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, 2000 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 28, 2000 is 48,735,481.
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. AND SUBSIDIARIES
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 . . . . . 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . 37
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 37
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in Thousands) (Unaudited)
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 228,664 $ 292,134
Federal Funds Sold and Reverse Repurchase Agreements - 84,009
Investment Securities Available for Sale
(amortized cost - $3,761,460 and $2,187,802) 3,672,997 2,111,037
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,180,795 3,990,923
Mortgage 563,018 576,570
Construction 612,205 559,797
Lease Financing 273,423 391,529
Consumer Lending:
Residential - Held for Sale 132,284 653,679
Installment 544,251 476,508
Lease Financing 443,100 361,907
------------ ------------
Total Loans and Leases 6,749,076 7,010,913
Reserve for Loan and Lease Losses (97,069) (94,045)
------------ ------------
Net Loans and Leases 6,652,007 6,916,868
Leased Equipment 176,844 171,258
Premises and Equipment 97,995 100,099
Receivables from Securitization Trusts 417,219 355,222
Other Assets 500,318 507,299
------------ ------------
$ 11,746,044 $ 10,537,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,231,501 $ 1,185,245
Interest Bearing 6,346,270 6,044,743
------------ ------------
Total Deposits 7,577,771 7,229,988
Short-Term Debt 1,373,181 977,835
Long-Term Debt 1,405,832 950,821
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 220,118 220,069
Accrued Interest and Other Liabilities 241,478 232,991
------------ ------------
Total Liabilities 10,818,380 9,611,704
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized,
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 48,726,164 and 48,618,330 Issued 14,442 14,410
Capital Surplus 312,395 308,237
Retained Earnings 651,328 646,472
Accumulated Other Comprehensive Loss (57,501) (49,897)
------------ ------------
Total Shareholders' Equity 927,664 926,222
------------ ------------
$ 11,746,044 $ 10,537,926
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------
(In Thousands, Except Per Share Data) 2000 1999
- ----------------------------------------------- ---------------------
Interest Income:
Interest and Fees on Loans and Leases $ 161,811 $ 144,506
Interest on Investment Securities 59,784 25,847
Other Interest Income 334 1,551
--------- ---------
Total Interest Income 221,929 171,904
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 17,081 14,110
Time Deposits 63,490 47,865
--------- ---------
Total Interest on Deposits 80,571 61,975
Interest on Short-Term Debt 24,660 14,906
Interest on Long-Term Debt 18,932 13,679
Interest on Junior Subordinated Debentures 4,564 2,166
--------- ---------
Total Interest Expense 128,727 92,726
--------- ---------
Net Interest Income 93,202 79,178
Provision for Loan and Lease Losses 9,700 12,975
--------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 83,502 66,203
Noninterest Income:
Service Charges on Deposit Accounts 8,493 7,537
Loan Servicing Fees 11,806 5,483
Other Service Charges and Fees 9,835 9,950
Operating Lease Income 10,086 8,898
Gain on Sales of Loans and Leases - Non-Cash 15,441 19,324
Gain on Sales of Loans and Leases - Cash 7,698 7,980
Warrant Gains 1,000 -
Security Gains/(Losses) 24 (7)
Other 4,555 5,894
--------- ---------
Total Noninterest Income 68,938 65,059
Noninterest Expense:
Salaries, Wages and Benefits 40,370 36,885
Charges and Fees 4,747 3,884
Occupancy 5,008 4,605
Depreciation on Operating Lease Equipment 6,285 4,725
Equipment Expense 6,236 5,532
Professional Services 5,033 4,024
Merger and Restructuring Charges 39,300 4,200
Other 16,043 16,504
--------- ---------
Total Noninterest Expense 123,022 80,359
--------- ---------
Income Before Income Taxes 29,418 50,903
Applicable Income Taxes 12,646 18,368
--------- ---------
Net Income $ 16,772 $ 32,535
========= =========
Per Common Share:
Basic Earnings Per Share $ .34 $ .69
Diluted Earnings Per Share .33 .67
Cash Dividends Declared .24 .22
See notes to consolidated financial statements.
4
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Capital Retained Treasury Comprehensive
(In Thousands) Stock Stock Surplus Earnings Stock Loss Total
- ---------------------------- -------- -------- -------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 7,000 $ 14,150 $276,796 $534,657 ($21,425) ($ 9,024) $802,154
Net Income 32,535 32,535
Change in Unrealized Loss
on Marketable Securities (7,871) (7,871)
--------
Comprehensive Income 24,664
Dividends Paid on:
Preferred Stock (216) (216)
Common Stock (10,355) (10,355)
Exercise of Stock Options 18 997 1,015
Purchase of Treasury Stock (8,645) (8,645)
Other 163 163
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 7,000 $ 14,168 $277,956 $556,621 ($30,070) ($16,895) $808,780
======== ======== ======== ======== ======== ======== ========
Balance at January 1, 2000 $ 7,000 $ 14,410 $308,237 $646,472 $ - ($49,897) $926,222
Net Income 16,772 16,772
Change in Unrealized Loss
on Marketable Securities (7,604) (7,604)
--------
Comprehensive Income 9,168
Dividends Paid on:
Preferred Stock (237) (237)
Common Stock (11,679) (11,679)
Exercise of Stock Options 32 1,931 1,963
Cash Paid in Lieu of
Issuance of Fractional
Shares in Acquisition (31) (31)
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,478 1,478
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2000 $ 7,000 $ 14,442 $312,395 $651,328 $ - ($57,501) $927,664
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
(In Thousands) 2000 1999
- ---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Operating Activities:
Net Income $ 16,772 $ 32,535
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 9,700 12,975
Amortization of Goodwill and Other Intangible Assets 956 573
Other Amortization and Accretion (7,990) (4,140)
Depreciation of Leased Equipment and
Premises and Equipment 11,558 9,531
Realized Investment Security (Gains) Losses (24) 7
Proceeds from Sale of Loans Held for Sale 524,415 592,636
Origination of Loans Held for Sale (529,886) (538,148)
Realized Gains on Residential Loans Held for Sale (15,557) (20,197)
Decrease in Net Trading Account Securities - 36,756
Increase in Interest Receivable (1,970) (1,579)
Decrease in Other Assets 7,995 20,757
Increase in Interest Payable 8,205 8,179
Increase (Decrease) in Other Liabilities (3,572) 2,781
----------- -----------
Net Cash Provided By Operating Activities 20,602 152,666
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 404,344 186,261
Proceeds from Maturities and Prepayments 90,913 75,121
Purchases (1,494,631) (406,476)
Increase in Receivables Due From Securitization Trusts (76,838) (79,257)
Net Increase in Loans and Leases (266,234) (398,556)
Net (Increase) Decrease in Operating Lease Equipment (11,871) 4,899
Net Increase in Premises and Equipment (3,169) (2,610)
----------- -----------
Net Cash Used In Investing Activities (1,357,486) (620,618)
----------- -----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 81,334 81,868
Net Increase in Other Deposits 266,449 200,098
Net Increase in Short-Term Debt 395,346 299,493
Principal Payments on Long-Term Debt (85,998) (130,795)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 540,000 8,019
Cash Dividends Paid (11,916) (10,571)
Purchase of Treasury Stock - (8,645)
Proceeds from Exercise of Stock Options 1,963 1,015
Net Increase in Other Equity Items 2,227 163
----------- -----------
Net Cash Provided By Financing Activities 1,189,405 440,645
----------- -----------
Decrease in Cash and Cash Equivalents (147,479) (27,307)
Cash and Cash Equivalents at Beginning of Period 376,143 337,351
----------- -----------
Cash and Cash Equivalents at End of Period $ 228,664 $ 310,044
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 120,521 $ 86,110
Income Taxes 22,217 13,560
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 5,057 531
Residual Interest in Securitized Assets Created from
the Sale of Loans 54,695 49,040
</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.
