SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 2002 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common stock, without par
value, outstanding at April 30, 2002 is 49,287,390.
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 . . . . . . . . . . . . . . . . . . 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 31
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
(Dollars in Thousands) (Unaudited)
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 227,137 $ 378,257
Federal Funds Sold and Reverse Repurchase Agreements 96,313 122,966
Trading Account Securities 100,002 101,156
Loans Held for Sale 125,421 217,914
Investment Securities Available for Sale
(amortized cost - $3,935,457 and $3,510,601) 3,897,222 3,486,058
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,321,443 4,540,088
Mortgage 862,514 939,824
Construction 563,425 528,008
Lease Financing 1,220,299 1,188,319
Consumer Lending:
Residential 848,676 922,747
Installment 911,151 913,312
Lease Financing 1,431,132 1,463,658
------------ ------------
Total Loans and Leases 10,158,640 10,495,956
Reserve for Loan and Lease Losses (240,663) (240,653)
------------ ------------
Net Loans and Leases 9,917,977 10,255,303
Leased Equipment 178,393 185,863
Premises and Equipment 101,794 103,085
Goodwill 82,432 80,649
Other Assets 631,785 642,303
------------ ------------
TOTAL ASSETS $ 15,358,476 $ 15,573,554
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 849,694 $ 994,978
Interest Bearing 8,056,706 7,859,272
------------ ------------
Total Deposits 8,906,400 8,854,250
Short-Term Debt 1,668,360 1,885,309
Long-Term Debt 2,881,313 2,941,165
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 450,759 450,759
Accrued Interest and Other Liabilities 529,099 549,481
------------ ------------
Total Liabilities 14,435,931 14,680,964
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, 49,257,004 and 49,205,897 Issued 14,603 14,587
Capital Surplus 322,836 322,024
Retained Earnings 663,012 647,675
Accumulated Other Comprehensive Loss (84,906) (98,696)
------------ ------------
Total Shareholders' Equity 922,545 892,590
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,358,476 $ 15,573,554
============ ============
See notes to consolidated financial statements.
-3-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
(In Thousands, Except Per Share Data) 2002 2001
- ----------------------------------------------------------------------------
Interest Income:
Interest and Fees on Loans and Leases $185,948 $223,098
Interest on Investment Securities 53,348 56,844
Other Interest Income 5,066 5,076
-------- --------
Total Interest Income 244,362 285,018
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 9,051 21,759
Time Deposits 58,403 89,976
-------- --------
Total Interest on Deposits 67,454 111,735
Interest on Short-Term Debt 10,311 12,915
Interest on Long-Term Debt 34,248 44,254
Interest on Junior Subordinated Debentures 5,938 7,237
-------- --------
Total Interest Expense 117,951 176,141
-------- --------
Net Interest Income 126,411 108,877
Provision for Loan and Lease Losses 23,990 23,687
-------- --------
Net Interest Income After Provision
for Loan and Lease Losses 102,421 85,190
Noninterest Income:
Service Charges on Deposit Accounts 10,449 9,108
Loan Servicing Fees 9,955 11,578
Other Service Charges and Fees 10,363 9,492
Leasing Income 9,914 11,421
Gain on Sales of Loans and Leases 2,640 379
Security Gains - -
Other 10,263 11,394
-------- --------
Total Noninterest Income 53,584 53,372
Noninterest Expense:
Salaries, Wages and Benefits 56,389 48,132
Charges and Fees 10,057 7,085
Occupancy 6,018 5,608
Leasing Expense 10,446 7,199
Equipment Expense 6,207 6,658
Professional Services 6,085 5,423
Other 18,341 15,351
-------- --------
Total Noninterest Expense 113,543 95,456
-------- --------
Income Before Income Taxes 42,462 43,106
Applicable Income Taxes 15,074 15,303
-------- --------
Net Income $ 27,388 $ 27,803
======== ========
Per Common Share:
Basic Earnings Per Share $ 0.55 $ 0.56
Diluted Earnings Per Share 0.54 0.55
Cash Dividends Paid 0.24 0.24
See notes to consolidated financial statements.
-4-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Preferred Common Capital Retained Comprehensive
(In Thousands) Stock Stock Surplus Earnings Loss Total
- -----------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 7,000 $ 14,469 $ 314,895 $ 672,348 $ (17,929) $ 990,783
Net Income 27,803 27,803
Other Comprehensive Income,
Net of Tax:
Cumulative Effect of a Change
in Accounting Principle (28,332) (28,332)
Change in Unrealized
Gains (Losses) on:
Hedging Instruments (12,486) (12,486)
Marketable Securities 8,635 8,635
---------
Total Comprehensive Income (4,380)
Dividends Paid on:
Preferred Stock (237) (237)
Common Stock (11,722) (11,722)
Exercise of Stock Options and
Accompanying Tax Benefits 11 609 620
Distribution of Contingent
Shares for Prior Year
Acquisition 8 822 830
------- -------- --------- --------- --------- ---------
Balance at March 31, 2001 $ 7,000 $ 14,488 $ 316,326 $ 688,192 $ (50,112) $ 975,894
======= ======== ========= ========= ========= =========
Balance at January 1, 2002 $ 7,000 $ 14,587 $ 322,024 $ 647,675 $ (98,696) $ 892,590
Net Income 27,388 27,388
Other Comprehensive Income,
Net of Tax:
Change in Unrealized
Gains (Losses) on:
Hedging Instruments 22,690 22,690
Marketable Securities (8,900) (8,900)
---------
Total Comprehensive Income 41,178
Dividends Paid on:
Preferred Stock (237) (237)
Common Stock (11,814) (11,814)
Exercise of Stock Options and
Accompanying Tax Benefits 16 826 842
Stock Repurchased and Cancelled (14) (14)
------- -------- --------- --------- --------- ---------
Balance at March 31, 2002 $ 7,000 $ 14,603 $ 322,836 $ 663,012 $ (84,906) $ 922,545
======= ======== ========= ========= ========= =========
See notes to consolidated financial statements.
