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
June 30, 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 July 31, 2001 is 49,056,878.
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 . . . . . . . . . . . . . . . . . . . 34
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 35
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
(Dollars in Thousands) (Unaudited)
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 231,888 $ 286,051
Federal Funds Sold and Reverse Repurchase Agreements 82,671 82,977
Trading Account Securities 87,748 41,949
Loans Held for Sale 154,682 206,168
Investment Securities Available for Sale
(amortized cost - $3,094,514 and $3,041,204) 3,068,703 3,013,621
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,765,512 4,580,215
Mortgage 586,006 632,801
Construction 817,314 801,211
Lease Financing 1,185,972 607,478
Consumer Lending:
Residential 1,103,816 835,510
Installment 761,628 580,046
Lease Financing 1,200,443 1,039,645
------------ ------------
Total Loans and Leases 10,420,691 9,076,906
Reserve for Loan and Lease Losses (176,975) (154,300)
------------ ------------
Net Loans and Leases 10,243,716 8,922,606
Leased Equipment 191,695 215,227
Premises and Equipment 102,893 103,919
Receivables from Securitization Trusts 316,390 417,420
Other Assets 603,798 567,447
------------ ------------
$ 15,084,184 $ 13,857,385
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,145,640 $ 1,293,396
Interest Bearing 7,618,220 7,535,714
------------ ------------
Total Deposits 8,763,860 8,829,110
Short-Term Debt 1,769,045 639,023
Long-Term Debt 2,663,336 2,774,493
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 450,539 329,239
Accrued Interest and Other Liabilities 454,726 294,737
------------ ------------
Total Liabilities 14,101,506 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, 48,915,139 and 48,814,463 Issued 14,499 14,469
Capital Surplus 317,154 314,895
Retained Earnings 708,069 672,348
Accumulated Other Comprehensive Loss (64,044) (17,929)
------------ ------------
Total Shareholders' Equity 982,678 990,783
------------ ------------
$ 15,084,184 $ 13,857,385
============ ============
See notes to consolidated financial statements.
-3-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(In Thousands, Except Per Share Data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $225,925 $173,571 $449,023 $335,382
Interest on Investment Securities 51,941 59,886 108,785 119,670
Other Interest Income 5,023 159 10,099 493
-------- -------- -------- --------
Total Interest Income 282,889 233,616 567,907 455,545
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 18,800 18,377 40,559 35,458
Time Deposits 82,020 70,849 171,996 134,339
-------- -------- -------- --------
Total Interest on Deposits 100,820 89,226 212,555 169,797
Interest on Short-Term Debt 17,182 23,589 30,097 48,249
Interest on Long-Term Debt 40,323 21,904 84,577 40,836
Interest on Junior Subordinated Debentures 8,925 4,594 16,162 9,158
-------- -------- -------- --------
Total Interest Expense 167,250 139,313 343,391 268,040
-------- -------- -------- --------
Net Interest Income 115,639 94,303 224,516 187,505
Provision for Loan and Lease Losses 24,900 9,700 48,587 19,400
-------- -------- -------- --------
Net Interest Income After Provision
for Loan and Lease Losses 90,739 84,603 175,929 168,105
Noninterest Income:
Service Charges on Deposit Accounts 10,131 8,745 18,603 17,238
Loan Servicing Fees 10,985 13,103 22,055 24,909
Other Service Charges and Fees 17,592 9,583 29,609 19,418
Operating Lease Income 11,410 10,413 22,831 20,499
Gain on Sales of Loans and Leases - Non-Cash - 19,006 - 34,447
Gain on Sales of Loans and Leases - Cash 857 2,270 1,236 9,968
Warrant Gains 412 3,800 412 4,800
Security Gains - - - 24
Other 11,856 3,363 21,235 7,918
-------- -------- -------- --------
Total Noninterest Income 63,243 70,283 115,981 139,221
Noninterest Expense:
Salaries, Wages and Benefits 53,036 40,917 101,168 81,287
Charges and Fees 8,824 5,803 15,909 10,550
Occupancy 5,541 4,971 11,149 9,979
Depreciation on Operating Lease Equipment 6,502 6,971 13,067 13,256
Equipment Expense 6,359 6,103 13,017 12,339
Professional Services 7,344 5,401 12,767 10,434
Merger and Restructuring Charges - - - 39,300
Other 17,156 14,739 32,507 30,782
-------- -------- -------- --------
Total Noninterest Expense 104,762 84,905 199,584 207,927
-------- -------- -------- --------
Income Before Income Taxes 49,220 69,981 92,326 99,399
Applicable Income Taxes 17,368 25,092 32,671 37,738
-------- -------- -------- --------
Net Income $ 31,852 $ 44,889 $ 59,655 $ 61,661
======== ======== ======== ========
Per Common Share:
Basic Earnings Per Share $ 0.65 $ 0.92 $ 1.21 $ 1.26
Diluted Earnings Per Share 0.63 0.89 1.18 1.22
Cash Dividends Paid 0.24 0.24 0.48 0.48
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 61,661 61,661
Change in Unrealized Loss
on Marketable Securities (4,450) (4,450)
---------
Comprehensive Income 57,211
Dividends Paid on:
Preferred Stock (474) (474)
Common Stock (23,377) (23,377)
Exercise of Stock Options and
Accompanying Tax Benefits 39 2,374 2,413
Cash Paid in Lieu of
Issuance of Fractional
Shares in Acquisition (31) (31)
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,478 1,478
------- -------- --------- --------- --------- ---------
Balance at June 30, 2000 $ 7,000 $ 14,449 $ 312,838 $ 684,282 $ (54,347) $ 964,222
======= ======== ========= ========= ========= =========
Balance at January 1, 2001 $ 7,000 $ 14,469 $ 314,895 $ 672,348 $ (17,929) $ 990,783
Net Income 59,655 59,655
Change in Unrealized
Gain/(Loss) on:
Hedging Instruments (18,769) (18,769)
Marketable Securities 986 986
---------
Comprehensive Income Before
Cumulative Effect of a
Change in Accounting
Principle 41,872
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
---------
Comprehensive Income 13,540
Dividends Paid on:
Preferred Stock (474) (474)
Common Stock (23,460) (23,460)
Exercise of Stock Options and
Accompanying Tax Benefits 22 1,437 1,459
Distribution of Contingent
Shares for Prior Year
Acquisition 8 822 830
------- -------- --------- --------- --------- ---------
Balance at June 30, 2001 $ 7,000 $ 14,499 $ 317,154 $ 708,069 $ (64,044) $ 982,678
======= ======== ========= ========= ========= =========
See notes to consolidated financial statements.
