SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 2000 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
stock, without par value, outstanding at July 31, 2000 is 48,750,737.
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 . . . . . . . . . . . . . . . . . . . 36
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 36
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
(Dollars in Thousands) (Unaudited)
- ------------------------------------------------------ ------------ ------------
ASSETS
Cash and Due from Banks $ 247,428 $ 292,134
Federal Funds Sold and Reverse Repurchase Agreements 17,000 84,009
Investment Securities Available for Sale
(amortized cost - $3,296,412 and $2,187,802) 3,212,802 2,111,037
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 4,306,470 3,990,923
Mortgage 535,805 576,570
Construction 699,032 559,797
Lease Financing 324,985 391,529
Consumer Lending:
Residential - Held for Sale 48,867 653,679
Installment 411,089 476,508
Lease Financing 449,548 361,907
------------ ------------
Total Loans and Leases 6,775,796 7,010,913
Reserve for Loan and Lease Losses (97,588) (94,045)
------------ ------------
Net Loans and Leases 6,678,208 6,916,868
Leased Equipment 217,372 171,258
Premises and Equipment 99,470 100,099
Receivables from Securitization Trusts 421,758 355,222
Other Assets 544,788 507,299
------------ ------------
$ 11,438,826 $ 10,537,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $ 1,260,372 $ 1,185,245
Interest Bearing 6,433,048 6,044,743
------------ ------------
Total Deposits 7,693,420 7,229,988
Short-Term Debt 909,360 977,835
Long-Term Debt 1,400,364 950,821
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 220,166 220,069
Accrued Interest and Other Liabilities 251,294 232,991
------------ ------------
Total Liabilities 10,474,604 9,611,704
Shareholders' Equity:
Preferred Stock, 5,000,000 Shares Authorized,
Series D, 70,272 Issued 7,000 7,000
Common Stock, No Par Value, 110,000,000 Shares
Authorized, 48,748,520 and 48,618,330 Issued 14,449 14,410
Capital Surplus 312,838 308,237
Retained Earnings 684,282 646,472
Accumulated Other Comprehensive Loss (54,347) (49,897)
------------ ------------
Total Shareholders' Equity 964,222 926,222
------------ ------------
$ 11,438,826 $ 10,537,926
============ ============
See notes to consolidated financial statements.
3
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(In Thousands, Except Per Share Data) 2000 1999 2000 1999
- ---------------------------------------------- -------- -------- -------- --------
Interest Income:
Interest and Fees on Loans and Leases $173,571 $148,402 $335,382 $292,908
Interest on Investment Securities 59,886 26,990 119,670 52,837
Other Interest Income 159 1,672 493 3,223
-------- -------- -------- --------
Total Interest Income 233,616 177,064 455,545 348,968
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 18,377 13,975 35,458 28,085
Time Deposits 70,849 48,635 134,339 96,500
-------- -------- -------- --------
Total Interest on Deposits 89,226 62,610 169,797 124,585
Interest on Short-Term Debt 23,589 15,220 48,249 30,126
Interest on Long-Term Debt 21,904 12,074 40,836 25,753
Interest on Junior Subordinated Debentures 4,594 2,226 9,158 4,392
-------- -------- -------- --------
Total Interest Expense 139,313 92,130 268,040 184,856
-------- -------- -------- --------
Net Interest Income 94,303 84,934 187,505 164,112
Provision for Loan and Lease Losses 9,700 8,150 19,400 21,125
-------- -------- -------- --------
Net Interest Income After Provision
for Loan and Lease Losses 84,603 76,784 168,105 142,987
Noninterest Income:
Service Charges on Deposit Accounts 8,745 8,154 17,238 15,691
Loan Servicing Fees 13,103 6,005 24,909 11,488
Other Service Charges and Fees 9,583 11,468 19,418 21,418
Operating Lease Income 10,413 10,334 20,499 19,232
Gain on Sales of Loans and Leases - Non-Cash 19,006 17,667 34,447 36,991
Gain on Sales of Loans and Leases - Cash 2,270 851 9,968 8,831
Warrant Gains 3,800 1,169 4,800 1,169
Security Gains - 113 24 106
Other 3,363 3,584 7,918 9,478
-------- -------- -------- --------
Total Noninterest Income 70,283 59,345 139,221 124,404
Noninterest Expense:
Salaries, Wages and Benefits 40,917 36,175 81,287 73,060
Charges and Fees 5,803 3,570 10,550 7,454
Occupancy 4,971 4,686 9,979 9,291
Depreciation on Operating Lease Equipment 6,971 5,578 13,256 10,303
Equipment Expense 6,103 6,169 12,339 11,701
Professional Services 5,401 5,182 10,434 9,206
Merger and Restructuring Charges - - 39,300 4,200
Other 14,739 16,773 30,782 33,277
-------- -------- -------- --------
Total Noninterest Expense 84,905 78,133 207,927 158,492
-------- -------- -------- --------
Income Before Income Taxes 69,981 57,996 99,399 108,899
Applicable Income Taxes 25,092 20,432 37,738 38,800
-------- -------- -------- --------
Net Income $ 44,889 $ 37,564 $ 61,661 $ 70,099
======== ======== ======== ========
Per Common Share:
Basic Earnings Per Share $ 0.92 $ 0.79 $ 1.26 $ 1.48
Diluted Earnings Per Share 0.89 0.77 1.22 1.43
Cash Dividends Declared 0.24 0.22 0.48 0.44
See notes to consolidated financial statements.
4
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Preferred Common Capital Retained Treasury Comprehensive
(In Thousands) Stock Stock Surplus Earnings Stock Loss Total
- -------------------------- -------- -------- -------- -------- -------- -------- --------
Balance at January 1, 1999 $ 7,000 $ 14,150 $276,796 $534,657 $(21,425) $ (9,024) $802,154
Net Income 70,099 70,099
Change in Unrealized Loss
on Marketable Securities (30,500) (30,500)
--------
Comprehensive Income 39,599
Dividends Paid on:
Preferred Stock (435) (435)
Common Stock (20,356) (20,356)
Exercise of Stock Options 27 1,691 1,718
Purchase of Treasury Stock (8,645) (8,645)
Other 271 271
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 $ 7,000 $ 14,177 $278,758 $583,965 $(30,070) $(39,524) $814,306
======== ======== ======== ======== ======== ======== ========
Balance at January 1, 2000 $ 7,000 $ 14,410 $308,237 $646,472 $ - $(49,897) $926,222
Net Income 61,661 61,661
Change in Unrealized Loss
on Marketable Securities (4,450) (4,450)
--------
Comprehensive Income 57,211
Dividends Paid on:
Preferred Stock (474) (474)
Common Stock (23,377) (23,377)
Exercise of Stock Options 39 2,374 2,413
Cash Paid in Lieu of
Issuance of Fractional
Shares in Acquisition (31) (31)
Amortization of Expense
Related to Employee Stock
Benefit Plans 780 780
Liquidation of Employee
Stock Benefit Plans 1,478 1,478
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 $ 7,000 $ 14,449 $312,838 $684,282 $ - $(54,347) $964,222
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
5
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
--------------------------
(In Thousands) 2000 1999
- ---------------------------------------------------------- ----------- -----------
Operating Activities:
Net Income $ 61,661 $ 70,099
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 19,400 21,125
Amortization of Goodwill and Other Intangible Assets 2,149 1,185
Other Amortization and Accretion (16,562) (7,827)
Depreciation of Leased Equipment and
Premises and Equipment 23,631 20,522
Realized Investment Security Gains (24) (106)
Proceeds from Sale of Loans Held for Sale 1,049,470 1,144,663
Origination of Loans Held for Sale (986,636) (1,111,189)
Realized Gains on Residential Loans Held for Sale (30,607) (35,321)
Decrease in Net Trading Account Securities - 15,333
Increase in Interest Receivable (19,212) (5,707)
Increase in Other Assets (20,426) (37,069)
Increase (Decrease) in Interest Payable 7,488 (1,262)
Increase (Decrease) in Other Liabilities 2,273 (25,355)
----------- -----------
Net Cash Provided By Operating Activities 92,605 49,091
----------- -----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 1,175,626 290,358
Proceeds from Maturities and Prepayments 189,366 139,268
Purchases (1,837,803) (481,712)
Increase in Receivables Due From Securitization Trusts (95,472) (128,435)
Net Increase in Loans and Leases (389,708) (294,796)
Net Increase in Operating Lease Equipment (59,370) (11,949)
Net Increase in Premises and Equipment (9,746) (12,551)
----------- -----------
Net Cash Used In Investing Activities (1,027,107) (499,817)
----------- -----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 97,982 133,904
Net Increase in Other Deposits 365,450 268,634
Net Decrease in Short-Term Debt (68,475) (6,435)
Principal Payments on Long-Term Debt (101,055) (149,525)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 548,096 146,650
Cash Dividends Paid (23,851) (20,791)
Purchase of Treasury Stock - (8,645)
Proceeds from Exercise of Stock Options 2,413 1,718
Net Increase in Other Equity Items 2,227 271
----------- -----------
Net Cash Provided By Financing Activities 822,787 365,781
----------- -----------
Decrease in Cash and Cash Equivalents (111,715) (84,945)
Cash and Cash Equivalents at Beginning of Period 376,143 337,351
----------- -----------
Cash and Cash Equivalents at End of Period $ 264,428 $ 252,406
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 260,550 $ 186,827
Income Taxes 41,437 26,293
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 5,649 1,857
Residual Interest in Securitized Assets Created from
the Sale of Loans 106,098 96,748
See notes to consolidated financial statements.
