SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 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 October 31, 2001 is
49,193,470.
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 . . . . . . . . . . . . . . . . . . . . 36
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
(Dollars in Thousands) (Unaudited)
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 271,571 $ 286,051
Federal Funds Sold and Reverse Repurchase Agreements 221,634 82,977
Trading Account Securities 78,411 41,949
Loans Held for Sale 230,030 206,168
Investment Securities Available for Sale
(amortized cost - $3,041,264 and $3,041,204) 3,064,819 3,013,621
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,509,252 4,580,215
Mortgage 622,756 632,801
Construction 820,546 801,211
Lease Financing 1,201,284 607,478
Consumer Lending:
Residential 1,009,233 835,510
Installment 871,575 580,046
Lease Financing 1,353,750 1,039,645
------------ ------------
Total Loans and Leases 10,388,396 9,076,906
Reserve for Loan and Lease Losses (206,846) (154,300)
------------ ------------
Net Loans and Leases 10,181,550 8,922,606
Leased Equipment 163,548 215,227
Premises and Equipment 101,506 103,919
Receivables from Securitization Trusts 301,292 417,420
Other Assets 653,532 567,447
------------ ------------
$ 15,267,893 $ 13,857,385
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,007,242 $ 1,293,396
Interest Bearing 8,308,121 7,535,714
------------ ------------
Total Deposits 9,315,363 8,829,110
Short-Term Debt 1,401,711 639,023
Long-Term Debt 2,687,393 2,774,493
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 450,649 329,239
Accrued Interest and Other Liabilities 465,585 294,737
------------ ------------
Total Liabilities 14,320,701 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, 49,174,494 and 48,814,463 Issued 14,577 14,469
Capital Surplus 321,703 314,895
Retained Earnings 688,610 672,348
Accumulated Other Comprehensive Loss (84,698) (17,929)
------------ ------------
Total Shareholders' Equity 947,192 990,783
------------ ------------
$ 15,267,893 $ 13,857,385
============ ============
See notes to consolidated financial statements.
-3-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
(In Thousands, Except Per Share Data) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $ 224,155 $ 185,088 $ 673,178 $ 520,470
Interest on Investment Securities 49,306 53,199 158,091 172,869
Other Interest Income 8,016 167 18,115 660
--------- --------- --------- ---------
Total Interest Income 281,477 238,454 849,384 693,999
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 16,230 20,958 56,789 56,416
Time Deposits 77,643 79,304 249,639 213,643
--------- --------- --------- ---------
Total Interest on Deposits 93,873 100,262 306,428 270,059
Interest on Short-Term Debt 17,772 15,677 47,869 63,926
Interest on Long-Term Debt 38,321 22,469 122,898 63,305
Interest on Junior Subordinated Debentures 7,839 4,779 24,001 13,937
--------- --------- --------- ---------
Total Interest Expense 157,805 143,187 501,196 411,227
--------- --------- --------- ---------
Net Interest Income 123,672 95,267 348,188 282,772
Provision for Loan and Lease Losses 66,010 42,550 114,597 61,950
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 57,662 52,717 233,591 220,822
Noninterest Income:
Service Charges on Deposit Accounts 10,312 8,997 29,551 26,235
Loan Servicing Fees 9,948 13,677 32,003 38,586
Other Service Charges and Fees 12,977 12,349 43,704 31,767
Leasing Income 10,500 10,991 33,331 31,490
Gain on Sales of Loans and Leases - Non-Cash - - - 34,447
Gain on Sales of Loans and Leases - Cash 3,254 356 4,490 10,324
Warrant Gains - 2,700 412 7,500
Security Gains - 72 - 96
Other 10,112 3,310 31,367 11,228
--------- --------- --------- ---------
Total Noninterest Income 57,103 52,452 174,858 191,673
Noninterest Expense:
Salaries, Wages and Benefits 52,783 41,518 153,951 122,805
Charges and Fees 8,757 6,084 24,666 16,634
Occupancy 5,634 5,066 16,783 15,045
Leasing Expense 28,123 6,644 42,964 19,900
Equipment Expense 6,209 7,079 19,226 19,418
Professional Services 5,476 5,521 18,243 15,955
Merger and Restructuring Charges - - - 39,300
Other 18,881 16,239 51,388 47,021
--------- --------- --------- ---------
Total Noninterest Expense 125,863 88,151 327,221 296,078
--------- --------- --------- ---------
Income Before Income Taxes (11,098) 17,018 81,228 116,417
Applicable Income Taxes (3,663) 6,065 29,008 43,803
--------- --------- --------- ---------
Net Income $ (7,435) $ 10,953 $ 52,220 $ 72,614
========= ========= ========= =========
Per Common Share:
Basic Earnings Per Share $ (0.16) $ 0.22 $ 1.05 $ 1.48
Diluted Earnings Per Share (0.15) 0.22 1.03 1.44
Cash Dividends Paid 0.24 0.24 0.72 0.72
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 72,614 72,614
Change in Unrealized Loss
on Marketable Securities 12,213 12,213
---------
Comprehensive Income 84,827
Dividends Paid on:
Preferred Stock (712) (712)
Common Stock (35,079) (35,079)
Exercise of Stock Options and
Accompanying Tax Benefits 42 2,557 2,599
Cash Paid in Lieu of
Issuance of Fractional
Shares in Acquisition (31) (31)
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,478 1,478
Federal Income Tax
Filing Adjustment 567 567
------- -------- --------- --------- --------- ---------
Balance at September 30, 2000 $ 7,000 $ 14,452 $ 313,588 $ 683,295 $ (37,684) $ 980,651
======= ======== ========= ========= ========= =========
Balance at January 1, 2001 $ 7,000 $ 14,469 $ 314,895 $ 672,348 $ (17,929) $ 990,783
Net Income 52,220 52,220
Change in Unrealized
Gain/(Loss) on:
Hedging Instruments (71,676) (71,676)
Marketable Securities 33,239 33,239
---------
Comprehensive Income Before
Cumulative Effect of a
Change in Accounting
Principle 13,783
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
---------
Comprehensive Income (14,549)
Dividends Paid on:
Preferred Stock (712) (712)
Common Stock (35,246) (35,246)
Exercise of Stock Options and
Accompanying Tax Benefits 100 5,913 6,013
Distribution of Contingent
Shares for Prior Year
Acquisition 8 822 830
Other 73 73
------- -------- --------- --------- --------- ---------
Balance at September 30, 2001 $ 7,000 $ 14,577 $ 321,703 $ 688,610 $ (84,698) $ 947,192
======= ======== ========= ========= ========= =========
See notes to consolidated financial statements.
