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, 2001 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
stock, without par value, outstanding at April 30, 2000 is 48,883,344.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 36
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
March 31, December 31,
2001 2000
(Dollars in Thousands) (Unaudited)
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 314,440 $ 286,051
Federal Funds Sold and Reverse Repurchase Agreements 360,136 82,977
Trading Account Securities 51,873 41,949
Loans Held for Sale 159,314 206,168
Investment Securities Available for Sale
(amortized cost - $3,194,335 and $3,041,204) 3,180,037 3,013,621
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,641,039 4,580,215
Mortgage 659,041 632,801
Construction 811,708 801,211
Lease Financing 708,523 607,478
Consumer Lending:
Residential 1,022,342 835,510
Installment 677,422 580,046
Lease Financing 1,118,711 1,039,645
------------ ------------
Total Loans and Leases 9,638,786 9,076,906
Reserve for Loan and Lease Losses (163,682) (154,300)
------------ ------------
Net Loans and Leases 9,475,104 8,922,606
Leased Equipment 202,023 215,227
Premises and Equipment 102,460 103,919
Receivables from Securitization Trusts 324,293 417,420
Other Assets 619,374 567,447
------------ ------------
$ 14,789,054 $ 13,857,385
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,226,372 $ 1,293,396
Interest Bearing 7,862,059 7,535,714
------------ ------------
Total Deposits 9,088,431 8,829,110
Short-Term Debt 1,199,444 639,023
Long-Term Debt 2,713,154 2,774,493
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 450,428 329,239
Accrued Interest and Other Liabilities 361,703 294,737
------------ ------------
Total Liabilities 13,813,160 12,866,602
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, 48,877,269 and 48,814,463 Issued 14,488 14,469
Capital Surplus 316,326 314,895
Retained Earnings 688,192 672,348
Accumulated Other Comprehensive Loss (50,112) (17,929)
------------ ------------
Total Shareholders' Equity 975,894 990,783
------------ ------------
$ 14,789,054 $ 13,857,385
============ ============
See notes to consolidated financial statements.
-3-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
(In Thousands, Except Per Share Data) 2001 2000
- --------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $223,098 $161,811
Interest on Investment Securities 56,844 59,784
Other Interest Income 5,076 334
-------- --------
Total Interest Income 285,018 221,929
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 21,759 17,081
Time Deposits 89,976 63,490
-------- --------
Total Interest on Deposits 111,735 80,571
Interest on Short-Term Debt 12,915 24,660
Interest on Long-Term Debt 44,254 18,932
Interest on Junior Subordinated Debentures 7,237 4,564
-------- --------
Total Interest Expense 176,141 128,727
-------- --------
Net Interest Income 108,877 93,202
Provision for Loan and Lease Losses 23,687 9,700
-------- --------
Net Interest Income After Provision
for Loan and Lease Losses 85,190 83,502
Noninterest Income:
Service Charges on Deposit Accounts 8,472 8,493
Loan Servicing Fees 11,070 11,806
Other Service Charges and Fees 12,017 9,835
Operating Lease Income 11,421 10,086
Gain on Sales of Loans and Leases - Non-Cash - 15,441
Gain on Sales of Loans and Leases - Cash 379 7,698
Warrant Gains - 1,000
Security Gains - 24
Other 9,379 4,555
-------- --------
Total Noninterest Income 52,738 68,938
Noninterest Expense:
Salaries, Wages and Benefits 48,132 40,370
Charges and Fees 7,085 4,747
Occupancy 5,608 5,008
Depreciation on Operating Lease Equipment 6,565 6,285
Equipment Expense 6,658 6,236
Professional Services 5,423 5,033
Merger and Restructuring Charges - 39,300
Other 15,351 16,043
-------- --------
Total Noninterest Expense 94,822 123,022
-------- --------
Income Before Income Taxes 43,106 29,418
Applicable Income Taxes 15,303 12,646
-------- --------
Net Income $ 27,803 $ 16,772
======== ========
Per Common Share:
Basic Earnings Per Share $ 0.56 $ 0.34
Diluted Earnings Per Share 0.55 0.33
Cash Dividends Paid 0.24 0.24
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 Comprehensive
(In Thousands) Stock Stock Surplus Earnings Loss Total
- -------------------------------------------------------------------------------------------------
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 and
Accompanying Tax Benefits 32 1,900 1,932
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
======= ======= ======== ========= ========= =========
Balance at January 1, 2001 $ 7,000 $14,469 $314,895 $ 672,348 $ (17,929) $ 990,783
Net Income 27,803 27,803
Change in Unrealized
Gain/(Loss) on:
Hedging Instruments (12,486) (12,486)
Marketable Securities 8,635 8,635
---------
Comprehensive Income Before
Cumulative Effect of a
Change in Accounting
Principle 23,952
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
---------
Comprehensive Income (4,380)
Dividends Paid on:
Preferred Stock (237) (237)
Common Stock (11,722) (11,722)
Exercise of Stock Options and
Accompanying Tax Benefits 11 609 620
Distribution of Contingent
Shares for Prior Year
Acquisition 8 822 830
------- ------- -------- --------- --------- ---------
Balance at March 31, 2001 $ 7,000 $14,488 $316,326 $ 688,192 $ (50,112) $ 975,894
======= ======= ======== ========= ========= =========
See notes to consolidated financial statements.