On February 4, 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. The merger was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial
statements and other financial information for periods prior to the
merger include the accounts and operations of Fidelity Financial.
The financial statements presented herein should be read in conjunction
with the financial statements and notes thereto included in Provident's
1999 annual report on Form 10-K filed with the Securities and Exchange
Commission.
7
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted
earnings per common share, as calculated with and without merger and
restructuring charges:
Three Months Ended
March 31,
--------------------
(In Thousands, Except Per Share Data) 2000 1999
- ---------------------------------------------------- -------- --------
Including Merger & Restructuring Charges:
Basic:
Net Income $ 16,772 $ 32,535
Less Preferred Stock Dividends (237) (217)
-------- --------
Income Available to Common Shareholders 16,535 32,318
Weighted-Average Common Shares Outstanding 48,691 47,076
-------- --------
Basic Earnings Per Share $ 0.34 $ 0.69
======== ========
Diluted:
Net Income $ 16,772 $ 32,535
Weighted-Average Common Shares Outstanding 48,691 47,076
Assumed Conversion of:
Convertible Preferred Stock 988 988
Dilutive Stock Options (Treasury Stock Method) 706 807
-------- --------
Dilutive Potential Common Shares 50,385 48,871
-------- --------
Diluted Earnings Per Share $ 0.33 $ 0.67
======== ========
Excluding Merger & Restructuring Charges:
Basic:
Net Income $ 43,772 $ 35,265
Less Preferred Stock Dividends (237) (217)
-------- --------
Income Available to Common Shareholders 43,535 35,048
Weighted-Average Common Shares Outstanding 48,691 47,076
-------- --------
Basic Operating Earnings Per Share $ 0.89 $ 0.74
======== ========
Diluted:
Net Income $ 43,772 $ 35,265
Weighted-Average Common Shares Outstanding 48,691 47,076
Assumed Conversion of:
Convertible Preferred Stock 988 988
Dilutive Stock Options (Treasury Stock Method) 706 807
-------- --------
Dilutive Potential Common Shares 50,385 48,871
-------- --------
Diluted Operating Earnings Per Share $ 0.87 $ 0.72
======== ========
8
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. MERGER AND RESTRUCTURING CHARGES
- -----------------------------------------
In connection with Provident's acquisition of Fidelity Financial,
direct-merger related and other post-merger business line restructuring
charges of $39.3 million were recorded during the first quarter of
2000. During the first quarter of 1999, Fidelity Financial had taken
$4.2 million of merger charges related to their acquisition of Glenway
Financial Corporation.
Merger and restructuring charges expensed during the first quarter of
2000 include estimates of cash outlays totaling $12.6 million and
non-cash write-downs of assets totaling $26.7 million. Cash outlays
include severance costs of $8.6 million, of which $4.0 were paid as of
March 31, 2000. Contract termination charges of $2.3 million are
estimated to be incurred, primarily from lease buyout agreements on
rented facilities. None of these termination charges had been paid as
of March 31, 2000. Professional fees of $1.3 million had been paid as
of the end of the quarter in connection with the acquisition of
Fidelity Financial, and an additional $.4 million is expected to be
paid within the remainder of the year.
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.
NOTE 4. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
- --------------------------------------------------------------------
JUNIOR SUBORDINATED DEBENTURES
- ------------------------------
During 1996, Provident established Provident Capital Trust I. Capital
Trust I 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.
Similarly, Provident formed Provident Capital Trust II during the
second quarter of 1999. Capital Trust II issued $125 million of
preferred Capital Securities to the public and $3.9 million of common
to Provident. Proceeds from the issuance of the capital securities were
invested in Provident's 8.75% Junior Subordinated Debentures, due 2029.
Provident fully guarantees the Capital Securities. The sole assets of
Capital Trust I and II are the Debentures.
9
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. 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 March 31, 2000 follow:
(In Thousands) Total Assets
- -------------------------------------------- ------------
Provident Auto Leasing Company $149,031
Provident Auto Rental Company LLC (1998-1) 28,546
Provident Auto Rental Company LLC (1998-2) 31,098
Provident Auto Rental Company LLC (1999-PRU) 5,804
Provident Auto Rental LLC (1999-1) 186,571
Provident Auto Rental Company LLC (2000-A) 15,498
Provident Lease Receivables Company LLC 107,880
10
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Forward Looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements that are
subject to numerous assumptions, risks or uncertainties. 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, the
ability to securitize loans and leases and the spreads realized on
securitizations; 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. 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Dollars in Thousands, --------------------------------
Except Per Share Data) 2000 1999 % Change
- ------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Net Interest Income $ 93,202 $ 79,178 18%
Noninterest Income 68,938 65,059 6
Total Revenue 162,140 144,237 12
Provision for Loan
and Lease Losses 9,700 12,975 (25)
Noninterest Expense(1) 123,022 80,359 53
Net Income(1) 16,772 32,535 (48)
Diluted Earnings per Share(1) 0.33 0.67 (51)
Return on Average Equity(1) 7.25% 15.82%
Return on Average Assets(1) 0.58% 1.37%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $ 83,722 $ 76,159 10%
Net Income 43,772 35,265 24
Diluted Earnings per Share 0.87 0.72 21
Return on Average Equity 18.92% 17.15%
Return on Average Assets 1.51% 1.48%
Efficiency Ratio 51.64% 52.78%
</TABLE>
11
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating earnings per share increased 21% to $.87 during the first
quarter of 2000, versus $.72 reported during the same period in 1999.
First quarter 2000 operating earnings exclude a $27.0 million after-tax
charge primarily related to the acquisition of Fidelity Financial,
which was completed February 4, 2000. Included in this charge are
direct-merger related charges and other post-merger business line
restructuring charges. First quarter 1999 operating earnings exclude a
$2.7 million after-tax charge related to the merger of Fidelity
Financial and Glenway Financial Corporation, which was completed March
19, 1999. The increase in operating earnings per share for the quarter
was due to strong revenue growth as well as continued emphasis on
expense control.
Total revenue (net interest income plus noninterest income) increased
12% during 2000 over the first quarter of 1999. Net interest income
increased by $14.0 million, or 18%, as a result of strong growth in the
commercial lending portfolio. Noninterest income increased $3.9
million, or 6%, primarily due to strong growth in loan servicing fees
which was partially offset by a decline in non-cash gains on the sale
of loans. Provident is intentionally keeping non-conforming mortgage
loan production levels equivalent with last year's production levels.
Total average assets for the first quarter of 2000 grew $2.1 billion,
or 22%. The increase was primarily in the investment security and
commercial lending portfolios, which experienced growth of $1.6 billion
and $.8 billion in average assets during this time period. In addition,
loans and leases, which had been sold with servicing retained,
increased from $3.6 billion at March 31, 1999 to $6.4 billion at March
31, 2000.
Operating noninterest expense was $83.7 million for the first quarter
of 2000 as compared to $84.5 million for the fourth quarter of 1999 and
$76.2 million for the first quarter of 1999. The decline in operating
noninterest expenses from the fourth quarter of 1999 to the current
period is the result of the successful integration of Fidelity
Financial into Provident and Provident's continued attention to cost
control. The ratio of operating noninterest expense to tax equivalent
revenue ("efficiency ratio") was 51.64% for the first quarter of 2000
compared to 52.78% for the first quarter of 1999. For purposes of
calculating the efficiency ratio, tax equivalent revenue excludes
security gains or losses.
12
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business Lines
- --------------
The following table summarizes total revenue, operating income and
average assets by major lines of business for the three-month periods
ended March 31, 2000 and 1999. Prior period information has been
restated to match current period income/expense allocation methodology
and business unit roll-up.