6
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
The accompanying financial statements have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary to be in conformity with generally
accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary
for fair presentation. The results of operations for interim periods
are not necessarily indicative of the results to be expected for the
full year.
The consolidated financial statements include the accounts of Provident
Financial Group, Inc. and its subsidiaries, all of which are wholly
owned. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to conform to the
current year presentation.
On February 4, 2000 Provident acquired Fidelity Financial of Ohio,
Inc., a holding company for Centennial Bank. Centennial operated
fifteen banking centers in the greater Cincinnati metropolitan area and
held deposits of $588 million. The merger was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial
statements and other financial information for periods prior to the
merger include the accounts and operations of Fidelity Financial.
The financial statements presented herein should be read in conjunction
with the financial statements and notes thereto included in Provident's
1999 annual report on Form 10-K filed with the Securities and Exchange
Commission.
7
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted
earnings per common share, as calculated with and without merger and
restructuring charges:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(In Thousands, Except Per Share Data) 2000 1999 2000 1999
- ---------------------------------------------------- -------- -------- -------- --------
Including Merger & Restructuring Charges:
Basic:
Net Income (1) $ 44,889 $ 37,564 $ 61,661 $ 70,099
Less Preferred Stock Dividends (237) (218) (474) (435)
-------- -------- -------- --------
Income Available to Common Shareholders 44,652 37,346 61,187 69,664
Weighted-Average Common Shares Outstanding 48,739 47,023 48,715 47,049
-------- -------- -------- --------
Basic Earnings Per Share (1) $ 0.92 $ 0.79 $ 1.26 $ 1.48
======== ======== ======== ========
Diluted:
Net Income (1) $ 44,889 $ 37,564 $ 61,661 $ 70,099
Weighted-Average Common Shares Outstanding 48,739 47,023 48,715 47,049
Assumed Conversion of:
Convertible Preferred Stock 988 988 988 988
Dilutive Stock Options (Treasury Stock Method) 590 887 648 845
-------- -------- -------- --------
Dilutive Potential Common Shares 50,317 48,898 50,351 48,882
-------- -------- -------- --------
Diluted Earnings Per Share (1) $ 0.89 $ 0.77 $ 1.22 $ 1.43
======== ======== ======== ========
(1) Excluding Merger & Restructuring Charges:
Net Income $ 88,187 $ 72,829
Basic Operating Earnings Per Share 1.81 1.54
Diluted Operating Earnings Per Share 1.76 1.49
NOTE 3. MERGER AND RESTRUCTURING CHARGES
- -----------------------------------------
In connection with Provident's acquisition of Fidelity Financial,
direct-merger related and other post-merger business line restructuring
charges of $39.3 million were recorded during the first quarter of
2000. During the first quarter of 1999, Fidelity Financial had taken
$4.2 million of merger charges related to their acquisition of Glenway
Financial Corporation.
Merger and restructuring charges expensed during the first quarter of
2000 include estimates of cash outlays totaling $12.6 million and
non-cash write-downs of assets totaling $26.7 million. Cash outlays
include severance costs of $8.6 million, of which $6.8 were paid as of
June 30, 2000. Contract termination charges of $2.3 million are
estimated to be incurred, primarily from lease buyout agreements on
rented facilities, of which $.2 million were paid as of June 30, 2000.
All of the $1.7 million of estimated professional fees had been paid as
of the end of the second quarter in connection with the acquisition of
Fidelity Financial.
A charge of $5.1 million was taken on the write-down of fixed assets,
primarily from the closing and consolidation of banking centers.
Balance sheet restructuring, consisting primarily of the sale and
write-down of acquired residential loans and investment securities,
accounted for the remaining $21.6 million of these non-cash charges.
8
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
- ---------------------------------------------------------------
JUNIOR SUBORDINATED DEBENTURES
- ------------------------------
During 1996, Provident established Provident Capital Trust I. Capital
Trust I issued $100 million of preferred Capital Securities to the
public and $3.1 million of common to Provident. Proceeds from the
issuance of the capital securities were invested in Provident's 8.60%
Junior Subordinated Debentures, due 2026.
Similarly, Provident formed Provident Capital Trust II during the
second quarter of 1999. Capital Trust II issued $125 million of
preferred Capital Securities to the public and $3.9 million of common
to Provident. Proceeds from the issuance of the capital securities were
invested in Provident's 8.75% Junior Subordinated Debentures, due 2029.
Provident fully guarantees the Capital Securities. The sole assets of
Capital Trust I and II are the Debentures.
NOTE 5. RESTRICTED ASSETS
- --------------------------
Provident formed the subsidiaries listed below to account for and
support the process of transferring, securitizing and/or selling of
vehicle and equipment leases. These subsidiaries are separate legal
entities and each maintains books and records with respect to its
assets and liabilities. The assets of these subsidiaries, which are
included in the consolidated financial statements, are not available to
secure financing or otherwise satisfy claims of creditors of Provident
or any of its other subsidiaries.
The subsidiaries and their total assets as of June 30, 2000 follow:
(In Thousands) Total Assets
- -------------------------------------------- ------------
Provident Auto Leasing Company $147,936
Provident Auto Rental Company LLC (1998-1) 30,978
Provident Auto Rental Company LLC (1998-2) 33,446
Provident Auto Rental Company LLC (1999-PRU) 9,789
Provident Auto Rental LLC (1999-1) 182,901
Provident Auto Rental Company LLC (2000-A) 31,797
Provident Lease Receivables Company LLC 119,795
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT
- ----------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement
No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", becomes effective for
fiscal years beginning after June 15, 2000. This SFAS establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires that derivatives be recognized
9
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
derivative instruments not accounted for as hedges, changes in fair
value are required to be recognized in earnings.
Provident plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001.
Generally, Provident uses its derivatives as hedging instruments.
Management believes that its hedges are highly effective and that the
adoption of this SFAS will not have a material impact on Provident's
financial position or the results of its operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Forward Looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements that are
subject to numerous assumptions, risks or uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Actual results could differ materially from
those contained in or implied by such forward-looking statements for a
variety of factors including: sharp and/or rapid changes in interest
rates; significant changes in the anticipated economic scenario which
could materially change anticipated credit quality trends, the ability
to generate loans and leases, the ability to securitize loans and
leases and the spreads realized on securitizations; significant cost,
delay in, or inability to execute strategic initiatives designed to
grow revenues and/or manage expenses; consummation of significant
business combinations or divestitures; and significant changes in
accounting, tax, or regulatory practices or requirements and factors
noted in connection with forward looking statements. In addition,
borrowers could suffer unanticipated losses without regard to general
economic conditions. The result of these and other factors could cause
a difference from expectations of the level of defaults and a change in
the risk characteristics of the loan and lease portfolio and a change
in the provision for loan and lease losses. Forward-looking statements
speak only as of the date made. Provident undertakes no obligations to
update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
10
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Summary
- -------
The following table summarizes earnings components, earnings per share
and key financial ratios:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Thousands, -------------------------------- -------------------------------
Except Per Share Data) 2000 1999 Change 2000 1999 Change
- ----------------------------- -------- -------- -------- -------- -------- --------
Net Interest Income $ 94,303 $ 84,934 11% $187,505 $164,112 14%
Noninterest Income 70,283 59,345 18 139,221 124,404 12
Total Revenue 164,586 144,279 14 326,726 288,516 13
Provision for Loan
and Lease Losses 9,700 8,150 19 19,400 21,125 (8)
Noninterest Expense(1) 84,905 78,133 9 207,927 158,492 31
Net Income(1) 44,889 37,564 20 61,661 70,099 (12)
Diluted Earnings per Share(1) 0.89 0.77 16 1.22 1.43 (15)
Return on Average Equity(1 19.50% 18.31% 13.36% 17.06%
Return on Average Assets(1) 1.51% 1.55% 1.05% 1.46%
Efficiency Ratio 51.58% 54.18% 51.61% 53.48%
(1) Financial Data Based on Operating Earnings follows
(excludes Merger and Restructuring Charges):
Noninterest Expense $168,627 $154,292 9%
Net Income 88,661 72,829 22
Diluted Earnings per Share 1.76 1.49 18
Return on Average Equity 19.21% 17.73%
Return on Average Assets 1.51% 1.52%
Operating earnings per share increased 16% to $.89 during the second
quarter of 2000, versus $.77 reported during the same period in 1999.