-5-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
(In Thousands) 2002 2001
- --------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 27,388 $ 27,803
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 23,990 23,687
Amortization of Goodwill - 1,111
Other Amortization and Accretion 1,880 (6,743)
Depreciation of Leased Equipment and
Premises and Equipment 11,309 12,348
Tax Benefit Received from Exercise of Stock Options 266 280
Proceeds from Sale of Loans Held for Sale 521,175 409,083
Origination of Loans Held for Sale (427,197) (362,229)
Realized Gains on Loans Held for Sale (1,485) -
(Increase) Decrease in Trading Account Securities 1,154 (9,924)
(Increase) Decrease in Interest Receivable (3,931) 2,843
(Increase) Decrease in Other Assets (2,822) 59,344
Increase in Interest Payable 5,467 16,015
Increase (Decrease) in Other Liabilities 6,716 (38,144)
----------- -----------
Net Cash Provided By Operating Activities 163,910 135,474
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 420,524 691,403
Proceeds from Maturities and Prepayments 209,190 286,577
Purchases (1,052,077) (1,123,267)
(Increase) Decrease in Loans and Leases 312,821 (574,996)
Decrease in Operating Lease Equipment 1,744 6,639
Increase in Premises and Equipment (4,292) (4,324)
----------- -----------
Net Cash Used In Investing Activities (112,090) (717,968)
----------- -----------
Financing Activities:
Increase in Deposits 52,656 287,001
Increase (Decrease) in Short-Term Debt (216,949) 560,421
Principal Payments on Long-Term Debt (55,204) (70,023)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 1,393 122,262
Cash Dividends Paid (12,051) (11,959)
Proceeds from Exercise of Stock Options 576 340
Common Stock Repurchased and Cancelled (14) -
----------- -----------
Net Cash Provided By (Used In) Financing Activities (229,593) 888,042
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (177,773) 305,548
Cash and Cash Equivalents at Beginning of Period 501,223 369,028
----------- -----------
Cash and Cash Equivalents at End of Period $ 323,450 $ 674,576
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 112,484 $ 160,126
Income Taxes - 8,207
Non-Cash Activity:
Transfer of Loans and Leases to Other Real Estate 6,293 1,346
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 significant
intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to conform to the current year
presentation. These reclassifications had no effect on net income.
The financial statements presented herein should be read in conjunction with
the financial statements and notes thereto included in Provident's 2001
annual report on Form 10-K filed with the Securities and Exchange
Commission.
NOTE 2. EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
per common share:
Three Months Ended
March 31,
--------------------
(In Thousands, Except Per Share Data) 2002 2001
- ----------------------------------------------------------------------------
Basic:
Net Income $ 27,388 $ 27,803
Less Preferred Stock Dividends (237) (237)
-------- --------
Income Available to Common Shareholders 27,151 27,566
Weighted-Average Common Shares Outstanding 49,228 48,866
-------- --------
Basic Earnings Per Share $ 0.55 $ 0.56
======== ========
Diluted:
Net Income $ 27,388 $ 27,803
Weighted-Average Common Shares Outstanding 49,228 48,866
Assumed Conversion of:
Convertible Preferred Stock 988 988
Dilutive Stock Options (Treasury Stock Method) 371 683
-------- --------
Dilutive Potential Common Shares 50,587 50,537
-------- --------
Diluted Earnings Per Share $ 0.54 $ 0.55
======== ========
-7-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income represents the changes in equity during a period except
those resulting from investments by owners and distributions to owners. For
Provident, components of comprehensive income include the unrealized
gains/losses on securities available for sale and unrealized gains/losses on
cash flow hedging derivatives (collectively known as other comprehensive
income), as well as net income. A summary of activity in accumulated other
comprehensive income (loss) follows:
Three Months Ended
March 31,
--------------------
(In Thousands) 2002 2001
- -------------------------------------------------------------------------------------
Accumulated Unrealized Losses on Securities Available
for Sale at January 1, Net of Tax $(15,953) $(17,929)
Net Unrealized Gains (Losses) for the Period, Net of Tax
Expense (Benefit) of $(4,792) in 2002 and $4,650 in 2001 (8,900) 8,635
-------- --------
Accumulated Unrealized Losses on Securities Available
for Sale at March 31, Net of Tax $(24,853) $ (9,294)
======== ========
Accumulated Unrealized Losses on Derivatives Used in Cash
Flow Hedging Relationships at January 1, Net of Tax $(82,743) $ -
Cumulative Effect of Change in Accounting Principle, Net of
Tax Benefit of $15,256 in 2001 - (28,332)
Net Unrealized Gains (Losses) for the Period, Net of Tax
Expense (Benefit) of $21,908 in 2002 and $(5,681) in 2001 40,687 (10,550)
Reclassification Adjustment for Losses Included in Net Income,
Net of Tax Benefit of $9,691 in 2002 and $1,042 in 2001 (17,997) (1,936)
-------- --------
Effect on Other Comprehensive Income (Loss) for the Year 22,690 (40,818)
-------- --------
Accumulated Unrealized Losses on Derivatives Used in Cash
Flow Hedging Relationships at March 31, Net of Tax $(60,053) $(40,818)
======== ========
Accumulated Other Comprehensive Loss at January 1, Net of Tax $(98,696) $(17,929)
Other Comprehensive Income (Loss), Net of Tax 13,790 (32,183)
-------- --------
Accumulated Other Comprehensive Loss at March 31, Net of Tax $(84,906) $(50,112)
======== ========
NOTE 4. LINE OF BUSINESS REPORTING
- -----------------------------------
Provident's three major business lines, referred to as Commercial Banking,
Retail Banking and Mortgage Banking, are based on the products and services
offered, and its management structure. Commercial Banking offers a full
range of commercial lending and financial products and services to corporate
businesses. Retail Banking provides consumer lending, deposit accounts,
trust, brokerage and investment products and services to consumers and small
businesses. Mortgage Banking offers traditional and non-traditional
residential mortgage loans to consumers, and also provides fee-based loan
processing, loan warehousing and sub-servicing for third party originators.
-8-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed income statements and average assets are provided below for
Provident's three major lines of business for the three months ended March
31, 2002 and 2001.