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
(In Thousands) 2001 2000
- --------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 52,220 $ 72,614
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 114,597 61,950
Valuation Adjustment on Leased Equipment 20,000 -
Amortization of Goodwill 3,363 3,425
Other Amortization and Accretion (4,900) (25,489)
Depreciation of Leased Equipment and
Premises and Equipment 36,084 35,869
Tax Benefit Received from Exercise of Stock Options 2,504 291
Realized Investment Security Gains - (96)
Proceeds from Sale of Loans Held for Sale 1,892,462 1,049,470
Origination of Loans Held for Sale (1,914,805) (986,636)
Realized Gains on Loans Held for Sale (1,519) (30,607)
Increase in Trading Account Securities (36,462) (21)
Increase in Interest Receivable (5,022) (15,661)
(Increase) Decrease in Other Assets (52,447) 11,355
Increase in Interest Payable 15,778 17,563
Increase in Other Liabilities 66,692 196
----------- -----------
Net Cash Provided By Operating Activities 188,545 194,223
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,895,947 1,783,642
Proceeds from Maturities and Prepayments 901,360 310,036
Purchases (2,778,549) (2,428,417)
(Increase) Decrease in Receivables Due From
Securitization Trusts 116,128 (99,729)
Net Increase in Loans and Leases (1,370,878) (1,828,332)
Net (Increase) Decrease in Operating Lease Equipment 12,711 (61,785)
Net Increase in Premises and Equipment (14,703) (16,280)
Acquisition - (129,190)
----------- -----------
Net Cash Used In Investing Activities (1,237,984) (2,470,055)
----------- -----------
Financing Activities:
Increase (Decrease) in Deposits of
Securitization Trusts (110,478) 83,389
Increase in Other Deposits 543,081 804,378
Increase in Short-Term Debt 762,688 913,487
Principal Payments on Long-Term Debt (125,563) (106,766)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 136,264 616,606
Cash Dividends Paid (35,958) (35,791)
Proceeds from Exercise of Stock Options 3,509 2,308
Net Increase in Other Equity Items 73 2,794
----------- -----------
Net Cash Provided By Financing Activities 1,173,616 2,280,405
----------- -----------
Increase in Cash and Cash Equivalents 124,177 4,573
Cash and Cash Equivalents at Beginning of Period 369,028 376,143
----------- -----------
Cash and Cash Equivalents at End of Period $ 493,205 $ 380,716
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 483,132 $ 393,664
Income Taxes 19,989 58,433
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 13,346 11,167
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 unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and
footnotes necessary to be in conformity with generally accepted
accounting principles for annual financial statements. 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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
(In Thousands, Except Per Share Data) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Basic:
Net Income $ (7,435) $ 10,953 $ 52,220 $ 72,614
Less Preferred Stock Dividends (237) (237) (712) (712)
-------- -------- -------- --------
Income Available to Common Shareholders (7,672) 10,716 51,508 71,902
Weighted-Average Common Shares Outstanding 49,081 48,753 48,949 48,728
-------- -------- -------- --------
Basic Earnings Per Share $ (0.16) $ 0.22 $ 1.05 $ 1.48
======== ======== ======== ========
Diluted:
Net Income $ (7,435) $ 10,953 $ 52,220 $ 72,614
Weighted-Average Common Shares Outstanding 49,081 48,753 48,949 48,728
Assumed Conversion of:
Convertible Preferred Stock 988 988 988 988
Dilutive Stock Options (Treasury Stock Method) 598 458 656 584
-------- -------- -------- --------
Dilutive Potential Common Shares 50,667 50,199 50,593 50,300
-------- -------- -------- --------
Diluted Earnings Per Share $ (0.15) $ 0.22 $ 1.03 $ 1.44
======== ======== ======== ========
-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. Approximately $345 million of the preferred
securities qualify as Tier 1 capital and the remainder qualifies as
Tier 2 capital for bank regulatory purposes. The sole assets of the
trusts are the debentures. The junior subordinated debentures consisted
of the following at September 30, 2001:
Stated Effective Maturity
(Dollars in Thousands) Rate Rate(1) Date Amount
- -----------------------------------------------------------------------
November 1996 Issuance 8.60% 8.66% 12/01/26 $ 99,050
June 1999 Issuance 8.75% 3.92% 06/30/29 121,358
November 2000 Issuance 10.25% 5.34% 12/31/30 109,113
March 2001 Issuance 9.45% 5.53% 03/30/31 121,128
--------
Total $450,649
========
(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 September 30, 2001
follow:
(In Thousands) Total Assets
- -----------------------------------------------------------------------
Provident Auto Leasing Company $740,175
Provident Auto Rental LLC (2000-1) 379,888
Provident Lease Receivables Company LLC 201,782
Provident Auto Rental LLC (1999-1) 196,903
Provident Auto Rental LLC (2000-2) 161,678
Provident Auto Rental Company LLC (1998-2) 40,063
Provident Auto Rental Company LLC (1998-1) 37,356
The above amounts include items which are eliminated in the
Consolidated Financial Statements.