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------
(In Thousands) 2001 2000
- --------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 27,803 $ 16,772
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 23,687 9,700
Amortization of Goodwill 1,111 956
Other Amortization and Accretion (8,344) (7,990)
Depreciation of Leased Equipment and
Premises and Equipment 12,348 11,558
Tax Benefit Received from Exercise of Stock Options 280 220
Realized Investment Security Gains - (24)
Proceeds from Sale of Loans Held for Sale 409,083 524,415
Origination of Loans Held for Sale (362,229) (529,886)
Realized Gains on Loans Held for Sale - (15,557)
Increase in Trading Account Securities (9,924) -
(Increase) Decrease in Interest Receivable 2,843 (1,970)
(Increase) Decrease in Other Assets (32,182) 7,995
Increase in Interest Payable 16,015 8,205
Decrease in Other Liabilities (38,144) (3,572)
----------- -----------
Net Cash Provided By Operating Activities 42,347 20,822
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 691,403 404,344
Proceeds from Maturities and Prepayments 286,577 90,913
Purchases (1,123,267) (1,494,631)
(Increase) Decrease in Receivables Due From
Securitization Trusts 93,127 (76,838)
Net Increase in Loans and Leases (574,996) (266,234)
Net (Increase) Decrease in Operating Lease Equipment 6,639 (11,871)
Net Increase in Premises and Equipment (4,324) (3,169)
----------- -----------
Net Cash Used In Investing Activities (624,841) (1,357,486)
----------- -----------
Financing Activities:
Increase (Decrease) in Deposits of
Securitization Trusts (76,576) 81,334
Increase in Other Deposits 363,577 266,449
Increase in Short-Term Debt 560,421 395,346
Principal Payments on Long-Term Debt (70,023) (85,998)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 122,262 540,000
Cash Dividends Paid (11,959) (11,916)
Proceeds from Exercise of Stock Options 340 1,712
Net Increase in Other Equity Items - 2,258
----------- -----------
Net Cash Provided By Financing Activities 888,042 1,189,185
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 305,548 (147,479)
Cash and Cash Equivalents at Beginning of Period 369,028 376,143
----------- -----------
Cash and Cash Equivalents at End of Period $ 674,576 $ 228,664
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 160,126 $ 120,521
Income Taxes 8,207 22,217
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 1,346 5,057
Residual Interest in Securitized Assets Created from
the Sale of Loans - 54,695
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. ("Provident") and its subsidiaries,
all of which are wholly owned. All significant intercompany balances
and transactions have been eliminated. Certain reclassifications have
been made to conform to the current year presentation.
The financial statements presented herein should be read in
conjunction with the financial statements and notes thereto included
in Provident's 2000 annual report on Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended
March 31,
--------------------
(In Thousands, Except Per Share Data) 2001 2000
- ----------------------------------------------------------------------
Basic:
Net Income $ 27,803 $ 16,772
Less Preferred Stock Dividends (237) (237)
-------- --------
Income Available to Common Shareholders 27,566 16,535
Weighted-Average Common Shares Outstanding 48,866 48,691
-------- --------
Basic Earnings Per Share $ 0.56 $ 0.34
======== ========
Diluted:
Net Income $ 27,803 $ 16,772
Weighted-Average Common Shares Outstanding 48,866 48,691
Assumed Conversion of:
Convertible Preferred Stock 988 988
Dilutive Stock Options (Treasury Stock Method) 683 706
-------- --------
Dilutive Potential Common Shares 50,537 50,385
-------- --------
Diluted Earnings Per Share $ 0.55 $ 0.33
======== ========
-7-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
- ----------------------------------------------------------------------
SUBORDINATED DEBENTURES
- -----------------------
Wholly-owned subsidiary trusts of Provident have issued $462.5 million
of preferred securities and, in turn, purchased $462.5 million of
newly-authorized Provident junior subordinated debentures. The
debentures provide interest and principal payments to fund the trusts'
obligations. Provident fully and unconditionally guarantees the
preferred securities. The preferred securities qualify as Tier 1
capital for bank regulatory purposes. The sole assets of the trusts
are the debentures. The junior subordinated debentures consisted of
the following at March 31, 2001:
Stated Effective Maturity
(Dollars in Thousands) Rate Rate(1) Date Amount
- ---------------------------------------------------------------------
November 1996 Issuance 8.60% 8.62% 12/01/26 $ 99,019
June 1999 Issuance 8.75% 7.67% 06/30/29 121,292
November 2000 Issuance 10.25% 9.08% 12/31/30 109,055
March 2001 Issuance 9.45% 9.45% 03/30/31 121,062
--------
Total $450,428
========
(1) Effective rate reflects interest rate after adjustment for notes
issued at discount or premium, capitalized fees associated with
the issuance of the debt and interest rate swap agreements entered
to alter the payment characteristics.
NOTE 4. RESTRICTED ASSETS
- --------------------------
Provident formed the subsidiaries listed below to account for and
support the process of transferring, securitizing and/or selling
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, 2001 follow:
(In Thousands) Total Assets
- ----------------------------------------------------------------------
Provident Auto Leasing Company $469,571
Provident Auto Rental LLC (2000-1) 390,405
Provident Lease Receivables Company LLC 223,316
Provident Auto Rental LLC (1999-1) 187,122
Provident Auto Rental LLC (2000-2) 165,809
Provident Auto Rental Company LLC (1998-2) 36,855
Provident Auto Rental Company LLC (1998-1) 34,917
NOTE 5. DERIVATIVE INSTRUMENTS
- -------------------------------
ACCOUNTING POLICY FOR DERIVATIVE INSTRUMENTS: Provident adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities",
on January 1, 2001. SFAS No. 133 requires that derivatives be
recognized as either assets or liabilities in the balance sheet and
that those instruments be measured at fair value. The accounting for
-8-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the gain or loss resulting from the change in fair value depends on
the intended use of the derivative. For a derivative used to hedge
changes in fair value of a recognized asset or liability, or an
unrecognized firm commitment, the gain or loss on the derivative will
be recognized in earnings together with the offsetting loss or gain on
the hedged item. This results in earnings recognition only to the
extent that the hedge is ineffective in achieving offsetting changes
in fair value. For a derivative used to hedge changes in cash flows
associated with forecasted transactions, the gain or loss on the
effective portion of the derivative will be deferred, and reported as
accumulated other comprehensive income, a component of shareholders'
equity, until such time the hedged transaction affects earnings. For
derivative instruments not accounted for as hedges, changes in fair
value are required to be recognized in earnings.
FAIR VALUE HEDGING STRATEGY: Provident uses derivative instruments to
assist in the management of its interest rate risk. These derivative
instruments consist generally of interest rate swap agreements, but
also include interest rate cap and floor agreements. The interest rate
swaps effectively modify Provident's exposure to interest risk by
converting fixed rate liabilities, generally time deposits and
long-term debt, to a floating rate. These interest rate swaps involve
the receipt of fixed rate amounts in exchange for floating rate
interest payments over the life of the agreements without an exchange
of the underlying principal amounts.
As the changes in fair value of the hedged items offset the changes in
fair value of the derivatives, no gain or loss was recognized at the
time of adoption of SFAS No. 133 or for the three months ended March
31, 2001.
CASH FLOW HEDGING STRATEGY: Provident has also entered into interest
rate swap agreements to reduce the impact of interest rate changes on
future interest expense. These interest rate swaps convert floating
rate debt to a fixed rate basis. These interest rate swaps have
generally been used to hedge interest payments involving floating rate
debt and off-balance sheet securitization transactions with maturities
up to December 2012.
Upon the adoption of SFAS No. 133 and for the three months ended March
31, 2001, Provident recorded reductions in accumulated other
comprehensive income of $28.3 million and $12.5 million, respectively.
