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
September 30, 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 October 31, 2000 is
48,787,491.
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
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 . . . . . 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . 35
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 36
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
(Dollars in Thousands) (Unaudited)
-------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 301,716 $ 292,134
Federal Funds Sold and Reverse Repurchase Agreements 79,000 84,009
Trading Account Securities 74,737 -
Investment Securities Available for Sale
(amortized cost - $3,195,936 and $2,187,802) 3,137,961 2,111,037
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,652,836 3,990,923
Mortgage 661,773 576,570
Construction 765,759 559,797
Lease Financing 491,770 391,529
Consumer Lending:
Residential 418,893 653,679
Installment 488,947 476,508
Lease Financing 880,186 361,907
------------ ------------
Total Loans and Leases 8,360,164 7,010,913
Reserve for Loan and Lease Losses (120,277) (94,045)
------------ ------------
Net Loans and Leases 8,239,887 6,916,868
Leased Equipment 213,143 171,258
Premises and Equipment 102,110 100,099
Receivables from Securitization Trusts 426,015 355,222
Other Assets 547,548 507,299
------------ ------------
$ 13,122,117 $ 10,537,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,313,205 $ 1,185,245
Interest Bearing 6,874,550 6,044,743
------------ ------------
Total Deposits 8,187,755 7,229,988
Short-Term Debt 1,988,617 977,835
Long-Term Debt 1,464,672 950,821
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 220,214 220,069
Accrued Interest and Other Liabilities 280,208 232,991
------------ ------------
Total Liabilities 12,141,466 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, 48,758,291 and 48,618,330 Issued 14,452 14,410
Capital Surplus 313,588 308,237
Retained Earnings 683,295 646,472
Accumulated Other Comprehensive Loss (37,684) (49,897)
------------ ------------
Total Shareholders' Equity 980,651 926,222
------------ ------------
$ 13,122,117 $ 10,537,926
============ ============
See notes to consolidated financial statements.
3
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(In Thousands, Except Per Share Data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $ 185,088 $ 156,580 $ 520,470 $ 449,488
Interest on Investment Securities 53,199 27,613 172,869 80,450
Other Interest Income 167 694 660 3,917
--------- --------- --------- ---------
Total Interest Income 238,454 184,887 693,999 533,855
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 20,958 14,892 56,416 42,977
Time Deposits 79,304 53,262 213,643 149,762
--------- --------- --------- ---------
Total Interest on Deposits 100,262 68,154 270,059 192,739
Interest on Short-Term Debt 15,677 14,826 63,926 44,952
Interest on Long-Term Debt 22,469 12,561 63,305 38,314
Interest on Junior Subordinated Debentures 4,779 4,524 13,937 8,916
--------- --------- --------- ---------
Total Interest Expense 143,187 100,065 411,227 284,921
--------- --------- --------- ---------
Net Interest Income 95,267 84,822 282,772 248,934
Provision for Loan and Lease Losses 42,550 16,485 61,950 37,610
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 52,717 68,337 220,822 211,324
Noninterest Income:
Service Charges on Deposit Accounts 8,997 8,496 26,235 24,187
Loan Servicing Fees 13,677 8,105 38,586 19,593
Other Service Charges and Fees 12,349 9,279 31,767 30,697
Operating Lease Income 10,991 10,328 31,490 29,560
Gain on Sales of Loans and Leases - Non-Cash - 21,516 34,447 58,507
Gain on Sales of Loans and Leases - Cash 356 6,583 10,324 15,414
Warrant Gains 2,700 7,978 7,500 9,147
Security Gains/(Losses) 72 (107) 96 (1)
Other 3,310 4,036 11,228 13,514
--------- --------- --------- ---------
Total Noninterest Income 52,452 76,214 191,673 200,618
Noninterest Expense:
Salaries, Wages and Benefits 41,518 40,006 122,805 113,066
Charges and Fees 6,084 3,663 16,634 11,117
Occupancy 5,066 4,779 15,045 14,070
Depreciation on Operating Lease Equipment 6,644 6,183 19,900 16,486
Equipment Expense 7,079 6,169 19,418 17,870
Professional Services 5,521 6,046 15,955 15,252
Merger and Restructuring Charges - - 39,300 4,200
Other 16,239 17,132 47,021 50,409
--------- --------- --------- ---------
Total Noninterest Expense 88,151 83,978 296,078 242,470
--------- --------- --------- ---------
Income Before Income Taxes 17,018 60,573 116,417 169,472
Applicable Income Taxes 6,065 21,337 43,803 60,137
--------- --------- --------- ---------
Net Income $ 10,953 $ 39,236 $ 72,614 $ 109,335
========= ========= ========= =========
Per Common Share:
Basic Earnings Per Share $ 0.22 $ 0.83 $ 1.48 $ 2.31
Diluted Earnings Per Share 0.22 0.80 1.44 2.24
Cash Dividends Declared 0.24 0.22 0.72 0.66
See notes to consolidated financial statements.
4
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Preferred Common Capital Retained Treasury Comprehensive
(In Thousands) Stock Stock Surplus Earnings Stock Loss Total
--------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $ 7,000 $14,150 $ 276,796 $ 534,657 $(21,425) $ (9,024) $ 802,154
Net Income 109,335 109,335
Change in Unrealized Loss
on Marketable Securities (35,646) (35,646)
---------
Comprehensive Income 73,689
Dividends Paid on:
Preferred Stock (653) (653)
Common Stock (30,491) (30,491)
Exercise of Stock Options and
Accompanying Tax Benefits 48 3,095 3,143
Purchase of Treasury Stock (8,645) (8,645)
Federal Income Tax
Filing Adjustment 482 482
Other 612 612
------- ------- --------- --------- -------- --------- ---------
Balance at September 30, 1999 $ 7,000 $14,198 $ 280,985 $ 612,848 $(30,070) $ (44,670) $ 840,291
======= ======= ========= ========= ======== ========= =========
Balance at January 1, 2000 $ 7,000 $14,410 $ 308,237 $ 646,472 $ - $ (49,897) $ 926,222
Net Income 72,614 72,614
Change in Unrealized Loss
on Marketable Securities 12,213 12,213
---------
Comprehensive Income 84,827
Dividends Paid on:
Preferred Stock (712) (712)
Common Stock (35,079) (35,079)
Exercise of Stock Options and
Accompanying Tax Benefits 42 2,557 2,599
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
Federal Income Tax
Filing Adjustment 567 567
------- ------- --------- --------- -------- --------- ---------
Balance at September 30, 2000 $ 7,000 $14,452 $ 313,588 $ 683,295 $ - $ (37,684) $ 980,651
======= ======= ========= ========= ======== ========= =========
See notes to consolidated financial statements.