Commercial Retail Mortgage Corporate
(Dollars in Millions) Banking Banking Banking Center Total
- -------------------------------------------------------------------------------------------
Three Months Ended March 31 2002:
Net Interest Income $ 56.6 $ 54.7 $ 15.1 $ - $ 126.4
Provision for Loan Losses (18.7) (3.6) (1.7) - (24.0)
Noninterest Income 28.1 18.9 6.6 - 53.6
Noninterest Expense (47.9) (48.5) (17.1) - (113.5)
Income Taxes (6.4) (7.7) (1.0) - (15.1)
------ ------ ------ ------ -------
Net Income $ 11.7 $ 13.8 $ 1.9 $ - $ 27.4
====== ====== ====== ====== =======
Average Assets $6,902 $3,726 $1,685 $3,083 $15,396
====== ====== ====== ====== =======
Three Months Ended March 31 2001:
Net Interest Income $ 49.6 $ 44.2 $ 15.1 $ - $ 108.9
Provision for Loan Losses (12.6) (5.7) (5.4) - (23.7)
Noninterest Income 30.5 16.3 6.6 - 53.4
Noninterest Expense (37.2) (42.0) (16.3) - (95.5)
Income Taxes (10.8) (4.5) - - (15.3)
------ ------ ------ ------ -------
Net Income $ 19.5 $ 8.3 $ - $ - 27.8
====== ====== ====== ====== =======
Average Assets $6,452 $3,074 $1,978 $2,801 $14,305
====== ====== ====== ====== =======
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, operational and other 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 its level of net charge-offs as well as 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 balance sheet and income
statement items not allocated to the primary business lines, gain/loss on
the sale of investment securities, and any unusual business revenues and
expenses. For the three months ended March 31, 2002 and 2001, all revenue
and expenses were fully allocated to the three business lines.
-9-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. GOODWILL AND OTHER INTANGIBLES
- --------------------------------------
Provident adopted the provisions of Statement of Financial Accounting
Standards ("FAS") No. 141, "Business Combinations", and No. 142, "Goodwill
and Other Intangible Assets", on January 1 2002. 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. During the first six months of 2002,
Provident will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets. Provident cannot predict
what effect the results of these tests will have on its earnings and
financial position.
After-tax amortization of goodwill expensed during the first three months of
2001 was $722,000. Had no amortization of goodwill been recorded during the
first quarter of 2001, net income and diluted earnings per share would have
been $28.5 million and $.56, respectively.
Changes in the carrying amount of goodwill for the three months ended March
31, 2002, are as follows:
Commercial Retail
(In Thousands) Banking Banking Total
- ----------------------------------------------------------------------------
Balance at January 1, 2002 $39,825 $40,824 $80,649
Goodwill Acquired During the Year - 189 189
Goodwill Recorded as a Result of Contingent
Consideration being Recognized 1,594 - 1,594
------- ------- -------
Balance at March 31, 2002 $41,419 $41,013 $82,432
======= ======= =======
As all of Provident's intangible assets have been determined to have limited
lives, these assets have continued to be amortized as in the past.
Intangible assets, along with accumulated amortization, is provided below as
of March 31, 2002:
Gross Net
Carrying Accumulated Carrying
(In Thousands) Value Amortization Value
- ----------------------------------------------------------------------------
Non-Contractual Customer Relationships $20,234 $ 4,246 $15,988
Purchased Core Deposits 1,429 804 625
------- ------- -------
Balance at March 31, 2002 $21,663 $ 5,050 $16,613
======= ======= =======
The estimated amortization of intangible assets, by year, is $3.4 million
for the remainder of 2002; $4.6 million for 2003; $4.2 million for 2004;
$3.1 million for 2005; and $1.3 million for 2006.
-10-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. 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 $336 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 March 31, 2002:
Stated Effective Maturity
(Dollars in Thousands) Rate Rate (1) Date Amount
- ----------------------------------------------------------------------------
November 1996 Issuance 8.60% 8.66% 12/01/26 $ 98,971
June 1999 Issuance 8.75% 3.36% 06/30/29 121,423
November 2000 Issuance 10.25% 4.73% 12/31/30 109,171
March 2001 Issuance 9.45% 5.01% 03/30/31 121,194
--------
Total $450,759
========
(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 7. RESTRICTED ASSETS
- --------------------------
Provident formed the subsidiaries listed below to account for and support
the process of transferring, securitizing and/or selling vehicle and
equipment leases. These subsidiaries are separate legal entities and each
maintains books and records with respect to its assets and liabilities. The
assets of these subsidiaries, which are included in the consolidated
financial statements, are not available to secure financing or otherwise
satisfy claims of creditors of Provident or any of its other subsidiaries.
The subsidiaries and their total assets as of March 31, 2002 follow:
(In Thousands) Total Assets
- ----------------------------------------------------------------------------
Provident Auto Leasing Company $505,669
Provident Auto Rental LLC 2000-1 370,570
Provident Auto Rental LLC 2001-1 344,082
Provident Auto Rental LLC 1999-1 210,979
Provident Lease Receivables Company LLC 173,955
Provident Auto Rental LLC 2000-2 158,289
Provident Auto Rental Company LLC 1998-2 42,611
Provident Auto Rental Company LLC 1998-1 39,945
The above amounts include items which are eliminated in the Consolidated
Financial Statements.
-11-
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 increase 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
- -------
The following table summarizes earnings components, earnings per share and
key financial ratios:
Three Months Ended
March 31,
(Dollars in Thousands, --------------------------------
Except Per Share Data) 2002 2001 Change
- -------------------------------------------------------------------------------------
Net Interest Income $126,411 $108,877 16%
Noninterest Income 53,584 53,372 0
Total Revenue 179,995 162,249 11
Provision for Loan and Lease Losses 23,990 23,687 1
Noninterest Expense 113,543 95,456 19
Net Income 27,388 27,803 (1)
Diluted Earnings per Share 0.54 0.55 (2)
Return on Average Equity 11.89% 11.48%
Return on Average Assets 0.71% 0.78%
Efficiency Ratio 63.08% 58.82%
Efficiency Ratio (Excludes Unusual Credit Charges) 61.16% 58.82%
-12-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First quarter 2002 earnings per diluted share and net income were $.54 and
$27.4 million, respectively, compared with $.55 and $27.8 million in the
first quarter of 2001. Although down slightly from those reported a year
ago, current earnings did increase significantly from the third and fourth
quarters of 2001, which posted net losses of $7.4 million and $28.9 million,
respectively. The losses were primarily the result of large credit-related
charges during the final two quarters of 2001 that were not as significant
during the current quarter.