Three Months Ended
March 31,
-------------------------
(Dollars in Millions) 2000 1999 Change
- --------------------- ------- ------ ------
Total Revenue:
Commercial Banking $ 68.9 $ 60.3 14%
Retail Banking 61.9 54.1 14
Mortgage Banking 31.3 29.8 5
Corporate Center - - -
------- ------ --
$ 162.1 $144.2 12
======= ====== ==
Operating Income:
Commercial Banking $ 22.9 $ 21.0 9%
Retail Banking 11.3 5.2 117
Mortgage Banking 9.6 9.1 5
Corporate Center - - -
------- ------ --
$ 43.8 $ 35.3 24
======= ====== ==
Average Assets:
Commercial Banking $ 5,080 $4,024 26%
Retail Banking 2,138 2,082 3
Mortgage Banking 1,060 752 41
Corporate Center 3,326 2,646 26
------- ------ --
$11,604 $9,504 22
======= ====== ==
Key components of the management reporting process follows:
o Risk-Based Equity Allocations: Provident uses a comprehensive
approach for measuring risk and making risk-based equity
allocations. Risk measurements are applied to credit, residual,
operational and corporate-level risks.
o Transfer Pricing: Provident utilizes a cash flow-matched funds
transfer pricing methodology that isolates the business units from
fluctuations in interest rates, and provides management the ability
to measure customer, product or business unit level profitability
based on the financial characteristics of the products rather than
the level of interest rates.
o Provision for Loan and Lease Losses: Business lines are charged for
provision based upon the size and composition of its loan/lease
portfolio.
o Costs Allocation: 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.
13
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o "Corporate Center": Corporate Center includes revenue and expenses
not allocated to the primary business lines, gain/loss on the sale
of investment securities, and any unusual business revenues and
expenses.
Business line descriptions and fluctuation analysis follows:
o Commercial Banking is a provider of credit products and cash
management services to commercial customers. The group includes
Commercial Lending, serving middle market clients in the Midwest;
Provident Capital Corp., a national financier of business
expansions, re-capitalizations, and provider of asset based lending
services; Commercial Mortgage, an originator and servicer of
construction and permanent mortgage financing; Information Leasing
Corporation, a national small to mid-ticket equipment leasing
company; and Provident Commercial Group, a national lessor of large
equipment.
Commercial Banking is the Company's largest line of business
contributing 52% of the Bank's operating income. Operating income
for the first three months of 2000 was $22.9 million compared to
$21.0 for the same time period in 1999. Average loan balances
increased by 26%, and total revenues were up 14% over the same
period in 1999. A 12% increase in operating lease balances combined
with growth in servicing income for the small equipment lease
portfolio drove the 26% increase in non-interest income. Operating
expenses increased 25% due partially to expenses associated with the
servicing of the small equipment lease portfolio and the addition of
Capstone, a commercial mortgage servicer.
o 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. Operating income increased $6.1 million for
the three-month period ended March 31, 2000 as compared to the same
period in 1999. The increase was due primarily to increases in
deposit net interest income and fees from Financial Centers, Private
Banking, Trust and Investment Products.
Retail Banking benefited from growth in deposits. Average core
deposits for the first quarter of 2000 grew by 15% as compared to
the first quarter of 1999. Significant deposit growth came from the
Florida franchise and from the in-market acquisition of OHSL
Financial Corp. To further capitalize on the Florida deposit growth,
Provident announced plans to open five additional Financial Centers
in Florida during 2000. Also in 2000, Provident will continue to
enhance its distribution of products and services via on-line
banking, ATM machines and a call center.
14
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest income increased $1.2 million during the first quarter
of 2000 as compared to the first quarter of 1999. Higher fees in the
areas of brokerage, fund management, trust, ATM charges and service
charges on deposit accounts contributed to this increase.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Operating income for
the first quarter of 2000 was $9.6 million, an increase of $.5
million as compared to the same period in 1999. The increase in
operating income was primarily the result of higher net interest
income and loan servicing fees which was partially offset by a lower
gain recognized on the securitization and sale of nonconforming
residential loans.
The interest rate environment of moderate increases has had an
unfavorable impact on funding expenses as measured by the bond
coupon. Despite industry consolidation that has led to more rational
pricing, the interest rate environment has slowed new originations
in the nonconforming sector, and has compressed yields. During the
first quarter of 2000, Mortgage Banking securitized and sold $515
million of nonconforming loans resulting in the recognition of a
$15.4 million gain, a gain to loans sold ratio of 3.0%. During the
first quarter of 1999, $515 million of loans were securitized and
sold resulting in a $19.3 million gain, a gain to loans sold ratio
of 3.8%.
Revenue for the first quarter of 2000 was $31.3 million, an increase
of $1.5 million as compared to the same period in 1999. Operating
expenses increased during 2000 due primarily to increased staffing
associated with the higher volume of loans being serviced by this
business unit. Net income based on having securitized its loan
portfolio (as reported which includes the gain on sale of loans) was
lower than as if the loans had been held in the portfolio and
recognized (as earned which excludes the gain on sale of loans).
Also, positive net cash flows occurred for the first quarter of
2000. Details of the as reported income versus the as earned income,
along with an operating cash flow analysis are provided within
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Securitization Activity" section of
this report.
15
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Interest Income
- -------------------
Net interest income for the three months ended March 31, 2000,
increased $14.0 million compared to the first three months of 1999. The
increase in interest income was primarily due to an increase in average
earning assets of $1.8 billion, or 21%. This increase was amplified by
a 50 basis point increase in the average yield on earning assets from
8.11% to 8.61%. The largest portion of the increase in average earning
assets from the first three months of 1999 to the first three months of
2000 occurred in the average balances of commercial loan and investment
security portfolios. Interest expense for the three months ended March
31, 2000 increased due to a 20% increase in total interest bearing
liabilities with a 71 basis point increase on the average rate paid.
The increase in interest bearing liabilities was principally due to
increases in interest bearing deposits, primarily time deposits, and
long-term debt.
Net Interest Margin
- -------------------
Net interest margin represents net interest income as a percentage of
total interest earning assets. For the first quarter of 2000, the net
interest margin, on a tax-equivalent basis, was 3.62% compared to 3.74%
for the same period in 1999. This decrease was driven by changes in
rates and volumes of earning assets and the corresponding funding
sources. In addition, the first quarter of 2000 carried acquired asset
portfolios which had been sold, but cash settlement had not yet taken
place. The following table details the components of the change in net
interest income (on a tax-equivalent basis) by major category of
interest earning assets and interest bearing liabilities for the
three-month periods ended March 31, 2000 and 1999.