5
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
(In Thousands) 2000 1999
----------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 72,614 $ 109,335
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 61,950 37,610
Amortization of Goodwill and Other Intangible Assets 3,425 1,737
Other Amortization and Accretion (25,489) (13,224)
Depreciation of Leased Equipment and
Premises and Equipment 35,869 32,110
Tax Benefit Received from Exercise of Stock Options 291 1,238
Realized Investment Security (Gains)/Losses (96) 1
Proceeds from Sale of Loans Held for Sale 1,049,470 1,768,599
Origination of Loans Held for Sale (986,636) (1,783,061)
Realized Gains on Residential Loans Held for Sale (30,607) (52,609)
(Increase) Decrease in Net Trading Account Securities (21) 15,078
Increase in Interest Receivable (15,661) (19,783)
(Increase) Decrease in Other Assets 11,355 (12,632)
Increase in Interest Payable 17,563 2,504
Increase (Decrease) in Other Liabilities 196 (7,262)
----------- -----------
Net Cash Provided By Operating Activities 194,223 79,641
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,783,642 290,371
Proceeds from Maturities and Prepayments 310,036 190,764
Purchases (2,428,417) (569,185)
Increase in Receivables Due From Securitization Trusts (99,729) (226,791)
Net Increase in Loans and Leases (1,828,332) (430,237)
Net Increase in Operating Lease Equipment (61,785) (39,455)
Net Increase in Premises and Equipment (16,280) (20,333)
Acquisition (129,190) -
----------- -----------
Net Cash Used In Investing Activities (2,470,055) (804,866)
----------- -----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 83,389 214,410
Net Increase in Other Deposits 804,378 755,891
Net Increase (Decrease) in Short-Term Debt 913,487 (174,015)
Principal Payments on Long-Term Debt (106,766) (171,316)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 616,606 173,168
Cash Dividends Paid (35,791) (31,144)
Purchase of Treasury Stock - (8,645)
Proceeds from Exercise of Stock Options 2,308 1,905
Net Increase in Other Equity Items 2,794 1,094
----------- -----------
Net Cash Provided By Financing Activities 2,280,405 761,348
----------- -----------
Increase in Cash and Cash Equivalents 4,573 36,123
Cash and Cash Equivalents at Beginning of Period 376,143 354,970
----------- -----------
Cash and Cash Equivalents at End of Period $ 380,716 $ 391,093
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 393,664 $ 282,698
Income Taxes 58,433 45,683
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 11,167 3,922
Residual Interest in Securitized Assets Created from
the Sale of Loans 106,098 155,240
See notes to consolidated financial statements.
6
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 September 29, 2000, Provident purchased Bank One Corporation's
Housing and Health Care Capital Business, including the operations and
substantially all of the assets of Banc One Capital Funding
Corporation, a wholly-owned subsidiary of Bank One. Based in Columbus,
Ohio, Bank One's Housing and Health Care Capital Business is an active
underwriter of tax-exempt multi-family housing bonds, syndicator of
equity for Section 42 affordable housing projects and Fannie Mae DUS
and FHA project mortgage lender; it also remarkets in excess of $1.4
billion in floating-rate bonds, services in excess of $2.4 billion in
mortgage debt and manages assets of over $350 million in housing and
health care-related debt and equity investments. The business will
operate under the name Red Capital Group as a division of Provident
Bank.
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
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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(In Thousands, Except Per Share Data) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
Basic:
Net Income $ 10,953 $ 39,236 $ 72,614 $ 109,335
Less Preferred Stock Dividends (237) (217) (712) (652)
--------- --------- --------- ---------
Income Available to Common Shareholders 10,716 39,019 71,902 108,683
Weighted-Average Common Shares Outstanding 48,753 47,071 48,728 47,056
--------- --------- --------- ---------
Basic Earnings Per Share $ 0.22 $ 0.83 $ 1.48 $ 2.31
========= ========= ========= =========
Diluted:
Net Income $ 10,953 $ 39,236 $ 72,614 $ 109,335
Weighted-Average Common Shares Outstanding 48,753 47,071 48,728 47,056
Assumed Conversion of:
Convertible Preferred Stock 988 988 988 988
Dilutive Stock Options (Treasury Stock Method) 458 877 584 860
--------- --------- --------- ---------
Dilutive Potential Common Shares 50,199 48,936 50,300 48,904
--------- --------- --------- ---------
Diluted Earnings Per Share $ 0.22 $ 0.80 $ 1.44 $ 2.24
========= ========= ========= =========
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, contract termination charges
of $2.3 million and professional fees of $1.7 million. As of September
30, substantially all cash outlays had been paid.
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.
8
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 September 30, 2000
follow:
(In Thousands) Total Assets
---------------------------------------------------------
Provident Auto Leasing Company $669,876
Provident Auto Rental Company LLC (1998-1) 30,308
Provident Auto Rental Company LLC (1998-2) 34,376
Provident Auto Rental LLC (1999-1) 182,338
Provident Lease Receivables Company LLC 120,308
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT
----------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement
No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", becomes effective for
fiscal years beginning after June 15, 2000. This SFAS establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires that derivatives be recognized
as either assets or liabilities in the balance sheet and that those
9
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments be measured at fair value. The accounting for the gain or
loss resulting from the change in fair value depends on the intended
use of the derivative. For a derivative used to hedge changes in fair
value of a recognized asset or liability, or an unrecognized firm
commitment, the gain or loss on the derivative will be recognized in
earnings together with the offsetting loss or gain on the hedged item.
This results in earnings recognition only to the extent that the hedge
is ineffective in achieving offsetting changes in fair value. For a
derivative used to hedge changes in cash flows associated with forward
transactions, the gain or loss on the effective portion of the
derivative will be deferred, and reported as Accumulated Other
Comprehensive Income, a component of shareholders' equity, until such
time the hedge transaction affects earnings. For derivative instruments
not accounted for as hedges, changes in fair value are required to be
recognized in earnings.
Provident plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that as of September 30, 2000, its hedges are
highly effective and that the adoption of this SFAS will not have a
material impact on Provident's financial position or the results of its
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. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Actual results could differ materially from
those contained in or implied by such forward-looking statements for a
variety of factors including: sharp and/or rapid changes in interest
rates; significant changes in the anticipated economic scenario which
could materially change anticipated credit quality trends, the ability
to generate loans and leases, 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; risks involved with the
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. 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.
10
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Summary
-------
The following table summarizes earnings components, earnings per share
and key financial ratios:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands, -------------------------------- --------------------------------
Except Per Share Data) 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------
Net Interest Income $ 95,267 $ 84,822 12% $282,772 $248,934 14%
Gain on Sale of Loans and Leases 356 28,099 (99) 44,771 73,921 (39)
Other Noninterest Income 52,096 48,115 8 146,902 126,697 16
Total Revenue 147,719 161,036 (8) 474,445 449,552 6
Provision for Loan
and Lease Losses 42,550 16,485 158 61,950 37,610 65
Noninterest Expense(1) 88,151 83,978 5 296,078 242,470 22
Net Income(1) 10,953 39,236 (72) 72,614 109,335 (34)
Diluted Earnings per Share(1) 0.22 0.80 (73) 1.44 2.24 (36)
Return on Average Equity(1) 4.53% 19.09% 10.33% 17.97%
Return on Average Assets(1) 0.37% 1.58% 0.82% 1.50%
Efficiency Ratio 59.69% 52.10% 54.13% 52.99%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $256,778 $238,270 8%
Net Income 99,614 112,065 (11)
Diluted Earnings per Share 1.98 2.29 (14)
Return on Average Equity 14.16% 18.42%
Return on Average Assets 1.13% 1.54%
During the third quarter of 2000, Provident announced that it will
change the structure of its securitizations to secured financings which
eliminates the use of gain-on-sale accounting. The switch to a secured
financing structure does not affect the total profit Provident will
recognize over the life of a loan, but rather impacts the timing of
income recognition. Secured financing transactions cause reported
earnings from securitized loans to be lower in the initial periods and
higher in later periods, as interest is earned on the loans. As a
result, moving away from transaction structures that use gain-on-sale
accounting will temporarily cause Provident's earnings to be lower over
the next several quarters.