The provision for loan and lease losses was $24.0 million for the first
three months of 2002 as compared to $23.7 million during the same time
period of 2001. Additionally, Provident recorded $3.5 million of
credit-related charges for the write-down of foreclosed property and leased
equipment (included with noninterest expense) during the first quarter of
2002. During the third and fourth quarters of 2001, Provident recorded
provision and other credit-related charges of $86.0 million and $115.2
million, respectively. The higher than normal expenses incurred for
provision and other credit-related charges were due primarily to the
weakened economy and the events of September 11, 2001. Although encouraged
by the reduced credit-related volatility in the current quarter's earnings,
management continues to work diligently to resolve remaining credit issues
in the lending portfolio.
Provident's total revenue (net interest income plus noninterest income)
increased $17.7 million, or 11%, during the first quarter of 2002 as
compared to the first quarter of 2001. Net interest income increased by
$17.5 million, or 16%, as a result of growth in earning assets, primarily
equipment lease financing, and an improved net interest margin which
increased from 3.42% to 3.56%. Noninterest income increased a modest $.2
million from that reported in last year's first quarter.
Noninterest expense increased $18.1 million, or 19%, to $113.5 million for
the first quarter of 2002 as compared to the first quarter of 2001. The
increase in noninterest expense was primarily the result of three
activities. First, Provident is investing in businesses where strong growth
opportunities exist, including middle market commercial lending, middle
market equipment leasing and mortgage servicing. Also, significant
investments were made within the credit and risk administration functions.
Finally, as noted earlier in this section, the current quarter's noninterest
expense included a $3.5 credit-related charge for the write-down of
foreclosed properties and leased equipment. The ratio of noninterest expense
to tax equivalent revenue ("efficiency ratio"), excluding the credit-related
charges, increased to 61.16% for the first quarter of 2002 as compared to
58.82% during 2001.
Total assets decreased $215 million from December 31, 2001 to March 31, 2002
primarily as a result of a decline in commercial loans outstanding. The
decrease in commercial loans is due to a softness in commercial loan demand
and management's decision to de-emphasize its structured finance business.
Total deposits increased $52 million during the first quarter. Retail
deposits increased 6% (annualized) to $5.7 billion which was somewhat offset
by a decrease in commercial deposits.
-13-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Lines
- --------------
Provident's major business lines are Commercial Banking, Retail Banking and
Mortgage Banking. The following table summarized net income by major lines
of business for the three-month period ended March 31, 2002 and 2001.
Condensed income statements and average balances are provided in Note 4 of
the "Notes to Consolidated Financial Statements".
Three Months Ended
March 31,
------------------------
(Dollars in Millions) 2002 2001
- ----------------------------------------------------------------------------
Commercial Banking $ 11.7 $ 19.5
Retail Banking 13.8 8.3
Mortgage Banking 1.9 -
------ ------
$ 27.4 $ 27.8
====== ======
Business line descriptions and fluctuation analysis follows:
o Commercial Banking provides a full range of commercial banking and
commercial real estate products and services. Areas of focus and
expertise include regional middle-market lending, equipment leasing and
financing, cash management, and loan servicing, structuring and
investment banking services for the multi-family housing and healthcare
industries.
Commercial Banking contributed 43% of the Bank's net income in the first
quarter of 2002. Average loan balances for the first three months of 2002
increased 4% and total revenues were up 6% compared to the same time
period in 2001. However, net income for the first three months of 2002
failed to keep pace with asset and revenue growth. Net income was
primarily impaired by credit write-offs and residual write-downs from
loans and leases due to the extended economic softness. New initiatives
and improved internal policies are being implemented to reduce credit
risk and safeguard the commercial lending portfolio from further credit
problems.
Red Capital Group and Capstone Realty Advisors, business units within
Commercial Banking, continued to make significant contributions to
revenue growth in the first three months of 2002. The favorable rate
environment during the past quarter provided for an increased demand for
their services. Both Red Capital and Capstone provide a platform to
generate fee income from originating, selling and servicing commercial
mortgage loans which improves Provident's balance between interest spread
and fee-based revenues.
o Retail Banking provides a variety of banking and investment products and
services to retail consumers and businesses. Services are delivered
through various delivery channels including Financial Centers, telephone,
ATMs and the internet. Primary operating areas include Retail and
Business Banking, Consumer Lending and Provident Financial Advisors.
-14-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating income increased $5.5 million for the three-month period ended
March 31, 2002 as compared to the same period in 2001. The primary driver
for the increase was an increase in the deposit net interest income.
Average noninterest bearing retail deposits grew by 4% while average
total retail deposits grew by 10% during the first quarter of 2002 as
compared to the first quarter of 2001. The largest area of deposit growth
was from internet deposit-gathering initiatives. In addition to an
increase in deposit volume, the favorable rate environment has had a
positive impact on the net interest margin.
o Mortgage Banking offers traditional and non-traditional residential
mortgage loans to consumers, and also provides fee-based loan processing,
loan warehousing and sub-servicing for third party originators. Loans are
originated through retail and broker channels and are sold on a
whole-loan basis. Whole-loan sales refer to the transfer of credit risk
along with the payment stream of the loan. Primary operating areas
include Mortgage Services, Warehouse Lending Services and National
Servicing Center.
Net operating income for the first quarter of 2002 was $1.9 million as
compared to no income for the first quarter of 2001. The improvement in
operating income for 2002 was driven primarily by the division's growing
mortgage warehousing business (short-term lending to mortgage originators
and brokers). Mortgage Banking continues to implement strategic
initiatives designed to reduce Mortgage Banking's risk profile. Since the
third quarter of 2001, nonconforming loan originations have been sold on
a whole-loan basis to investors. During the first quarter of 2002, the
net sales premium on nonconforming loan sales averaged approximately 130
basis points. These sales provided Mortgage Banking with an additional
$1.5 million of gains that was not present in the first quarter of 2001.
Through associations with other companies, a direct retail marketing loan
division and mortgage services company have been started as management
continues to seek and cultivate new opportunities for diverse cash flow
streams within the mortgage business.
Net Interest Income
- -------------------
Net interest income for the three months ended March 31, 2002, increased
$17.5 million, or 16%, compared to the first three months of 2001. The
increase in interest income was due to an increase in average earning assets
of $1.5 billion, or 11%, and an increase in the net interest margin. The
increase in average earning assets resulted primarily from the growth of the
lending portfolio, principally equipment lease financing. The growth in
earning assets were primarily supported by a corresponding growth in
interest bearing liabilities. The largest increase in interest bearing
liabilities was short-term debt, primarily federal funds purchased.