For the six months ended June 30, 2000, operating earnings per share
was $1.76, an increase of 18%, compared to $1.49 reported in 1999.
Operating earnings for 2000 exclude a $27.0 million after-tax charge
primarily related to the acquisition of Fidelity Financial, which was
completed February 4, 2000. Included in this charge are direct-merger
related charges and other post-merger business line restructuring
charges. Operating earnings for 1999 exclude a $2.7 million after-tax
charge related to the merger of Fidelity Financial and Glenway
Financial Corporation, which was completed March 19, 1999. The increase
in operating earnings per share for the quarter was due to strong
revenue growth as well as continued emphasis on expense control.
Total revenue (net interest income plus noninterest income) increased
14% during the second quarter of 2000 over the second quarter of 1999,
and 13% for the first six months of 2000 over the first six months of
1999. For the six-month periods, net interest income increased by $23.4
million, or 14%, as a result of strong growth in the commercial lending
portfolio. Noninterest income increased $14.8 million, or 12%,
primarily due to continued growth in loan servicing fees. Loans and
leases, which had been sold with servicing retained, increased from
$4.5 billion at June 30, 1999 to $6.9 billion at June 30, 2000.
11
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total average assets for the first six months of 2000 grew $2.1
billion, or 22%. The increase was primarily in the investment security
and commercial lending portfolios, which experienced growth of $1.6
billion and $.8 billion, respectively, in average assets during this
time period.
Noninterest expense was $84.9 million for the second quarter of 2000 as
compared to $84.5 million for the fourth quarter of 1999 and $78.1
million for the second quarter of 1999. The annualized growth rate of
only 1% since the fourth quarter of 1999 to the current quarter is the
result of the successful integration of Fidelity Financial into
Provident and Provident's continued attention to cost control. The
ratio of operating noninterest expense to tax equivalent revenue
("efficiency ratio") was 51.61% for the first six months of 2000
compared to 53.48% for the same period during 1999. For purposes of
calculating the efficiency ratio, operating noninterest expense
excludes merger and restructuring charges and tax equivalent revenue
excludes security gains or losses.
Business Lines
- --------------
The following table summarizes total revenue, operating income and
average assets by major lines of business for the three-month and
six-month periods ended June 30, 2000 and 1999. Prior period
information has been reclassified to match current period
income/expense allocation methodology and business unit consolidation.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
(Dollars in Millions) 2000 1999 Change 2000 1999 Change
- --------------------- --------- -------- ------- --------- -------- -------
Total Revenue:
Commercial Banking $ 63.2 $ 58.0 9% $ 132.5 $ 118.3 12%
Retail Banking 70.0 59.5 18% 132.1 113.6 16%
Mortgage Banking 31.4 26.7 18% 62.1 56.5 10%
Corporate Center - 0.1 -100% - 0.1 -100%
--------- -------- --------- --------
$ 164.6 $ 144.3 14% $ 326.7 $ 288.5 13%
========= ======== ========= ========
Operating Income:
Commercial Banking $ 21.0 $ 19.3 9% $ 44.1 $ 40.4 9%
Retail Banking 15.6 11.0 42% 27.1 16.0 69%
Mortgage Banking 8.3 7.2 15% 17.5 16.3 7%
Corporate Center - 0.1 -100% - 0.1 -100%
--------- -------- --------- --------
$ 44.9 $ 37.6 19% $ 88.7 $ 72.8 22%
========= ======== ========= ========
Average Assets:
Commercial Banking $ 5,448 $ 4,185 30% $ 5,393 $ 4,151 30%
Retail Banking 2,376 2,205 8% 2,312 2,167 7%
Mortgage Banking 727 593 23% 711 602 18%
Corporate Center 3,346 2,739 22% 3,336 2,693 24%
--------- -------- --------- --------
$ 11,897 $ 9,722 22% $ 11,752 $ 9,613 22%
========= ======== ========= ========
12
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Key components of the management reporting process follows:
o Risk-Based Equity Allocations: Provident uses a comprehensive
approach for measuring risk and making risk-based equity
allocations. Risk measurements are applied to credit, residual,
operational and corporate-level risks.
o Transfer Pricing: Provident utilizes a cash flow-matched funds
transfer pricing methodology that isolates the business units from
fluctuations in interest rates, and provides management the ability
to measure customer, product or business unit level profitability
based on the financial characteristics of the products rather than
the level of interest rates.
o Provision for Loan and Lease Losses: Business lines are charged for
provision based upon the size and composition of its loan/lease
portfolio.
o Costs Allocation: Provident applies a detailed approach to
allocating costs at the business unit, product and customer levels.
Allocations are generally based on volume/activity and are reviewed
and updated regularly.
o "Corporate Center": Corporate Center includes revenue and expenses
not allocated to the primary business lines, gain/loss on the sale
of investment securities, and any unusual business revenues and
expenses.
Business line descriptions and fluctuation analysis follows:
o Commercial Banking is a provider of credit products and cash
management services to commercial customers. The group includes
Commercial Lending, serving middle market clients in the Midwest;
Provident Capital Corp., a national financier of business
expansions, re-capitalizations, and provider of asset based lending
services; Commercial Mortgage, an originator and servicer of
construction and permanent mortgage financing; Information Leasing
Corporation, a national small to mid-ticket equipment leasing
company; and Provident Commercial Group, a national lessor of large
equipment.
Commercial Banking is the Company's largest line of business
contributing approximately 50% of the Bank's operating income.
Operating income for Commercial Banking was $21.0 million and $44.1
million the three-month and six-month periods ended June 30, 2000,
which was an increase of $1.7 million and $3.7 million,
respectively, over the comparable periods of 1999.
The strong income performance was driven primarily by Commercial
Banking's loan growth. Commercial Banking achieved a 30% average
asset growth rate for both the three-month and six-month periods
ended June 30, 2000. Average assets for the second quarter of 2000
were $5.4 billion. The strong asset growth was achieved across all
business lines.
13
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Retail Banking provides consumer lending, deposit accounts, trust,
brokerage and investment products and services to its customers.
This business line includes both the Consumer Lending and Consumer
Banking business units. Operating income for the three-month and
six-month periods ended June 30, 2000 increased $4.6 million and
$11.1 million, respectively, over the comparable periods in 1999.
The increase was due primarily to increases in deposit net interest
income and fees from financial centers, private banking, trust and
investment products.
Retail Banking benefited from growth in total deposits. Average core
deposits for the second quarter of 2000 grew by 13% as compared to
the second quarter of 1999. Significant deposit growth came from the
Florida franchise and from internet banking products. To further
capitalize on the Florida deposit growth, Provident is opening four
additional financial centers in Florida during 2000. Also in 2000,
Provident will continue to enhance its distribution of products and
services via internet banking, ATM machines and the TeleBank
customer service call center.