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
(In Thousands) 2001 2000
- --------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 59,655 $ 61,661
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 48,587 19,400
Amortization of Goodwill 2,238 2,149
Other Amortization and Accretion (10,857) (16,562)
Depreciation of Leased Equipment and
Premises and Equipment 24,611 23,631
Tax Benefit Received from Exercise of Stock Options 453 250
Realized Investment Security Gains - (24)
Proceeds from Sale of Loans Held for Sale 976,603 1,049,470
Origination of Loans Held for Sale (925,117) (986,636)
Realized Gains on Loans Held for Sale - (30,607)
Increase in Trading Account Securities (45,799) -
(Increase) Decrease in Interest Receivable 1,795 (19,212)
(Increase) Decrease in Other Assets (47,337) (20,426)
Increase in Interest Payable 11,567 7,488
Decrease in Other Liabilities 49,489 2,273
----------- -----------
Net Cash Provided By Operating Activities 145,888 92,855
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,368,361 1,175,626
Proceeds from Maturities and Prepayments 598,224 189,366
Purchases (2,006,168) (1,837,803)
(Increase) Decrease in Receivables Due From
Securitization Trusts 101,030 (95,472)
Net Increase in Loans and Leases (1,368,864) (389,708)
Net (Increase) Decrease in Operating Lease Equipment 10,465 (59,370)
Net Increase in Premises and Equipment (10,518) (9,746)
----------- -----------
Net Cash Used In Investing Activities (1,307,470) (1,027,107)
----------- -----------
Financing Activities:
Increase (Decrease) in Deposits of
Securitization Trusts (87,267) 97,982
Increase in Other Deposits 64,763 365,450
Increase in Short-Term Debt 1,130,022 (68,475)
Principal Payments on Long-Term Debt (106,142) (101,055)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 128,665 548,096
Cash Dividends Paid (23,934) (23,851)
Proceeds from Exercise of Stock Options 1,006 2,163
Net Increase in Other Equity Items - 2,227
----------- -----------
Net Cash Provided By Financing Activities 1,107,113 822,537
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (54,469) (111,715)
Cash and Cash Equivalents at Beginning of Period 369,028 376,143
----------- -----------
Cash and Cash Equivalents at End of Period $ 314,559 $ 264,428
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 330,954 $ 260,550
Income Taxes 14,634 41,437
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 12,033 5,649
Residual Interest in Securitized Assets Created from
the Sale of Loans - 106,098
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
(In Thousands, Except Per Share Data) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Basic:
Net Income $ 31,852 $ 44,889 $ 59,655 $ 61,661
Less Preferred Stock Dividends (237) (237) (474) (474)
-------- -------- -------- --------
Income Available to Common Shareholders 31,615 44,652 59,181 61,187
Weighted-Average Common Shares Outstanding 48,897 48,739 48,881 48,715
-------- -------- -------- --------
Basic Earnings Per Share $ 0.65 $ 0.92 $ 1.21 $ 1.26
======== ======== ======== ========
Diluted:
Net Income $ 31,852 $ 44,889 $ 59,655 $ 61,661
Weighted-Average Common Shares Outstanding 48,897 48,739 48,881 48,715
Assumed Conversion of:
Convertible Preferred Stock 988 988 988 988
Dilutive Stock Options (Treasury Stock Method) 689 590 686 648
-------- -------- -------- --------
Dilutive Potential Common Shares 50,574 50,317 50,555 50,351
-------- -------- -------- --------
Diluted Earnings Per Share $ 0.63 $ 0.89 $ 1.18 $ 1.22
======== ======== ======== ========
-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 June 30, 2001:
Stated Effective Maturity
(Dollars in Thousands) Rate Rate(1) Date Amount
- ----------------------------------------------------------------------
November 1996 Issuance 8.60% 8.68% 12/01/26 $ 99,035
June 1999 Issuance 8.75% 5.04% 06/30/29 121,325
November 2000 Issuance 10.25% 6.49% 12/31/30 109,084
March 2001 Issuance 9.45% 6.65% 03/30/31 121,095
--------
Total $450,539
========
(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 June 30, 2001 follow:
(In Thousands) Total Assets
- -----------------------------------------------------------------------
Provident Auto Leasing Company $557,183
Provident Auto Rental LLC (2000-1) 382,973
Provident Lease Receivables Company LLC 214,882
Provident Auto Rental LLC (1999-1) 191,607
Provident Auto Rental LLC (2000-2) 162,626
Provident Auto Rental Company LLC (1998-2) 38,501
Provident Auto Rental Company LLC (1998-1) 36,833
-8-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
Upon the adoption of SFAS No. 133 and for the six months ended June 30,
2001, Provident recorded reductions in accumulated other comprehensive
income of $28.3 million and $18.8 million, respectively. No gain or
loss was recognized at the time of adoption or for the first two
quarters of 2001 as a result of ineffective cash flow hedges.