No gain or loss was recognized at the time of adoption or for the
first quarter of 2001 as a result of ineffective cash flow hedges.
During the next twelve months, management expects to reclassify $23.8
million of net losses on derivative instruments from accumulated other
comprehensive income to earnings which it believes will be offset by
improved cash flows of the hedged items associated with these
derivative instruments. Management's expectation is that the net
effect of the hedging transactions will result in no material impact
on the Statement of Income over the next twelve months.
-9-
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. 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
March 31,
(Dollars in Thousands, --------------------------------
Except Per Share Data) 2001 2000 Change
----------------------------------------------------------------------------------------
Net Interest Income $108,877 $ 93,202 17%
Gain on Sale of Loans and Leases 379 23,139 (98)
Other Noninterest Income 52,359 45,799 14
Total Revenue 161,615 162,140 (0)
Provision for Loan
and Lease Losses 23,687 9,700 144
Noninterest Expense(1) 94,822 123,022 (23)
Net Income(1) 27,803 16,772 66
Diluted Earnings per Share(1) 0.55 0.33 67
Return on Average Equity(1) 11.48% 7.25%
Return on Average Assets(1) 0.78% 0.58%
Efficiency Ratio 58.66% 51.64%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $ 94,822 $ 83,722 13%
Net Income 27,803 43,772 (36)
Diluted Earnings per Share 0.55 0.87 (37)
Return on Average Equity 11.48% 18.92%
Return on Average Assets 0.78% 1.51%
Provident reported net income of $27.8 million for the first three
months of 2001 compared to $16.8 million for the same period in 2000.
On an operating income basis (excludes unusual and significant
expenses), net income for the first quarter of 2001 and 2000 was $27.8
million and $43.8 million, respectively. Operating earnings for 2000
exclude a $27.0 million after-tax charge related to the acquisition of
Fidelity Financial of Ohio, Inc. Operating earnings per diluted share
was $.55 for the first quarter of 2001 versus $.87 in last year's
first quarter. First quarter 2001 returns on average equity and assets
were 11.48% and .78%, respectively, compared with 18.92% and 1.51% for
2000's first quarter.
The lower net income and financial performance ratios for 2001 were
the result of the third quarter 2000 decision to 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 cause Provident's earnings to be lower over the short
term.
-11-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Provident's total revenue (net interest income plus noninterest
income) remained relatively stable during 2001 compared to the first
quarter of 2000 despite the absence of gains on sale of loans and
leases during 2001. Net interest income increased by $15.7 million, or
17%, as a result of strong growth in both the corporate and consumer
lending portfolios. Noninterest income, excluding gain on sale of
loans and leases, increased $6.6 million, or 14%, primarily due to
growth in other service charges and fees. Gain on sale of loans and
leases decreased $22.8 million due to the change in the structure of
securitizations.
Total average assets for the first three months of 2001 grew $2.7
billion, or 23% as compared to the same period during 2000. The
increase was primarily in the consumer and corporate lending
portfolios, which experienced growth of $1.3 billion and $1.1 billion,
respectively, in average assets during this time period.
The provision for loan and lease losses was $23.7 million for the
first quarter of 2001 as compared to $9.7 million during the same time
period of 2000. 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, (2)
higher net charge-offs, and (3) a higher ratio of reserve for loan and
lease losses to total loans and leases.
Operating noninterest expense increased $11.1 million, or 13%, to
$94.8 million for the first quarter of 2001 as compared to $83.7
million for the first quarter of 2000. The increase in noninterest
expense was primarily the result of the acquisition of Red Capital
Group in September of 2000. The ratio of operating noninterest expense
to tax equivalent revenue ("efficiency ratio") increased to 58.66%
during 2001 as compared to 51.64% for the same period during 2000. The
increase in the efficiency ratio was principally the 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 periods
ended March 31, 2001 and 2000.
Three Months Ended
March 31,
-----------------------------------
(Dollars in Millions) 2001 2000 Change
- ---------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 79.9 $ 68.9 16%
Retail Banking 60.2 61.9 -3%
Mortgage Banking 21.5 31.3 -31%
Corporate Center - - n/m
------- -------
$ 161.6 $ 162.1 0%
======= =======
Operating Income:
Commercial Banking $ 19.5 $ 22.9 -15%
Retail Banking 8.3 11.3 -27%
Mortgage Banking - 9.6 -100%
Corporate Center - - n/m
------- -------
$ 27.8 $ 43.8 -37%
======= =======
Average Assets:
Commercial Banking $ 6,452 $ 5,080 27%
Retail Banking 3,074 2,138 44%
Mortgage Banking 1,978 1,060 87%
Corporate Center 2,813 3,326 -15%
------- -------
$14,317 $11,604 23%
======= =======
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 matched funded transfer
pricing methodology that isolates the business units from
fluctuations in interest rates, and provides management with the
ability to measure business unit, product and customer level
profitability based on the financial characteristics of the products
rather than the level of interest rates.
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.
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.
-13-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, a provider of construction and
permanent mortgage financing; Capstone Realty Advisors, a commercial
real estate servicing and origination business, Information Leasing
Corporation, a national small to mid-ticket equipment leasing
company; Provident Commercial Group, a national lessor of large
equipment; and Red Capital Group, a financier and loan servicer of
multifamily and health-care facilities.
Commercial Banking is the company's largest line of business
contributing 70% of Provident's net operating income in the first
quarter of 2001. Average assets for the first three months of 2001
increased 27% and total revenues were up 16% compared to the same
time period in 2000. However, net operating income for the first
three months of 2001 declined $3.4 million compared to the same time
period for 2000. The lower net operating income was due primarily to
the third quarter 2000 decision to change securitization structures
which eliminated gain-on-sale accounting. This decision resulted in
no gain on sales being recognized during the first quarter of 2001
as compared to pre-tax gains of $7.4 million being recognized during
the first quarter of 2000. Also contributing to the lower income
level was a larger loan loss provision resulting from higher credit
losses and management's decision to increase the reserve for loan
losses to total loans ratio. Based upon uncertain economic
conditions, the ratio was increased from 1.44% to 1.70%.
Capstone Realty Advisors and Red Capital Group made significant
contributions to revenue growth during the first three months of
2001. Capstone, a commercial real estate servicing and origination
business, was acquired in September 1999. Red Capital, acquired in
September 2000, provides a national platform to generate fee income
from originating, selling and servicing in the multifamily housing
and health-care real estate markets. Plans are to continue the
expansion of both the Capstone and Red Capital businesses in 2001,
thereby increasing revenues and improving the balance between spread
and fee-based revenue.