11
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Primarily as a result of the change in the structure of
securitizations, diluted earnings per share decreased 73%, to $.22
during the third quarter of 2000, versus $.80 reported in 1999. For the
nine months ended September 30, 2000, operating earnings per share was
$1.98, a decrease of 14%, compared to $2.29 reported in 1999. Operating
earnings for 2000 exclude a $27.0 million after-tax charge primarily
related to the acquisition of Fidelity Financial. Included in this
charge are direct-merger related charges and other post-merger business
line restructuring charges. Operating earnings for 1999 exclude a $2.7
million after-tax charge related to the merger of Fidelity Financial
and Glenway Financial Corporation.
Total revenue (net interest income plus noninterest income) decreased
8% during the third quarter of 2000 over the third quarter of 1999, and
increased 6% for the first nine months of 2000 over the first nine
months of 1999. For the nine-month periods, net interest income
increased by $33.8 million, or 14%, as a result of strong growth in the
commercial lending portfolio. Noninterest income, excluding gain on
sale of loans and leases, increased $20.2 million, or 16%, primarily
due to continued growth in loan servicing fees. Loans and leases, which
had been sold with servicing retained, increased from $5.3 billion at
September 30, 1999 to $6.1 billion at September 30, 2000. Gain on sale
of loans and leases decreased $29.2 million primarily due to the change
in the structure of securitizations beginning with the third quarter of
the current year.
Total average assets for the first nine months of 2000 grew $2.0
billion, or 21% as compared to the same period during 1999. The
increase was primarily in the investment security and commercial
lending portfolios, which experienced growth of $1.5 billion and $1.0
billion, respectively, in average assets during this time period.
The provision for loan and lease losses was $42.6 million for the third
quarter of 2000 as compared to $16.5 million during the same time
period of 1999. The increase was due primarily to (1) higher loan and
lease balances resulting from the change in securitization structure
which no longer removes loans and leases from the balance sheet and (2)
higher net charge-offs. Noninterest expense increased $4.2 million, or
5%, to $88.2 million for the third quarter of 2000 as compared to $84.0
million for the third quarter of 1999. While operating expense levels
grew only 8% for the first nine months of 2000 as compared to 1999, the
ratio of operating noninterest expense to tax equivalent revenue
("efficiency ratio") increased to 54.13% during 2000 as compared to
52.99% for the same period during 1999. The increase in the efficiency
ratio was a result of the elimination of gain on sale of loans during
the current quarter. For purposes of calculating the efficiency ratio,
operating noninterest expense excludes merger and restructuring
charges, and tax equivalent revenue excludes security gains or losses.
12
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 and
nine-month periods ended September 30, 2000 and 1999. Prior period
information has been reclassified to match current period
income/expense allocation methodology and business unit consolidation.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
(Dollars in Millions) 2000 1999 Change 2000 1999 Change
-------------------------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 67.8 $ 63.9 6% $ 200.3 $ 182.3 10%
Retail Banking 65.5 65.2 0% 197.6 178.8 11%
Mortgage Banking 14.3 32.0 -55% 76.4 88.5 -14%
Corporate Center 0.1 (0.1) n/m 0.1 - n/m
--------- -------- --------- --------
$ 147.7 $ 161.0 -8% $ 474.4 $ 449.6 6%
========= ======== ========= ========
Operating Income:
Commercial Banking $ 6.3 $ 17.6 -64% $ 50.4 $ 58.0 -13%
Retail Banking 7.0 10.4 -33% 34.1 26.4 29%
Mortgage Banking (2.4) 11.3 -121% 15.0 27.7 -46%
Corporate Center 0.1 (0.1) n/m 0.1 - n/m
--------- -------- --------- --------
$ 11.0 $ 39.2 -72% $ 99.6 $ 112.1 -11%
========= ======== ========= ========
Average Assets:
Commercial Banking $ 5,459 $ 4,440 23% $ 5,509 $ 4,248 30%
Retail Banking 2,368 2,007 18% 2,371 2,113 12%
Mortgage Banking 1,162 621 87% 729 609 20%
Corporate Center 2,755 2,892 -5% 3,142 2,743 15%
--------- -------- --------- --------
$ 11,744 $ 9,960 18% $ 11,751 $ 9,713 21%
========= ======== ========= ========
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
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-ticket equipment.
Commercial Banking is the Company's largest line of business
contributing approximately 50% of the Bank's operating income.
Operating income for Commercial Banking was $6.3 million and $50.4
million for the three-month and nine-month periods ended September
30, 2000, which was a decrease of $11.3 million and $7.6 million,
respectively, over the comparable periods of 1999.
Loan growth in Commercial Banking continued its strong performance.
Average assets grew 23% and 30% for the three-month and nine-month
periods ended September 30, 2000. Asset growth was achieved across
all business units with average assets of $5.5 billion for the third
quarter of 2000. The reduction in operating income was driven by the
decision to change the structure of securitizations resulting in the
elimination of gain-on-sale accounting. As a result, no gains on
sales were recognized during the third quarter of 2000 compared to a
$6.3 million gain recognized during the third quarter of 1999. In
addition, the charge-off of three commercial loans totaling $12.8
million, along with the growth in loan and lease balances, resulted
in a higher provision for loan and lease losses. Partially
offsetting these declines in operating income was higher net
interest income resulting from the growth in loan and lease
balances.
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 for the nine-month period
ended September 30, 2000 increased $7.7 million over the comparable
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. Operating income for the
three-month period ended September 30, 2000 decreased $3.4 million
over the comparable period in 1999. The decrease is due to the
14
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
recognition of a $4.3 million gain on a home equity securitization
in September of 1999 which was absent in the third quarter of 2000.
Retail Banking benefited from growth in total deposits. Average core
deposits for the third quarter of 2000 grew by 14% as compared to
the third quarter of 1999. Significant deposit growth came from the
Florida franchise and from internet banking products. To further
capitalize on the Florida deposit growth, Provident is opening four
additional financial centers in Florida. Provident will continue to
enhance its distribution of products and services via internet
banking, ATM machines and the TeleBank customer service call center.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Operating income for
the third quarter of 2000 was $(2.4) million, a decrease of $13.7
million as compared to the same period in 1999. Operating income
through the first nine months of 2000 was $15.0 million, a decrease
of $12.7 million as compared to the same period in 1999. The lower
operating income for both periods of 2000 was driven by the decision
to change the structure of securitizations resulting in the
elimination of gain-on-sale accounting during the third quarter of
2000. Despite the elimination of gain-on-sale income, there was no
incremental net interest income in the first quarter of this
accounting change as prior loan sales had always occurred at the end
of the quarter. Partially offsetting the elimination of gain-on-sale
income were higher loan servicing fees which increased $6.2 million
during the first nine months of 2000 compared to the same period of
1999.