16
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended
-------------------------------------
March 31, 2000 March 31, 1999
----------------- -----------------
Average Average Average Average
(Dollars in Millions) Balance Rate Balance Rate
- ------------------------------- ------- ----- ------- -----
Assets:
Loans and Leases:
Corporate Lending:
Commercial $ 4,091 9.18% $ 3,306 8.56%
Mortgage 580 9.02 542 8.63
Construction 571 8.60 471 8.03
Lease Financing 393 11.39 267 10.45
------- ----- ------- -----
Total Corporate Lending 5,635 9.26 4,586 8.62
Consumer Lending:
Residential 376 11.42 916 8.19
Installment 526 10.02 692 10.03
Lease Financing 484 6.88 546 8.44
------- ----- ------- -----
Total Consumer Lending 1,386 9.31 2,154 8.85
------- ----- ------- -----
Total Loans and Leases 7,021 9.27 6,740 8.70
Investment Securities 3,324 7.24 1,746 6.01
Trading Account Securities - - 75 5.42
Federal Funds Sold and Reverse
Repurchase Agreements 26 5.10 36 6.26
------- ----- ------- -----
Total Earning Assets 10,371 8.61 8,597 8.11
Cash and Due From Banks 242 235
Other Assets 991 672
------- -------
Total Assets $11,604 $ 9,504
======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 331 2.09 $ 360 2.00
Savings Deposits 1,321 4.68 1,406 3.56
Time Deposits 4,471 5.71 3,600 5.39
------- ----- ------- -----
Total Deposits 6,123 5.29 5,366 4.68
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,514 5.78 1,061 4.66
Commercial Paper 211 5.49 230 4.76
Short-Term Notes Payable 2 5.63 1 4.45
------- ----- ------- -----
Total Short-Term Debt 1,727 5.75 1,292 4.68
Long-Term Debt 1,241 6.13 993 5.59
Junior Subordinated Debentures 220 8.34 99 8.88
------- ----- ------- -----
Total Interest Bearing
Liabilities 9,311 5.56 7,750 4.85
Noninterest Bearing Deposits 1,143 602
Other Liabilities 225 330
Shareholders' Equity 925 822
------- -------
Total Liabilities and
Shareholders' Equity $11,604 $ 9,504
======= =======
Net Interest Spread 3.05% 3.26%
===== =====
Net Interest Margin 3.62% 3.74%
===== =====
17
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision and Allowance for Loan and Lease Losses and Credit Quality
- --------------------------------------------------------------------
Provident provides for credit loss reserves for both its on and
off-balance sheet lending portfolios. Discussion and analysis of the
reserves as well as the overall credit quality of the off-balance sheet
lending portfolio is provided with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report. The following
paragraphs provide information concerning its on-balance sheet credit
portfolio.
The provision for loan and lease losses was $9.7 million and $13.0
million for the first three months of 2000 and 1999, respectively. The
ratio of reserve for loan and lease losses to total loans and leases
was 1.44% and 1.26% at March 31, 2000 and 1999, respectively. Prior to
the acquisition of Fidelity Financial and the corresponding restatement
of prior period numbers, the March 31, 1999 ratio of reserve for loan
and lease losses to total loans and leases was 1.35%.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios:
Three Months Ended
March 31,
---------------------
(Dollars in Thousands) 2000 1999
- -------------------------------------------------- -------- --------
Balance at Beginning of Period $ 94,045 $ 78,867
Provision for Loan and Lease Losses 9,700 12,975
Loans and Leases Charged Off (9,448) (10,999)
Recoveries 2,772 2,330
-------- --------
Balance at End of Period $ 97,069 $ 83,173
======== ========
Reserve for Loan and Lease Losses as a Percent of:
Nonperforming Loans 174.66% 172.50%
Nonperforming Assets 154.00% 164.23%
Total Loans and Leases 1.44% 1.26%
18
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following tables present the distribution of net loan charge-offs
by loan type for the three-month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------------------- --------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Total Net Net Total Net
Charge- Loans Charge- Charge- Loans Charge-
(Dollars in Thousands) Offs (annualized) Offs Offs (annualized) Offs
- ----------------------- ------ ------------ ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Corporate Lending:
Commercial $4,262 0.42% 63.8% $4,444 0.54% 51.3%
Mortgage - - - - - -
Construction - - - - - -
Lease Financing 308 0.31 4.6 1,364 2.04 15.7
------ ----- ------ ------
Net Corporate Lending 4,570 0.32 68.4 5,808 0.51 67.0
Consumer Lending:
Residential 934 0.99 14.0 143 0.06 1.6
Installment 346 0.29 5.2 2,371 1.37 27.4
Lease Financing 826 0.68 12.4 347 0.25 4.0
------ ----- ------ ------
Net Consumer Lending 2,106 0.61 31.6 2,861 0.53 33.0
------ ----- ------ ------
Net Charge-Off's $6,676 0.38 100.0 $8,669 0.51 100.0
====== ===== ====== ======
</TABLE>
19
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nonperforming assets at March 31, 2000 were $63.0 million compared to
$61.1 million and $50.6 million as of December 31, 1999 and March 31,
1999, respectively. The composition of nonperforming assets over the
past five quarters is provided in the following table.
2000 1999
------- -------------------------------------
First Fourth Third Second First
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------- ------- ------- ------- ------- -------
Nonaccrual Loans:
Corporate Lending:
Commercial $46,282 $43,452 $49,250 $41,828 $33,210
Mortgage 1,654 3,003 1,527 566 548
Construction - 216 216 247 247
Lease Financing 2,016 1,309 2,926 6,724 7,162
------- ------- ------- ------- -------
Total Corporate Lending 49,952 47,980 53,919 49,365 41,167
Consumer Lending:
Residential - 48 26 - 117
Installment 5,624 7,640 7,358 7,315 5,354
Lease Financing - - - - -
------- ------- ------- ------- -------
Total Consumer Lending 5,624 7,688 7,384 7,315 5,471
------- ------- ------- ------- -------
Total Nonaccrual Loans 55,576 55,668 61,303 56,680 46,638
Renegotiated Loans - 1,541 1,557 1,565 1,577
------- ------- ------- ------- -------
Total Nonperforming Loans 55,576 57,209 62,860 58,245 48,215
Other Real Estate 7,457 3,870 4,092 2,921 2,430
------- ------- ------- ------- -------
Total Nonperforming Assets $63,033 $61,079 $66,952 $61,166 $50,645
======= ======= ======= ======= =======
Loans 90 Days Past Due
Still Accruing $13,908 $15,769 $18,484 $24,740 $21,678
Nonperforming Loans to
Total Loans and Leases 0.82% 0.82% 0.96% 0.89% 0.73%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 0.93% 0.87% 1.02% 0.94% 0.76%
Total Assets 0.54% 0.58% 0.68% 0.66% 0.54%
Nonaccrual loans decreased $.1 million during the first quarter of
2000. The decrease was composed of $14.7 million of additions to
nonaccrual loans, $7.3 million of payments on nonaccrual loans, $4.6
million of nonaccrual loans charged off and $2.9 million transferred to
other real estate. Renegotiated loans decreased $1.5 million during the
first quarter due to the improved performance of one loan. Other real
estate increased $3.6 million during the first quarter of 2000. The
increase was primarily the result of the foreclosure of one commercial
real estate property and several residential properties.
20
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Income
- ------------------
The following table details the components of noninterest income and
their change for the first three-month periods ended March 31, 2000 and
1999:
Three Months Ended
March 31,
------------------- Pctg
(Dollars in Thousands) 2000 1999 Change
- ------------------------------------------- -------- -------- ------
Service Charges on Deposit Accounts $ 8,493 $ 7,537 12.7%
Loan Servicing Fees 11,806 5,483 115.3
Other Service Charges and Fees 9,835 9,950 (1.2)
Operating Lease Income 10,086 8,898 13.4
Gain on Sale of Loans and Leases - Non-Cash 15,441 19,324 (20.1)
Gain on Sale of Loans and Leases - Cash 7,698 7,980 (3.5)
Warrant Gains 1,000 - -
Security Gains/(Losses) 24 (7) -
Other 4,555 5,894 (22.7)
-------- --------
Total Noninterest Income $ 68,938 $ 65,059 6.0
======== ========
Noninterest income for the first quarter of 2000 increased by $3.9
million, or 6%, from the prior year first quarter. Explanations for
significant changes in noninterest income by category follow:
o Service charges on deposit accounts increased $1.0 million primarily
from pricing and volume increases on corporate and personal deposit
accounts and higher ATM fees from the increased number of ATMs.