Commercial Banking continued its history of strong asset generation
as evidenced by average loan balances increasing 18% from first
quarter 2000 to 2001. Contributing to this growth was the expansion
of the Commercial Lending and Commercial Mortgage business units,
accompanied by the opening of commercial banking offices in the
Akron, Baltimore, Chicago, Dallas, Denver, Houston and Pittsburgh
markets.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Retail Banking provides consumer lending, deposit accounts, trust,
brokerage and investment products and services to its customers.
This business line includes Small Business Banking, Consumer
Lending, Consumer Banking and Provident Financial Advisors business
units. Operating income decreased $3.0 million for the three-month
period ended March 31, 2001 as compared to the same period in 2000.
The primary driver for the decrease was the loan loss provision.
Provision increased as a result of management's decision to increase
the reserve for loan losses to total loans ratio. In addition,
provision increased from the prior year due to higher on balance
sheet loan balances resulting from the decision to structure
securitizations as secured financings rather than sales. Loan
balances for the first quarter of 2001 grew by 42% as compared to
the first quarter of 2000. Partially offsetting the increased
provision was higher net interest income.
Retail Banking benefited from growth in deposits. Average core
deposits for the first quarter of 2001 grew by 17% as compared to
the first quarter of 2000. Significant deposit growth came from the
Florida banking centers and from the Internet channel. To further
capitalize on opportunities in Florida, Provident opened five
additional Financial Centers bringing its total to eleven in the
Sarasota and surrounding area. In 2001, Provident will continue to
enhance its distribution of products and services via on-line
banking, ATM machines and a call center.
o Mortgage Banking originates, services and sub-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 2001 was $0, as compared to $9.6
million for same period in 2000. The lower operating income for 2001
was driven by the decision to change the structure of
securitizations resulting in the elimination of gain-on-sale
accounting. This decision resulted in no gain on sales being
recognized during the first quarter of 2001 as compared to pre-tax
gains of $15.4 million being recognized during the first quarter of
2000. Partially offsetting the elimination of gain-on-sale income
was higher net interest income as loans now remain on the balance
sheet. As loans remain on the balance sheet, additional provision
for loan losses was incurred. Additionally, provision increased due
to management's decision to increase the ratio of loan loss reserves
to total loans.
In conjunction with the decision to eliminate the use of
gain-on-sale accounting, the level of nonconforming loan
originations is being moderated. During the first quarter of 2001,
Mortgage Banking originated or purchased $349 million of
nonconforming loans compared to $511 million in the first quarter of
2000. Mortgage Banking is now focusing its efforts toward growing
its sub-servicing operations for third-party originators. By
leveraging the expertise from its existing loan servicing platform,
Provident expects to see significant growth from this low risk area.
-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 three months ended March 31, 2001,
increased $15.7 million compared to the first three months of 2000.
The increase in interest income was due primarily to (1) an increase
in average earning assets of $2.6 billion, or 25%, and (2) an increase
in the average yield on earning assets of 33 basis points. The
increase in average earning assets resulted primarily from the growth
of the commercial loan, consumer lease and residential mortgage
portfolios. Interest expense for the three months ended March 31, 2001
increased due to a 26% increase in total interest bearing liabilities
with a 52 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. For the first three months of 2001, the
net interest margin, on a tax-equivalent basis, was 3.42% compared to
3.62% for the same period in 2000. This decrease was driven by changes
in rates and volumes of earning assets and the corresponding funding
sources. 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, 2001 and 2000.
-16-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended
-----------------------------------------
March 31, 2001 March 31, 2000
------------------ ------------------
Average Average Average Average
(Dollars in Millions) Balance Rate Balance Rate
- ---------------------------------------------------------------------------
Assets:
Loans and Leases:
Corporate Lending:
Commercial $ 4,600 8.80% $ 4,091 9.18%
Mortgage 649 9.32 580 9.02
Construction 804 8.42 571 8.60
Lease Financing 649 11.56 393 11.39
------- ----- ------- -----
Total Corporate Lending 6,702 9.07 5,635 9.26
Consumer Lending:
Residential 941 11.59 376 11.42
Installment 663 10.76 526 10.02
Lease Financing 1,079 10.77 484 6.88
------- ----- ------- -----
Total Consumer Lending 2,683 11.06 1,386 9.31
------- ----- ------- -----
Total Loans and Leases 9,385 9.64 7,021 9.27
Investment Securities 3,281 7.03 3,324 7.24
Federal Funds Sold and Reverse
Repurchase Agreements 96 5.77 26 5.10
Other Short Term Investments 172 8.73 - -
------- ----- ------- -----
Total Earning Assets 12,934 8.94 10,371 8.61
Cash and Due From Banks 297 242
Other Assets 1,086 991
------- -------
Total Assets $14,317 $11,604
======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 464 3.41 $ 331 2.09
Savings Deposits 1,501 4.82 1,321 4.68
Time Deposits 5,727 6.37 4,471 5.71
------- ----- ------- -----
Total Deposits 7,692 5.89 6,123 5.29
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 780 5.13 1,514 5.78
Commercial Paper 219 5.61 211 5.49
Short-Term Notes Payable 2 5.14 2 5.63
------- ----- ------- -----
Total Short-Term Debt 1,001 5.24 1,727 5.75
Long-Term Debt 2,731 6.57 1,241 6.13
Junior Subordinated Debentures 335 8.76 220 8.34
------- ----- ------- -----
Total Interest Bearing
Liabilities 11,759 6.08 9,311 5.56
Noninterest Bearing Deposits 1,260 1,143
Other Liabilities 330 225
Shareholders' Equity 968 925
------- -------
Total Liabilities and
Shareholders' Equity $14,317 $11,604
======= =======
Net Interest Spread 2.86% 3.05%
==== ====
Net Interest Margin 3.42% 3.62%
==== ====
-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 $23.7 million and $9.7
million for the first three months of 2001 and 2000, respectively. The
ratio of reserve for loan and lease losses to total loans and leases
was 1.70% and 1.44% at March 31, 2001 and 2000, respectively. During
the fourth quarter of 2000, general economic conditions weakened and
Provident began to see signs of deterioration in a portion of the
commercial loan portfolio with lower credit ratings. As a result of
the change in asset quality indicators and the uncertain economic
environment, the ratio of loan and lease losses to total loans and
leases was increased to 1.70% and maintained at that level during the
first quarter of 2001.