Noninterest income for the three-month and six-month periods ended
June 30, 2000 increased $1.7 million and $3.2 million, respectively,
over the comparable periods in 1999. Higher fees in the areas of
brokerage, fund management and trust contributed to this increase.
o Mortgage Banking originates and services conforming and
nonconforming residential loans to consumers and provides short-term
financing to mortgage originators and brokers. Operating income for
the second quarter of 2000 was $8.3 million, an increase of $1.1
million as compared to the same period in 1999. Operating income
through the first six months of 2000 was $17.5 million, an increase
of $1.2 million as compared to the same period in 1999. The increase
in operating income for both the quarterly and six-month comparisons
were primarily the result of higher net interest income and loan
servicing fees which was partially offset by lower gains (for the
six-month period) recognized on the securitization and sale of
nonconforming residential loans.
The interest rate environment of moderate increases has had an
unfavorable impact on funding expenses and has slowed new
originations in the nonconforming sector. During the second quarter
of 2000, Mortgage Banking securitized and sold $515 million of
nonconforming loans resulting in the recognition of a $14.9 million
gain, a gain to loans sold ratio of 2.9%. During the second quarter
of 1999, $515 million of loans were securitized and sold resulting
in a $14.4 million gain, a gain to loans sold ratio of 2.8%.
Revenue increased $4.7 million for the second quarter of 2000 and
$5.6 million for the first six months of 2000 as compared to the
same periods in 1999. Operating expenses increased during 2000 due
primarily to increased staffing associated with the higher volume of
loans being serviced by this business unit.
14
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income, as reported and on a pro-forma as earned basis, along
with an operating cash flow analysis are provided within
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Securitization Activity" section of
this report.
Net Interest Income
- -------------------
Net interest income for the six months ended June 30, 2000, increased
$23.4 million compared to the first six months of 1999. The increase in
interest income was due primarily to an increase in average earning
assets of $1.8 billion, or 20%. In addition, the average yield on
earning assets grew 67 basis points from 8.10% to 8.77%. The largest
portion of the increase in average earning assets from the first six
months of 1999 to the first six months of 2000 occurred in the average
balances of commercial loan and investment security portfolios.
Interest expense for the six months ended June 30, 2000 increased due
to a 21% increase in total interest bearing liabilities with a 92 basis
point increase on the average rate paid. The increase in interest
bearing liabilities was due principally to increases in interest
bearing deposits, primarily time deposits, and long-term debt.
Net Interest Margin
- -------------------
Net interest margin represents net interest income as a percentage of
total interest earning assets. For the second quarter of 2000, the net
interest margin, on a tax-equivalent basis, was 3.61% compared to 3.88%
for the same period in 1999. This decrease was driven by changes in
rates and volumes of earning assets and the corresponding funding
sources. In addition, the first half of 2000 carried lower yielding
asset portfolios from acquired institutions that had been sold, but all
cash settlements had not taken place until June of 2000. The following
table details the components of the change in net interest income (on a
tax-equivalent basis) by major category of interest earning assets and
interest bearing liabilities for the three-month and six-month periods
ended June 30, 2000 and 1999.
15
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------- ----------------- ----------------- -----------------
Average Average Average Average Average Average Average Average
(Dollars in Millions) Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Assets:
Loans and Leases:
Corporate Lending:
Commercial $ 4,252 9.39% $ 3,421 8.72% $ 4,178 9.27% $ 3,364 8.64%
Mortgage 546 8.68 533 8.46 563 8.86 537 8.55
Construction 645 9.27 489 7.95 608 8.95 480 7.99
Lease Financing 299 12.25 264 9.38 346 11.77 266 9.91
------- ------- ------- ------- ------- ------- ------- -------
Total Corporate Lending 5,742 9.46 4,707 8.65 5,695 9.35 4,647 8.64
Consumer Lending:
Residential 334 12.63 849 8.58 355 12.00 883 8.38
Installment 560 10.88 561 9.98 543 10.46 627 10.01
Lease Financing 497 10.46 762 7.82 490 8.70 654 8.08
------- ------- ------- ------- ------- ------- ------- -------
Total Consumer Lending 1,391 11.15 2,172 8.67 1,388 10.23 2,164 8.76
------- ------- ------- ------- ------- ------- ------- -------
Total Loans and Leases 7,133 9.79 6,879 8.66 7,083 9.52 6,811 8.67
Investment Securities 3,378 7.13 1,795 6.04 3,351 7.18 1,770 6.02
Trading Account Securities - - 84 5.79 - - 79 5.62
Federal Funds Sold and Reverse
Repurchase Agreements 9 6.71 35 5.28 11 8.73 35 5.77
------- ------- ------- ------- ------- ------- ------- -------
Total Earning Assets 10,520 8.93 8,793 8.08 10,445 8.77 8,695 8.10
Cash and Due From Banks 229 233 235 234
Other Assets 1,148 696 1,072 675
------- ------- ------- -------
Total Assets $11,897 $ 9,722 $11,752 $ 9,604
======= ======= ======= =======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $ 345 1.98 $ 371 1.98 $ 338 2.03 $ 365 1.99
Savings Deposits 1,362 4.92 1,314 3.71 1,342 4.80 1,360 3.63
Time Deposits 4,652 6.12 3,811 5.12 4,562 5.92 3,706 5.25
------- ------- ------- ------- ------- ------- ------- -------
Total Deposits 6,359 5.64 5,496 4.57 6,242 5.47 5,431 4.63
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 1,318 6.24 1,066 4.79 1,415 6.00 1,064 4.73
Commercial Paper 206 6.11 206 4.81 208 5.80 218 4.78
Short-Term Notes Payable 2 6.17 1 4.82 2 5.90 1 4.63
------- ------- ------- ------- ------- ------- ------- -------
Total Short-Term Debt 1,526 6.22 1,273 4.79 1,625 5.97 1,283 4.73
Long-Term Debt 1,404 6.27 892 5.43 1,323 6.21 942 5.51
Junior Subordinated Debentures 220 8.39 103 8.68 220 8.37 101 8.78
------- ------- ------- ------- ------- ------- ------- -------
Total Interest Bearing
Liabilities 9,509 5.89 7,764 4.76 9,410 5.73 7,757 4.81
Noninterest Bearing Deposits 1,245 823 1,194 713
Other Liabilities 222 314 225 312
Shareholders' Equity 921 821 923 822
------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $11,897 $ 9,722 $11,752 $ 9,604
======= ======= ======= =======
Net Interest Spread 3.04% 3.32% 3.04% 3.29%
======= ======= ======= =======
Net Interest Margin 3.61% 3.88% 3.61% 3.81%
======= ======= ======= =======
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 $19.4 million and $21.1
million for the first six months of 2000 and 1999, respectively. The
ratio of reserve for loan and lease losses to total loans and leases
was 1.44% and 1.28% at June 30, 2000 and 1999, respectively. Prior to
the acquisition of Fidelity Financial and the corresponding restatement
of prior period numbers, the June 30, 1999 ratio of reserve for loan
and lease losses to total loans and leases was 1.37%.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
(Dollars in Thousands) 2000 1999 2000 1999
- ----------------------------------- -------- -------- -------- --------
Balance at Beginning of Period $ 97,069 $ 83,173 $ 94,045 $ 78,867
Provision for Loan and Lease Losses 9,700 8,150 19,400 21,125
Loans and Leases Charged Off (13,308) (11,387) (22,756) (22,386)
Recoveries 4,127 3,303 6,899 5,633
-------- -------- -------- --------
Balance at End of Period $ 97,588 $ 83,239 $ 97,588 $ 83,239
======== ======== ======== ========
Reserve for Loan and Lease Losses as a Percent of:
Nonperforming Loans 149.15% 142.91%
Nonperforming Assets 138.35% 136.09%
Total Loans and Leases 1.44% 1.28%
17
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following tables present the distribution of net loan charge-offs
by loan type for the three-month and six-month periods ended June 30,
2000 and 1999:
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------------------ ------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
(Dollars in Thousands) Offs (annualized) Offs Offs (annualized) Offs
- ----------------------- ------- ------------ ------- ------- ------------ -------
Corporate Lending:
Commercial $ 6,920 0.65% 75.5% $ 4,698 0.55% 58.0%
Mortgage 96 0.07 1.0 - - -
Construction - - - - - -
Lease Financing 728 0.97 7.9 1,293 1.96 16.0
------- ----- ------- -----
Net Corporate Lending 7,744 0.54 84.4 5,991 0.51 74.0
Consumer Lending:
Residential 1,112 1.33 12.1 63 0.03 0.8
Installment 396 0.28 4.3 1,516 1.08 18.8
Lease Financing (71) (0.06) (0.8) 514 0.27 6.4
------- ----- ------- -----
Net Consumer Lending 1,437 0.41 15.6 2,093 0.39 26.0
------- ----- ------- -----
Net Charge-Off's $ 9,181 0.51 100.0 $ 8,084 0.47 100.0
======= ===== ======= =====
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------------------ ------------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
(Dollars in Thousands) Offs (annualized) Offs Offs (annualized) Offs
- ----------------------- ------- ------------ ------- ------- ------------ -------
Corporate Lending:
Commercial $11,182 0.54% 70.5% $ 9,142 0.54% 54.6%
Mortgage 96 0.03 0.6 - - -
Construction - - - - - -
Lease Financing 1,036 0.60 6.5 2,657 2.00 15.9
------- ----- ------- -----
Net Corporate Lending 12,314 0.43 77.6 11,799 0.51 70.5
Consumer Lending:
Residential 2,046 1.15 12.9 206 0.05 1.2
Installment 742 0.27 4.7 3,887 1.24 23.2
Lease Financing 755 0.31 4.8 861 0.26 5.1
------- ----- ------- -----
Net Consumer Lending 3,543 0.51 22.4 4,954 0.46 29.5
------- ----- ------- -----
Net Charge-Off's $15,857 0.45 100.0 $16,753 0.49 100.0
======= ===== ======= =====
18
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming assets at June 30, 2000 were $70.5 million compared to
$61.1 million and $61.2 million as of December 31, 1999 and June 30,
1999, respectively. The composition of nonperforming assets over the
past five quarters is provided in the following table.
