOMESTIC> 72,837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