-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 nine months ended
September 30, 2001, Provident recorded reductions in accumulated other
comprehensive income of $28.3 million and $71.7 million, respectively.
No gain or loss was recognized in earnings at the time of adoption or
for the first three quarters of 2001.
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. Provident cannot predict what effect the
results of these tests will have on its earnings and financial
position.
-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 a net loss of $7.4 million for the third quarter of
2001 compared to net income of $11.0 million for the same period in
2000. On an operating income basis (excludes unusual and significant
expenses), net income for the first nine months of 2001 and 2000 was
$52.2 million and $99.6 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
(loss) per diluted share was $(.15) and $1.03 for the third quarter and
first nine months of 2001, respectively, versus $.22 and $1.98 in last
year's third quarter and first nine 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 Nine Months Ended
September 30, September 30,
(Dollars in Thousands, ---------------------------------- ---------------------------------
Except Per Share Data) 2001 2000 Change 2001 2000 Change
- -----------------------------------------------------------------------------------------------------------
Net Interest Income $ 123,672 $ 95,267 30% $ 348,188 $ 282,772 23%
Gain on Sale of Loans and Leases 3,254 356 814 4,490 44,771 (90)
Other Noninterest Income 53,849 52,096 3 170,368 146,902 16
Total Revenue 180,775 147,719 22 523,046 474,445 10
Provision for Loan and Lease Losses 66,010 42,550 55 114,597 61,950 85
Noninterest Expense(1) 125,863 88,151 43 327,221 296,078 11
Net Income(1) (7,435) 10,953 (168) 52,220 72,614 (28)
Diluted Earnings per Share(1) (0.15) 0.22 (168) 1.03 1.44 (28)
Return on Average Equity(1) -2.99% 4.53% 7.11% 10.33%
Return on Average Assets(1) -0.19% 0.37% 0.47% 0.82%
Efficiency Ratio 69.60% 59.69% 62.55% 54.13%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $ 327,221 $ 256,778 27%
Net Income 52,220 99,614 (48)
Diluted Earnings per Share 1.03 1.98 (48)
Return on Average Equity 7.11% 14.16%
Return on Average Assets 0.47% 1.13%
Provident's net loss of $7.4 million for the third quarter of 2001
includes pre-tax charges of $50 million which were substantially
related to exposures impacted by the tragic events of September 11. The
$50.0 million of charges were comprised of a $20.0 million write-down
for the deterioration of residual assets related to aircraft leases, a
$15.0 million provision for loans and leases in the commercial airline
industry, and a $15.0 million provision for credit extensions to other
industry sectors. Prior to the provision and residual charge, Provident
had loan and lease exposure of $290 million to the commercial airline
industry. Unrelated to the September 11 events, net charge-offs in the
commercial lending portfolio were $15.0 million higher than anticipated
by management.
For the first nine months of 2001 and 2000, operating net income was
$52.2 million and $99.6 million, respectively. This reduction resulted
primarily from the credit-related adjustments discussed in the previous
paragraph and 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.
-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)
increased 10% during the first nine months of 2001 compared to the same
period during 2000 despite the absence of securitization gains during
2001. Net interest income increased by $65.4 million, or 23%, as a
result of growth in consumer lending and the decision to discontinue
the securitization/sale of loans. Noninterest income, excluding gain on
sale of loans and leases, increased $23.5 million, or 16%, primarily
due to the September 2000 acquisition of Red Capital Group and
Provident's continued emphasis on fee growth. Gain on sale of loans and
leases decreased $40.3 million due to the change in the structure of
securitizations.
The provision for loan and lease losses was $114.6 million for the
first nine months of 2001 as compared to $62.0 million during the same
time period of 2000. The significant increase was due primarily to (1)
a higher ratio of reserve for loan and lease losses to total loans and
leases (as a result of the events of September 11 and the deteriorating
economic climate), (2) higher net charge-offs (also attributable to the
weakening economic climate), and (3) higher loan and lease balances
(due to the change in securitization structure which no longer removes
loans and leases from the balance sheet and robust consumer loan
growth).
Operating noninterest expense increased $70.4 million, or 27%, to
$327.2 million for the first three quarters of 2001 as compared to
$256.8 million for the first three quarters of 2000. The increase in
noninterest expense was primarily the result of the acquisition of Red
Capital Group, additional investments within existing businesses where
good growth opportunities exist, and the write-down of airline residual
assets. The ratio of operating noninterest expense to tax equivalent
revenue ("efficiency ratio") increased to 62.55% during 2001 as
compared to 54.13% during 2000. The increase in the efficiency ratio
was the result of the elimination of gain on sale of loans and leases
and the write-off of the residual assets. For purposes of calculating
the efficiency ratio, operating noninterest expense excludes merger and
restructuring charges, and tax equivalent revenue excludes security
gains or losses.
Total average deposits for the first nine months of 2001 grew $1.4
billion, or 19%, as compared to the same period during 2000. Average
core deposits grew 17% during these time periods with significant
contribution coming from internet deposit-gathering initiatives and
deposit growth within the financial centers.
-12-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Lines
- --------------
The following table summarizes total revenue, operating income and
average assets by major lines of business for the three-month and
nine-month periods ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
(Dollars in Millions) 2001 2000 Change 2001 2000 Change
- -------------------------------------------------------------------------------
Total Revenue:
Commercial Banking $ 89.2 $ 67.8 32% $ 261.9 $ 200.3 31%
Retail Banking 69.4 65.5 6% 194.1 197.6 -2%
Mortgage Banking 22.2 14.3 55% 67.0 76.4 -12%
Corporate Center - 0.1 - - 0.1 -
------- ------- ------- -------
$ 180.8 $ 147.7 22% $ 523.0 $ 474.4 10%
======= ======= ======= =======
Operating Income:
Commercial Banking $ (18.3) $ 6.3 -390% $23.1 $50.4 -54%
Retail Banking 7.6 7.0 9% 25.2 34.1 -26%
Mortgage Banking 3.3 (2.4) -238% 3.9 15.0 -74%
Corporate Center - 0.1 - - 0.1 -
------- ------- ------- -------
$(7.4) $11.0 -167% $52.2 $99.6 -48%
======= ======= ======= =======
Average Assets:
Commercial Banking $ 7,210 $ 5,459 32% $ 6,882 $ 5,509 25%
Retail Banking 3,426 2,368 45% 3,219 2,371 36%
Mortgage Banking 2,119 1,162 82% 2,075 729 185%
Corporate Center 2,626 2,755 -5% 2,732 3,142 -13%
------- ------- ------- -------
$15,381 $11,744 31% $14,908 $11,751 27%
======= ======= ======= =======
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 contributed approximately 50% of Provident's
total revenue for the third quarter and first nine months of 2001.