The interest rate environment of moderate increases has had an
unfavorable impact on funding expenses and has slowed new
originations in the nonconforming sector. During the third quarter
of 2000, Mortgage Banking originated and held for portfolio $323
million of nonconforming loans with no gain on sale recognition.
During the third quarter of 1999, $601 million of loans were
securitized and sold resulting in a $17.0 million gain.
Revenue decreased $17.7 million for the third quarter of 2000 and
$12.1 million for the first nine months of 2000 as compared to the
same periods in 1999. Operating expenses increased during 2000 due
primarily to increased staffing associated with the start-up of a
new business unit that sub-services mortgage loans for other
financial institutions.
15
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 nine months ended September 30, 2000,
increased $33.8 million compared to the first nine months of 1999. The
increase in interest income was due primarily to (1) an increase in
average earning assets of $1.7 billion, or 19%, and (2) an increase in
the average yield on earning assets of 72 basis points. The increase in
average earning assets resulted primarily from the growth of the
commercial loan and investment security portfolios. Interest expense
for the nine months ended September 30, 2000 increased due to a 20%
increase in total interest bearing liabilities with a 100 basis point
increase on the average rate paid. The increase in interest bearing
liabilities was due principally 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. The net interest margin has remained
steady during 2000 with each three-month period being in the 3.60% to
3.65% range. For the first nine months of 2000, the net interest
margin, on a tax-equivalent basis, was 3.61% compared to 3.80% 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 half of 2000 carried lower yielding asset
portfolios from acquired institutions that had been sold, but all cash
settlements had not taken place until June of 2000. 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 and nine-month periods
ended September 30, 2000 and 1999.
16
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
Average Average Average Average Average Average Average Average
(Dollars in Millions) Balance Rate Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------------------------------------------------
Assets:
Loans and Leases:
Corporate Lending:
Commercial $ 4,385 9.82% $ 3,651 8.62% $ 4,248 9.46% $ 3,461 8.64%
Mortgage 549 9.50 532 8.45 559 9.07 535 8.51
Construction 724 9.04 498 8.19 647 8.98 486 8.06
Lease Financing 393 11.58 326 9.69 362 11.70 286 9.83
------- ----- ------- ---- ------- ----- ------- ----
Total Corporate Lending 6,051 9.81 5,007 8.63 5,816 9.51 4,768 8.63
Consumer Lending:
Residential 252 10.28 911 8.88 320 11.55 892 8.55
Installment 448 11.70 592 9.91 511 10.83 615 9.98
Lease Financing 615 10.45 581 8.50 532 9.37 630 8.21
------- ----- ------- ---- ------- ----- ------- ----
Total Consumer Lending 1,315 10.84 2,084 9.07 1,363 10.43 2,137 8.86
------- ----- ------- ---- ------- ----- ------- ----
Total Loans and Leases 7,366 10.00 7,091 8.76 7,179 9.69 6,905 8.70
Investment Securities 3,084 6.86 1,765 6.21 3,263 7.08 1,758 6.12
Trading Account Securities - - 50 4.24 - - 69 5.28
Federal Funds Sold and Reverse
Repurchase Agreements 10 6.70 14 4.47 11 8.10 28 5.55
------- ----- ------- ---- ------- ----- ------- ----
Total Earning Assets 10,460 9.07 8,920 8.22 10,453 8.87 8,760 8.15
Cash and Due From Banks 232 232 235 233
Other Assets 1,052 808 1,063 720
------- ------- ------- -------
Total Assets $11,744 $ 9,960 $11,751 $ 9,713
======= ======= ======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 378 2.93 $ 365 1.98 $ 352 2.36 $ 365 1.98
Savings Deposits 1,364 5.30 1,305 3.97 1,349 4.97 1,342 3.74
Time Deposits 4,906 6.43 3,991 5.29 4,678 6.10 3,802 5.27
------- ----- ------- ---- ------- ----- ------- ----
Total Deposits 6,648 6.00 5,661 4.78 6,379 5.65 5,509 4.68
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 785 6.35 972 5.04 1,203 6.08 1,033 4.82
Commercial Paper 198 6.27 195 5.03 205 5.95 210 4.86
Short-Term Notes Payable 2 5.83 2 4.76 2 5.88 1 4.67
------- ----- ------- ---- ------- ----- ------- ----
Total Short-Term Debt 985 6.33 1,169 5.04 1,410 6.06 1,244 4.83
Long-Term Debt 1,395 6.41 896 5.56 1,348 6.28 926 5.53
Junior Subordinated Debentures 220 8.63 220 8.16 220 8.46 141 8.45
------- ----- ------- ---- ------- ----- ------- ----
Total Interest Bearing
Liabilities 9,248 6.16 7,946 5.00 9,357 5.87 7,820 4.87
Noninterest Bearing Deposits 1,258 914 1,216 781
Other Liabilities 272 278 240 301
Shareholders' Equity 966 822 938 811
------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $11,744 $ 9,960 $11,751 $ 9,713
======= ======= ======= =======
Net Interest Spread 2.91% 3.22% 3.00% 3.28%
==== ==== ==== ====
Net Interest Margin 3.62% 3.77% 3.61% 3.80%
==== ==== ==== ====
17
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 in 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 $62.0 million and $37.6
million for the first nine months of 2000 and 1999, respectively. The
increase in the provision for loan losses was primarily attributable to
additional loans and leases that typically would have been securitized
and accounted for as sales, but are now kept on the balance sheet. In
addition higher net charge-offs contributed to the higher provision.
The ratio of reserve for loan and lease losses to total loans and
leases was 1.44% and 1.33% at September 30, 2000 and 1999,
respectively.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
(Dollars in Thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------
Balance at Beginning of Period $ 97,588 $ 83,239 $ 94,045 $ 78,867
Acquired Reserves 2,377 - 2,377 -
Provision for Loan and Lease Losses 42,550 16,485 61,950 37,610
Loans and Leases Charged Off (24,786) (16,110) (47,542) (38,496)
Recoveries 2,548 4,109 9,447 9,742
--------- --------- --------- ---------
Balance at End of Period $ 120,277 $ 87,723 $ 120,277 $ 87,723
========= ========= ========= =========
Reserve for Loan and Lease Losses
as a Percent of:
Nonperforming Loans 182.02% 139.55%
Nonperforming Assets 160.83% 131.02%
Total Loans and Leases 1.44% 1.33%
18
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 and nine-month periods ended September
30, 2000 and 1999:
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
------------------------------- -------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
(Dollars in Thousands) Offs (annualized) Offs Offs (annualized) Offs
-------------------------------------------------------------------------------------------
Corporate Lending:
Commercial $ 20,098 1.83% 90.4% $ 9,972 1.09% 83.2%
Mortgage (21) (0.02) (0.1) - - -
Construction - - - - - -
Lease Financing (207) (0.21) (0.9) 630 0.77 5.2
-------- ----- -------- -----
Net Corporate Lending 19,870 1.31 89.4 10,602 0.85 88.4
Consumer Lending:
Residential 1,495 2.37 6.7 138 0.06 1.1
Installment 697 0.62 3.1 869 0.59 7.2
Lease Financing 176 0.11 0.8 392 0.27 3.3
-------- ----- -------- -----
Net Consumer Lending 2,368 0.72 10.6 1,399 0.27 11.6
-------- ----- -------- -----
Net Charge-Off's $ 22,238 1.21 100.0 $ 12,001 0.68 100.0
======== ===== ======== =====
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------------------- -------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
(Dollars in Thousands) Offs (annualized) Offs Offs (annualized) Offs
-------------------------------------------------------------------------------------------
Corporate Lending:
Commercial $31,280 0.98% 82.1% $19,114 0.74% 66.5%
Mortgage 75 0.02 0.2 - - -
Construction - - - - - -
Lease Financing 829 0.31 2.2 3,287 1.53 11.4
------- ----- ------- -----
Net Corporate Lending 32,184 0.74 84.5 22,401 0.63 77.9
Consumer Lending:
Residential 3,541 1.48 9.3 344 0.05 1.2
Installment 1,439 0.38 3.8 4,756 1.03 16.5
Lease Financing 931 0.23 2.4 1,253 0.27 4.4
------- ----- ------- -----
Net Consumer Lending 5,911 0.58 15.5 6,353 0.40 22.1
------- ----- ------- -----
Net Charge-Off's $38,095 0.71 100.0 $28,754 0.56 100.0
======= ===== ======= =====
The increase in net charge-offs in the third quarter of 2000 is
primarily due to three commercial loans that were charged off during
the third quarter.