NOTE 6: NEW ACCOUNTING STANDARDS
- ---------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other
intangible assets continue to be amortized over their useful lives.
Provident will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application
of the nonamortization provisions of the Statement is expected to
result in an increase in net income of $2.9 million, or six cents per
share, per year. During 2002, Provident will perform the first of the
required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002 and has not yet determined what the effect
of these tests will be on the earnings and financial position of
Provident.
-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; significant cost, delay in, or inability
to execute strategic initiatives designed to grow revenues and/or
manage expenses; consummation of significant business combinations or
divestitures; and significant changes in accounting, tax, or regulatory
practices or requirements and factors noted in connection with forward
looking statements. Additionally, borrowers could suffer unanticipated
losses without regard to general economic conditions. The result of
these and other factors could cause differences from expectations in
the level of defaults, changes in risk characteristics of the loan and
lease portfolio, and changes in the provision for loan and lease
losses. Forward-looking statements speak only as of the date made.
Provident undertakes no obligations to update any forward-looking
statements to reflect events or circumstances arising after the date on
which they are made.
RESULTS OF OPERATIONS
- ---------------------
Summary
- -------
Provident reported net income of $31.9 million for the second quarter
of 2001 compared to $44.9 million for the same period in 2000. On an
operating income basis (excludes unusual and significant expenses), net
income for the first six months of 2001 and 2000 was $59.7 million and
$88.7 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 $.63
and $1.18 for the second quarter and first six months of 2001,
respectively, versus $.89 and $1.76 in last year's second quarter and
first six months, respectively.
-10-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes earnings components, earnings per share
and key financial ratios:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Thousands, ------------------------------ --------------------------------
Except Per Share Data) 2001 2000 Change 2001 2000 Change
- -------------------------------------------------------------------------------------------------------
Net Interest Income $115,639 $ 94,303 23% $224,516 $187,505 20%
Gain on Sale of Loans and Leases 857 21,276 (96) 1,236 44,415 (97)
Other Noninterest Income 62,386 49,007 27 114,745 94,806 21
Total Revenue 178,882 164,586 9 340,497 326,726 4
Provision for Loan and Lease Losses 24,900 9,700 157 48,587 19,400 150
Noninterest Expense(1) 104,762 84,905 23 199,584 207,927 (4)
Net Income(1) 31,852 44,889 (29) 59,655 61,661 (3)
Diluted Earnings per Share(1) 0.63 0.89 (29) 1.18 1.22 (3)
Return on Average Equity(1) 13.06% 19.50% 12.27% 13.36%
Return on Average Assets(1) 0.85% 1.51% 0.81% 1.05%
Efficiency Ratio 58.57% 51.58% 58.61% 51.61%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $199,584 $168,627 18%
Net Income 59,655 88,661 (33)
Diluted Earnings per Share 1.18 1.76 (33)
Return on Average Equity 12.27% 19.21%
Return on Average Assets 0.81% 1.51%
The lower net income and financial performance ratios for 2001 were the
result of the third quarter 2000 decision to change the structure of
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 loans and leases, but rather impacts the timing of income
recognition. Secured financing transactions cause reported earnings
from securitized loans and leases to be lower in the initial periods
and higher in later periods, as interest is earned on the loans and
leases. As a result, moving away from transaction structures that use
gain-on-sale accounting causes Provident's earnings to be lower over
the short term.
Provident's total revenue (net interest income plus noninterest income)
increased 4% during the first six months of 2001 compared to the same
period during 2000 despite the absence of gains on sale of loans and
leases during 2001. Net interest income increased by $37.0 million, or
20%, 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 $19.9 million, or 21%, primarily due to growth in
other service charges and fees. Gain on sale of loans and leases
decreased $43.2 million due to the change in the structure of
securitizations.
Total average assets for the first six months of 2001 grew $2.9
billion, or 25% as compared to the same period during 2000. The
increase was primarily in the consumer and corporate lending
portfolios, which experienced growth of $1.4 billion and $1.3 billion,
respectively, in average assets during this time period.
-11-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The provision for loan and lease losses was $48.6 million for the first
six months of 2001 as compared to $19.4 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 $31.0 million, or 18%, to
$199.6 million for the first two quarters of 2001 as compared to $168.6
million for the first two quarters of 2000. The increase in noninterest
expense was primarily the result of the acquisition of Red Capital
Group in September of 2000 as well as additional investments within
existing businesses where good growth opportunities exist. The ratio
of operating noninterest expense to tax equivalent revenue ("efficiency
ratio") increased to 58.61% during 2001 as compared to 51.61% during
2000. The increase in the efficiency ratio was principally the result
of the elimination of gain on sale of loans and leases. For purposes of
calculating the efficiency ratio, operating noninterest expense
excludes merger and restructuring charges, and tax equivalent revenue
excludes security gains or losses.
Business Lines
- --------------
The following table summarizes total revenue, operating income and
average assets by major lines of business for the three-month and
six-month periods ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
(Dollars in Millions) 2001 2000 Change 2001 2000 Change
- -------------------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 91.8 $ 63.2 45% $ 171.7 $ 132.5 30%
Retail Banking 64.1 70.0 -8% 124.3 132.1 -6%
Mortgage Banking 23.0 31.4 -27% 44.5 62.1 -28%
Corporate Center - - - - - -
------- ------- ------- -------
$ 178.9 $ 164.6 9% $ 340.5 $ 326.7 4%
======= ======= ======= =======
Operating Income:
Commercial Banking $ 21.6 $ 21.0 3% $ 41.2 $ 44.1 -7%
Retail Banking 9.5 15.6 -39% 17.7 27.1 -35%
Mortgage Banking 0.8 8.3 -90% 0.8 17.5 -95%
Corporate Center - - - - - -
------- ------- ------- -------
$ 31.9 $ 44.9 -29% $ 59.7 $ 88.7 -33%
======= ======= ======= =======
Average Assets:
Commercial Banking $ 6,975 $ 5,448 28% $ 6,715 $ 5,393 25%
Retail Banking 3,154 2,376 33% 3,114 2,312 35%
Mortgage Banking 2,126 727 192% 2,052 711 189%
Corporate Center 2,764 3,346 -17% 2,788 3,336 -16%
------- ------- ------- -------
$15,019 $11,897 26% $14,669 $11,752 25%
======= ======= ======= =======
-12-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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 nearly 70% of Provident's net operating income in both
the second quarter and first six months of 2001. Total revenues for
the second quarter and first half of 2001 increased 45% and 30%,
respectively, as compared to the same time periods during 2000.