Total revenues for the third quarter and first nine months of 2001
increased 32% and 31%, respectively, as compared to the same time
periods during 2000. However, Commercial Banking posted an $18.3
million net operating loss for the third quarter and operating
income decreased $27.3 million for the first nine months of 2001
compared to the same time interval of 2000. The primary reason for
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 and to 1.99% at September 30, 2001. In addition,
Provident Commercial Group posted a special charge of $20 million
for estimated aircraft residual impairment due to the slow-down in
air travel and the uncertainty which the airline industry is
currently facing. Also contributing to the lower 2001 income level
was 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 2001 as
compared to pre-tax gains of $9.1 million being recognized during
the first nine months of 2000.
Red Capital made significant contributions to revenue growth during
the third 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. Provident plans to continue the
expansion of fee revenue businesses, thereby increasing revenues and
improving the balance between spread and fee-based revenue.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Commercial Banking continued its history of strong asset growth as
evidenced by average assets increasing 25% from the first nine
months of 2000 to 2001. Contributing to this growth was the
acquisition of Red Capital Group, 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. Excluding the
acquisition of Red Capital Group, average asset growth was 15% from
the first nine months of 2000 to 2001.
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 $8.9 million for the nine-month
period ended September 30, 2001 as compared to the same period in
2000. The primary driver for the decrease 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 nine months of 2001 as compared to
a pre-tax gain of $4.2 million being recognized during the same
period of 2000. Also, provision increased as a result of
management's decision to increase the reserve for loan losses to
total loans ratio and higher loan balances. Loan balances for the
third quarter of 2001 grew by 57% as compared to the third quarter
of 2000.
Retail Banking continues to experience strong growth in deposits.
Average core deposits for the third quarter of 2001 grew by 17% as
compared to the third quarter of 2000. Significant deposit growth
came from the Ohio financial centers and from internet banking
products. Provident plans to continue to enhance its distribution of
products and services via internet banking, ATM machines and the
TeleBank customer service call center.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Net operating income
for the third quarter of 2001 was $3.3 million as compared to $(2.4)
million for the third quarter of 2000. For the first nine months of
2001 and 2000, net operating income was $3.9 million and $15.0
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 three quarters of 2001 as compared to pre-tax gains of $30.3
million being recognized during the same time period in 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, the provision increased due to
management's decision to increase the ratio of loan loss reserves to
total loans.
-15-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Mortgage Banking successfully transitioned their business plan and
implemented strategic initiatives to reduce the business' risk
profile. Beginning with the third quarter of 2001, nonconforming
loan originations have been sold on a whole-loan basis to investors,
with a net sales premium averaging approximately 200 basis points.
While not having a significant impact on third quarter earnings, the
implications of increasing the growth and breadth of the mortgage
business are expected to yield positive results in the future.
Net Interest Income
- -------------------
Net interest income for the nine months ended September 30, 2001,
increased $65.4 million compared to the first nine months of 2000. The
increase in interest income was due primarily to an increase in average
earning assets of $3.1 billion, or 30%. The increase in average earning
assets resulted primarily from the growth of the lending portfolio.
Interest expense for the nine months ended September 30, 2001 increased
due to a 31% increase in total interest bearing liabilities while the
average rate paid decreased 42 basis points to 5.45%. 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 nine months of 2001, the
net interest margin, on a tax-equivalent basis, was 3.43% 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 nine-month periods ended September 30, 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 Nine Months Ended
----------------------------------------- -----------------------------------------
September 30, 2001 September 30, 2000 September 30, 2001 September 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 $ 4,640 7.35% $ 4,385 9.82% $ 4,688 7.95% $ 4,248 9.46%
Mortgage 597 8.44 549 9.50 622 8.75 559 9.07
Construction 807 6.73 724 9.04 811 7.54 647 8.98
Lease Financing 1,200 10.25 393 11.58 958 10.72 362 11.70
------- ----- ------- ----- ------- ----- ------- -----
Total Corporate Lending 7,244 7.85 6,051 9.81 7,079 8.35 5,816 9.51
Consumer Lending:
Residential 1,064 10.92 252 10.28 1,024 11.12 320 11.55
Installment 821 9.42 448 11.70 735 10.13 511 10.83
Lease Financing 1,277 9.97 615 10.45 1,170 10.29 532 9.37
------- ----- ------- ----- ------- ----- ------- -----
Total Consumer Lending 3,162 10.15 1,315 10.84 2,929 10.54 1,363 10.43