2000 1999
------------------ -----------------------------
Second First Fourth Third Second
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------- ------- ------- ------- ------- -------
Nonaccrual Loans:
Corporate Lending:
Commercial $52,397 $46,282 $43,452 $49,250 $41,828
Mortgage 1,576 1,654 3,003 1,527 566
Construction - - 216 216 247
Lease Financing 5,165 2,016 1,309 2,926 6,724
------- ------- ------- ------- -------
Total Corporate Lending 59,138 49,952 47,980 53,919 49,365
Consumer Lending:
Residential 6,290 5,624 7,640 7,358 7,315
Installment - - 48 26 -
Lease Financing - - - - -
------- ------- ------- ------- -------
Total Consumer Lending 6,290 5,624 7,688 7,384 7,315
------- ------- ------- ------- -------
Total Nonaccrual Loans 65,428 55,576 55,668 61,303 56,680
Renegotiated Loans - - 1,541 1,557 1,565
------- ------- ------- ------- -------
Total Nonperforming Loans 65,428 55,576 57,209 62,860 58,245
Other Real Estate 5,108 7,457 3,870 4,092 2,921
------- ------- ------- ------- -------
Total Nonperforming Assets $70,536 $63,033 $61,079 $66,952 $61,166
======= ======= ======= ======= =======
Loans 90 Days Past Due
Still Accruing $23,787 $13,908 $15,769 $18,484 $24,740
Nonperforming Loans to
Total Loans and Leases 0.97% 0.82% 0.82% 0.96% 0.89%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 1.04% 0.93% 0.87% 1.02% 0.94%
Total Assets 0.62% 0.54% 0.58% 0.68% 0.66%
Nonaccrual loans increased $9.8 million during the first six months of
2000. The increase was due primarily to the addition of one $8 million
commercial loan during the second quarter. Renegotiated loans decreased
$1.5 million during the first half of 2000 due to the improved
performance of one loan. Other real estate increased $1.2 million
during the first six months of 2000. The increase was primarily the
result of the foreclosure of one commercial real estate property during
the first quarter. The increase in loans ninety days past due still
accruing was primary due to increases in delinquent residential and
commercial loans.
19
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Income
- ------------------
The following table details the components of noninterest income and
their change for the second quarter and first six-month periods ended
June 30, 2000 and 1999:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2000 1999 Change 2000 1999 Change
- ----------------------------------- -------- -------- ------ -------- -------- ------
Service Charges on Deposit Accounts $ 8,745 $ 8,154 7.2% $ 17,238 $ 15,691 9.9%
Loan Servicing Fees 13,103 6,005 118.2 24,909 11,488 116.8
Other Service Charges and Fees 9,583 11,468 (16.4) 19,418 21,418 (9.3)
Operating Lease Income 10,413 10,334 0.8 20,499 19,232 6.6
Gain on Sale of Loans and Leases:
Non-Cash 19,006 17,667 7.6 34,447 36,991 (6.9)
Cash 2,270 851 166.7 9,968 8,831 12.9
Warrant Gains 3,800 1,169 225.1 4,800 1,169 310.6
Security Gains - 113 (100.0) 24 106 (77.4)
Other 3,363 3,584 (6.2) 7,918 9,478 (16.5)
-------- -------- -------- --------
Total Noninterest Income $ 70,283 $ 59,345 18.4 $139,221 $124,404 11.9
======== ======== ======== ========
Noninterest income for the three-month and six-month periods ended June
30, 2000 increased by $10.9 million and $14.8 million, respectively,
over the comparable periods in 1999. Explanations for significant
changes in noninterest income by category follow:
o Service charges on deposit accounts increased $.6 million and $1.5
million in the quarterly and six-month comparisons. The increases
for both periods were a result of pricing and volume increases on
corporate and personal deposit accounts and higher ATM fees from the
increased number of ATMs. Since June 30, 1999, an additional 105
ATMs have been placed into service bringing the total number of
Provident ATMs to 459.
o Loan servicing fees increased $7.1 million and $13.4 million in the
quarterly and six-month comparisons. The higher revenue was
primarily from increases in the residential mortgage and auto
leasing areas.
o Other service charges and fees decreased $1.9 million and $2.0
million in the quarterly and six-month comparisons due primarily to
large loan syndication fees that occurred during the second quarter
of 1999.
o Operating lease income increased $1.3 million in the six-month
comparison due primarily to the growth of Provident Commercial
Group, a national lessor of large equipment.
20
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Gain on sales of loans and leases increased $2.8 million in the
quarterly comparison due primarily to gains from home equity loan
and equipment lease securitizations. In the six-month comparison,
gain on sales of loans and leases decreased $1.4 million due
primarily to the decrease in gains from the securitization of
nonconforming residential loan and credit card securitizations. The
following table provides detail of the gain on sales recognized
during the second quarter and first six-month periods of 2000 and
1999:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
(In Thousands) 2000 1999 2000 1999
- ------------------------------------------------ ------- ------- ------- -------
Gain on Sale of Loan and Lease Sales - Non-Cash:
Nonconforming Residential Loan Securitizations $14,850 $14,372 $30,291 $33,696
Prime Consumer Home Equity Securitizations 4,156 - 4,156 -
Credit Card Securitizations - 3,295 - 3,295
------- ------- ------- -------
19,006 17,667 34,447 36,991
------- ------- ------- -------
Gain on Sale of Loan and Lease Sales - Cash:
Equipment Lease Securitizations 1,703 - 9,083 6,914
Conforming Residential Whole Loan Sales 146 576 262 1,449
Nonconforming Residential Whole Loan Sales - - - 174
Other Loan Sales 421 275 623 294
------- ------- ------- -------
2,270 851 9,968 8,831
------- ------- ------- -------
$21,276 $18,518 $44,415 $45,822
======= ======= ======= =======
A detailed discussion of the various securitizations and sales of
loans and leases is provided under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset
Securitization Activity" section of this report.
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 increased $2.6 million in
the second quarter comparison and $3.6 million in six-month
comparison.
o Other income decreased $1.6 million in the six-month comparison as
decreases in gains from the sale of equipment lease residual assets
and other miscellaneous income more than offset the increase in
income from investments in partnerships.