However, net operating income increased only $.6 million for the
second quarter and decreased $2.9 million for the first six months
of 2001 compared to the same time intervals of 2000. Net operating
income for 2001 has been impacted by 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 2001 as compared to pre-tax gains of $1.7
million and $9.1 million being recognized during the second quarter
-13-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and first six months of 2000, respectively. 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% at
December 31, 2000.
Red Capital made significant contributions to revenue growth during
the second quarter of 2001. Acquired in September 2000, Red Capital
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 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 assets increasing 25% from the first six
months of 2000 to 2001. Contributing to this growth was the
expansion of the Commercial Banking business units, including the
acquisition of approximately $500 million of leases by Information
Leasing Corporation and the opening of additional Commercial Banking
offices.
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 $6.1 million and $9.4 million for
the second quarter and six-month period ended June 30, 2001 as
compared to the same periods in 2000. The primary driver for the
decreases was 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 half of 2001 as compared to a pre-tax
gain of $4.2 million being recognized during the second quarter of
2000. Also, provision increased as a result of (1) management's
decision to increase the reserve for loan losses to total loans
ratio and (2) higher loan balances. Loan balances for the second
quarter of 2001 grew by 48% as compared to the second quarter of
2000.
Retail Banking benefited from growth in deposits. Average core
deposits for the second quarter of 2001 grew by 19% as compared to
the second quarter of 2000. Significant deposit growth came from the
Internet channel and Florida banking centers. To further capitalize
on opportunities in Florida, Provident opened five additional
Financial Centers bringing its total to twelve 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.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Net
operating income for the second quarter of 2001 was $.8 million as
compared to $8.3 million for the second quarter of 2000. For the
first six months of 2001 and 2000, net operating income was $.8
million and $17.5 million, respectively. 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 half of 2001 as compared to a pre-tax
gains of $30.3 million being recognized during the first half 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.
Beginning in July 2001, an initiative to reduce the risk profile of
Mortgage Banking is being implemented. Nonconforming loan
originations will be sold on a whole-loan basis, with servicing
retained, which will permit Mortgage Banking to grow at a more rapid
pace without the associated credit risks. While the earnings
implications of this decision are negligible, the capital savings
and reduced risk exposure are significantly beneficial.
Net Interest Income
- -------------------
Net interest income for the six months ended June 30, 2001, increased
$37.0 million compared to the first six months of 2000. The increase in
interest income was due primarily to an increase in average earning
assets of $2.9 billion, or 28%. The increase in average earning assets
resulted primarily from the growth of the lending portfolio. Interest
expense for the six months ended June 30, 2001 increased due to a 28%
increase in total interest bearing liabilities while the average rate
paid remained flat. 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 six months of 2001, the
net interest margin, on a tax-equivalent basis, was 3.40% compared to
3.61% 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 and six-month periods ended June 30, 2001 and 2000.
-15-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
----------------- ----------------- ----------------- -----------------
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 $ 4,825 7.75% $ 4,252 9.39% $ 4,713 8.26% $ 4,178 9.27%
Mortgage 622 8.47 546 8.68 635 8.90 563 8.86
Construction 821 7.49 645 9.27 812 7.95 608 8.95
Lease Financing 1,020 10.74 299 12.25 836 11.06 346 11.77
------- ----- ------- ----- ------- ----- ------- -----
Total Corporate Lending 7,288 8.20 5,742 9.46 6,996 8.62 5,695 9.35
Consumer Lending:
Residential 1,067 10.91 334 12.63 1,004 11.23 355 12.00
Installment 719 10.38 560 10.88 691 10.56 543 10.46
Lease Financing 1,152 10.21 497 10.46 1,115 10.48 490 8.70
------- ----- ------- ----- ------- ----- ------- -----
Total Consumer Lending 2,938 10.51 1,391 11.15 2,810 10.77 1,388 10.23
------- ----- ------- ----- ------- ----- ------- -----
Total Loans and Leases 10,226 8.86 7,133 9.79 9,806 9.23 7,083 9.52
Investment Securities 3,139 6.64 3,378 7.13 3,213 6.83 3,351 7.18
Federal Funds Sold and Reverse
Repurchase Agreements 112 5.46 9 6.71 104 5.60 11 8.73
Other Short Term Investments 236 5.96 - - 204 7.12 - -
------- ----- ------- ----- ------- ----- ------- -----
Total Earning Assets 13,713 8.27 10,520 8.93 13,327 8.59 10,445 8.77
Cash and Due From Banks 239 229 268 235
Other Assets 1,066 1,148 1,072 1,072
------- ------- ------- -------
Total Assets $15,018 $11,897 $14,667 $11,752
======= ======= ======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 486 2.87 $ 345 1.98 $ 475 3.13 $ 338 2.03
Savings Deposits 1,550 3.97 1,362 4.92 1,526 4.39 1,342 4.80
Time Deposits 5,698 5.77 4,652 6.12 5,712 6.07 4,562 5.92
------- ----- ------- ----- ------- ----- ------- -----
Total Deposits 7,734 5.23 6,359 5.64 7,713 5.56 6,242 5.47