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) 2001 2000
- -----------------------------------------------------------------------
Balance at Beginning of Period $ 154,300 $ 94,045
Acquired Reserves 1,275 -
Provision for Loan and Lease Losses 23,687 9,700
Loans and Leases Charged Off (19,326) (9,448)
Recoveries 3,746 2,772
--------- ---------
Balance at End of Period $ 163,682 $ 97,069
========= =========
Reserve for Loan and Lease Losses
as a Percent of:
Nonaccrual Loans 154.11% 174.66%
Nonperforming Assets 144.14% 154.00%
Total Loans and Leases 1.70% 1.44%
-18-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table presents the distribution of net loan charge-offs
by loan type for the three-month periods ended March 31, 2001 and
2000:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------------------------- --------------------------------
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
- ----------------------------------------------------------------------------------------------
Corporate Lending:
Commercial $ 9,792 0.85% 62.9% $ 4,262 0.42% 63.8%
Mortgage 25 0.02 0.2 - - -
Construction - - - - - -
Lease Financing 625 0.38 4.0 308 0.31 4.6
-------- ----- ------- -----
Net Corporate Lending 10,442 0.62 67.1 4,570 0.32 68.4
Consumer Lending:
Residential 3,295 1.40 21.1 934 0.99 14.0
Installment 856 0.52 5.5 346 0.26 5.2
Lease Financing 987 0.37 6.3 826 0.68 12.4
-------- ----- ------- -----
Net Consumer Lending 5,138 0.77 32.9 2,106 0.61 31.6
-------- ----- ------- -----
Net Charge-Off's $ 15,580 0.66 100.0 $ 6,676 0.38 100.0
======== ===== ======= =====
The increase in net charge-offs for the first quarter of 2001 was due
primarily to the charge off of five larger commercial loans during the
first quarter of 2001 compared to only two during the first quarter of
2000.
-19-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at March 31, 2001 were $113.6 million compared to
$104.8 million and $63.0 million as of December 31, 2000 and March 31,
2000, respectively. Unfavorable business conditions required Provident
to place three large loans, totaling approximately $52 million, on
nonaccrual status late in the fourth quarter of 2000. In conjunction
with the changes in asset quality indicators in the fourth quarter and
the uncertain economic environment, several large commercial loan
charge-offs were recorded during the fourth quarter of 2000. The
composition of nonperforming assets over the past five quarters is
provided in the following table.
2001 2000
-------- ---------------------------------------------
First Fourth Third Second First
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $ 74,172 $ 74,401 $ 48,031 $ 52,397 $ 46,282
Mortgage 1,676 1,712 1,529 1,576 1,654
Construction 4,520 - - - -
Lease Financing 8,685 6,503 5,147 5,165 2,016
-------- -------- -------- -------- --------
Total Corporate Lending 89,053 82,616 54,707 59,138 49,952
Consumer Lending:
Residential 17,160 13,404 11,371 6,290 5,624
Installment - - - - -
Lease Financing - - - - -
-------- -------- -------- -------- --------
Total Consumer Lending 17,160 13,404 11,371 6,290 5,624
-------- -------- -------- -------- --------
Total Nonaccrual Loans 106,213 96,020 66,078 65,428 55,576
Other Real Estate 7,348 8,805 8,706 5,108 7,457
-------- -------- -------- -------- --------
Total Nonperforming Assets $113,561 $104,825 $ 74,784 $ 70,536 $ 63,033
======== ======== ======== ======== ========
Loans 90 Days Past Due
Still Accruing $ 42,327 $ 28,780 $ 28,959 $ 23,787 $ 13,908
Nonaccrual Loans to
Total Loans and Leases 1.10% 1.06% 0.79% 0.97% 0.82%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 1.18% 1.15% 0.89% 1.04% 0.93%
Total Assets 0.77% 0.76% 0.57% 0.62% 0.54%
Nonaccrual loans increased $10.2 million during the first quarter of
2001. The increase was composed of $45.0 million of additions to
nonaccrual loans, less $23.8 million of payments on nonaccrual loans,
$9.6 million of nonaccrual loans charged off and $1.4 million
transferred to other real estate. Other real estate decreased $1.5
million during the first quarter of 2001. Activity within other real
estate included $2.3 million of sales and payments on properties, $1.4
million of additions from foreclosed properties and approximately $.6
million of charge-offs on property in other real estate. The increase
in loans ninety days past due still accruing was due primary 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 three-month periods ended March 31, 2001 and
2000:
Three Months Ended
March 31,
---------------------- Pctg
(Dollars in Thousands) 2001 2000 Change
- ----------------------------------------------------------------------
Service Charges on
Deposit Accounts $ 8,472 $ 8,493 (0.2)%
Loan Servicing Fees 11,070 11,806 (6.2)
Other Service Charges and Fees 12,017 9,835 22.2
Operating Lease Income 11,421 10,086 13.2
Warrant Gains - 1,000 n/m
Security Gains - 24 n/m
Other 9,379 4,555 105.9
-------- --------
Noninterest Income Before Gain
on Sale of Loans and Leases 52,359 45,799 14.3
Gain on Sale of Loans and Leases:
Non-Cash - 15,441 n/m
Cash 379 7,698 (95.1)
-------- --------
Total Noninterest Income $ 52,738 $ 68,938 (23.5)
======== ========
Explanations for significant changes in noninterest income by category
follow:
o Loan servicing fees decreased $.7 million due primarily to the
decrease in the residential mortgage lending area more than
offsetting the increase in the small to mid-ticket equipment leasing
area.
o Other service charges and fees increased $2.2 million due primarily
to origination and other fee income produced by Red Capital Group, a
financing and loan servicer for multifamily and health-care
facilities that was acquired in September 2000.
o Operating lease income increased $1.3 million due primarily to the
growth of Provident Commercial Group, a national lessor of
large-ticket equipment.
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 of $0 and $1.0 million
were recognized during the first quarter of 2001 and 2000,
respectively.
o Other income increased $4.8 million during the first quarter of 2001
due primarily to increases in income from miscellaneous fees earned
by Red Capital Group and gains realized on the sale of equipment
lease residuals.
-21-
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 $22.8 million in 2001
due to the third quarter 2000 decision to change the structure of
securitizations resulting in the elimination of gain-on-sale
accounting. Securitizations after this date have been structured in
order to account for the transactions as secured financings. The
following table provides detail of the gain on sales recognized
during the first quarters of 2001 and 2000:
Three Months Ended
March 31,
------------------
(In Thousands) 2001 2000
--------------------------------------------------------------------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $ - $15,441
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations - 7,380
Other Loan Sales 379 318
------- -------
Total Gain on Sales - Cash 379 7,698
------- -------
Total Gain on Sales $ 379 $23,139
======= =======
A detailed discussion of the various securitizations of loans and
leases is provided under the "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report.