21
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Expenses
- --------------------
The following table details the components of noninterest expense and
their change for the second quarter and six-month periods of 2000 and
1999:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- Pctg ------------------- Pctg
(Dollars in Thousands) 2000 1999 Change 2000 1999 Change
- ---------------------------------- -------- -------- ------ -------- -------- ------
Salaries, Wages and Benefits $ 40,917 $ 36,175 13.1% $ 81,287 $ 73,060 11.3%
Charges and Fees 5,803 3,570 62.5 10,550 7,454 41.5
Occupancy 4,971 4,686 6.1 9,979 9,291 7.4
Depreciation on Operating
Lease Equipment 6,971 5,578 25.0 13,256 10,303 28.7
Equipment Expense 6,103 6,169 (1.1) 12,339 11,701 5.5
Professional Services 5,401 5,182 4.2 10,434 9,206 13.3
Other 14,739 16,773 (12.1) 30,782 33,277 (7.5)
-------- -------- -------- --------
Noninterest Expense Before Merger
and Restructuring Charges 84,905 78,133 8.7 168,627 154,292 9.3
Merger and Restructuring Charges - - - 39,300 4,200 835.7
-------- -------- -------- --------
Total Noninterest Expense $ 84,905 $ 78,133 8.7 $207,927 $158,492 31.2
======== ======== ======== ========
Noninterest expense before merger and restructuring charges increased
$14.3 million, or 9%, in the six-month comparison. Explanations for
significant changes in noninterest expense by category follow:
o Salaries, wages and benefits increased $4.7 million and $8.2 million
in the quarterly and six-month comparisons. During the past 12
months, the number of full-time equivalent employees (FTEs) has
increased by 152 to 2,876 at June 30, 2000. The largest area of FTE
growth has come in the Mortgage Banking business line, resulting
from the higher volume of loans being serviced by this area.
o Increased goodwill amortization expense, resulting from the
acquisitions of OHSL Financial Corp. and Capstone Realty Advisors,
was the primary reason for the increase in charges and fees in both
the three-month and six-month comparisons.
o The growth of Provident Commercial Group, a national lessor of large
equipment, was the primary reason for the increase in depreciation
on operating lease equipment.
o Equipment expense increased $.6 million in the six-month comparison
due to higher depreciation expense related to technology
investments, branches and ATMs.
o Professional fees increased $.2 million and $1.2 million in the
quarterly and six-month comparisons as a result of higher legal and
temporary employment services and miscellaneous professional fees.
22
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o Significant items within other noninterest expense for the second
quarter and first six months of 2000 include marketing expense of
$3.0 million and $4.6 million, respectively, travel expense of $2.2
million and $4.1 million, respectively, communication expense of
$1.5 million and $3.2 million, respectively, and franchise taxes of
$1.1 million and $3.8 million, respectively.
o Merger and restructuring charges during the first quarter of 2000
relate to the acquisition of Fidelity Financial and other
post-merger business line restructuring charges. The first quarter
of 1999 merger and restructuring charges relate to the merger of
Fidelity Financial and Glenway Financial Corporation. Additional
details of these charges are provided in Note 3 of the "Notes to
Consolidated Financial Statements" section of this report.
FINANCIAL CONDITION
- -------------------
Short-Term Investments and Investment Securities
- ------------------------------------------------
Federal funds sold and reverse repurchase agreements decreased $67.0
million since December 31, 1999. The amount of federal funds sold
changes daily as cash is managed to meet reserve requirements and
customer needs. After funds have been allocated to meet lending and
investment requirements, any remainder is placed in overnight federal
funds.
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $1.1 billion during the first half of
2000. Mortgage-backed securities accounted for 60% of the increase and
U.S. treasuries and agencies accounted for an additional 34% of the
increase. Funds obtained from deposit growth, increased borrowings and
proceeds from the sale of loans were deployed into investment
securities with higher credit quality, increased liquidity and an
improved interest rate risk profile. Cash flows from the newly
purchased securities will be systematically redeployed to fund ongoing
loan growth.
Loans and Leases
- ----------------
As of June 30, 2000 total loans and leases were $6.8 billion compared
to $7.0 billion at December 31, 1999. Provident had an additional $6.9
billion and $5.9 billion of off-balance sheet loans and leases as of
June 30, 2000 and December 31, 1999, respectively. For more information
concerning these off-balance sheet loans and leases, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset Securitization Activity".
23
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 June 30, 2000:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- -------------------------------- -------- --- ----------
Manufacturing $ 905.1 21 $20.2
Service Industries 828.2 19 22.3
Real Estate Operators/Investment 401.0 9 -
Retail Trade 398.7 9 1.3
Finance & Insurance 353.8 8 0.2
Wholesale Trade 343.5 8 1.8
Transportation/Utilities 325.0 8 0.9
Construction 182.3 4 1.4
Automobile Dealers 152.4 4 -
Other 416.5 10 4.3
-------- --- -----
Total $4,306.5 100 $52.4
======== === =====
The composition of the commercial mortgage and construction loan
categories by property type at June 30, 2000 follows:
Amount on
(Dollars in Millions) Amount % Nonaccrual
- --------------------------- -------- --- ----------
Residential Development $ 311.2 25 $ 0.5
Office/Warehouse 234.6 19 0.2
Shopping/Retail 198.8 16 0.3
Apartments 163.2 13 -
Land 65.1 5 -
Hotels/Motels 47.3 4 -
Industrial Plants 32.6 3 -
Health Facilities 15.8 1 -
Auto Sales and Service 13.8 1 -
Churches 12.3 1 -
Other Commercial Properties 140.1 12 0.6
-------- --- -----
Total $1,234.8 100 $ 1.6
======== === =====
The following table shows the composition of the installment loan
category by loan type at June 30, 2000:
(Dollars in Millions) Amount %
- -------------------- -------- ---
Indirect Installment $ 228.2 56
Direct Installment 69.7 17
Home Equity 64.4 16
Credit Card 42.9 10
Other Consumer Loans 5.9 1
-------- ---
Total $ 411.1 100
======== ===
24
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Earning Assets
- --------------------------
Leased equipment increased $46.1 million, or 27%, during the first half
of 2000. The addition of three new operating leases was the primary
reason for the increase.
For details concerning receivables from securitization trusts, see
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Asset Securitization Activities.
Deposits
- --------
Noninterest bearing deposits and interest bearing deposits increased
$75.1 million and $388.3 million, respectively, during the first six
months of 2000. Average core deposits for the first six months of 2000
grew at an annualized rate of 10%, with significant contribution coming
from Provident Bank of Florida.
Borrowed Funds
- --------------
Short-term debt decreased $68.5 million, or 7%, to $909.4 million
during the first six months of 2000. The decrease was due primarily to
a decrease in federal funds purchased and repurchase agreements.
Long-term debt increased $.4 billion, or 47%, to $1.4 billion during
the first six months of 2000. The increase is primarily the result of
increases in Federal Home Loan Bank advances.
25
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 June 30, 2000 was $964.2 million compared
to $926.2 million at December 31, 1999. The change in the equity
balance primarily relates to net income exceeding dividends by $37.8
million, funds of $2.4 million received from the exercise of stock
options and a decrease in the market value of investment securities
classified as available for sale of $4.5 million (net of deferred
income taxes).
The quarterly common dividend rate was increased from $.22 per share to
$.24 per share beginning with the first quarter of 2000.
The following table of ratios is important for the analysis of capital
adequacy:
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
Average Shareholders' Equity to Average Assets 7.86% 8.34%
Dividend Payout to Net Earnings 38.68 27.10
Dividend Payout to Operating Earnings 26.90 26.62
Tier 1 Leverage Ratio 10.28 10.87
Tier 1 Capital to Risk-Weighted Assets 8.95 9.97
Total Risk-Based Capital To Risk-Weighted Assets 10.91 11.98
Capital expenditures planned by Provident in 2000 for building
improvements and furniture and equipment are currently estimated to be
approximately $33 million. Included in this amount are projected
capital expenditures for the purchase of data processing hardware and
software, facility renovations, branch additions, renovations and
enhancements, and ATMs. Through June 30, 2000, approximately $13
million of these expenditures had been made.
Stock Options
- -------------
During the first half of 2000, Provident granted options for the
purchase of 800,000 shares of Provident Common Stock to all Provident
associates. This grant was in addition to Provident's regular stock
option grants to officers and directors. Total options granted during
the first six months of 2000 were for the purchase of 1.7 million
shares. The options have exercise prices ranging from $23.48 to $31.83.
26
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET SECURITIZATION ACTIVITY
- -----------------------------
Provident securitizes and sells many of the loans and leases it
originates and purchases. Loan sales through securitizations provide
Provident with immediate cash flows to fund additional loan
originations and purchases. The following discusses the impact which
asset securitization activity had on the Consolidated Statements of
Income, Consolidated Balance Sheets and the credit quality of the
securitized loans and leases.