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,275 4.39 1,318 6.24 1,029 4.67 1,415 6.00
Commercial Paper 221 4.24 206 6.11 220 4.92 208 5.80
Short-Term Notes Payable 49 7.25 2 6.17 25 7.18 2 5.90
------- ----- ------- ----- ------- ----- ------- -----
Total Short-Term Debt 1,545 4.46 1,526 6.22 1,274 4.76 1,625 5.97
Long-Term Debt 2,685 6.02 1,404 6.27 2,708 6.30 1,323 6.21
Junior Subordinated Debentures 450 7.95 220 8.39 393 8.29 220 8.37
------- ----- ------- ----- ------- ----- ------- -----
Total Interest Bearing
Liabilities 12,414 5.40 9,509 5.89 12,088 5.73 9,410 5.73
Noninterest Bearing Deposits 1,212 1,245 1,236 1,194
Other Liabilities 416 222 371 225
Shareholders' Equity 976 921 972 923
------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $15,018 $11,897 $14,667 $11,752
======= ======= ======= =======
Net Interest Spread 2.87% 3.04% 2.86% 3.04%
===== ===== ===== =====
Net Interest Margin 3.38% 3.61% 3.40% 3.61%
===== ===== ===== =====
-16-
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 $48.6 million and $19.4
million for the first six 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 June 30, 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 half of 2001.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
(Dollars in Thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------
Balance at Beginning of Period $ 163,682 $ 97,069 $ 154,300 $ 94,045
Acquired Reserves 8,728 - 10,003 -
Provision for Loan and Lease Losses 24,900 9,700 48,587 19,400
Loans and Leases Charged Off (24,470) (13,308) (43,796) (22,756)
Recoveries 4,135 4,127 7,881 6,899
--------- --------- --------- ---------
Balance at End of Period $ 176,975 $ 97,588 $ 176,975 $ 97,588
========= ========= ========= =========
Reserve for Loan and Lease Losses
as a Percent of:
Nonaccrual Loans 160.05% 149.15%
Nonperforming Assets 139.51% 138.35%
Total Loans and Leases 1.70% 1.44%
-17-
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 and six-month periods ended June 30,
2001 and 2000:
Three Months Ended Three Months Ended
June 30, 2001 June 30, 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 $12,491 1.04% 61.4% $ 6,920 0.65% 75.5%
Mortgage - - - 96 0.07 1.0
Construction - - - - - -
Lease Financing 3,810 1.49 18.7 728 0.97 7.9
------- ----- ------- -----
Net Corporate Lending 16,301 0.89 80.1 7,744 0.54 84.4
Consumer Lending:
Residential 2,958 1.11 14.6 1,112 1.33 12.1
Installment 144 0.08 0.7 396 0.28 4.3
Lease Financing 932 0.32 4.6 (71) (0.06) (0.8)
------- ----- ------- -----
Net Consumer Lending 4,034 0.55 19.9 1,437 0.41 15.6
------- ----- ------- -----
Net Charge-Off's $20,335 0.79 100.0 $ 9,181 0.51 100.0
======= ===== ======= =====
Six Months Ended Six Months Ended
June 30, 2001 June 30, 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 $22,283 0.95% 62.0% $11,182 0.54% 70.5%
Mortgage 25 0.01 0.1 96 0.03 0.6
Construction - - - - - -
Lease Financing 4,435 1.06 12.4 1,036 0.60 6.5
------- ----- ------- -----
Net Corporate Lending 26,743 0.76 74.5 12,314 0.43 77.6
Consumer Lending:
Residential 6,253 1.25 17.4 2,046 1.15 12.9
Installment 1,000 0.29 2.8 742 0.27 4.7
Lease Financing 1,919 0.34 5.3 755 0.31 4.8
------- ----- ------- -----
Net Consumer Lending 9,172 0.65 25.5 3,543 0.51 22.4
------- ----- ------- -----
Net Charge-Off's $35,915 0.73 100.0 $15,857 0.45 100.0
======= ===== ======= =====
The increase in net charge-offs for the first half of 2001 was due
primarily to commercial loan charge-offs. Due to the varying size of
the commercial loans, a change in the number of large charge-offs can
result in a significant fluctuation in the total charge-offs of this
loan type. There were twelve charge-offs greater than one million
dollars in the first half of 2001 compared to five in the first half of
2000.
-18-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at June 30, 2001 were $126.9 million compared to
$104.8 million and $70.5 million as of December 31, 2000 and June 30,
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
-------------------- -------------------------------
Second First Fourth Third Second
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $ 74,098 $ 74,172 $ 74,401 $ 48,031 $ 52,397
Mortgage 1,944 1,676 1,712 1,529 1,576
Construction 4,585 4,520 - - -
Lease Financing 6,079 8,685 6,503 5,147 5,165
-------- -------- -------- -------- --------
Total Corporate Lending 86,706 89,053 82,616 54,707 59,138
Consumer Lending:
Residential 23,868 17,160 13,404 11,371 6,290
Installment - - - - -
Lease Financing - - - - -
-------- -------- -------- -------- --------
Total Consumer Lending 23,868 17,160 13,404 11,371 6,290
-------- -------- -------- -------- --------
Total Nonaccrual Loans 110,574 106,213 96,020 66,078 65,428
Other Real Estate/Equipment 16,279 7,348 8,805 8,706 5,108
-------- -------- -------- -------- --------
Total Nonperforming Assets $126,853 $113,561 $104,825 $ 74,784 $ 70,536
======== ======== ======== ======== ========
Loans 90 Days Past Due
Still Accruing $ 22,830 $ 42,327 $ 28,780 $ 28,959 $ 23,787
Nonaccrual Loans to
Total Loans and Leases 1.06% 1.10% 1.06% 0.79% 0.97%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate/Equipment 1.22% 1.18% 1.15% 0.89% 1.04%
Total Assets 0.84% 0.77% 0.76% 0.57% 0.62%
Nonaccrual loans increased $14.6 million during the first six months of
2001. The increase was composed of $98.3 million of additions to
nonaccrual loans, less $46.0 million of payments on nonaccrual loans,
$25.9 million of nonaccrual loans charged off and $11.8 million
transferred to other real estate and equipment. The significant
increase in residential nonaccrual loans is due to residential loans
now being held on balance sheet rather than being securitized and sold.