------- ----- ------- ----- ------- ----- ------- -----
Total Loans and Leases 10,406 8.55 7,366 10.00 10,008 8.99 7,179 9.69
Investment Securities 3,151 6.21 3,084 6.86 3,192 6.62 3,263 7.08
Federal Funds Sold and Reverse
Repurchase Agreements 102 3.53 10 6.70 103 4.91 11 8.10
Other Short Term Investments 428 6.59 - - 280 6.85 - -
------- ----- ------- ----- ------- ----- ------- -----
Total Earning Assets 14,087 7.93 10,460 9.07 13,583 8.36 10,453 8.87
Cash and Due From Banks 241 232 259 235
Other Assets 1,053 1,052 1,066 1,063
------- ------- ------- -------
Total Assets $15,381 $11,744 $14,908 $11,751
======= ======= ======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 487 2.32 $ 378 2.93 $ 479 2.85 $ 352 2.36
Savings Deposits 1,581 3.36 1,364 5.30 1,544 4.03 1,349 4.97
Time Deposits 5,832 5.28 4,906 6.43 5,753 5.80 4,678 6.10
------- ----- ------- ----- ------- ----- ------- -----
Total Deposits 7,900 4.71 6,648 6.00 7,776 5.27 6,379 5.65
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,433 3.97 785 6.35 1,165 4.38 1,203 6.08
Commercial Paper 209 3.79 198 6.27 216 4.55 205 5.95
Short-Term Notes Payable 60 9.63 2 5.83 37 8.53 2 5.88
------- ----- ------- ----- ------- ----- ------- -----
Total Short-Term Debt 1,702 4.14 985 6.33 1,418 4.51 1,410 6.06
Long-Term Debt 2,670 5.69 1,395 6.41 2,695 6.10 1,348 6.28
Junior Subordinated Debentures 451 6.90 220 8.63 412 7.78 220 8.46
------- ----- ------- ----- ------- ----- ------- -----
Total Interest Bearing
Liabilities 12,723 4.92 9,248 6.16 12,301 5.45 9,357 5.87
Noninterest Bearing Deposits 1,203 1,258 1,225 1,216
Other Liabilities 460 272 402 240
Shareholders' Equity 995 966 980 938
------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $15,381 $11,744 $14,908 $11,751
======= ======= ======= =======
Net Interest Spread 3.01% 2.91% 2.91% 3.00%
==== ==== ==== ====
Net Interest Margin 3.48% 3.62% 3.43% 3.61%
==== ==== ==== ====
-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 $114.6 million and $62.0
million for the first nine months of 2001 and 2000, respectively. The
ratio of reserve for loan and lease losses to total loans and leases
was 1.99% and 1.44% at September 30, 2001 and 2000, respectively. The
increase in provision for loan and lease losses was due primarily to a
higher ratio of reserve for loan and lease losses to total loans and
leases (as a result of the deteriorating economic climate and the
events of September 11), higher net charge-offs and higher loan and
lease balances (due to the change in securitization structure that
occurred during the third quarter of 2000).
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
(Dollars in Thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------
Balance at Beginning of Period $ 176,975 $ 97,588 $ 154,300 $ 94,045
Acquired Reserves - 2,377 10,003 2,377
Provision for Loan and Lease Losses 66,010 42,550 114,597 61,950
Loans and Leases Charged Off (40,735) (24,786) (84,531) (47,542)
Recoveries 4,596 2,548 12,477 9,447
--------- --------- --------- ---------
Balance at End of Period $ 206,846 $ 120,277 $ 206,846 $ 120,277
========= ========= ========= =========
Reserve for Loan and Lease Losses
as a Percent of:
Nonaccrual Loans 157.10% 182.02%
Nonperforming Assets 140.31% 160.83%
Total Loans and Leases 1.99% 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 and nine-month periods ended September
30, 2001 and 2000:
Three Months Ended Three Months Ended
September 30, 2001 September 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 $ 27,900 2.41% 77.2% $ 20,098 1.83% 90.4%
Mortgage 483 0.32 1.4 (21) (0.02) (0.1)
Construction - - - - - -
Lease Financing 3,081 1.03 8.5 (207) (0.21) (0.9)
-------- ----- -------- -----
Net Corporate Lending 31,464 1.74 87.1 19,870 1.31 89.4
Consumer Lending:
Residential 2,179 0.82 6.0 1,495 2.37 6.7
Installment 834 0.41 2.3 697 0.62 3.1
Lease Financing 1,662 0.52 4.6 176 0.11 0.8
-------- ----- -------- -----
Net Consumer Lending 4,675 0.59 12.9 2,368 0.72 10.6
-------- ----- -------- -----
Net Charge-Off's $ 36,139 1.39 100.0 $ 22,238 1.21 100.0
======== ===== ======== =====
Nine Months Ended Nine Months Ended
September 30, 2001 September 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 $ 50,183 1.43% 69.7% $ 31,280 0.98% 82.1%
Mortgage 508 0.11 0.7 75 0.02 0.2
Construction - - - - - -
Lease Financing 7,516 1.05 10.4 829 0.31 2.2
-------- ----- -------- -----
Net Corporate Lending 58,207 1.10 80.8 32,184 0.74 84.5
Consumer Lending:
Residential 8,432 1.10 11.7 3,541 1.48 9.3
Installment 1,834 0.33 2.5 1,439 0.38 3.8
Lease Financing 3,581 0.41 5.0 931 0.23 2.4
-------- ----- -------- -----
Net Consumer Lending 13,847 0.63 19.2 5,911 0.58 15.5
-------- ----- -------- -----
Net Charge-Off's $ 72,054 0.96 100.0 $ 38,095 0.71 100.0
======== ===== ======== =====
The increase in net charge-offs for the first nine months 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 eighteen charge-offs greater than one
million dollars in the first nine months of 2001 compared to nine in
the first nine months of 2000. The increase in net charge-offs for
corporate lease financing and residential was due primarily to the
growth in loan and lease balances in 2001 as compared to 2000.
-19-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at September 30, 2001 were $147.4 million compared
to $104.8 million and $74.8 million as of December 31, 2000 and
September 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. Nonaccrual loans have increased during 2001 as the economic
climate has continued to deteriorate. The composition of nonperforming
assets over the past five quarters is provided in the following table.