Since March 31, 1999, an additional 104 ATMs have been placed into
service bringing the total number of Provident ATMs to 453.
o Loan servicing fees increased $6.3 million primarily from increases
in the residential mortgage and auto leasing areas.
o Operating lease income increased $1.2 million due primarily to the
growth of Provident Commercial Group, a national lessor of large
equipment.
21
<PAGE>
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 decreased $4.2 million due
primarily to the decrease in gain from nonconforming residential
loan securitizations. The following table provides detail of the
gain on sales recognized during the first quarter of 2000 and 1999:
Three Months Ended
March 31,
------------------
(In Thousands) 2000 1999
------------------------------------------------ ------- -------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $15,441 $19,324
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations 7,380 6,914
Conforming Residential Whole Loan Sales 116 699
Nonconforming Residential Whole Loan Sales - 174
Other Loan Sales 202 193
------- -------
7,698 7,980
------- -------
$23,139 $27,304
======= =======
A detailed discussion of the various securitizations and sales of
loans and leases is provided under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report.
o 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 increased $1.0 million
during the first quarter of 2000.
o Other income decreased $1.3 million during the first quarter of 2000
as decreases in gains from the sale of equipment lease residual
assets and trading account income more than offset the increase in
income from investments in partnerships.
22
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Expense
- -------------------
The following table details the components of noninterest expense and
their change for the first quarters of 2000 and 1999:
Three Months Ended
March 31,
------------------- Pctg
(Dollars in Thousands) 2000 1999 Change
- ----------------------------------------- -------- -------- ------
Salaries, Wages and Benefits $ 40,370 $ 36,885 9.4%
Charges and Fees 4,747 3,884 22.2
Occupancy 5,008 4,605 8.8
Depreciation on Operating Lease Equipment 6,285 4,725 33.0
Equipment Expense 6,236 5,532 12.7
Professional Services 5,033 4,024 25.1
Other 16,043 16,504 (2.8)
-------- --------
Noninterest Expense Before Merger and
Restructuring Charges 83,722 76,159 9.9
Merger and Restructuring Charges 39,300 4,200 835.7
-------- --------
Total Noninterest Expense $123,022 $ 80,359 53.1
======== ========
Noninterest expense before merger and restructuring charges increased
$7.6 million, or 10%, from the prior year first quarter. Explanations
for significant changes in noninterest expense by category follow:
o Salaries, wages and benefits increased $3.5 million during the first
quarter of 2000 as compared to the first quarter of 1999. The
increase was due primarily to expansion in the Mortgage Banking and
Commercial Banking business lines.
o Charges and fees increased $.9 million due primarily to increased
goodwill amortization expense.
o The growth of Provident Commercial Group, a national lessor of large
equipment, was the primary reason for the increase in depreciation
on operating lease equipment.
o Equipment expense increased $.7 million due to higher depreciation
expense related to technology investments, branches and ATMs.
o Professional fees increased $1.0 million as a result of higher legal
and temporary employment services and miscellaneous professional
fees.
o Significant items within other noninterest expense for the first
quarter of 2000 include franchise tax expense of $2.7 million,
travel expense of $1.8 million and communication expense of $1.6
million.
23
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o Merger and restructuring charges during the first quarter of 2000
relate to the acquisition of Fidelity Financial of Ohio, Inc. which
was completed on February 4, 2000, and other post-merger business
line restructuring charges. The first quarter of 1999 merger and
restructuring charges relate to the merger of Fidelity Financial and
Glenway Financial Corporation which was completed March 19, 1999.
Additional details of these charges are provided in Note 3 of the
"Notes to Consolidated Financial Statements" section of this report.
FINANCIAL CONDITION
- -------------------
Short-Term Investments and Investment Securities
- ------------------------------------------------
Federal funds sold and reverse repurchase agreements decreased $84.0
million since December 31, 1999. 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.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $1.6 billion during the first quarter
of 2000. Mortgage-backed securities accounted for approximately 80% of
the increase. Funds obtained from deposit growth, increased borrowings
and proceeds from the sale of loans were deployed into investment
securities with higher credit quality, increased liquidity and an
improved interest rate risk profile. Cash flows from the newly
purchased securities will be systematically redeployed to fund ongoing
loan growth.
Loans and Leases
- ----------------
As of March 31, 2000 total loans and leases were $6.7 billion compared
to $7.0 billion at December 31, 1999. Provident has an additional $6.4
billion and $5.9 billion of off-balance sheet loans and leases as of
March 31, 2000 and December 31, 1999, respectively. For more
information concerning these off-balance sheet loans and leases, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Securitization Activity".
24
<PAGE>
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 March 31, 2000:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -------------------------------- -------- --- ----------
Manufacturing $ 874.2 21 $13.6
Service Industries 813.8 19 24.2
Real Estate Operators/Investment 397.5 10 0.3
Retail Trade 378.1 9 1.2
Finance & Insurance 349.4 8 0.6
Transportation/Utilities 308.6 7 0.7
Wholesale Trade 282.1 7 2.0
Automobile Dealers 178.6 4 -
Construction 149.6 4 0.8
Other 448.9 11 2.9
-------- --- -----
Total $4,180.8 100 $46.3
======== === =====
The composition of the commercial mortgage and construction loan
categories by property type at March 31, 2000 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- --------------------------- ------ --- ----------
Residential Development $306.3 26 $0.6
Office/Warehouse 223.0 19 -
Shopping/Retail 182.2 16 0.3
Apartments 137.4 12 -
Land 58.1 5 0.2
Hotels/Motels 42.8 4 -
Industrial Plants 33.7 3 -
Auto Sales and Service 26.5 2 -
Health Facilities 13.6 1 -
Churches 12.9 - -
Other Commercial Properties 138.7 12 0.6
-------- --- ----
Total $1,175.2 100 $1.7
======== === ====
The following table shows the composition of the installment loan
category by loan type at March 31, 2000:
(Dollars in Millions) Amount %
- ----------------------------- ------ ---
Indirect Installment $242.3 45
Home Equity 148.4 27
Direct Installment 73.3 13
Credit Card 63.4 12
Other Consumer Loans 16.9 3
------ ---
Total $544.3 100
====== ===
25
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Receivables from Securitization Trusts
- --------------------------------------
Since March 1998, Provident has provided for credit enhancements to its
securitizations in the form of cash reserve accounts that are funded at
closing. Generally, the cash reserve accounts, referred to as
"Receivables from Securitization Trusts" on the Consolidated Balance
Sheets, are deposited at Provident. Credit losses, with the exception
of credit card loans, are absorbed directly into these receivables from
securitization trusts. The remaining funds not used to cover such
losses are returned to Provident over the term of the securitization.
Receivables from securitization trusts of credit card loans absorb
losses only in the event that the interest spreads are insufficient to
cover such credit losses. Provident estimates the amount of credit
losses based upon loan credit grades, collateral, market conditions and
other pertinent factors. Assumptions used to calculate the estimated
credit losses are provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset Securitization
Activity". Detail of the March 31, 2000 receivables from securitization
trusts, net of loss estimates follows:
Receivables Receivables
from Net of
Securitization Loss Loss
(In Thousands) Trusts Estimates(1) Estimates
- -------------------------------- -------------- ------------ ---------
Nonconforming Residential Loans $ 423,890 $ (92,251) $ 331,639
Equipment Leases 54,900 (17,861) 37,039
Credit Card Loans 28,732 - 28,732
Prime Home Equity Loans 20,982 (1,173) 19,809
--------- --------- ---------
$ 528,504 $(111,285) $ 417,219
========= ========= =========
(1) See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset Securitization Activities" for
additional estimates established and an overall analysis of the
credit quality of off-balance sheet loans and leases.