Noninterest Expenses
- --------------------
The following table details the components of noninterest expense and
their change for the first quarters of 2001 and 2000:
Three Months Ended
March 31,
------------------- Pctg
(Dollars in Thousands) 2001 2000 Change
- ----------------------------------------------------------------------
Salaries, Wages and Benefits $ 48,132 $ 40,370 19.2%
Charges and Fees 7,085 4,747 49.3
Occupancy 5,608 5,008 12.0
Depreciation on Operating
Lease Equipment 6,565 6,285 4.5
Equipment Expense 6,658 6,236 6.8
Professional Services 5,423 5,033 7.7
Other 15,351 16,043 (4.3)
-------- --------
Noninterest Expense Before Merger
and Restructuring Charges 94,822 83,722 13.3
Merger and Restructuring Charges - 39,300 n/m
-------- --------
Total Noninterest Expense $ 94,822 $123,022 (22.9)
======== ========
Explanations for significant changes in noninterest expense by
category follow:
o Salaries, wages and benefits increased $7.8 million in the first
quarter of 2001 due primarily to increased staffing expenses
associated with Red Capital Group, which was acquired in September
of 2000.
-22-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Charges and fees increased $2.3 million due primarily to expenses
related to a credit risk transfer transaction. Detail concerning
this transaction is provided in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Derivative and Off-Balance Sheet Financial Instruments" section of
this report.
o An increase in rent expense was the primary reason for the increase
in occupancy expense.
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 due to higher depreciation expense
related to ATMs and the acquisition of Red Capital Group.
o Professional fees increased as a result of technology expenditures
related to Red Capital Group and other miscellaneous professional
fees.
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.
FINANCIAL CONDITION
- -------------------
Short-Term Investments and Investment Securities
- ------------------------------------------------
Federal funds sold and reverse repurchase agreements increased $277
million since December 31, 2000. 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 increased $10 million during the first
quarter of 2001. Provident trades investment securities with the
intention of recognizing short-term profits. These securities are
carried at fair value with realized and unrealized gains and losses
reported in noninterest income.
Provident classified $159 million of loans as held for sale at March
31, 2001. This is a decrease of $47 million from the amount reported
at December 31, 2000. These loans consist of multifamily loans which
are pending securitization by either the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation or the Federal
Housing Association. These loans are generally outstanding for sixty
days or less. Activities related to both the loans held for sale and
the trading account securities are part of the operations of Red
Capital Group.
-23-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $166 million during the first three
months of 2001. U.S. government agency mortgage-backed securities
accounted for the majority of the increase, as funds obtained from
deposit growth, debt borrowings, and the sale of private
mortgage-backed securities and other debt securities were deployed
into investment securities with higher credit quality, increased
liquidity and an improved interest rate risk profile.
Loans and Leases
- ----------------
As of March 31, 2001 total loans and leases were $9.6 billion compared
to $9.1 billion at December 31, 2000. Provident had an additional $5.4
billion and $5.8 billion of off-balance sheet loans and leases as of
March 31, 2001 and December 31, 2000, 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".
The following table shows the composition of the commercial loan
category by industry type at March 31, 2001:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- ----------------------------------------------------------------------
Manufacturing $ 900.6 19 $ 5.8
Service Industries 807.2 17 36.0
Real Estate Operators/Investment 449.2 10 0.1
Retail Trade 397.5 9 3.5
Wholesale Trade 347.7 8 1.0
Transportation/Utilities 330.8 7 5.9
Finance and Insurance 328.5 7 12.7
Construction 222.2 5 1.3
Automobile Dealers 144.5 3 -
Other 712.8 15 7.9
---------- --- -------
Total $ 4,641.0 100 $ 74.2
========== === =======
-24-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At March 31, 2001, Provident had approximately $903 million of
commercial loans that are shared national credit loans. Shared
national credit loans are loans that have a principal balance of at
least $20 million and involve at least three participating banks. In
an on-going effort to diversify its portfolio, the shared national
credit loans that Provident participates in are distributed across
nine industry types, with the largest industry concentration
accounting for approximately 29% of its total shared national credit
loans. The average outstanding balance of a shared national credit
loan was $6.1 million. Credit quality for the shared national credit
loans was not substantially different than the rest of the commercial
loan portfolio.
The composition of the commercial mortgage and construction loan
categories by property type at March 31, 2001 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- ----------------------------------------------------------------------
Residential Development $ 334.6 23 $ 5.1
Office/Warehouse 244.6 17 0.2
Apartments 224.6 15 -
Shopping/Retail 207.0 14 0.1
Land 89.2 6 -
Hotels/Motels 69.0 5 -
Health Facilities 33.9 2 -
Industrial Plants 30.7 2 -
Auto Sales and Service 11.6 1 -
Churches 11.1 1 -
Other Commercial Properties 214.4 14 0.8
---------- --- -------
Total $ 1,470.7 100 $ 6.2
========== === =======
The following table shows the composition of the installment loan
category by loan type at March 31, 2001:
(Dollars in Millions) Amount %
- ---------------------------------------------------------
Home Equity $ 383.9 57
Indirect Installment 186.0 27
Direct Installment 65.1 10
Credit Card 13.5 2
Other Consumer Loans 28.9 4
-------- ---
Total $ 677.4 100
======== ===
Deposits
- --------
Total deposits increased $259 million during the first quarter of
2001. Average core deposits for the first three months of 2001 grew at
an annualized rate of 23%, with significant contribution coming from
Florida banking centers and Internet deposit-gathering initiatives.
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Borrowed Funds
- --------------
Short-term debt increased $560 million, or 88%, during the first
quarter of 2001. The increase was due primarily to an increase in
federal funds purchased and repurchase agreements.
Long-term debt decreased $61 million, or 2%, during the first quarter
of 2001 due primarily to principal payments on the debt.
During the first quarter of 2001, Provident established Provident
Capital Trust IV. Capital Trust IV issued capital securities of $125
million of preferred stock to the public and $3.9 million of common
stock to Provident. Proceeds from the issuance of the capital
securities were invested in Provident's 9.45% junior subordinated
debentures due 2031.
Noninterest-Bearing Liabilities
- -------------------------------
Other liabilities increased $67 million, or 23% during the first
quarter of 2001 due primarily to the adoption of the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". For further details concerning SFAS No. 133, see Note 5
of the Notes to Consolidated Financial Statements.