-15-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net interest margin represents net interest income as a percentage of total
interest earning assets. For the first three months of 2002, the net
interest margin, on a tax-equivalent basis, was 3.56% compared to 3.42% for
the same period in 2001. This increase 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 period ended March 31, 2002
and 2001.
Three Months Ended
---------------------------------------
March 31, 2002 March 31, 2001
----------------- -----------------
Average Average Average Average
(Dollars in Millions) Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------
Assets:
Loans and Leases:
Corporate Lending:
Commercial $ 4,386 6.08% $ 4,600 8.80%
Mortgage 882 6.54 841 9.11
Construction 567 4.82 612 8.42
Lease Financing 1,196 10.23 649 11.56
------- ----- ------- -----
Total Corporate Lending 7,031 6.74 6,702 9.07
Consumer Lending:
Residential 869 10.80 941 11.59
Installment 937 7.37 663 10.76
Lease Financing 1,447 8.09 1,079 10.77
------- ----- ------- -----
Total Consumer Lending 3,253 8.61 2,683 11.06
------- ----- ------- -----
Total Loans and Leases 10,284 7.33 9,385 9.64
Investment Securities 3,721 5.82 3,270 7.05
Federal Funds Sold and Reverse Repurchase Agreements 109 2.79 96 5.77
Other Short Term Investments 285 6.15 172 8.73
------- ----- ------- -----
Total Earning Assets 14,399 6.88 12,923 8.95
Cash and Due From Banks 238 297
Other Assets 759 1,085
------- -------
Total Assets $15,396 $14,305
======= =======
Liabilities and Shareholders' Equity:
Deposits:
Demand Deposits $ 512 1.01 $ 464 3.41
Savings Deposits 1,535 2.05 1,501 4.82
Time Deposits 5,920 4.00 5,727 6.37
------- ----- ------- -----
Total Deposits 7,967 3.43 7,692 5.89
Short-Term Debt:
Federal Funds Purchased and Repurchase Agreements 1,479 2.47 766 5.23
Commercial Paper 273 1.92 219 5.61
Short-Term Notes Payable 2 1.61 2 4.87
------- ----- ------- -----
Total Short-Term Debt 1,754 2.38 987 5.31
Long-Term Debt 2,912 4.77 2,731 6.57
Junior Subordinated Debentures 451 5.34 335 8.76
------- ----- ------- -----
Total Interest Bearing Liabilities 13,084 3.66 11,745 6.08
Noninterest Bearing Deposits 847 1,260
Other Liabilities 543 332
Shareholders' Equity 922 968
------- ----- ------- -----
Total Liabilities and Shareholders' Equity $15,396 $14,305
======= =======
Net Interest Spread 3.22% 2.87%
===== =====
Net Interest Margin 3.56% 3.42%
===== =====
-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 $24.0 million and $23.7 million
for the first three months of 2002 and 2001, respectively. During the third
and fourth quarters of 2001, Provident recorded $66.0 and $111.2 million of
provision expense. The higher than normal provision during the third and
fourth quarters of 2001 was due primarily to the weakened economy and the
events of September 11, 2001. As the credit-related volatility declined in
the current quarter, the provision returned to a more normal level. The
ratio of reserve for loan and lease losses to total loans and leases was
2.37% and 1.70% at March 31, 2002 and 2001, respectively. The ratio of
reserve for loan and lease losses to total loans and leases was raised
during 2001 based on analyses of the lending portfolio, deterioration of
asset quality indicators and the uncertain economic environment. Despite the
economy showing early indications of improvement, management decided it was
prudent not to reduce the loss reserve at this time.
Management continues to remain focused on resolving its credit issues.
Provident has initiated various steps to enhance its credit review function
including the hiring of a Chief Credit and Risk Officer, enlarging its
credit administration department and improving internal policies and
procedures. Additionally, Provident is implementing several strategic
changes to improve its credit quality metrics, portfolio diversification and
loan concentrations. These initiatives include de-emphasizing its structured
finance lending and auto leasing, as well as selling its nonconforming
residential loans on a whole-loan basis. Regional middle-market commercial
lending, middle-market leasing and prime home equity loans are businesses
which management believes it can grow with more predictable future earnings
streams.
-17-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the progression of the reserve for loan and lease
losses and selected reserve ratios:
Three Months Ended
March 31,
-----------------------
(Dollars in Thousands) 2002 2001
- ----------------------------------------------------------------------------
Balance at Beginning of Period $ 240,653 $ 154,300
Acquired Reserves - 1,275
Provision for Loan and Lease Losses 23,990 23,687
Loans and Leases Charged Off (31,963) (19,326)
Recoveries 7,983 3,746
--------- ---------
Balance at End of Period $ 240,663 $ 163,682
========= =========
Reserve for Loan and Lease Losses
as a Percent of:
Nonaccrual Loans 131.22% 154.11%
Nonperforming Assets 113.79% 144.14%
Total Loans and Leases 2.37% 1.70%
The following table presents the distribution of net loan charge-offs by
loan type for the three-month periods ended March 31, 2002 and 2001:
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
---------------------------------- --------------------------------
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 $ 13,937 1.27% 58.1% $ 9,792 0.85% 62.9%
Mortgage 24 0.01 0.1 25 0.01 0.2
Construction 300 0.21 1.3 - - -
Lease Financing 4,324 1.45 18 625 0.38 4.0
-------- ----- -------- -----
Net Corporate Lending 18,585 1.06 77.5 10,442 0.62 67.1
Consumer Lending:
Residential 3,017 1.39 12.6 3,295 1.40 21.1
Installment 727 0.31 3.0 856 0.52 5.5
Lease Financing 1,651 0.46 6.9 987 0.37 6.3
-------- ----- -------- -----
Net Consumer Lending 5,395 0.66 22.5 5,138 0.77 32.9
-------- ----- -------- -----
Net Charge-Off's $ 23,980 0.93 100.0 $ 15,580 0.66 100.0
======== ===== ======== =====
The increase in net charge-offs for commercial loans was due primarily to
the weak economic environment. The increase in net charge-offs for both
commercial and consumer lease financing was due primarily to the growth in
lease balances since March 31, 2001.