Deposits
- --------
Noninterest bearing deposits increased $46.3 million during the first
quarter of 2000. As noted above, the cash reserve accounts, used as
credit enhancements for its securitizations, are generally deposited
into noninterest bearing checking accounts at Provident. As of March
31, 2000 and December 31, 1999, these cash reserve accounts totaled
$507.8 million and $426.5 million, respectively.
Average core deposits for the first quarter of 2000 grew at an
annualized rate of 12% since the fourth quarter of 1999, with
significant contribution coming from Provident Bank of Florida.
26
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Borrowed Funds
- --------------
Short-term debt increased $.4 billion, or 40%, to $1.4 billion during
the first three months of 2000. The increase was due to an increase in
federal funds purchased and repurchase agreements.
Long-term debt increased $.5 billion, or 48%, to $1.4 billion during
the first quarter of 2000. The increase is primarily the result of
increases in Federal Home Loan Bank advances.
Capital Resources and Adequacy
- ------------------------------
Total shareholders' equity at March 31, 2000 was $927.7 million
compared to $926.2 million at December 31, 1999. The change in the
equity balance primarily relates to net income exceeding dividends by
$4.9 million, funds of $2.0 million received from the exercise of stock
options and a decrease in the market value of investment securities
classified as available for sale of $7.6 million (net of deferred
income taxes).
The quarterly common dividend rate was increased from $.22 per share to
$.24 per share beginning with the first quarter of 2000.
The following table of ratios is important for the analysis of capital
adequacy:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Average Shareholders' Equity to Average Assets 7.97% 8.28%
Dividend Payout to Net Earnings 71.05 27.10
Dividend Payout to Operating Earnings 27.22 26.62
Tier 1 Leverage Ratio 9.78 10.87
Tier 1 Capital to Risk-Weighted Assets 9.29 9.97
Total Risk-Based Capital To Risk-Weighted Assets 10.83 11.98
</TABLE>
Capital expenditures planned by Provident for building improvements and
furniture and equipment in 2000 are currently estimated to be
approximately $33 million. Included in this amount are projected
capital expenditures for the purchase of data processing hardware and
software, facility renovations, branch additions, renovations and
enhancements, and ATMs. Through March 31, 2000, approximately $6
million of these expenditures had been made.
Stock Options
- -------------
During the first quarter of 2000, Provident granted options for the
purchase of 750,000 shares of Provident Common Stock to all Provident
associates. This grant was in addition to Provident's regular stock
option grants to officers and directors. Total options granted during
the first three months of 2000 were for the purchase of 1.7 million
shares. The options have exercise prices ranging from $26.68 to $28.09.
27
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASSET SECURITIZATION ACTIVITY
- -----------------------------
Provident securitizes and sells many of the loans and leases it
originates. Loan sales through securitizations provide Provident
immediate cash flows to fund additional loan originations, provide
future cash flows generated by the payment differentials between
interest paid by the borrowers and interest remitted to the investors,
and enhance current operating profits from gain on sale recognition.
The following discusses the impact which asset securitization activity
had on the Consolidated Statements of Income, Consolidated Balance
Sheets and the credit quality of the securitized loans and leases.
Impact of Securitizations on the Consolidated Statements of Income
- ------------------------------------------------------------------
Based on the asset type, terms and structure of the securitization
transaction, a gain may be recognized immediately upon the sale of the
assets and/or income is recognized throughout the life of the
securitization. The following table provides a summary of principal
sold and gains recognized for the various types of securitizations sold
during the periods indicated:
Three Months Ended March 31,
-----------------------------------------
2000 1999
------------------- -------------------
(In Thousands) Principal Gain Principal Gain
- --------------------------- -------- -------- -------- --------
Non-Cash Gains:
Nonconforming Residential $515,000 $ 15,441 $515,000 $ 19,324
Cash Gains:
Equipment Leases 167,780 7,380 115,000 6,914
Non-Recognition of Gains:
Automobile Leases 98,244 - - -
-------- -------- -------- --------
Total Securitizations $781,024 $ 22,821 $630,000 $ 26,238
======== ======== ======== ========
The securitization and sale of nonconforming residential, prime home
equity and credit card loans have resulted in the recognition of
non-cash gains. Under the structure of these securitizations, Provident
receives cash equal to the amount of loans sold. The methodology used
by Provident to calculate gains on the sale of these securities follow:
1. An amortization schedule is created for the loan portfolio based on
each loan's maturity, rate and balance.
2. The amortization schedule is adjusted using a prepayment speed
curve. The prepayment curve estimates the actual timing of principal
payments by the borrowers.
3. The net spread is calculated on the loan portfolio by taking the
cash inflows (loan portfolio yield and prepayment penalties) and
reducing it by the cash outflows (bond yield paid to investors,
servicing fees and other fees). Prepayments reduce the average life
of the portfolio, which in turn reduces the net spread collected by
Provident.
28
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
4. The present value of the net spread is calculated by applying a
discount rate indicative of the risk associated with the
transaction.
o In pre-1998 credit enhancement structures, the net spread is used
to create excess collateral as credit support. In these
transactions, cash flow to Provident is delayed until the target
over-collateralization is met and cash is released. This delay in
cash receipts reduces the present value.
o Beginning with the March 1998 securitization, Provident has
provided credit enhancement in the form of an upfront cash
reserve account. Therefore Provident does not experience delays
in cash receipts. The net spread is not subordinated to the
losses. Losses are absorbed directly in the cash reserve account
instead of reducing the net spread. In addition the cash reserve
account is placed in a noninterest bearing checking account at
Provident, whereby no cash outlay is experienced in the funding
of the account.
5. The gain is calculated by taking the present value of the net spread
on a relative fair value basis and reducing it by the present value
of the expected credit losses, underwriting expenses, accounting and
legal fees and deferred expenses paid to originate the loans.
Cash gains have been recognized from the securitization and sale of
equipment leases. Under the structure of these securitizations,
Provident sells the lease payments under the lease contract but retains
ownership of the underlying equipment. The cash received from these
sales exceeds the present value of the lease payments and generates the
cash gain.
The securitization and sale of automobile leases do not result in the
recognition of gains. Under the structure of the sale of the automobile
leases, Provident sells the ownership of the automobiles and leases the
vehicles back from the investor in a sale-leaseback arrangement. Lease
payments paid by Provident to the investor may be more or less than
that received by Provident from the consumer. The difference in the
lease payments, net of credit losses and servicing fees, is recognized
as net operating lease income or expense over the life of the
securitization. Sales of mortgage warehouse lines do not result in
up-front gains due to the short-term nature of the underlying assets
sold.
29
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Underlying assumptions used in the determination of future cash flows
on the loan and lease portfolios follow:
<TABLE>
<CAPTION>
Year 2000
Securitizations Weighted Average of All Securitizations
--------------- ----------------------------------------------------------
Nonconforming Nonconforming Prime Credit Equipment Auto
Residential Residential Home Equity Cards Leasing Leasing
-------------- ------------- ----------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Assumptions Used:
Prepayment Speed(1):
Initial Rate 13.58% 12.20% 10.00% n/a n/a n/a
Peak Rate 35.00% 32.62% 30.00% n/a n/a n/a
Calculated Weighted
Average Life of the
Loan Portfolios 2.4 Years 2.7 Years 2.1 Years n/a n/a n/a
Estimated Credit Losses
Losses(2):
Annual Basis 1.12% 1.08% 0.19% 5.40% 1.00% 0.50%
Percentage of
Original Balance 2.70% 2.94% 0.41% n/a 1.97% n/a
Discount Rate 12.00% 11.86% 10.27% 12.00% 9.41% n/a
<FN>
(1) Provident applies an annual prepayment model that adjusts the
monthly speeds to account for declining loan balances.