Other real estate and equipment increased $7.5 million during the first
six months of 2001. The increase was primarily the result of the
repossession of two airplanes that were collateral for two nonaccrual
loans during the second quarter. The decrease in loans ninety days past
due still accruing was due primarily to the decrease in delinquent
commercial loans.
-19-
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 second quarter and first six-month periods ended
June 30, 2001 and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2001 2000 Change 2001 2000 Change
- -------------------------------------------------------------------------------------------------
Service Charges on
Deposit Accounts $ 10,131 $ 8,745 15.8% $ 18,603 $ 17,238 7.9%
Loan Servicing Fees 10,985 13,103 (16.2) 22,055 24,909 (11.5)
Other Service Charges and Fees 17,592 9,583 83.6 29,609 19,418 52.5
Operating Lease Income 11,410 10,413 9.6 22,831 20,499 11.4
Warrant Gains 412 3,800 (89.2) 412 4,800 (91.4)
Security Gains - - - - 24 (100.0)
Other 11,856 3,363 252.5 21,235 7,918 168.2
-------- -------- -------- --------
Noninterest Income Before Gain
on Sale of Loans and Leases 62,386 49,007 27.3 114,745 94,806 21.0
Gain on Sale of Loans and Leases:
Non-Cash - 19,006 - - 34,447 -
Cash 857 2,270 (62.2) 1,236 9,968 (87.6)
-------- -------- -------- --------
Total Noninterest Income $ 63,243 $ 70,283 (10.0) $115,981 $139,221 (16.7)
======== ======== ======== ========
Explanations for significant changes in noninterest income by category
follow:
o Service charges on deposit accounts increased $1.4 million in both
the quarterly and six-month comparisons. The increases for both
periods were a result of pricing and volume increases on corporate
deposit accounts.
o Loan servicing fees decreased $2.1 million and $2.9 million in the
quarterly and six-month comparisons due primarily to the decrease in
fees in the residential mortgage area more than offsetting the
increase in the small to mid-ticket equipment leasing area.
o Other service charges and fees increased $8.0 million and $10.2
million in the quarterly and six-month comparisons due primarily to
loan origination and other fee income from 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 $1.0 million and $2.3 million in
the quarterly and six-month comparisons. The increase in the second
quarter was due primarily to increases in income from auto lease
sale-leaseback transactions and the growth of Provident Commercial
Group, a national lessor of large equipment. The increase in the
six-month comparison was due primarily to the growth of Provident
Commercial Group.
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 $.4 million and $4.8
million were recognized during the first six months of 2001 and
2000, respectively.
-20-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Other income increased $8.5 million and $13.3 million in the
quarterly and six-month comparisons due primarily to increases in
miscellaneous fees earned by Red Capital Group and income from
investments in partnerships.
o Gain on sales of loans and leases decreased $20.4 million and $43.2
million in the quarterly and six-month comparisons 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 to account for
the transactions as secured financings. The following table provides
detail of the gain on sales recognized during the second quarter and
six-month periods of 2001 and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(In Thousands) 2001 2000 2001 2000
----------------------------------------------------------------------------------------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $ - $14,850 $ - $30,291
Prime Consumer Home Equity Securitizations - 4,156 - 4,156
------- ------- ------- -------
Total Gain on Sales - Non-Cash - 19,006 - 34,447
------- ------- ------- -------
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations - 1,703 - 9,083
Other Loan Sales 857 567 1,236 885
------- ------- ------- -------
Total Gain on Sales - Cash 857 2,270 1,236 9,968
------- ------- ------- -------
Total Gain on Sales $ 857 $21,276 $ 1,236 $44,415
======= ======= ======= =======
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 second quarter and six-month periods of 2001 and
2000:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2001 2000 Change 2001 2000 Change
- ------------------------------------------------------------------------------------------------
Salaries, Wages and Benefits $ 53,036 $ 40,917 29.6% $101,168 $ 81,287 24.5%
Charges and Fees 8,824 5,803 52.1 15,909 10,550 50.8
Occupancy 5,541 4,971 11.5 11,149 9,979 11.7
Depreciation on Operating
Lease Equipment 6,502 6,971 (6.7) 13,067 13,256 (1.4)
Equipment Expense 6,359 6,103 4.2 13,017 12,339 5.5
Professional Services 7,344 5,401 36.0 12,767 10,434 22.4
Other 17,156 14,739 16.4 32,507 30,782 5.6
-------- -------- -------- --------
Noninterest Expense Before Merger
and Restructuring Charges 104,762 84,905 23.4 199,584 168,627 18.4
Merger and Restructuring Charges - - - - 39,300 -
-------- -------- -------- --------
Total Noninterest Expense $104,762 $ 84,905 23.4 $199,584 $207,927 (4.0)
======== ======== ======== ========
-21-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Explanations for significant changes in noninterest expense by category
follow:
o Salaries, wages and benefits increased $12.1 million and $19.9
million in the quarterly and six-month comparisons due primarily to
increased incentive pay and increased staffing expenses associated
with Red Capital Group, which was acquired in September of 2000.
o Charges and fees increased $3.0 million and $5.4 million in the
quarterly and six-month comparisons 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 Occupancy increased $.6 million and $1.2 million in the quarterly
and six-month comparisons due primarily to increases in rent
expense.
o A reduction in operating lease balances at Information Leasing
Corporation, a national small to mid-ticket equipment leasing
company, was the primary reason for the decrease 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 $1.9 million in the quarterly comparison
due primarily to legal and other professional fees related to loan
collections. In the six-month comparison, professional fees
increased $2.3 million due primarily to technology expenditures
related to Red Capital Group as well as increased fees related to
loan collections noted in the quarterly comparison.
o Other expense increased as a result of an increase in franchise
taxes and miscellaneous expense.