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
sold and gains recognized for the various types of securitizations sold
during the periods indicated:
Three Months Ended June 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
(In Thousands) Principal Gain Principal Gain
- ---------------------------- ---------- ---------- ---------- ----------
Non-Cash Gains:
Nonconforming Residential $ 515,000 $ 14,850 $ 515,000 $ 14,372
Prime Consumer Home Equity 158,598 4,156 - -
Credit Card - - 185,000 3,295
---------- ---------- ---------- ----------
673,598 19,006 700,000 17,667
Cash Gains:
Equipment Leases 55,925 1,703 - -
Non-Recognition of Gains:
Automobile Leases 115,936 - 386,839 -
---------- ---------- ---------- ----------
Total Securitizations $ 845,459 $ 20,709 $1,086,839 $ 17,667
========== ========== ========== ==========
Six Months Ended June 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
(In Thousands) Principal Gain Principal Gain
- ---------------------------- ---------- ---------- ---------- ----------
Non-Cash Gains:
Nonconforming Residential $1,030,000 $ 30,291 $1,030,000 $ 33,696
Prime Consumer Home Equity 158,598 4,156 - -
Credit Card - - 185,000 3,295
---------- ---------- ---------- ----------
1,188,598 34,447 1,215,000 36,991
Cash Gains:
Equipment Leases 223,705 9,083 115,000 6,914
Non-Recognition of Gains:
Automobile Leases 214,180 - 386,839 -
---------- ---------- ---------- ----------
Total Securitizations $1,626,483 $ 43,530 $1,716,839 $ 43,905
========== ========== ========== ==========
27
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The securitization and sale of nonconforming residential, prime home
equity and credit card loans have resulted in the recognition of
non-cash gains. Under the structure of these securitizations, Provident
receives cash equal to the amount of loans sold. The methodology used
by Provident to calculate gains on the sale of these securities follow:
1. An amortization schedule is created for the loan portfolio based on
each loan's maturity, rate and balance.
2. The amortization schedule is adjusted using a prepayment speed
curve. The prepayment curve estimates the timing of principal
payments by the borrowers.
3. The net spread is calculated on the loan portfolio by taking the
cash inflows (loan portfolio yield and prepayment penalties) and
reducing it by the cash outflows (bond yield paid to investors,
servicing fees and other fees). Prepayments reduce the average life
of the portfolio, which in turn reduces the net spread collected by
Provident.
4. The present value of the net spread is calculated by applying a
discount rate indicative of the risk associated with the
transaction.
o In pre-1998 credit enhancement structures, the net spread is used
to create excess collateral as credit support. In these
transactions, cash flow to Provident is delayed until the target
over-collateralization is met and cash is released. This delay in
cash receipts reduces the present value.
o Beginning with the March 1998 securitization, Provident has
provided credit enhancement in the form of an upfront cash
reserve account. Therefore Provident does not experience delays
in cash receipts. The net spread is not subordinated to the
losses. Losses are absorbed directly in the cash reserve account
instead of reducing the net spread.
5. The gain is calculated by taking the present value of the net spread
on a relative fair value basis and reducing it by the present value
of the expected credit losses, underwriting expenses, accounting and
legal fees and deferred expenses paid to originate the loans.
Cash gains 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 generates the
cash gain.
28
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The securitization and sale of automobile leases do not result in the
recognition of gains. Under the structure of the sale of the automobile
leases, Provident sells the ownership of the automobiles and leases the
vehicles back from the investor in a sale-leaseback arrangement. Lease
payments paid by Provident to the investor may be more or less than
that received by Provident from the consumer. The difference in the
lease payments, net of credit losses and servicing fees, is recognized
as net operating lease income or expense over the life of the
securitization.
Underlying assumptions used in the determination of future cash flows
on the loan and lease portfolios follow:
Second Quarter
2000 Weighted Average of All Securitizations
------------- ----------------------------------------------------------
Nonconforming Nonconforming Prime Credit Equipment Auto
Residential Residential Home Equity Cards Leasing Leasing
------------- ------------- ----------- ------ --------- -------
Assumptions Used:
Prepayment Speed(1):
Initial Rate 13.91% 12.36% 10.00% n/a n/a n/a
Peak Rate 35.00% 32.84% 30.00% n/a n/a n/a
Calculated Weighted
Average Life of the
Loan Portfolios 2.4 Years 2.6 Years 2.1 Years n/a n/a n/a
Estimated Credit Losses(2):
Annual Basis 1.16% 1.09% 0.20% 5.40% 1.00% 0.50%
Percentage of
Original Balance 3.00% 2.94% 0.42% n/a 1.97% n/a
Discount Rate 12.00% 11.88% 10.63% 12.00% 9.29% n/a
<FN>
(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.
</FN>
The recognition of gains on the sale of loans and leases requires
management to make assumptions regarding prepayment speeds and credit
losses for the securitized loan and lease pools. In general,
Provident's securitized pools have performed better than the initial
estimates. Therefore management believes these estimates to be
conservative. The performances of the pools are extensively monitored,
and adjustments to these assumptions will be made if necessary.
No assurance can be given that the level of loan originations and
purchases will continue to permit the recognition of such gains on
sales of loans in the future. The percentage of gains may also be
affected by changing conditions in the asset-backed markets upon which
Provident has no control.
Provident retains the servicing of the loans and leases it securitizes
and sells. This servicing activity was primarily responsible for the
generation of $24.9 million and $11.5 million in loan servicing fees
during the first six months of 2000 and 1999, respectively.
29
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonconforming residential loans, originated or acquired by the Mortgage
Banking business line, have been securitized and sold on a quarterly
basis since 1996. Major characteristics of these nonconforming loans
include: 54% with an "A" credit grade and 31% with a "B" credit grade;
68% with full documentation; 69% have prepayment penalties; 95% are
secured by first mortgages; 92% are owner occupied; and, on average,
have a 78% loan-to-value ratio.
A summary of nonconforming residential loans originated by loan type as
of and for the six-month period ended June 30, 2000 and 1999 is
provided below:
Six Months Ended June 30,
-------------------------
(In Thousands) 2000 1999
- ------------------------------------- ---------- ----------
Originations for the Period Ended:
Fixed Rate, Fully Amortizing $ 482,134 $ 370,725
Fixed Rate, 15-Year Balloon Payments 263,629 245,264
---------- ----------
Total Fixed Rate Loans 745,763 615,989
Adjustable, Six-Month LIBOR 2,270 8,456
Adjustable Rate, 3/27 Loans 197,881 358,595
Adjustable Rate, 2/28 Loans 33,380 49,867
Adjustable Rate, 5/25 Loans 706 93
---------- ----------
Total Adjustable Rate Loans 234,237 417,011
---------- ----------
Total Originations $ 980,000 $1,033,000
========== ==========
Loans Outstanding as of:
Fixed Rate, Fully Amortizing $1,486,558 $ 775,815
Fixed Rate, 15-Year Balloon Payments 866,423 491,297
---------- ----------
Total Fixed Rate Loans 2,352,981 1,267,112
Adjustable, Six-Month LIBOR 54,938 90,938
Adjustable Rate, 3/27 Loans 1,497,703 988,270
Adjustable Rate, 2/28 Loans 181,780 182,520
Adjustable Rate, 5/25 Loans 7,221 7,432
---------- ----------
Total Adjustable Rate Loans 1,741,642 1,269,160
---------- ----------
Total Outstanding $4,094,623 $2,536,272
========== ==========
30
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table estimates the differences in the recognition of net
income for the Mortgage Banking business line for the first six months
of 2000 and 1999 based on having securitized its loan portfolio as
reported (including gain on sale of loans), and as if the loans had
been held in the portfolio and interest recognized as earned (excluding
gain on sale of loans). The differences, primarily in the areas of net
interest income, gain on sale of loans, servicing fee income and
provision expense, are a matter of timing and not total income to be
recorded over the life of the loans. Net income on an as earned basis
continues to rise from earlier periods due to the growth in the balance
of securitized loans and the resulting net interest income these loans
would have provided.