2001 2000
-------------------------------- --------------------
Third Second First Fourth Third
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $ 84,700 $ 74,098 $ 74,172 $ 74,401 $ 48,031
Mortgage 1,984 1,944 1,676 1,712 1,529
Construction 2,213 4,585 4,520 - -
Lease Financing 5,977 6,079 8,685 6,503 5,147
-------- -------- -------- -------- --------
Total Corporate Lending 94,874 86,706 89,053 82,616 54,707
Consumer Lending:
Residential 36,792 23,868 17,160 13,404 11,371
Installment - - - - -
Lease Financing - - - - -
-------- -------- -------- -------- --------
Total Consumer Lending 36,792 23,868 17,160 13,404 11,371
-------- -------- -------- -------- --------
Total Nonaccrual Loans 131,666 110,574 106,213 96,020 66,078
Other Real Estate/Equipment 15,758 16,279 7,348 8,805 8,706
-------- -------- -------- -------- --------
Total Nonperforming Assets $147,424 $126,853 $113,561 $104,825 $ 74,784
======== ======== ======== ======== ========
Loans 90 Days Past Due
Still Accruing $ 34,929 $ 22,830 $ 42,327 $ 28,780 $ 28,959
Nonaccrual Loans to
Total Loans and Leases 1.27% 1.06% 1.10% 1.06% 0.79%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate/Equipment 1.42% 1.22% 1.18% 1.15% 0.89%
Total Assets 0.97% 0.84% 0.77% 0.76% 0.57%
Nonaccrual loans increased $35.6 million during the first nine months
of 2001. The increase was composed of $155.9 million of additions to
nonaccrual loans, less $48.5 million of payments on nonaccrual loans,
$59.0 million of nonaccrual loans charged off and $12.8 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.
The increase in nonaccrual commercial loans was due primarily to the
deteriorating economic climate. Other real estate and equipment
increased $7.0 million during the first nine 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 increase in loans ninety days past due still accruing was
due primarily to the increase in delinquent residential loans.
-20-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Income
- ------------------
The following table details the components of noninterest income and
their change for the third quarter and first nine-month periods ended
September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2001 2000 Change 2001 2000 Change
- -------------------------------------------------------------------------------------------------
Service Charges on
Deposit Accounts $ 10,312 $ 8,997 14.6% $ 29,551 $ 26,235 12.6%
Loan Servicing Fees 9,948 13,677 (27.3) 32,003 38,586 (17.1)
Other Service Charges and Fees 12,977 12,349 5.1 43,704 31,767 37.6
Leasing Income 10,500 10,991 (4.5) 33,331 31,490 5.8
Warrant Gains - 2,700 (100.0) 412 7,500 (94.5)
Security Gains - 72 (100.0) - 96 (100.0)
Other 10,112 3,310 205.5 31,367 11,228 179.4
-------- -------- -------- --------
Noninterest Income Before Gain
on Sale of Loans and Leases 53,849 52,096 3.4 170,368 146,902 16.0
Gain on Sale of Loans and Leases:
Non-Cash - - - - 34,447 (100.0)
Cash 3,254 356 814.0 4,490 10,324 (56.5)
-------- -------- -------- --------
Total Noninterest Income $ 57,103 $ 52,452 8.9 $174,858 $191,673 (8.8)
======== ======== ======== ========
Explanations for significant changes in noninterest income by category
follow:
o Service charges on deposit accounts increased $1.3 million and $3.3
million in the quarterly and nine-month comparisons. The increases
for both periods were a result of pricing and volume increases on
corporate deposit accounts.
o Loan servicing fees decreased $3.7 million and $6.6 million in the
quarterly and nine-month comparisons due primarily to the decrease
in fees in the residential mortgage and auto leasing areas more than
offsetting the increase from Red Capital Group, a financing and loan
servicer for multifamily and health-care facilities that was
acquired in September 2000.
o Other service charges and fees increased $11.9 million in the
nine-month comparison due primarily to loan origination and other
fee income generated by Red Capital Group.
o Leasing income increased $1.8 million in the nine-month comparison
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.
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 $7.5
million were recognized during the first nine months of 2001 and
2000, respectively.
-21-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Other income increased $6.8 million and $20.1 million in the
quarterly and nine-month comparisons due primarily to increases in
miscellaneous fees earned by Red Capital Group, income from
investments in partnerships, and income from trading account
activity.
o Gain on sales of loans and leases increased $2.9 million and
decreased $40.3 million in the quarterly and nine-month comparisons.
The increase in the quarterly comparison is due primarily to gains
recognized from the sale of nonconforming residential mortgage loans
on a whole-loan basis. The decrease in the nine-month comparison is
the result of the third quarter 2000 decision to change the
structure of securitizations resulting in the elimination of
gain-on-sale accounting. The following table provides detail of the
gain on sales recognized during the third quarter and nine-month
periods of 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In Thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $ - $ - $ - $30,291
Prime Consumer Home Equity Securitizations - - - 4,156
------- ------- ------- -------
Total Gain on Sales - Non-Cash - - - 34,447
------- ------- ------- -------
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations - - - 9,083
Other Loan Sales 3,254 356 4,490 1,241
------- ------- ------- -------
Total Gain on Sales - Cash 3,254 356 4,490 10,324
------- ------- ------- -------
Total Gain on Sales $ 3,254 $ 356 $ 4,490 $44,771
======= ======= ======= =======
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 third quarter and nine-month periods of 2001 and
2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2001 2000 Change 2001 2000 Change
- --------------------------------------------------------------------------------------------------
Salaries, Wages and Benefits $ 52,783 $ 41,518 27.1% $153,951 $122,805 25.4%
Charges and Fees 8,757 6,084 43.9 24,666 16,634 48.3
Occupancy 5,634 5,066 11.2 16,783 15,045 11.6
Leasing Expense 28,123 6,644 323.3 42,964 19,900 115.9
Equipment Expense 6,209 7,079 (12.3) 19,226 19,418 (1.0)
Professional Services 5,476 5,521 (0.8) 18,243 15,955 14.3
Other 18,881 16,239 16.3 51,388 47,021 9.3
-------- -------- -------- --------
Noninterest Expense Before Merger
and Restructuring Charges 125,863 88,151 42.8 327,221 256,778 27.4
Merger and Restructuring Charges - - - - 39,300 (100.0)
-------- -------- -------- --------
Total Noninterest Expense $125,863 $ 88,151 42.8 $327,221 $296,078 10.5
======== ======== ======== ========
-22-
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 $11.3 million and $31.1
million in the quarterly and nine-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 $2.7 million and $8.0 million in the
quarterly and nine-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 $1.7 million in the quarterly
and nine-month comparisons due primarily to increases in rent
expense.