Nonconforming residential loans typically experience higher
prepayment speeds compared to conforming loans. For nonconforming
residential loans, Provident uses a prepayment curve that applies a
10% prepayment rate to new loans (higher for seasoned loans) and
ramps up to 35% after 12 months. Provident continues to use the 35%
prepayment rate for the remainder of the portfolio life.
(2) Provident applies a cumulative static pool approach to credit
losses. Higher prepayment speeds and shorter average lives do not
alter the cumulative credit loss assumption. As a result, higher
prepayment speeds increase the annualized losses.
</FN>
</TABLE>
The recognition of gains on the sale of loans requires management to
make assumptions regarding prepayment speeds and credit losses for the
securitized loan and lease pools. In general, Provident's securitized
pools have performed better than the initial estimates. Therefore
management believes these estimates to be conservative. The performance
of the pools are extensively monitored, and adjustments to these
assumptions will be made if necessary.
No assurance can be given that the level of loan originations and
acquisitions will continue to permit the recognition of such gains on
sales of loans in the future. The percentage of gains may also be
affected by changing conditions in the asset-backed markets upon which
Provident has no control.
Provident retains the servicing of the loans and leases it securitizes
and sells. This servicing activity was primarily responsible for the
generation of $11.8 million and $5.5 million in loan servicing fees
during the first three months of 2000 and 1999, respectively.
Nonconforming residential loans, originated or acquired by the Mortgage
Banking business line, have been securitized and sold on a quarterly
basis since 1996. Major characteristics of these nonconforming loans
include: 54% with an "A" credit grade and 31% with a "B" credit grade;
68% with full documentation; 68% have prepayment penalties; 95% are
secured by first mortgages; 92% are owner occupied; and, on average,
have a 78% loan-to-value ratio.
30
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A summary of nonconforming residential loans originated by loan type as
of and for the three-month period ended March 31, 2000 and 1999 is
provided below:
Three Months Ended March 31,
----------------------------
(In Thousands) 2000 1999
- ------------------------------------- ---------- ----------
Originations for the Period Ending:
Fixed Rate, Fully Amortizing $ 226,895 $ 171,650
Fixed Rate, 15-Year Balloon Payments 115,408 105,459
---------- ----------
Total Fixed Rate Loans 342,303 277,109
Adjustable, Six-Month LIBOR 1,449 5,716
Adjustable Rate, 3/27 Loans 154,930 183,827
Adjustable Rate, 2/28 Loans 12,436 27,348
Adjustable Rate, 5/25 Loans 223 -
---------- ----------
Total Adjustable Rate Loans 169,038 216,891
---------- ----------
Total Originations $ 511,341 $ 494,000
========== ==========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,382,500 $ 600,867
Fixed Rate, 15-Year Balloon Payments 808,502 372,195
---------- ----------
Total Fixed Rate Loans 2,191,002 973,062
Adjustable, Six-Month LIBOR 58,955 103,220
Adjustable Rate, 3/27 Loans 1,396,362 888,218
Adjustable Rate, 2/28 Loans 176,777 175,102
Adjustable Rate, 5/25 Loans 7,086 8,119
---------- ----------
Total Adjustable Rate Loans 1,639,180 1,174,659
---------- ----------
Total Outstanding $3,830,182 $2,147,721
========== ==========
31
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table estimates the differences in the recognition of net
income for the Mortgage Banking business line for the first three
months of 2000 and 1999 based on having securitized its loan portfolio
as reported (including gain on sale of loans), and as if the loans had
been held in the portfolio and interest recognized as earned (excluding
gain on sale of loans). The differences, primarily in the areas of net
interest income, gain on sale of loans, servicing fee income and
provision expense, are a matter of timing and not total income to be
recorded over the life of the loans. Net income on an as earned basis
continues to rise from earlier periods due to the growth in the balance
of securitized loans and the resulting net interest income these loans
would have provided.
Three Months Ended March 31,
--------------------------------------------
2000 1999
-------------------- --------------------
As As As As
(In Thousands) Reported Earned Reported Earned
- --------------------------- -------- -------- -------- --------
Net Interest Income $ 7,832 $ 32,619 $ 3,961 $ 20,965
Loan Loss Provision (1,113) (7,234) (1,850) (6,576)
-------- -------- -------- --------
Net Interest Income After
Loan Loss Provision 6,719 25,385 2,111 14,389
Noninterest Income 23,420 5,298 25,835 4,918
Noninterest Expense (15,434) (15,434) (13,951) (13,951)
-------- -------- -------- --------
Income Before Taxes 14,705 15,249 13,995 5,356
Income Taxes (5,147) (5,337) (4,898) (1,875)
-------- -------- -------- --------
Net Income $ 9,558 $ 9,912 $ 9,097 $ 3,481
======== ======== ======== ========
The following table provides the operating cash flows for the Mortgage
Banking business line for first three months of 2000 and 1999:
Three Months Ended March 31,
----------------------------
(In Thousands) 2000 1999
- ------------------------------------------- -------- --------
Cash Inflows:
Net Interest Income $ 38,328 $ 26,261
Loan Servicing Fees 4,180 1,925
-------- --------
Total Cash Inflows 42,508 28,186
Cash Outflows:
Loan Acquisition and Securitization Costs 17,253 18,889
Cash Operating Expenses 14,730 13,247
Credit Losses 5,452 4,870
Servicer Advances 3,799 2,186
Taxes (3,324) 8,799
-------- --------
Total Cash Outflows 37,910 47,991
-------- --------
Net Cash Flows $ 4,598 ($19,805)
======== ========
32
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impact of Securitizations on the Consolidated Balance Sheets
- ------------------------------------------------------------
The impact from the securitization and sale of various loans and leases
can be seen in several areas of Provident's balance sheet. The most
significant has been the removal of loans and leases that Provident
continues to service. The following table provides a summary of these
off-balance sheet managed assets:
March 31,
-----------------------
(In Thousands) 2000 1999
- ------------------------- ---------- ----------
Nonconforming Residential $3,736,182 $2,079,653
Auto Leases 1,417,332 616,902
Equipment Leases 434,715 298,991
Prime Home Equity 384,769 286,717
Credit Card 230,000 -
Warehouse 186,200 365,919
---------- ----------
$6,389,198 $3,648,182
========== ==========
In connection with the recognition of non-cash gains, the present value
of future cash flows, referred to as retained interest in securitized
assets ("RISA"), are recorded as assets within the investment
securities line item of the consolidated balance sheets. Components of
the RISA as of March 31, 2000 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- ----------------------------------------- ------------- -----------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 523,951 $ 29,335
Less:
Estimated Credit Loss (1) (16,184) (338)
Servicing and Insurance Expense (57,989) (3,957)
Discount to Present Value (66,258) (2,652)
--------- ---------
Carrying Value of Retained Interest in
Securitized Assets $ 383,520 $ 22,388
========= =========
(1) Only the pre-1998 securitizations provide for estimated credit
losses within the cash flows of the RISA. Information on all
estimated credit losses is presented in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Credit Quality of Securitized Assets" immediately
following this table.