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.
-22-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Short-Term Investments and Investment Securities
- ------------------------------------------------
The change in federal funds sold and reverse repurchase agreements was
negligible 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 $46 million during the first half
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 $155 million of loans as held for sale at June 30,
2001. This is a decrease of $51 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.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $55 million during the first six
months of 2001. U.S. government agency securities and 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.
-23-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Loans and Leases
- ----------------
As of June 30, 2001 total loans and leases were $10.4 billion compared
to $9.1 billion at December 31, 2000. Provident had an additional $5.0
billion and $5.8 billion of off-balance sheet loans and leases as of
June 30, 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. Also contributing to the higher
on-balance sheet loan and lease balance was the purchase of
approximately $500 million of equipment leases during the second
quarter of 2001. 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 June 30, 2001:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -----------------------------------------------------------------------
Manufacturing $ 891.3 19 $ 12.0
Service Industries 812.9 17 36.1
Real Estate Operators/Investment 441.5 9 0.1
Retail Trade 403.7 8 2.8
Finance and Insurance 339.4 7 13.1
Wholesale Trade 330.9 7 0.7
Transportation/Utilities 311.8 7 1.3
Construction 222.4 5 1.2
Automobile Dealers 142.1 3 -
Other 869.5 18 6.8
-------- --- -------
Total $4,765.5 100 $ 74.1
======== === =======
At June 30, 2001, Provident had approximately $905 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 30% of its total shared national credit loans. The
average outstanding balance of a shared national credit loan was $6.2
million. Credit quality for the shared national credit loans was not
substantially different than the rest of the commercial loan portfolio.
-24-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The composition of the commercial mortgage and construction loan
categories by property type at June 30, 2001 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -----------------------------------------------------------------------
Residential Development $ 305.7 22 $ 4.9
Office/Warehouse 234.1 17 0.2
Apartments 209.4 15 0.5
Shopping/Retail 205.8 14 0.1
Land 87.5 6 -
Hotels/Motels 67.1 5 -
Health Facilities 32.0 2 -
Industrial Plants 30.2 2 -
Auto Sales and Service 11.4 1 -
Churches 10.9 1 -
Other Commercial Properties 209.2 15 0.8
-------- --- -----
Total $1,403.3 100 $ 6.5
======== === =====
The following table shows the composition of the installment loan
category by loan type at June 30, 2001:
(Dollars in Millions) Amount %
- -------------------------------------------------------
Home Equity $500.5 66
Indirect Installment 165.1 22
Direct Installment 65.2 8
Other Consumer Loans 30.8 4
------ ---
Total $761.6 100
====== ===
Deposits
- --------
Total deposits decreased $65 million during the first half of 2001.
Average core deposits for the first six months of 2001 grew at an
annualized rate of 15%, with significant contribution coming from
Internet deposit-gathering initiatives.
Borrowed Funds
- --------------
Short-term debt increased $1.1 billion, or 177%, during the first half
of 2001. The increase was due primarily to an increase in federal funds
purchased and repurchase agreements.
Long-term debt decreased $111 million, or 4%, during the first half 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.
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest-Bearing Liabilities
- -------------------------------
Other liabilities increased $160 million, or 54% during the first half
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 June 30, 2001 was $983 million compared
to $991 million at December 31, 2000. The change in the equity balance
primarily relates to net income exceeding dividends by $36 million
(quarterly common dividend rate of $.24), an increase in the market
value of investment securities of 1 million (net of deferred taxes) and
a decrease in the market value of cash flow hedging instruments of $47
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:
Six Months Ended Year Ended
June 30 2001 December 31, 2000
------------------------------------
Average Shareholders' Equity to Average Assets 6.63% 7.82%
Dividend Payout to Net Earnings 40.12 64.85
Dividend Payout to Operating Earnings 40.12 47.45
Tier 1 Leverage Ratio 8.51 9.56
Tier 1 Capital to Risk-Weighted Assets 8.84 9.18
Total Risk-Based Capital To Risk-Weighted Assets 11.18 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.
Through June 30, 2001, approximately $12 million of these expenditures
had been made.
Stock Options
- -------------
Options to purchase approximately 1.2 million shares of Provident
Common Stock were granted during the first six months of 2001. The
options have exercise prices ranging from $25.97 to $35.63.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 causes 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 June 30,
-------------------------------------------
2001 2000
------------------- --------------------
(In Thousands) Principal Gain Principal Gain
- -----------------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $ - $ - $515,000 $ 14,850
Prime Consumer Home Equity - - 158,598 4,156
--- --- -------- --------
- - 673,598 19,006
Cash Gains:
Equipment Leases - - 55,925 1,703
Non-Recognition of Gains:
Automobile Leases - - 115,936 -
--- --- -------- --------
Total Securitizations $ - $ - $845,459 $ 20,709
=== === ======== ========
Six Months Ended June 30,
-------------------------------------------
2001 2000
------------------- --------------------
(In Thousands) Principal Gain Principal Gain
- -----------------------------------------------------------------------------
Non-Cash Gains:
Nonconforming Residential $ - $ - $1,030,000 $ 30,291
Prime Consumer Home Equity - - 158,598 4,156
--- --- ---------- --------
- - 1,188,598 34,447
Cash Gains:
Equipment Leases - - 223,705 9,083
Non-Recognition of Gains:
Automobile Leases - - 214,180 -
--- --- ---------- --------
Total Securitizations $ - $ - $1,626,483 $ 43,530
=== === ========== ========
The securitization and sale of nonconforming residential and prime home
equity 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.