19
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at September 30, 2000 were $74.8 million compared
to $61.1 million and $67.0 million as of December 31, 1999 and
September 30, 1999, respectively. The composition of nonperforming
assets over the past five quarters is provided in the following table.
2000 1999
----------------------------- ------------------
Third Second First Fourth Third
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $48,031 $52,397 $46,282 $43,452 $49,250
Mortgage 1,529 1,576 1,654 3,003 1,527
Construction - - - 216 216
Lease Financing 5,147 5,165 2,016 1,309 2,926
------- ------- ------- ------- -------
Total Corporate Lending 54,707 59,138 49,952 47,980 53,919
Consumer Lending:
Residential 11,371 6,290 5,624 7,640 7,358
Installment - - - 48 26
Lease Financing - - - - -
------- ------- ------- ------- -------
Total Consumer Lending 11,371 6,290 5,624 7,688 7,384
------- ------- ------- ------- -------
Total Nonaccrual Loans 66,078 65,428 55,576 55,668 61,303
Renegotiated Loans - - - 1,541 1,557
------- ------- ------- ------- -------
Total Nonperforming Loans 66,078 65,428 55,576 57,209 62,860
Other Real Estate 8,706 5,108 7,457 3,870 4,092
------- ------- ------- ------- -------
Total Nonperforming Assets $74,784 $70,536 $63,033 $61,079 $66,952
======= ======= ======= ======= =======
Loans 90 Days Past Due
Still Accruing $28,959 $23,787 $13,908 $15,769 $18,484
Nonperforming Loans to
Total Loans and Leases 0.79% 0.97% 0.82% 0.82% 0.96%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 0.89% 1.04% 0.93% 0.87% 1.02%
Total Assets 0.57% 0.62% 0.54% 0.58% 0.68%
Nonaccrual loans increased $10.4 million during the first nine months
of 2000. The increase was due primarily to the addition of five
commercial loans and one commercial lease, which was partially offset
by the charge-off of three commercial loans. Renegotiated loans
decreased $1.5 million during the first nine months of 2000 due to the
improved performance of one loan. Other real estate increased $4.8
million during the first nine months of 2000. The increase was
primarily the result of foreclosures of residential properties. The
increase in loans ninety days past due still accruing was primary due
to the increase in delinquent commercial loans.
20
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 third quarter and first nine-month periods ended
September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- Pctg --------------------- Pctg
(Dollars in Thousands) 2000 1999 Change 2000 1999 Change
------------------------------------------------------------------------------------------------------
Service Charges on
Deposit Accounts $ 8,997 $ 8,496 5.9% $ 26,235 $ 24,187 8.5%
Loan Servicing Fees 13,677 8,105 68.7 38,586 19,593 96.9
Other Service Charges and Fees 12,349 9,279 33.1 31,767 30,697 3.5
Operating Lease Income 10,991 10,328 6.4 31,490 29,560 6.5
Warrant Gains 2,700 7,978 (66.2) 7,500 9,147 (18.0)
Security Gains 72 (107) n/m 96 (1) n/m
Other 3,310 4,036 (18.0) 11,228 13,514 (16.9)
--------- --------- --------- ---------
Noninterest Income Before Gain
on Sale of Loans and Leases 52,096 48,115 8.3 146,902 126,697 15.9
Gain on Sale of Loans and Leases:
Non-Cash - 21,516 (100.0) 34,447 58,507 (41.1)
Cash 356 6,583 (94.6) 10,324 15,414 (33.0)
--------- --------- --------- ---------
Total Noninterest Expense $ 52,452 $ 76,214 (31.2) $ 191,673 $ 200,618 (4.5)
========= ========= ========= =========
Explanations for significant changes in noninterest income by category
follow:
o Service charges on deposit accounts increased $.5 million and $2.0
million in the quarterly and nine-month comparisons. The increase in
the quarterly comparison was a result of pricing and volume
increases on corporate and personal deposit accounts. The increase
in the nine-month comparison was a result of pricing and volume
increases on corporate and personal deposit accounts combined with
higher ATM fees from the increased number of ATMs. Since the first
quarter of 1999, an additional 133 ATMs have been placed into
service bringing the total number of Provident ATMs to 482.
o Loan servicing fees increased $5.6 million and $19.0 million in the
quarterly and nine-month comparisons. The higher revenue was
primarily from increases in the residential mortgage and auto
leasing areas.
o Other service charges and fees increased $3.1 million and $1.1
million in the quarterly and nine-month comparisons. The increase in
the quarterly comparison was due primarily to loan syndication fees
that occurred during the third quarter of 2000. Credit card fees
were the primarily reason for the increase in the nine-month
comparison.
o Operating lease income increased $.7 million and $1.9 million in the
quarterly and nine-month comparisons due primarily to the growth of
Provident Commercial Group, a national lessor of large-ticket
equipment.
21
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 decreased $5.3 million in
the third quarter comparison and $1.6 million in nine-month
comparison.
o Gain on sales of loans and leases decreased $27.7 million in the
quarterly comparison and $29.2 million in the nine-month comparison
due to the decision to change the structure of securitizations
resulting in the elimination of gain-on-sale accounting during the
third quarter of 2000. Future securitizations of loans and leases
will be structured in order to account for the transactions as
secured financings. The following table provides detail of the gain
on sales recognized during the third quarter and first nine-month
periods of 2000 and 1999:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
(In Thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $ - $16,991 $30,291 $50,687
Prime Consumer Home Equity Securitizations - 4,279 4,156 4,279
Credit Card Securitizations - 246 - 3,541
---- ------- ------- -------
- 21,516 34,447 58,507
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations - 6,250 9,083 13,164
Conforming Residential Whole Loan Sales 253 296 515 1,745
Nonconforming Residential Whole Loan Sales - - - 174
Other Loan Sales 103 37 726 331
---- ------- ------- -------
356 6,583 10,324 15,414
---- ------- ------- -------
$356 $28,099 $44,771 $73,921
==== ======= ======= =======
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.