Capital Resources and Adequacy
- ------------------------------
Total shareholders' equity at March 31, 2001 was $976 million compared
to $991 million at December 31, 2000. The change in the equity balance
primarily relates to net income exceeding dividends by $16 million
(quarterly common dividend rate of $.24), an increase in the market
value of investment securities of 9 million (net of deferred taxes)
and a decrease in the market value of cash flow hedging instruments of
$41 million (net of deferred taxes) relating to the adoption of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
The following table of ratios is important for the analysis of capital
adequacy:
Three Months Ended Year Ended
March 31 2001 December 31, 2000
---------------------------------------
Average Shareholders' Equity to Average Assets 6.76% 7.82%
Dividend Payout to Net Earnings 43.01 64.85
Dividend Payout to Operating Earnings 43.01 47.45
Tier 1 Leverage Ratio 8.87 9.56
Tier 1 Capital to Risk-Weighted Assets 9.10 9.18
Total Risk-Based Capital To Risk-Weighted Assets 11.53 11.10
Capital expenditures planned by Provident in 2001 for premises and
equipment are currently estimated to be approximately $21 million.
Included in this amount are projected capital expenditures for the
purchase of data processing hardware and software, facility
renovations, branch additions, renovations and enhancements, and ATMs.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Through March 31, 2001, approximately $4 million of these expenditures
had been made.
Stock Options
- -------------
Options to purchase approximately 1.0 million shares of Provident
Common Stock were granted during the first three months of 2001. The
options have exercise prices ranging from $25.97 to $35.63.
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 penalized all
companies using gain-on-sale accounting. Although gain-on-sale
accounting is in compliance with Generally Accepted Accounting
Principles, the investment community clearly signaled its
dissatisfaction with this accounting method and management believed
this sentiment had been factored into Provident's stock price.
Additionally, 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 decided that securitizations
made during the third quarter 2000 and thereafter would be structured
to allow for the transactions to be treated as 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 cause Provident's earnings to be lower
over the short term.
Securitizations which were treated as sales have made 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.
-27-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
securitized and gains recognized for the various types of
securitization structures for the periods indicated:
Three Months Ended March 31,
----------------------------------------
2001 2000
----------------- -------------------
(In Thousands) Principal Gain Principal Gain
- ----------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $ - $ - $515,000 $ 15,441
Cash Gains:
Equipment Leases - - 167,780 7,380
Non-Recognition of Gains:
Automobile Leases - - 98,244 -
--- --- -------- --------
Total Securitizations $ - $ - $781,024 $ 22,821
=== === ======== ========
The securitization and sale of nonconforming residential, prime home
equity and credit card loans have resulted in the recognition of
non-cash gains. Gains recognized under this structure are referred to
as non-cash gains as Provident receives cash equal to the amount of
loans sold. The gains or losses are determined based on a present
value calculation of future cash flows of the underlying loans, net of
interest payments to security holders, loan loss and prepayment
assumptions and normal servicing revenue. These net cash flows, which
are represented by retained interests on securitized assets ("RISAs"),
are included in investment securities. No RISAs have been recorded
since June 2000.
Cash gains have been recognized from the securitization and sale of
equipment leases. Under the structure of these securitizations,
Provident sells the lease payments under the lease contract but
retains ownership of the underlying equipment. The cash received from
these sales exceeds the present value of the lease payments and
generated the cash gain.
The securitization and sale of automobile leases results in the
recognition of operating lease income or expense rather than 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.
-28-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Underlying assumptions used in the initial determination of future
cash flows on the loan and lease portfolios accounted for as sales
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 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.
Gain-on-sale accounting requires management to make assumptions
regarding prepayment speeds and credit losses for the securitized loan
and lease pools. 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. As a result, a significant level of assets is serviced by
Provident, which do not appear on its balance sheet. These off-balance
sheet assets were primarily responsible for the generation of $11.1
million and $11.8 million in loan servicing fees during the first
three months of 2001 and 2000, respectively.
The Mortgage Banking business line has been originating or acquiring
nonconforming residential loans since 1996. Major characteristics of
these nonconforming loans include: 54% with an "A" credit grade and
32% with a "B" credit grade; 70% with full documentation; 68% have
prepayment penalties; 96% are secured by first mortgages; 92% are
owner occupied; and, on average, have a 77% loan-to-value ratio.
-29-
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 or acquired by
loan type as of and for the three-month period ended March 31, 2001
and 2000 is provided below:
Three Months Ended March 31,
----------------------------
(In Thousands) 2001 2000
- ----------------------------------------------------------------------
Originations for the Period Ended:
Fixed Rate, Fully Amortizing $ 114,124 $ 226,895
Fixed Rate, 15-Year Balloon Payments 43,040 115,408
---------- ----------
Total Fixed Rate Loans 157,164 342,303
Adjustable Rate, 3/27 Loans 102,544 154,930
Other Adjustable Rate Loans 88,900 14,108
---------- ----------
Total Adjustable Rate Loans 191,444 169,038
---------- ----------
Total Originations $ 348,608 $ 511,341
========== ==========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,602,525 $1,382,500
Fixed Rate, 15-Year Balloon Payments 877,318 808,502
---------- ----------
Total Fixed Rate Loans 2,479,843 2,191,002
Adjustable Rate, 3/27 Loans 1,580,730 1,396,362
Adjustable Rate, 2/28 Loans 145,766 176,777
Other Adjustable Rate Loans 158,782 66,041
---------- ----------
Total Adjustable Rate Loans 1,885,278 1,639,180
---------- ----------
Total Outstanding $4,365,121 $3,830,182
========== ==========
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) 2001 2000
- ----------------------------------------------------------------------
Nonconforming Residential $3,394,163 $3,736,182
Auto Leases 1,093,911 1,417,332
Prime Home Equity 436,914 384,769
Equipment Leases 328,795 434,715
Credit Card 165,000 230,000
Warehouse - 186,200
---------- ----------
$5,418,783 $6,389,198
========== ==========
-30-
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
securitizations accounted for as sales, 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 March 31, 2001 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- ----------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 357,869 $ 25,462
Less:
Estimated Credit Loss (1) (8,794) (270)
Servicing and Insurance Expense (40,521) (3,340)
Discount to Present Value (39,354) (1,319)
--------- ---------
Carrying Value of Retained Interest in
Securitized Assets (1) $ 269,200 $ 20,533
========= =========
(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
$174.3 million.