-18-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at March 31, 2002 were $211.5 million compared to
$197.8 million and $113.6 million as of December 31, 2001 and March 31,
2001, respectively. The increase in nonperforming assets over the past
twelve months was due primarily to the overall weak economic environment,
particularly in the airline industry. Since year-end 2001, nonaccrual loans
in the corporate lending portfolio have decreased $8.4 million. The increase
in nonaccrual residential mortgage loans is primarily related to the
seasoning of the nonconforming mortgage loan portfolio. Management expects
nonaccrual residential mortgage loans to peak sometime during the second
half of 2002. The composition of nonperforming assets over the past five
quarters is provided in the following table.
2002 2001
-------- --------------------------------------------
First Fourth Third Second First
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------
Nonaccrual Loans:
Corporate Lending:
Commercial $111,727 $116,663 $ 84,700 $ 74,098 $ 74,172
Mortgage 1,938 1,929 1,984 1,944 1,676
Construction 1,984 2,699 2,213 4,585 4,520
Lease Financing 5,223 7,986 5,977 6,079 8,685
-------- -------- -------- -------- --------
Total Corporate Lending 120,872 129,277 94,874 86,706 89,053
Consumer Lending:
Residential 62,530 47,579 36,792 23,868 17,160
Installment - - - - -
Lease Financing - - - - -
-------- -------- -------- -------- --------
Total Consumer Lending 62,530 47,579 36,792 23,868 17,160
-------- -------- -------- -------- --------
Total Nonaccrual Loans 183,402 176,856 131,666 110,574 106,213
Other Nonperforming Assets 28,098 20,907 15,758 16,279 7,348
-------- -------- -------- -------- --------
Total Nonperforming Assets $211,500 $197,763 $147,424 $126,853 $113,561
======== ======== ======== ======== ========
Loans 90 Days Past Due
Still Accruing $ 30,115 $ 31,219 $ 34,929 $ 22,830 $ 42,327
Nonaccrual Loans to
Total Loans and Leases 1.81% 1.68% 1.27% 1.06% 1.10%
Nonperforming Assets to:
Total Loans, Leases and
Other Nonperforming Assets 2.08% 1.88% 1.42% 1.22% 1.18%
Total Assets 1.38% 1.27% 0.97% 0.84% 0.77%
Nonaccrual loans increased $6.5 million during the first quarter of 2002.
The increase was composed of $63.4 million of additions to nonaccrual loans,
less $29.7 million of payments on nonaccrual loans, $20.9 million of
nonaccrual loans charged off and $6.3 million transferred to other
nonperforming assets. The increase in nonaccrual residential loans more than
offset the decrease in nonaccrual loans in the corporate lending portfolio.
Other nonperforming assets increased $7.2 million during the first quarter
of 2002 due primarily to an increase in foreclosed residential properties.
The increase was composed of $6.3 million of transfers from nonaccrual loans
and $5.8 million of other additions less $1.8 million of payments and $3.1
million of charge-offs and write-downs of nonperforming assets.
-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 three-month periods ended March 31, 2002 and 2001:
Three Months Ended
March 31,
------------------- Pctg
(Dollars in Thousands) 2002 2001 Change
- ----------------------------------------------------------------------------
Service Charges on Deposit Accounts $10,449 $ 9,108 14.7%
Loan Servicing Fees 9,955 11,578 (14.0)
Other Service Charges and Fees 10,363 9,492 9.2
Leasing Income 9,914 11,421 (13.2)
Gain on Sales of Loans and Leases 2,640 379 596.6
Security Gains - - -
Other 10,263 11,394 (9.9)
------- -------
Total Noninterest Income $53,584 $53,372 0.4
======= =======
Explanations for significant changes in noninterest income by category
follow:
o Service charges on deposit accounts increased $1.3 million primarily as a
result of pricing and volume increases on corporate deposit accounts.
o Loan servicing fees decreased $1.6 million due primarily to a decrease in
fees from the residential mortgage and credit card areas more than
offsetting an increase from Red Capital Group, a financing and loan
servicer for multifamily and health-care facilities.
o Other service charges and fees increased $.9 million due primarily to an
increase in other fee income generated from the residential mortgage area
more than offsetting a decrease in credit card fees.
o Leasing income decreased $1.5 million primarily as a result of the
reduction in size of the leasing portfolio of Provident Commercial Group,
a national lessor of large equipment.
o The increase of $2.3 million in gain on sales of loans and leases is due
primarily to gains recognized from the sale of nonconforming residential
mortgage loans on a whole-loan basis, a strategy that Provident
implemented during the third quarter of 2001.
o A decrease in income from equity investments was the primary explanation
for the $1.1 million decrease in other income.
-20-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Expense
- -------------------
The following table details the components of noninterest expense and their
change for the three-month periods of 2002 and 2001:
Three Months Ended
March 31,
-------------------- Pctg
(Dollars in Thousands) 2002 2001 Change
- ----------------------------------------------------------------------------
Salaries, Wages and Benefits $ 56,389 $ 48,132 17.2%
Charges and Fees 10,057 7,085 41.9
Occupancy 6,018 5,608 7.3
Leasing Expense 10,446 7,199 45.1
Equipment Expense 6,207 6,658 (6.8)
Professional Services 6,085 5,423 12.2
Other 18,341 15,351 19.5
-------- --------
Total Noninterest Expense $113,543 $ 95,456 18.9
======== ========
Explanations for significant changes in noninterest expense by category
follow:
o Salaries, wages and benefits increased $8.3 million in the first quarter
of 2002 due primarily to increased staffing and incentive pay in areas
where opportunities for growth exist, such as middle market commercial
lending, middle market equipment leasing and mortgage servicing.
o Charges and fees increased $3.0 million due primarily to increased
expenses related to foreclosed properties and expenses related to credit
risk transfer agreements. Details concerning these transactions are
provided in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Derivative and Off-Balance Sheet
Financial Instruments" section of this report.
o An increase in rent expense and guard services were the primary reasons
for the increase in occupancy expense.
o A valuation adjustment and other disposal costs related to leased
equipment were the primary reasons for the increase in leasing expense.
o Equipment expense decreased during the first quarter of 2002 due to
decreases in depreciation and equipment rental expense.
o Professional fees increased $.7 million due primarily to legal fees
related to loan collections.
o The three largest expenses within other noninterest expense were
marketing ($2.7 million in 2002 and $2.0 million in 2001), travel ($1.9
million in 2002 and $2.1 million in 2001), and franchise taxes ($1.8
million in 2002 and $1.9 million in 2001).