22
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Expenses
--------------------
The following table details the components of noninterest expense and
their change for the third quarter and nine-month periods of 2000 and
1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2000 1999 Change 2000 1999 Change
-------------------------------------------------------------------------------------------------
Salaries, Wages and Benefits $ 41,518 $ 40,006 3.8% $122,805 $113,066 8.6%
Charges and Fees 6,084 3,663 66.1 16,634 11,117 49.6
Occupancy 5,066 4,779 6.0 15,045 14,070 6.9
Depreciation on Operating
Lease Equipment 6,644 6,183 7.5 19,900 16,486 20.7
Equipment Expense 7,079 6,169 14.8 19,418 17,870 8.7
Professional Services 5,521 6,046 (8.7) 15,955 15,252 4.6
Other 16,239 17,132 (5.2) 47,021 50,409 (6.7)
-------- -------- -------- --------
Noninterest Expense Before Merger
and Restructuring Charges 88,151 83,978 5.0 256,778 238,270 7.8
Merger and Restructuring Charges - - - 39,300 4,200 835.7
-------- -------- -------- --------
Total Noninterest Expense $ 88,151 $ 83,978 5.0 $296,078 $242,470 22.1
======== ======== ======== ========
Explanations for significant changes in noninterest expense by category
follow:
o Salaries, wages and benefits increased $1.5 million and $9.7 million
in the quarterly and nine-month comparisons. The increase was due
primarily to expansion in the Mortgage Banking and Commercial
Banking business lines during the past twelve months.
o Increased goodwill amortization expense, associated with the
acquisitions of OHSL Financial Corp. and Capstone Realty Advisors,
was the primary reason for the increase in charges and fees in both
the quarterly and nine-month comparisons.
o The growth of Provident Commercial Group, a national lessor of
large-ticket equipment, was the primary reason for the increase in
depreciation on operating lease equipment.
o Equipment expense increased $.9 million in the quarterly comparison
due primarily to higher repair and maintenance expenses. The $1.5
million increase in the nine-month comparison was due to higher
repair and maintenance expenses combined with higher depreciation
expense related to technology investments, branches and ATMs.
o Professional fees decreased $.5 million in the quarterly comparison
as a result of a decrease in management consulting fees. The $.7
million increase in the nine-month comparison was a result of higher
legal fees, primarily associated with the origination and collection
of loans, temporary employment services and miscellaneous
professional fees.
23
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 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. 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 $5.0
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.
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. The $74.7 million increase in trading account
securities resulted from the acquisition of the operations and
substantially all of the assets of Banc One Capital Funding Corporation
during the third quarter of 2000.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $1.0 billion during the first nine
months of 2000. Mortgage-backed securities accounted for approximately
65% of the increase and U.S. treasuries and agencies accounted for an
additional 30% of the increase. Funds obtained from deposit growth,
debt 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 September 30, 2000 total loans and leases were $8.4 billion
compared to $7.0 billion at December 31, 1999. Provident had an
additional $6.1 billion and $5.9 billion of off-balance sheet loans and
leases as of September 30, 2000 and December 31, 1999, respectively.
Due to the decision to structure and account for future securitizations
as secured financings rather than loan sales, on-balance sheet loans
and leases are expected to increase, while off-balance sheet loans and
leases are expected to decline, in the future. For more information
concerning the off-balance sheet loans and leases, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset Securitization Activity".
24
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the composition of the commercial loan
category by industry type at September 30, 2000:
Amount on
(Dollars in Millions) Amount % Nonaccrual
-------------------------------------------------------------
Manufacturing $ 892.7 19 $15.4
Service Industries 847.2 18 18.6
Retail Trade 434.2 9 1.3
Real Estate Operators/Investment 410.5 9 0.1
Finance and Insurance 366.6 8 0.1
Wholesale Trade 350.7 8 2.2
Transportation/Utilities 336.9 7 4.2
Construction 187.3 4 0.9
Automobile Dealers 147.6 3 -
Other 679.1 15 5.2
-------- --- -----
Total $4,652.8 100 $48.0
======== === =====
The composition of the commercial mortgage and construction loan
categories by property type at September 30, 2000 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
-------------------------------------------------------------
Residential Development $ 312.4 22 $ 0.3
Apartments 243.1 17 0.1
Office/Warehouse 241.3 17 0.2
Shopping/Retail 218.3 15 0.5
Health Facilities 70.6 5 0.3
Land 68.6 5 -
Hotels/Motels 60.7 4 -
Industrial Plants 32.0 2 -
Auto Sales and Service 13.8 1 -
Churches 11.8 1 -
Other Commercial Properties 154.9 11 0.1
-------- --- -----
Total $1,427.5 100 $ 1.5
======== === =====
The following table shows the composition of the installment loan
category by loan type at September 30, 2000:
(Dollars in Millions) Amount %
-------------------------------------------------
Indirect Installment $ 224.5 46
Home Equity 147.8 30
Direct Installment 68.5 14
Credit Card 32.4 7
Other Consumer Loans 15.7 3
-------- ---
Total $ 488.9 100
======== ===
25
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Earning Assets
--------------------------
Leased equipment increased $41.9 million, or 24%, during the first nine
months of 2000. The addition of four new operating leases was the
primary reason for the increase.
For details concerning receivables from securitization trusts, see
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Asset Securitization Activities.
Deposits
--------
Noninterest bearing deposits and interest bearing deposits increased
$128.0 million and $829.8 million, respectively, during the first nine
months of 2000. Average core deposits for the first nine months of 2000
grew at an annualized rate of 12%, with significant contribution coming
from Provident Bank of Florida.
Borrowed Funds
--------------
Short-term debt increased $1.0 billion, or 103%, to $2.0 billion during
the first nine months of 2000. The increase was due primarily to an
increase in federal funds purchased and repurchase agreements.
Long-term debt increased $.5 billion, or 54%, to $1.5 billion during
the first nine months of 2000. The increase is primarily the result of
increases in Federal Home Loan Bank advances.
Capital Resources and Adequacy
------------------------------
Total shareholders' equity at September 30, 2000 was $980.7 million
compared to $926.2 million at December 31, 1999. The change in the
equity balance primarily relates to net income exceeding dividends by
$36.8 million, proceeds and accompanying tax benefits of $2.6 million
received from the exercise of stock options and an increase in the
market value of investment securities classified as available for sale
of $12.2 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:
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
---------------------------------------
Average Shareholders' Equity to Average Assets 7.98% 8.34%
Dividend Payout to Net Earnings 49.29 27.10
Dividend Payout to Operating Earnings 35.93 26.62
Tier 1 Leverage Ratio 9.92 10.87
Tier 1 Capital to Risk-Weighted Assets 7.84 9.97
Total Risk-Based Capital To Risk-Weighted Assets 10.22 11.98
26
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital expenditures planned by Provident in 2000 for building
improvements and furniture and equipment are currently estimated to be
approximately $27 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 September 30, 2000, approximately $20
million of these expenditures had been made.