Provident has provided for credit enhancements to its securitizations
structured as sales in the form of cash reserve accounts that are
funded at closing. The cash reserve accounts are funded at a
significantly higher balance than the level of estimated credit losses
to improve the credit grade of the securitization and thereby reduce
the rate paid to investors of the securitization trust. 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 cash reserve accounts, net of loss estimates, at March
31, 2001 follows:
Cash Loss Net Cash
(In Thousands) Reserves Estimates Reserves
- -------------------------------------------------------------------------------
Receivables from Securitization Trusts:
Nonconforming Residential Loans (1) $ 444,586 $ (94,880) $ 349,706
Equipment Leases 47,543 (9,259) 38,284
Prime Home Equity Loans 29,179 (781) 28,398
--------- --------- ---------
Total Securitization Trusts $ 521,308 $(104,920) $ 416,388
========= ========= =========
(1) Total loss estimates including those contained within the RISA are
$103.7 million.
-31-
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, 2001:
Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential(1) Equity(1) Leases(1)
- ------------------------------------------------------------------------------------
For the Three Months Ended March 31, 2001:
Average Securitized Assets $3,481,026 $451,153 $335,750
Net Charge-Offs 8,747 542 642
Net Charge-Offs to Average
Securitized Assets (Annualized) 1.01% 0.48% 0.76%
As of March 31, 2001:
Securitized Assets $3,394,163 $436,914 $328,795
Estimated Credit Losses Provided For 103,674 781 9,259
Estimated Credit Losses to
Period-End Securitized Assets 3.05% 0.18% 2.82%
Estimated Credit Loss Rates:
Annual Basis 1.09% 0.20% 1.00%
Percentage of Original Balance 2.94% 0.42% 1.97%
Delinquency Rates:
30 to 89 Days 4.08% 0.25% 2.31%
90 or More 10.49% 0.15% 0.80%
FANNIE MAE DUS PROGRAM
- ----------------------
Red Capital Group, which was acquired by Provident at the end of
September 2000, is an approved Fannie Mae Delegated Underwriting and
Servicing ("DUS") mortgage lender. Under the Fannie Mae DUS program,
Red Capital underwrites, funds and sells mortgage loans on multifamily
rental projects. Red Capital then services these mortgage loans on
Fannie Mae's behalf. Participation in the Fannie Mae DUS program
requires execution of a Loss Sharing Agreement under which Red Capital
agrees to share the risk of loan losses with Fannie Mae. Red Capital's
share of any losses is limited to 20% of the original principal
balance of each loan. The substance of the Loss Sharing Agreement is
that Red Capital assumes the initial loss up to 5% of the unpaid
principal balance, after which Red Capital and Fannie Mae split
additional losses 25% to Red Capital and 75% to Fannie Mae until such
additional losses total 20% of the unpaid principal balance. From that
point, losses are split 10% to Red Capital and 90% to Fannie Mae with
the total loss to Red Capital capped at 20% of the original principal
balance of the loan.
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Red Capital services multifamily mortgage loans under the DUS program
with an outstanding principal balances aggregating approximately $1.8
billion at March 31, 2001. At March 31, 2001, no DUS loans in Red
Capital's loan servicing portfolio were delinquent or in default. Red
Capital has established reserves of approximately $6.2 million for
possible loan losses under this program. The reserve is determined by
evaluating pools of homogenous loans and includes information based
upon industry and historical loss experience, as well as each
project's recent operating performance. Management believes the
reserve is maintained at a level that adequately provides for the
inherent losses within Red Capital's portfolio of loans sold under the
DUS program. The employees and management team of Red Capital have
originated and serviced the existing Fannie Mae DUS loan servicing
portfolio since 1995 without any charge-offs relating to the DUS
loans.
DERIVATIVE AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
- ------------------------------------------------------
In the normal course of business, Provident uses derivative and
off-balance sheet financial instruments to manage its interest rate
risk and to meet the financing needs of its customers. At March 31,
2001, these financial instruments consisted of standby letters of
credit of $221 million, commitments to extend credit of $2.5 billion,
and interest rate swaps, caps and floors with a notional amount of
$6.1 billion, $6.3 billion and $2.0 billion respectively.
During 2000, Provident entered into a credit risk transfer
transaction. Under this transaction, Provident transferred 98% of the
credit risk on a $1.8 billion auto lease portfolio, while retaining a
2% first-loss position. As a result of this transaction, Provident was
able to lower its credit concentration in auto leasing while reducing
its regulatory capital requirements.
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, the
secured financing of corporate and consumer loans and leases and the
generation of new deposits. Provident may also borrow both short-term
and long-term funds. Provident has an additional $1.4 billion
available for borrowing under a $1.5 billion bank notes program.
Approximately $76 million of long-term debt is due to be repaid during
the remainder of 2001.
-33-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 2001 by its banking
subsidiary was approximately $159 million. The Parent has not received
any dividends from its subsidiaries during the current year.
During 2001, the Parent has not drawn on any of its $200 million in
general purpose lines of credit with unaffiliated banks. Additionally
the Parent had approximately $212 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
derivative 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 derivative instruments
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. Additional information concerning the use of
derivative instruments is provided in Note 5 of the Notes to the
Consolidated Financial Statements.
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 1.4% for a 100 basis
point decrease; increase 2.9% for a 200 basis point decrease; decrease
1.4% for a 100 basis point increase; and decrease 2.8% 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Registrant's annual meeting of shareholders was held on April 26,
2001. 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 44,577,714 349,794
(b) Thomas D. Grote, Jr. 44,613,447 314,061
(c) Robert L. Hoverson 43,408,729 1,518,779
(d) Philip R. Myers 43,535,648 1,391,860
(e) Joseph A. Pedoto 44,611,806 315,702
(f) Sidney A. Peerless 44,599,157 328,351
(g) Joseph A. Steger 44,560,482 367,026
Votes Votes Broker
For Against Abstained Non-Votes
----------------------------------------------
Increase shares authorized
under Provident's 1997 Stock
Option Plan from 4,000,000
shares to 7,000,000 shares 36,194,783 3,790,785 694,642 4,247,298
Approval of Ernst & Young LLP
as Provident's independent
public accountants for 2001 44,760,152 113,836 53,520 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(b) Reports on Form 8-K:
Form 8-K (Item 5) filed on January 30, 2001 reaffirming current
earnings per share expectations for 2001 to fall within the range of
$2.75 - $2.85. In addition, the first quarter of 2001 earnings per
share is being targeted to fall within the range of $.50 - $.55.
Form 8-K (Items 5 and 7) filed on March 23, 2001 stating that
Provident had entered into an Underwriting Agreement relating to the
sale of 5,000,000 9.45% Trust Preferred Securities of Provident
Capital Trust IV.
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: May 4, 2001 \s\ Christopher J. Carey
------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
-37-