-28-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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 $22.1 million
and $24.9 million in loan servicing fees during the first six months of
2001 and 2000, respectively.
-29-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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; 71% with full documentation; 69% have
prepayment penalties; 97% are secured by first mortgages; 92% are owner
occupied; and, on average, have a 77% loan-to-value ratio.
A summary of nonconforming residential loans originated or acquired by
loan type as of and for the six-month period ended June 30, 2001 and
2000 is provided below:
Six Months Ended June 30,
(In Thousands) 2001 2000
- -----------------------------------------------------------------------
Originations for the Period Ended:
Fixed Rate, Fully Amortizing $ 166,056 $ 482,134
Fixed Rate, 15-Year Balloon Payments 65,995 263,629
---------- ----------
Total Fixed Rate Loans 232,051 745,763
Adjustable Rate, 3/27 Loans 164,261 197,881
Other Adjustable Rate Loans 98,803 36,356
---------- ----------
Total Adjustable Rate Loans 263,064 234,237
---------- ----------
Total Originations $ 495,115 $ 980,000
========== ==========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,530,828 $1,486,558
Fixed Rate, 15-Year Balloon Payments 836,174 866,423
---------- ----------
Total Fixed Rate Loans 2,367,002 2,352,981
Adjustable Rate, 3/27 Loans 1,515,898 1,497,703
Adjustable Rate, 2/28 Loans 137,346 181,780
Other Adjustable Rate Loans 151,140 62,159
---------- ----------
Total Adjustable Rate Loans 1,804,384 1,741,642
---------- ----------
Total Outstanding $4,171,386 $4,094,623
========== ==========
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:
June 30,
-----------------------
(In Thousands) 2001 2000
- -----------------------------------------------------------------------
Nonconforming Residential $3,115,224 $4,046,624
Auto Leases 1,053,332 1,480,066
Prime Home Equity 387,480 526,114
Equipment Leases 284,854 453,434
Credit Card 155,000 230,000
Warehouse - 170,600
---------- ----------
$4,995,890 $6,906,838
========== ==========
-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 ("RISAs"), were
recorded as assets within the investment securities line item of the
consolidated balance sheets. Components of the RISAs as of June 30,
2001 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- -----------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 312,526 $ 22,744
Less:
Estimated Credit Loss (1) (12,636) (245)
Servicing and Insurance Expense (34,838) (2,685)
Discount to Present Value (32,118) (807)
--------- ---------
Carrying Value of Retained Interest in
Securitized Assets (1) $ 232,934 $ 19,007
========= =========
(1) Only the pre-1998 securitizations provide for estimated credit
losses within the cash flows of the RISAs. 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
$141.7 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 June 30, 2001
follows:
Cash Loss Net Cash
(In Thousands) Reserves Estimates Reserves
- --------------------------------------------------------------------------
Receivables from Securitization Trusts:
Nonconforming Residential Loans (1) $375,968 $(91,262) $284,706
Equipment Leases 54,840 (4,487) 50,353
Prime Home Equity Loans 28,760 (1,955) 26,805
-------- -------- --------
Total Securitization Trusts $459,568 $(97,704) $361,864
======== ======== ========
(1) Total loss estimates including those contained within the RISA are
$103.9 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
six months ended June 30, 2001:
Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases
- ------------------------------------------------------------------------------
For the Six Months Ended June 30, 2001:
Average Securitized Assets $3,346,498 $427,832 $315,793
Net Charge-Offs 22,177 899 3,257
Net Charge-Offs to Average
Securitized Assets (Annualized) 1.33% 0.42% 2.06%
As of June 30, 2001:
Securitized Assets $3,115,224 $387,480 $284,854
Estimated Credit Losses Provided For 103,898 2,200 4,487
Estimated Credit Losses to
Period-End Securitized Assets 3.34% 0.57% 1.58%
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 3.67% 0.35% 3.28%
90 or More 12.46% 0.27% 1.04%
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 Red Capital 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 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.
Red Capital services multifamily mortgage loans under the DUS program
with an outstanding principal balances aggregating approximately $2.2
billion at June 30, 2001. At June 30, 2001, no DUS loans in Red
Capital's loan servicing portfolio were delinquent or in default. Red
Capital has established reserves of approximately $7.0 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
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
maintained at a level that adequately provides for the inherent losses
within Red Capital's portfolio of DUS loans. 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 June 30,
2001, these financial instruments consisted of standby letters of
credit of $230 million, commitments to extend credit of $2.9 billion,
and interest rate swaps and caps with a notional amount of $7.0 billion
and $6.2 billion, respectively.
In December 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 $63
million of long-term debt is due to be repaid during the remainder of
2001.
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 June 30, 2001 by its banking
subsidiary was approximately $193 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 $112 million in cash, interest earning
deposits and federal funds sold to meet its liquidity needs.
-33-
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 .3% for a 100 basis
point decrease; increase .3% for a 200 basis point decrease; decrease
.7% for a 100 basis point increase; and decrease 1.7% 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.
-34-
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. Results of the shareholders' voting were reported
in Provident's first quarter 10-Q which was filed with the Securities
and Exchange Commission on May 15, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 10 - Material Contract
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
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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: August 10, 2001 \s\ Christopher J. Carey
-------------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
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