-21-
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
- ------------------------------------------------
Federal funds sold and reverse repurchase agreements decreased $27 million
since December 31, 2001. 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 were $100 million and $101 million as of March
31, 2002 and December 31, 2001, respectively. 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 $125 million of loans as held for sale at March 31,
2002. This is a decrease of $92 million from the amount reported at December
31, 2001. These loans consist of $54 million of multifamily loans and $71
million of nonconforming residential mortgage loans. The multifamily loans
are generally insured by either the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or the Federal Housing
Association. These loans are usually 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 a 2001 initiative to
transition the Mortgage Banking business and reduce its risk profile.
Securities purchased with the intention of being held for indefinite periods
of time are classified as investment securities available for sale. These
securities increased $411 million during the first three months of 2002.
U.S. government agency mortgage-backed securities accounted for the majority
of the increase, as funds obtained from loan payments and the sale of other
debt securities were deployed into investment securities with higher credit
quality, increased liquidity and an improved interest rate risk profile.
-22-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Loans and Leases
- ----------------
As of March 31, 2002 total loans and leases were $10.2 billion compared to
$10.5 billion at December 31, 2001. Provident had an additional $3.8 billion
and $4.1 billion of off-balance sheet loans and leases as of March 31, 2002
and December 31, 2001, respectively. As a result of recent earnings
volatility, management has re-evaluated the risk/reward relationships of its
lending portfolio. During the second half of 2001, Provident implemented a
whole-loan sale strategy for its nonconforming residential loans. Also,
management has decided to de-emphasize its structured finance lending while
placing a greater focus on its regional middle-market commercial lending and
middle-market equipment leasing. Provident is also providing fewer resources
to its auto leasing business as management has determined that this is a
thin margin business and that capital can be better deployed elsewhere. As a
result of these actions, Provident's lending portfolio in future periods
should have lower concentrations of residential loans and consumer leases,
higher concentrations of middle-market corporate leases, and a lower risk
profile of commercial loans. Provident does not have a material exposure to
foreign, energy or agricultural loans.
The following table shows the composition of the commercial loan category by
industry type at March 31, 2002:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- ----------------------------------------------------------------------------
Manufacturing $ 787.4 18 $ 28.2
Service Industries 686.0 16 20.4
Real Estate Operators/Investment 470.8 11 0.5
Retail Trade 366.7 8 2.0
Finance and Insurance 343.0 8 29.9
Wholesale Trade 254.6 6 0.5
Transportation/Utilities (1) 296.2 7 8.6
Construction 210.5 5 10.4
Automobile Dealers 100.0 2 -
Other 806.2 19 11.2
---------- --- --------
Total $ 4,321.4 100 $ 111.7
========== === ========
(1) Includes $50.4 million of commercial airline industry loans.
At March 31, 2002, Provident had loans and leases of $234 million to the
commercial airline industry, including $50 million of commercial loans and
$184 million of finance and operating leases. As the tragic events of
September 11, 2001 have had a significant financial impact upon the airline
industry and the re-sale value of aircraft, Provident recorded $66 million
of credit costs and other expenses during the second half of 2001 which were
related to secured commercial airline loans and leases.
Provident had approximately $880 million of commercial loans that are shared
national credit loans at March 31, 2002. Generally, shared national credit
loans are loans that have a principal balance of at least $20 million and
involve three or more supervised financial institutions. In an on-going
effort to diversify its portfolio, the shared national credit loans in which
Provident participates are distributed across eight industry types, with the
largest industry concentration (manufacturing) accounting for approximately
-23-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
30% of its total shared national credit loans. The average outstanding
balance of a shared national credit loan was $4.5 million.
The composition of the corporate mortgage and construction loan categories
by property type at March 31, 2002 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- ----------------------------------------------------------------------------
Residential Development $ 279.7 20 $ 1.2
Shopping/Retail 250.3 17 0.1
Office/Warehouse 212.3 15 0.2
Apartments 190.0 13 0.4
Land 71.0 5 0.7
Hotels/Motels 73.5 5 0.1
Health Facilities 63.8 4 -
Industrial Plants 29.6 2 -
Auto Sales and Service 9.5 1 -
Churches 10.0 1 -
Other Commercial Properties 236.2 17 1.2
---------- --- ------
Total $ 1,425.9 100 $ 3.9
========== === ======
The following table shows the composition of the installment loan category
by loan type at March 31, 2002:
(Dollars in Millions) Amount %
- ----------------------------------------------------------------------------
Home Equity $698.1 77
Indirect Installment 124.9 14
Direct Installment 60.0 6
Other Consumer Loans 28.2 3
------ ---
Total $911.2 100
====== ===
Deposits
- --------
Total deposits increased $52 million during the first quarter of 2002.
Growth in retail deposits more than offset a decrease in commercial
deposits. Noninterest bearing retail deposits increased at an annualized
rate of 7% which contributed to an overall growth in retail deposits of 6%.
The most significant growth within retail deposits was from internet
deposit-gathering initiatives.
Borrowed Funds
- --------------
Short-term debt decreased $217 million, or 12%, during the first quarter of
2002. A decrease in federal funds purchased was the primary reason for the
decrease in short-term debt.
Long-term debt decreased $60 million, or 2%, during the first quarter of
2002 due primarily to scheduled principal payments on long-term debt.
-24-
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 March 31, 2002 was $923 million compared to
$893 million at December 31, 2001. The change in the equity balance relates
primarily to net income exceeding dividends by $15 million (quarterly common
dividend rate of $.24), an increase in the market value of cash flow hedging
instruments of $23 million (net of deferred taxes) and a decrease in the
market value of investment securities of $9 million (net of deferred taxes).
The following table of ratios is important for an analysis of capital
adequacy:
Three Months Ended Year Ended
March 31, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------
Average Shareholders' Equity to Average Asset 5.99% 6.51%
Dividend Payout to Net Earnings 44.00 205.76
Tier 1 Capital to Risk-Weighted Assets 9.26 8.86
Total Risk-Based Capital To Risk-Weighted Assets 11.54 11.41
Tier 1 Leverage Ratio 8.02 7.87
Management is currently evaluating several alternative capital instruments
which, if issued, would improve the regulatory capital ratios.