o The increase in leasing expense for both the quarterly and
nine-month comparison is attributable to a $20.0 million write-down
in residual values related to aircraft leases. The deterioration in
residual values of aircraft leases is the result of the events of
September 11 and its financial impact on the airline industry.
o Professional fees increased $2.3 million in the nine-month
comparison due primarily to legal and other professional fees
related to loan collections.
o The three largest expenses within other noninterest expense were
marketing ($6.9 million in 2001 and $6.7 million in 2000), travel
($6.6 million in 2001 and $6.0 million in 2000), and franchise taxes
($6.2 million in 2001 and $5.9 million in 2000).
o Merger and restructuring charges, which were incurred 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 $139
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.
-23-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Trading account securities increased $36 million during the first nine
months of 2001. On a very limited basis, 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 $230 million of loans as held for sale at
September 30, 2001. This is an increase of $24 million from the amount
reported at December 31, 2000. These loans consist of $175 million of
multifamily loans and $55 million of nonconforming residential mortgage
loans. The multifamily loans are insured 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 the multifamily loans held
for sale are part of the operations of Red Capital Group. Nonconforming
residential mortgage loans are being sold on a whole-loan basis. This
is part of an initiative started during the third quarter of 2001 to
reduce the risk profile of the Mortgage Banking business line.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $51 million during the first nine
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.
Loans and Leases
- ----------------
As of September 30, 2001 total loans and leases were $10.4 billion
compared to $9.1 billion at December 31, 2000. Provident had an
additional $4.5 billion and $5.8 billion of off-balance sheet loans and
leases as of September 30, 2001 and December 31, 2000, respectively.
Due to the third quarter 2000 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. 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".
-24-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the composition of the commercial loan
category by industry type at September 30, 2001:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -----------------------------------------------------------------------
Manufacturing $ 855.1 19 $18.6
Service Industries 763.9 17 24.2
Real Estate Operators/Investment 431.2 10 -
Retail Trade 421.6 9 3.2
Finance and Insurance 354.9 8 9.2
Wholesale Trade 311.3 7 5.0
Transportation/Utilities (1) 308.0 7 1.3
Construction 236.2 5 14.1
Automobile Dealers 115.0 2 -
Other 712.1 16 9.1
-------- --- -----
Total $4,509.3 100 $84.7
======== === =====
(1) Includes $86.2 million of commercial airline industry loans.
At September 30, 2001, Provident had loans and leases of $290 million
to the commercial airline industry, including $86 million of commercial
loans and $204 million of finance and operating leases. As the tragic
events of September 11, 2001 has had a significant financial impact
upon the airline industry and the re-sale value of aircraft, Provident
recorded provision and lease residual charges of $35 million during the
third quarter of 2001.
Provident had approximately $942 million and $940 million of commercial
loans that are shared national credit loans at September 30, 2001 and
December 31, 2000, respectively. Shared national credit loans are loans
that have a principal balance of at least $20 million and involve three
or more participating banks. As of September 30, 2001, 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 $5.5 million.
The composition of the corporate mortgage and construction loan
categories by property type at September 30, 2001 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -----------------------------------------------------------------------
Residential Development $ 289.4 20 $ 2.2
Shopping/Retail 223.5 15 0.1
Office/Warehouse 222.3 15 0.2
Apartments 200.5 14 0.5
Land 79.9 6 -
Hotels/Motels 74.7 5 0.1
Health Facilities 32.0 2 -
Industrial Plants 30.6 2 -
Auto Sales and Service 11.2 1 -
Churches 10.8 1 -
Other Commercial Properties 268.4 19 1.1
-------- --- -----
Total $1,443.3 100 $ 4.2
======== === =====
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the composition of the installment loan
category by loan type at September 30, 2001:
(Dollars in Millions) Amount %
- -----------------------------------------------------------------------
Home Equity $635.5 73
Indirect Installment 150.7 17
Direct Installment 64.4 7
Other Consumer Loans 21.0 3
------ ---
Total $871.6 100
====== ===
Noninterest Earning Assets
- --------------------------
Leased equipment decreased $52 million, or 24%, during the first nine
months of 2001. The decrease was due primarily to a $20 million
write-down for the deterioration of residual assets related to aircraft
leases.
Deposits
- --------
Total deposits increased $486 million during the first nine months of
2001. Average core deposits for the first nine months of 2001 grew at
an annualized rate of 12%, with significant contribution coming from
internet deposit-gathering initiatives and deposit growth within the
Ohio financial centers.
Borrowed Funds
- --------------
Short-term debt increased $763 million, or 119%, during the first nine
months of 2001. The increase was due primarily to an increase in
federal funds purchased and repurchase agreements.
Long-term debt decreased $87 million, or 3%, during the first nine
months 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 $171 million, or 58%, during the first nine
months 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.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital Resources and Adequacy
- ------------------------------
Total shareholders' equity at September 30, 2001 was $947 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 $33 million (net of deferred
taxes) and a decrease in the market value of cash flow hedging
instruments of $100 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:
Nine Months Ended Year Ended
September 30, 2001 December 31, 2000
--------------------------------------
Average Shareholders' Equity to Average Assets 6.57% 7.82%
Dividend Payout to Net Earnings 68.86 64.85
Dividend Payout to Operating Earnings 68.86 47.45
Tier 1 Leverage Ratio 8.05 9.56
Tier 1 Capital to Risk-Weighted Assets 8.87 9.18
Total Risk-Based Capital To Risk-Weighted Assets 11.27 11.10
Capital expenditures planned by Provident in 2001 for premises and
equipment are currently estimated to be approximately $24 million.