33
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Credit Quality of Securitized Assets
- ------------------------------------
The following table presents a summary of various indicators of the
credit quality of off-balance sheet loans and leases as of and for the
three months ended March 31, 2000:
<TABLE>
<CAPTION>
(Dollars in Nonconforming Prime Home Equipment Auto Credit Warehouse
Thousands) Residential(1) Equity(1) Leases(1) Leases(2) Cards(2) (2)
- ------------------------ -------------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the Three Months
Ended March 31, 2000:
Average Securitized
Assets $3,454,944 $391,422 $335,287 $1,372,422 $230,000 $211,233
Net Charge-Offs 4,519 638 1,680 1,468 4,174 -
Net Charge-Offs
to Average Securitized
Assets (Annualized) 0.52% 0.65% 2.00% 0.43% 7.26% 0.00%
As of March 31, 2000:
Securitized Assets $3,736,182 $384,769 $434,715 $1,417,332 $230,000 $186,200
Estimated Credit
Losses Provided For 108,435 1,511 17,861 n/a n/a n/a
Estimated Credit
Losses to Period-End
Securitized Assets 2.90% 0.39% 4.11% n/a n/a n/a
Estimated Credit
Loss Rates:
Annual Basis 1.08% 0.19% 1.00% 0.50% 5.40% 0.10%
Percentage of
Original Balance 2.94% 0.41% 1.97% n/a n/a n/a
Delinquency Rates:
30 to 89 Days 2.14% 0.47% 1.13% 0.16% 2.19% 7.06%
90 or More 5.75% 0.21% 0.77% 0.02% 1.27% 6.81%
<FN>
(1) Estimates for credit losses on nonconforming residential loans,
prime home equity loans and equipment leases are determined at the
time of sale. The estimated credit loss balance for pre-1998
securitizations are contained within the RISA. Since the beginning
of 1998, Provident has provided for credit enhancements to its
securitizations in the form of cash reserve accounts that are
funded at closing. Generally, the cash reserve accounts, referred
to as "Receivables from Securitization Trusts" on the Consolidated
Balance Sheets, are deposited at Provident. Credit losses are
absorbed directly against these receivables from securitization
trusts. The remaining funds not used to cover such losses are
returned to Provident over the term of the securitization.
Provident estimates the amount of credit losses based upon loan
credit grades, collateral, market conditions and other pertinent
factors. Detail of the receivables from securitization trusts is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Receivables from
Securitization Trusts and Other Assets".
(2) Estimates for credit losses on revolving structures such as auto
leases, credit cards and warehouse loans are provided for
throughout the life of the securitization. The loss estimates are
accrued monthly increasing the estimate, while the charge-offs of
uncollectible balances reduce the estimate.
</FN>
</TABLE>
34
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
- ---------------------------------------------
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,
2000, these off-balance sheet instruments consisted of standby letters
of credit of $121 million, commitments to extend credit of $2.1 billion
and interest rate swaps with a notional amount of $5.2 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 and federal funds sold. Additional sources of
liquidity include the sale of investment securities and the sale of
corporate 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 $1.2
billion available for borrowing under a $1.5 billion bank notes
program. Approximately $330 million of long-term debt is due to be
repaid during the remainder of 2000.
The major source of liquidity for Provident on a parent-only basis 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, 2000 by its banking
subsidiaries was approximately $179.8 million. The Parent has not
received any dividends from its subsidiaries during the first three
months of 2000.
At March 31, 2000 the Parent had not drawn any of its $200 million in
general purpose lines of credit with unaffiliated banks. Additionally
the Parent had approximately $122.4 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
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.
35
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to the natural balance sheet hedges, ALCO utilizes
off-balance sheet instruments to manage interest rate risk on and off
its balance sheet. 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 of Provident, net interest income would change by the
following over the next 12-month period: increase 0.58% for a 100 basis
point decrease; increase 1.13% for a 200 basis point decrease; decrease
0.58% for a 100 basis point increase; and decrease 1.19% 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, which are
in compliance with policy, are presented to the Board of Directors.
36
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
On January 25, 2000 Registrant issued 10,514 common shares to Ken
Hanauer, a former executive officer of OHSL Financial Corp. The
issuance, made in connection with the exercise of stock options having
an exercise price of $9.16 per common share, was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2).
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Registrant's annual meeting of shareholders was held on April 25, 2000.
Proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934 and the following matters were voted upon and
approved by the shareholders as indicated below.
Votes Votes
For Withheld
---------- --------
Election of the following directors:
(a) Jack M. Cook 43,807,412 157,699
(b) Thomas D. Grote, Jr. 43,850,890 114,221
(c) Robert L. Hoverson 43,806,927 158,184
(d) Philip R. Myers 43,837,705 127,406
(e) Joseph A. Pedoto 43,853,783 111,328
(f) Sidney A. Peerless 43,804,349 160,762
(g) Joseph A. Steger 43,804,098 161,013
Votes Votes Broker
For Against Abstained Non-Votes
--------- ---------- --------- ---------
Preparation of Corporate
Strategic Plan Report 1,928,418 37,062,345 375,437 4,598,911
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 27.1 - Financial Data Schedule for March 31, 2000
Exhibit 27.2 - Restated Financial Data Schedule for
March 31, 1999
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
37
<PAGE>
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
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 12, 2000 \s\ Christopher J. Carey
-------------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
38
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Provident Financial Group, Inc.'s 10-Q for March 31, 2000 and is
qualified in its entirety be reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 228,664
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,672,997
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,749,076
<ALLOWANCE> 97,069
<TOTAL-ASSETS> 11,746,044
<DEPOSITS> 7,577,771
<SHORT-TERM> 1,373,181
<LIABILITIES-OTHER> 241,478
<LONG-TERM> 1,625,950
0
7,000
<COMMON> 14,442
<OTHER-SE> 906,222
<TOTAL-LIABILITIES-AND-EQUITY> 11,746,044
<INTEREST-LOAN> 161,811
<INTEREST-INVEST> 59,784
<INTEREST-OTHER> 334
<INTEREST-TOTAL> 221,929
<INTEREST-DEPOSIT> 80,571
<INTEREST-EXPENSE> 128,727
<INTEREST-INCOME-NET> 93,202
<LOAN-LOSSES> 9,700
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 123,022
<INCOME-PRETAX> 29,418
<INCOME-PRE-EXTRAORDINARY> 16,772
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,772
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 3.62
<LOANS-NON> 55,576
<LOANS-PAST> 13,908
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 55,344
<ALLOWANCE-OPEN> 94,045
<CHARGE-OFFS> 9,448
<RECOVERIES> 2,772
<ALLOWANCE-CLOSE> 97,069
<ALLOWANCE-DOMESTIC> 97,069
<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 March 31, 2000 and is
qualified in its entirety be reference to such financial statements.
The information for March 31, 1999 is being restated due to an
acquisition accounted for as a pooling-of-interest during the first
quarter of 2000. Accordingly, prior period balances have been restated.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 220,618
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 89,426
<TRADING-ASSETS> 29,473
<INVESTMENTS-HELD-FOR-SALE> 1,802,977
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,623,417
<ALLOWANCE> 83,173
<TOTAL-ASSETS> 9,440,754
<DEPOSITS> 6,238,445
<SHORT-TERM> 1,122,892
<LIABILITIES-OTHER> 280,317
<LONG-TERM> 990,320
0
7,000
<COMMON> 14,168
<OTHER-SE> 787,612
<TOTAL-LIABILITIES-AND-EQUITY> 9,440,754
<INTEREST-LOAN> 144,506
<INTEREST-INVEST> 25,847
<INTEREST-OTHER> 1,551
<INTEREST-TOTAL> 171,904
<INTEREST-DEPOSIT> 61,975
<INTEREST-EXPENSE> 92,726
<INTEREST-INCOME-NET> 79,178
<LOAN-LOSSES> 12,975
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 80,359
<INCOME-PRETAX> 50,903
<INCOME-PRE-EXTRAORDINARY> 32,535
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,535
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.67
<YIELD-ACTUAL> 3.74
<LOANS-NON> 46,638
<LOANS-PAST> 21,678
<LOANS-TROUBLED> 1,577
<LOANS-PROBLEM> 66,996
<ALLOWANCE-OPEN> 78,867
<CHARGE-OFFS> 10,999
<RECOVERIES> 2,330
<ALLOWANCE-CLOSE> 83,173
<ALLOWANCE-DOMESTIC> 83,173
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