Stock Options
-------------
During the first three quarters of 2000, Provident granted options for
the purchase of 869,100 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 nine months of 2000 were for the purchase of 1.8
million shares. The options have exercise prices ranging from $23.90 to
$32.39.
ASSET SECURITIZATION ACTIVITY
-----------------------------
From 1996 through the second quarter of 2000, the structure of many of
Provident's securitizations resulted in the transactions being treated
as sales. As such, gains or losses were recognized, loans and leases
were removed from the balance sheet and residual assets, representing
the present value of future cash flows, were recorded. While the
performance of Provident's residual assets have generally been better
than or consistent with their initial estimates, other companies
utilizing securitization structures requiring gain-on-sale accounting
have experienced problems and consequently, the market has penalized
all companies using gain-on-sale accounting. Although gain-on-sale
accounting is in compliance with Generally Accepted Accounting
Principles, the investment community has clearly signaled its
dissatisfaction with this accounting method and management believes
this sentiment has been factored into Provident's stock price.
Additionally, newly proposed regulatory guidelines regarding
securitization activity discourage the use of gain-on-sale accounting
by limiting the amount of residual assets that can be included as part
of regulatory capital.
As a result of these factors, Provident announced that it will change
the structure of its securitizations to secured financings which
eliminates the use of gain-on-sale accounting. The switch to a secured
financing structure does not affect the total profit Provident will
recognize over the life of the asset, but rather impacts the timing of
income recognition. Secured financing transactions cause reported
earnings from securitized assets to be lower in the initial periods and
higher in later periods, as interest is earned on the assets. As a
result, moving away from transaction structures that use gain-on-sale
accounting will temporarily cause Provident's earnings to be lower over
the next several quarters.
27
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although Provident did not securitize any loans or leases during the
third quarter of 2000, prior period securitization activity under the
gain-on-sale accounting structure has had a significant impact on
Provident's financial condition and results of operations. The
following discusses this impact on the Consolidated Statements of
Income, Consolidated Balance Sheets and the credit quality of the
off-balance sheet securitized loans and leases.
Impact of Securitizations on the Consolidated Statements of Income
------------------------------------------------------------------
Based on the structure of Provident's securitization transactions prior
to the third quarter of 2000, gains were recognized upon the sale of
many of its loans and leases. The following table provides a summary of
principal sold and gains recognized for the securitization structures
treated as sales during the periods indicated:
Three Months Ended September 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
(In Thousands) Principal Gain Principal Gain
--------------------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $ - $ - $ 600,762 $ 16,991
Prime Consumer Home Equity - - 126,098 4,279
Credit Card - - 15,000 246
--------- --------- ---------- ----------
- - 741,860 21,516
Cash Gains:
Equipment Leases - - 108,764 6,250
Non-Recognition of Gains:
Automobile Leases - - 285,040 -
--------- --------- ---------- ----------
Total Securitizations $ - $ - $1,135,664 $ 27,766
========= ========= ========== ==========
Nine Months Ended September 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
(In Thousands) Principal Gain Principal Gain
--------------------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $1,030,000 $ 30,291 $1,630,762 $ 50,687
Prime Consumer Home Equity 158,598 4,156 126,098 4,279
Credit Card - - 200,000 3,541
---------- ---------- ---------- ----------
1,188,598 34,447 1,956,860 58,507
Cash Gains:
Equipment Leases 223,705 9,083 223,764 13,164
Non-Recognition of Gains:
Automobile Leases 214,180 - 671,879 -
---------- ---------- ---------- ----------
Total Securitizations $1,626,483 $ 43,530 $2,852,503 $ 71,671
========== ========== ========== ==========
Nonconforming residential, prime home equity and credit card loan
securitizations have resulted in the recognition of non-cash gains for
periods prior to the third quarter of 2000. Under the structure of
these securitizations, Provident received cash equal to the amount of
loans sold. The methodology used by Provident to calculate gains on the
sale of these securities follows:
28
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. An amortization schedule was created for the loan portfolio based on
each loan's maturity, rate and balance.
2. The amortization schedule was adjusted using a prepayment speed
curve. The prepayment curve estimated the timing of principal
payments by the borrowers.
3. The net spread was 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.
4. The present value of the net spread was 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 the cash is released. This
delay in cash receipts reduces the present value.
o For securitizations transacted from March 1998 through June 2000,
Provident 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.
5. The gain was 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 were also recognized from the securitization and sale of
equipment leases prior to the third quarter of 2000. Under the
structure of these securitizations, Provident sold the lease payments
under the lease contract but retained ownership of the underlying
equipment. The cash received from these sales exceeded the present
value of the lease payments and generated the cash gain.
The securitization of automobile leases did not result in the
recognition of gains. Under the pre-third quarter 2000 securitization
structure of automobile leases, Provident sold the ownership of the
automobiles and leased 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.
29
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Underlying weighted average assumptions used in the determination of
future cash flows on the loan and lease portfolios prior to the change
in the securitization structures announced in the third quarter of 2000
follow:
Nonconforming Prime Equipment Auto
Residential Home Equity Leasing Leasing
-----------------------------------------------------
Assumptions Used:
Prepayment Speed(1):
Initial Rate 12.36% 10.00% n/a n/a
Peak Rate 32.84% 30.00% n/a n/a
Calculated Weighted Average
Life of the Loan Portfolios 2.6 Years 2.1 Years n/a n/a
Estimated Credit Losses(2):
Annual Basis 1.09% 0.20% 1.00% 0.50%
Percentage of Original Balance 2.94% 0.42% 1.97% n/a
Discount Rate 11.88% 10.63% 9.29% n/a
(1) Provident applied an annual prepayment model that adjusted 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 used a prepayment curve that
applied a 10% prepayment rate to new loans (higher for seasoned loans) and
ramped up to 35% after 12 months.
(2) Provident applied a cumulative static pool approach to credit losses.
Higher prepayment speeds and shorter average lives did not alter the
cumulative credit loss assumption. As a result, higher prepayment speeds
increase the annualized losses.
The recognition of gains on the sale of loans and leases required
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 performances of the pools are extensively monitored,
and adjustments to these assumptions will be made if necessary.
Provident retains the servicing of the loans and leases it securitizes.
This servicing activity was primarily responsible for the generation of
$38.6 million and $19.6 million in loan servicing fees during the first
nine months of 2000 and 1999, respectively.
Nonconforming residential loans, originated or acquired by the Mortgage
Banking business line, have been securitized since 1996. Major
characteristics of these nonconforming loans include: 54% with an "A"
credit grade and 31% with a "B" credit grade; 69% with full
documentation; 69% have prepayment penalties; 95% are secured by first
mortgages; 92% are owner occupied; and, on average, have a 78%
loan-to-value ratio.