Included in this amount are projected capital expenditures for the
purchase of data processing hardware and software, facility
renovations, branch additions, renovations and enhancements, and ATMs.
Through September 30, 2001, approximately $16 million of these
expenditures had been made.
Stock Options
- -------------
Options to purchase approximately 1.3 million shares of Provident
Common Stock were granted during the first nine months of 2001. The
options have exercise prices ranging from $23.74 to $35.63.
-27-
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, newly-issued 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
during the third quarter of 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.
-28-
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:
Nine Months Ended September 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.
The securitization of automobile leases results in the recognition of
operating lease income or expense. Under the structure of the
securitization of the automobile leases, Provident enters into a
sale-leaseback arrangement with the investors. Lease payments paid by
Provident to the investor may be more or less than that received by
Provident from the consumer. Credit losses are accrued at an annual
rate of 50 basis points. The difference in the lease payments, net of
credit losses and servicing fees, is recognized as net operating lease
income or expense over the life of the securitization.
-29-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Underlying assumptions used in the initial determination of future cash
flows on the loan and lease portfolios accounted for as sales follow:
Nonconforming Prime Equipment
Residential Home Equity Leasing
-------------------------------------
Assumptions Used:
Prepayment Speed(1):
Initial Rate 12.36% 10.00% n/a
Peak Rate 32.84% 30.00% n/a
Calculated Weighted Average
Life of the Loan Portfolios 2.6 Years 2.1 Years n/a
Estimated Credit Losses(2):
Annual Basis 1.09% 0.20% 1.00%
Percentage of Original Balance 2.94% 0.42% 1.97%
Discount Rate 11.88% 10.63% 9.29%
(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 $32.0 million
and $38.6 million in loan servicing fees during the first nine 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; 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.
-30-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Impact of Securitizations on the Consolidated Balance Sheets
- ------------------------------------------------------------
The impact from the securitization and sale of various loans and leases
can be seen in several areas of Provident's balance sheet. The most
significant has been the removal of loans and leases that Provident
continues to service. The following table provides a summary of these
off-balance sheet managed assets:
September 30,
-------------------------------
(In Thousands) 2001 2000
- -----------------------------------------------------------------------
Nonconforming Residential $2,871,850 $3,841,947
Auto Leases 1,013,057 1,173,622
Prime Home Equity 347,241 499,798
Equipment Leases 243,476 406,740
Credit Card - 200,000
---------- ----------
$4,475,624 $6,122,107
========== ==========
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 September
30, 2001 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- -----------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 262,963 $ 18,708
Less:
Estimated Credit Loss (1) (8,743) (226)
Servicing and Insurance Expense (29,424) (2,103)
Discount to Present Value (25,531) (352)
--------- --------
Carrying Value of Retained Interest in
Securitized Assets (1) $ 199,265 $ 16,027
========= ========
(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 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 $115.9 million.
-31-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Provident has provided for credit enhancements to its securitizations
structured as sales in the form of reserve accounts. The reserve
accounts are maintained 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
reserve accounts. 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)". Generally, reserve accounts are held at Provident, classified
as Receivables from Securitization Trusts, and do not earn interest.
Reserve accounts that earn interest are recorded as investment
securities. Detail of the reserve accounts, net of loss estimates, at
September 30, 2001 follows:
Loss Net
(In Thousands) Reserves Estimates Reserves
- -----------------------------------------------------------------------
Receivables from Securitization Trusts:
Nonconforming Residential Loans (1) $366,759 $(83,386) $283,373
Equipment Leases 56,239 (3,624) 52,615
Prime Home Equity Loans 27,821 (1,594) 26,227
-------- -------- --------
Total Securitization Trusts $450,819 $(88,604) $362,215
======== ======== ========
(1)Total loss estimates including those contained within the RISA are
$92.1 million.
Credit Quality of Securitized Assets
- ------------------------------------
The following table presents a summary of various indicators of the
credit quality of off-balance sheet loans and leases as of and for the
nine months ended September 30, 2001:
Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases
- -------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2001:
Average Securitized Assets $3,213,506 $404,943 $295,939
Net Charge-Offs 36,224 1,469 6,783
Net Charge-Offs to Average
Securitized Assets (Annualized) 1.50% 0.48% 3.06%
As of September 30, 2001:
Securitized Assets $2,871,850 347,241 $243,476
Estimated Credit Losses Provided For 92,129 1,820 3,624
Estimated Credit Losses to
Period-End Securitized Assets 3.21% 0.52% 1.49%
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 5.51% 0.27% 3.25%
90 or More 14.15% 0.30% 1.68%
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 outstanding principal balances aggregating approximately $2.3
billion at September 30, 2001. At September 30, 2001, no DUS loans in
Red Capital's loan servicing portfolio were delinquent or in default.
Red Capital has established reserves of approximately $7.4 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 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 September 30,
2001, these financial instruments consisted of standby letters of
credit of $236 million, commitments to extend credit of $2.5 billion,
and interest rate swaps and caps with a notional amount of $7.0 billion
and $6.1 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.
-33-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $44
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 September 30, 2001 by its
banking subsidiary was approximately $184 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 $186 million in cash and interest earning
deposits 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.
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 .17% for a 100 basis
point decrease; increase .42% for a 200 basis point decrease; decrease
.22% for a 100 basis point increase; and decrease .78% 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
---------------------------
All 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: November 14, 2001 \s\ Christopher J. Carey
------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
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