Capital expenditures planned by Provident in 2002 for premises and equipment
are currently estimated to be approximately $37 million. Included in this
amount are projected capital expenditures for the purchase of data
processing hardware and software, office/facility additions, renovations and
enhancements, and ATMs. Through March 31, 2002, approximately $4 million of
these expenditures had been made.
Stock Options
- -------------
Options to purchase approximately 1.4 million shares of Provident Common
Stock were granted during the first three months of 2002. The options have
exercise prices ranging from $21.73 to $28.70.
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.
-25-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The securitization and sale of loans and leases during this five-year time
period continues to impact the current presentation of Provident's financial
condition, results of operations and off-balance sheet market risks. The
areas most significantly affected are loans and leases, retained interest in
securitized assets, credit enhancements accounts and credit risk.
Securitized Loans and Leases
- ----------------------------
Securitized loans and leases that have been treated as sales have been
removed from the balance sheet. The following table provides a summary of
the outstanding balances of these off-balance sheet managed assets:
March 31
-------------------------------
(In Thousands) 2002 2001
- ----------------------------------------------------------------------------
Nonconforming Residential $2,412,274 $3,394,163
Auto Leases 937,001 1,093,911
Prime Home Equity 269,260 436,914
Equipment Leases 160,877 328,795
Credit Card - 165,000
---------- ----------
$3,779,412 $5,418,783
========== ==========
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 significantly
contributed to the generation of $10.0 million and $11.6 million in loan
servicing fees during the first three months of 2002 and 2001, respectively.
-26-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Retained Interest in Securitized Assets
- ---------------------------------------
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 March 31, 2002 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- ----------------------------------------------------------------------------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 193,706 $ 12,136
Less:
Estimated Credit Loss (3,938) (196)
Servicing and Insurance Expense (20,474) (1,126)
Discount to Present Value (13,969) (1,706)
--------- -------
Carrying Value of Retained Interest in
Securitized Assets $ 155,325 $ 9,108
========= =======
Securitization Credit Enhancements
- ----------------------------------
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.
During the fourth quarter of 2001, Provident reached an agreement with the
securitization insurer to release the reserve accounts for the nonconforming
residential loan securitizations and substitute an unfunded demand note
backed by a AAA rated standby letter of credit. Actual losses, which have
been reserved for, are submitted on a monthly basis to Provident by the
trustee. Should Provident fail to reimburse the trustee for these monthly
losses, the letter of credit can be drawn upon. There are no conditions that
can accelerate this monthly process.
As of March 31, 2002, Provident had $54.8 million and $29.2 million in
reserve accounts for the credit enhancement of securitized equipment leases
and prime home equity loans, respectively.
-27-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Securitization Credit Risk
- --------------------------
The following table presents a summary of various indicators of the credit
quality of off-balance sheet loans and leases as of and for the three months
ended March 31, 2002:
Nonconforming Prime Home Equipment
(Dollars in Thousands) Residential Equity Leases
- -----------------------------------------------------------------------------------
For the Three Months Ended March 31, 2002:
Average Securitized Assets $2,483,903 $280,671 $179,060
Net Charge-Offs 12,789 355 3,060
Net Charge-Offs to Average
Securitized Assets (Annualized) 2.06% 0.51% 6.84%
As of March 31, 2002:
Securitized Assets $2,412,274 $269,260 $160,877
Established Contingent Loss Liability 70,047 1,153 3,454
Estimated Credit Losses to
Period-End Securitized Assets 2.90% 0.43% 2.15%
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 6.09% 0.32% 3.34%
90 or More 17.87% 0.69% 2.24%
Management does not believe that future losses on off-balance sheet loans
and leases will exceed the established contingent loss liability.
FANNIE MAE DUS PROGRAM
- ----------------------
Red Capital Group, a business unit within the Commercial Banking business
line, 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 $2.6 billion at
March 31, 2002. At March 31, 2002, no DUS loans in Red Capital's loan
servicing portfolio were delinquent or in default. Red Capital has
established reserves of approximately $8.0 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 maintained at a level that adequately
-28-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 March 31, 2002, these financial
instruments consisted of standby letters of credit of $240 million,
commitments to extend credit of $2.7 billion, and interest rate swaps and
caps with a notional amount of $6.9 billion and $5.8 billion, respectively.
During 2001 and 2000, Provident entered into two credit risk transfer
transactions. Under the 2001 transaction, Provident transferred 97 1/2% of
the credit risk on a $.9 billion auto lease portfolio, while retaining a 2
1/2% first-loss position. Under the 2000 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 these transactions,
Provident was able to lower its credit concentration in auto leasing while
reducing its regulatory capital requirements. As of March 31, 2002, the
remaining unpaid auto lease balances on the 2001 and 2000 credit risk
transfer transactions were $.7 billion and $1.4 billion, respectively.
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
securities, the sale or 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 $173 million of long-term debt is due to be repaid during the
remainder of 2002.
The major source of liquidity for Provident on a parent-only basis is
dividends paid to it by its subsidiaries. Pursuant to Federal Reserve and
state banking regulations, the maximum amount available for dividend
distribution to the Parent at March 31, 2002 by its banking subsidiary was
approximately $76.5 million. The Parent has not received any dividends from
its subsidiaries during the current year. During 2001, higher credit costs
had an unfavorable impact on net income. While credit costs have declined
substantially during the first quarter of 2002, if these costs were to rise
again, this could impact Provident's ability to maintain the payment of its
quarterly dividend at current rates.
-29-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During 2002, the Parent has not drawn on any of its $170 million in general
purpose lines of credit with unaffiliated banks. Additionally the Parent had
approximately $173 million in cash and interest earning deposits to meet its
liquidity needs.
-30-
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 4.33% for a 100 basis point decrease; decrease .19% for a 100 basis
point increase; and decrease 2.76% for a 200 basis point increase. Due to
the current interest rate environment, nothing beyond a 100 basis point
decrease was simulated. 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.
-31-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(b) Reports on Form 8-K:
Form 8-K (Items 5 and 7) filed on January 3, 2002.
All other items required in Part II of this form have been omitted since
they are not applicable or not required.
-32-
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Provident Financial Group, Inc.
-------------------------------
Registrant
Date: May 15, 2002 \s\ Christopher J. Carey
-------------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