30
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 nine-month period ended September 30, 2000 and 1999 is
provided below:
Nine Months Ended September 30,
(In Thousands) 2000 1999
--------------------------------------------------------------------
Originations for the Period Ended:
Fixed Rate, Fully Amortizing $ 591,031 $ 614,632
Fixed Rate, 15-Year Balloon Payments 317,704 387,511
---------- ----------
Total Fixed Rate Loans 908,735 1,002,143
Adjustable, Three-Month LIBOR 3,317 -
Adjustable, Six-Month LIBOR 2,516 9,685
Adjustable Rate, Step Down 8,272 -
Adjustable Rate, 3/27 Loans 339,676 569,072
Adjustable Rate, 2/28 Loans 38,943 69,284
Adjustable Rate, 5/25 Loans 1,666 146
---------- ----------
Total Adjustable Rate Loans 394,390 648,187
---------- ----------
Total Originations $1,303,125 $1,650,330
========== ==========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,537,703 $ 956,266
Fixed Rate, 15-Year Balloon Payments 877,036 581,553
---------- ----------
Total Fixed Rate Loans 2,414,739 1,537,819
Adjustable, Three-Month LIBOR 3,027 -
Adjustable, Six-Month LIBOR 49,862 90,656
Adjustable Rate, Step Down 7,240 -
Adjustable Rate, 3/27 Loans 1,552,607 1,176,484
Adjustable Rate, 2/28 Loans 173,723 195,021
Adjustable Rate, 5/25 Loans 7,383 7,641
---------- ----------
Total Adjustable Rate Loans 1,793,842 1,469,802
---------- ----------
Total Outstanding $4,208,581 $3,007,621
========== ==========
Impact of Securitizations on the Consolidated Balance Sheets
------------------------------------------------------------
The impact from securitizations treated as sales 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:
September 30,
-----------------------
(In Thousands) 2000 1999
---------------------------------------------------
Nonconforming Residential $3,841,947 $2,876,444
Auto Leases 1,173,622 1,238,110
Prime Home Equity 499,798 372,433
Equipment Leases 406,740 336,267
Credit Card 200,000 200,000
Warehouse - 289,400
---------- ----------
$6,122,107 $5,312,654
========== ==========
31
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In connection with the recognition of non-cash gains on pre-third
quarter of 2000 securitizations, the present value of future cash
flows, referred to as retained interest in securitized assets ("RISA"),
were recorded as assets within the investment securities line item of
the consolidated balance sheets. Components of the RISA as of September
30, 2000 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
-----------------------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 454,759 $ 32,384
Less:
Estimated Credit Loss (1) (9,451) (284)
Servicing and Insurance Expense (53,158) (4,746)
Discount to Present Value (55,871) (2,518)
--------- ---------
Carrying Value of Retained Interest in
Securitized Assets (1) $ 336,279 $ 24,836
========= =========
(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 discussion of cash reserve accounts and credit quality of
securitized assets immediately following this table. The carrying value on
nonconforming residential loans, net of all loss estimates, is $233.7 million.
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 are deposited at Provident. Credit losses are absorbed
directly into these cash reserve accounts. The remaining funds not used
to cover such losses are returned to Provident over the term of the
securitization. Provident estimates the amount of all 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 (Impact of Securitizations on the Consolidated Statements of
Income)". Cash reserve accounts that earn interest are recorded as
investment securities and accounts that do not earn interest are
recorded as receivables from securitization trusts. Detail of the
September 30, 2000 cash reserve accounts, net of loss estimates
follows:
Cash Loss Net Cash
(In Thousands) Reserves Estimates Reserves
--------------------------------------------------------------------------------------
Receivables from Securitization Trusts:
Nonconforming Residential Loans (1) $ 471,302 $(102,598) $ 368,704
Equipment Leases 62,673 (12,287) 50,386
Prime Home Equity Loans (2) 29,807 (1,271) 28,536
--------- --------- ---------
Total Securitization Trusts $ 563,782 $(116,156) $ 447,626
========= ========= =========
(1) Total loss estimates including those contained within the RISA are $112.0 million.
(2) Total loss estimates including those contained within the RISA are $1.6 million.
32
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
nine months ended September 30, 2000:
Nonconforming Prime Home Equipment Auto
(Dollars in Thousands) Residential(1) Equity(1) Leases(1) Leases(2)
------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2000:
Average Securitized Assets $ 3,654,461 $ 424,753 $ 387,338 $ 1,385,609
Net Charge-Offs 16,635 1,494 6,426 3,708
Net Charge-Offs to Average
Securitized Assets (Annualized) 0.61% 0.47% 2.21% 0.36%
As of September 30, 2000:
Securitized Assets $ 3,841,947 $ 499,798 $ 406,740 $ 1,173,622
Estimated Credit Losses
Provided For 112,048 1,555 12,287 n/a
Estimated Credit Losses to
Period-End Securitized Assets 2.92% 0.31% 3.02% n/a
Estimated Credit Loss Rates:
Annual Basis 1.09% 0.20% 1.00% 0.50%
Percentage of Original Balance 2.94% 0.42% 1.97% n/a
Delinquency Rates:
30 to 89 Days 3.95% 0.57% 2.69% 0.39%
90 or More 8.03% 0.07% 0.75% 0.13%
(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 are deposited at Provident. Credit losses are
absorbed directly against these cash reserve accounts. 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. Details of the cash
reserve accounts are provided in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset Securitization Activity (Impact of
Securitizations on the Consolidated Balance Sheets).
(2) Estimates for credit losses on revolving structures 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.
33
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 September 30,
2000, these off-balance sheet instruments consisted of standby letters
of credit of $170 million, commitments to extend credit of $2.7 billion
and interest rate swaps with a notional amount of $6.1 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 $317 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 September 30, 2000 by its
banking subsidiaries was approximately $239.0 million. The Parent has
not received any dividends from its subsidiaries during the current
year.
During 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 $113.0 million in cash, interest earning
deposits and federal funds sold to meet its liquidity needs.
34
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
The responsibility of monitoring and managing market and liquidity risk
is assigned to the Asset Liability Committee ("ALCO"). The main
component of market risk is the risk of loss in the value of financial
instruments that may result from the changes in interest rates. ALCO is
bound to guidelines stated in the relevant policies approved by the
Board of Directors.
In addition to the natural balance sheet hedges, ALCO utilizes
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 0.89% for a 100 basis
point decrease; increase 1.62% for a 200 basis point decrease; decrease
1.66% for a 100 basis point increase; and decrease 3.28% 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.
35
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed:
Exhibit 27.1 - Financial Data Schedule for September 30, 2000
Exhibit 27.2 - Financial Data Schedule for September 30, 1999
(b) Reports on Form 8-K:
Form 8-K (Items 5 and 7) filed on August 22, 2000 announcing
the change in future securitization structures resulting in
the discontinuation of gain-on-sale accounting.
Form 8-K (Item 7) filed on October 30, 2000 disclosing the
supplemental consolidated balance sheets of Provident as of
December 31, 1999 and 1998, and the related supplemental
consolidated financial statements of income, changes in
shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. The supplemented
consolidated financial statements give retroactive effect to
the merger of Provident and Fidelity Financial on February 4,
2000, which has been accounted for using the pooling of
interests method. In addition, a consent of independent
auditors was provided.
Form 8-K (Items 5 and 7) filed on November 8, 2000 stating that
Provident had entered into an Underwriting Agreement relating
to the sale of $100,000,000 aggregate liquidation amount of
10 1/4% Trust Preferred Securities of Provident Capital Trust
III.
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
36
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: November 13, 2000 \s\ Christopher J. Carey
----------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
37