Six Months Ended June 30,
--------------------------------------------
2000 1999
-------------------- --------------------
As As As As
(In Thousands) Reported Earned Reported Earned
- --------------------------- -------- -------- -------- --------
Net Interest Income $ 17,152 $ 67,200 $ 9,597 $ 45,617
Loan Loss Provision (3,370) (15,436) (3,553) (11,397)
-------- -------- -------- --------
Net Interest Income After
Loan Loss Provision 13,782 51,764 6,044 34,220
Noninterest Income 44,973 12,565 46,894 9,861
Noninterest Expense (31,877) (31,877) (27,804) (27,804)
-------- -------- -------- --------
Income Before Taxes 26,878 32,452 25,134 16,277
Income Taxes (9,408) (11,358) (8,797) (5,697)
-------- -------- -------- --------
Net Income $ 17,470 $ 21,094 $ 16,337 $ 10,580
======== ======== ======== ========
The following table provides the operating cash flows for the Mortgage
Banking business line for first six months of 2000 and 1999:
Six Months Ended June 30,
-------------------------
(In Thousands) 2000 1999
- ------------------------------------------- -------- --------
Cash Inflows:
Net Interest Income $ 84,135 $ 59,891
Loan Servicing Fees 11,020 4,384
-------- --------
Total Cash Inflows 95,155 64,275
Cash Outflows:
Loan Acquisition and Securitization Costs 33,582 37,172
Cash Operating Expenses 30,469 26,396
Credit Losses 13,417 9,067
Servicer Advances 7,999 4,779
Taxes (5,218) 7,304
-------- --------
Total Cash Outflows 80,249 84,718
-------- --------
Net Cash Flows $ 14,906 $(20,443)
======== ========
31
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:
June 30,
-----------------------
(In Thousands) 2000 1999
- ------------------------- ---------- ----------
Nonconforming Residential $4,046,624 $2,444,272
Auto Leases 1,480,066 985,517
Prime Home Equity 526,114 265,026
Equipment Leases 453,434 253,857
Credit Card 230,000 185,000
Warehouse 170,600 327,900
---------- ----------
$6,906,838 $4,461,572
========== ==========
In connection with the recognition of non-cash gains, the present value
of future cash flows, referred to as retained interest in securitized
assets ("RISA"), are recorded as assets within the investment
securities line item of the consolidated balance sheets. Components of
the RISA as of June 30, 2000 follow:
Nonconforming Prime
(In Thousands) Residential Home Equity
- ----------------------------------------- ----------- -----------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $ 538,409 $ 36,635
Less:
Estimated Credit Loss (1) (13,105) (309)
Servicing and Insurance Expense (59,709) (5,545)
Discount to Present Value (65,235) (3,437)
--------- ----------
Carrying Value of Retained Interest in
Securitized Assets $ 400,360 $ 27,344
========= ==========
(1) Only the pre-1998 securitizations provide for estimated credit
losses within the cash flows of the RISA. Information on all
estimated credit losses is presented in the discussion of cash
reserve accounts and credit quality of securitized assets
immediately following this table.
32
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since the beginning of 1998, Provident has provided for credit
enhancements to its securitizations in the form of cash reserve
accounts that are funded at closing. Generally, the cash reserve
accounts are deposited at Provident. Credit losses, with the exception
of credit card loans, are absorbed directly into these cash reserve
accounts. The remaining funds not used to cover such losses are
returned to Provident over the term of the securitization. The credit
card cash reserve accounts absorb losses only in the event that the
interest spreads are insufficient to cover such credit losses.
Provident estimates the amount of all credit losses based upon loan
credit grades, collateral, market conditions and other pertinent
factors. Assumptions used to calculate the estimated credit losses are
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset Securitization Activity
(Impact of Securitizations on the Consolidated Statements of Income)".
Cash reserve accounts that earn interest are recorded as investment
securities and accounts that do not earn interest are recorded as
receivables from securitization trusts. Detail of the June 30, 2000
cash reserve accounts, net of loss estimates follows:
Cash Loss Net Cash
(In Thousands) Reserves Estimates Reserves
- ------------------------------------ --------- --------- ---------
Nonconforming Residential Loans (1) $ 479,498 $(104,114) $ 375,384
Equipment Leases 62,900 (18,742) 44,158
Credit Card Loans 41,379 - 41,379
Prime Home Equity Loans (2) 30,293 (1,727) 28,566
--------- --------- ---------
$ 614,070 $(124,583) $ 489,487
========= ========= =========
(1) Total loss estimates including those contained within the RISA are
$117,219,000.
(2) Total loss estimates including those contained within the RISA are
$2,036,000.
33
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Credit Quality of Securitized Assets
- ------------------------------------
The following table presents a summary of various indicators of the
credit quality of off-balance sheet loans and leases as of and for the
six months ended June 30, 2000:
Nonconforming Prime Home Equipment Auto Credit Warehouse
(Dollars in Thousands) Residential(1) Equity(1) Leases(1) Leases(2) Cards(2) (2)
- ------------------------ ------------- ---------- --------- ---------- -------- ---------
For the Six Months
Ended June 30, 2000:
Average Securitized
Assets $ 3,527,922 $ 382,526 $ 371,708 $1,397,723 $230,000 $ 186,550
Net Charge-Offs 10,218 983 4,753 2,251 8,335 -
Net Charge-Offs
to Average Securitized
Assets (Annualized) 0.58% 0.51% 2.56% 0.32% 7.25% 0.00%
As of June 30, 2000:
Securitized Assets $ 4,046,624 $ 526,114 $ 453,434 $1,480,067 $230,000 $ 170,600
Estimated Credit
Losses Provided For 117,219 2,036 18,742 n/a n/a n/a
Estimated Credit
Losses to Period-End
Securitized Assets 2.90% 0.39 4.13% n/a n/a n/a
Estimated Credit
Loss Rates:
Annual Basis 1.09% 0.20 1.00% 0.50% 5.40% 0.10%
Percentage of
Original Balance 2.94% 0.42% 1.97% n/a n/a n/a
Delinquency Rates:
30 to 89 Days 2.58% 0.66% 2.18% 0.33% 1.98% 4.70%
90 or More 5.91% 0.19% 0.73% 0.10% 1.32% 4.59%
<FN>
(1) Estimates for credit losses on nonconforming residential loans,
prime home equity loans and equipment leases are determined at the
time of sale. The estimated credit loss balance for pre-1998
securitizations are contained within the RISA. Since the beginning
of 1998, Provident has provided for credit enhancements to its
securitizations in the form of cash reserve accounts that are
funded at closing. Generally, the cash reserve accounts are
deposited at Provident. Credit losses are absorbed directly against
these cash reserve accounts. The remaining funds not used to cover
such loses are returned to Provident over the term of the
securitization. Provident estimates the amount of credit losses
based upon loan credit grades, collateral, market conditions and
other pertinent factors. Details of the cash reserve accounts are
provided in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset Securitization Activity
(Impact of Securitizations on the Consolidated Balance Sheets).
(2) Estimates for credit losses on revolving structures such as auto
leases, credit cards and warehouse loans are provided for
throughout the life of the securitization. The loss estimates are
accrued monthly increasing the estimate, while the charge-offs of
uncollectible balances reduce the estimate.
</FN>
Federal banking regulators are currently discussing various proposals
that could require more stringent capital adequacy standards on banks
and bank holding companies concerning the treatment of certain residual
interests generated by asset securitizations. Due to the uncertainties
surrounding the final content, timing and transition period of the
proposed requirements, Provident cannot measure the impact on its
financial position or the results of its operations if the proposed
requirements are adopted. Provident is actively monitoring these
discussions.
34
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
- ---------------------------------------------
In the normal course of business, Provident uses various financial
instruments with off-balance sheet risk to manage its interest rate
risk and to meet the financing needs of its customers. At June 30,
2000, these off-balance sheet instruments consisted of standby letters
of credit of $160 million, commitments to extend credit of $3.3 billion
and interest rate swaps with a notional amount of $5.8 billion.
LIQUIDITY
- ---------
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities,
fund operations and support asset growth. Provident has a number of
sources to provide for liquidity needs. First, liquidity needs can be
met by the liquid assets on its balance sheet such as cash, deposits
with other banks and federal funds sold. Additional sources of
liquidity include the sale of investment securities and the sale of
corporate and consumer loans and leases. Another source for providing
liquidity is the generation of new deposits. Provident may also borrow
both short-term and long-term funds. Provident has an additional $1.2
billion available for borrowing under a $1.5 billion bank notes
program. Approximately $320 million of long-term debt is due to be
repaid during the remainder of 2000.
The major source of liquidity for Provident on a parent-only basis is
dividends paid to it by its subsidiaries. Pursuant to Federal Reserve
and state banking regulations, the maximum amount available for
dividend distribution to the Parent at June 30, 2000 by its banking
subsidiaries was approximately $226.4 million. The Parent has not
received any dividends from its subsidiaries during the first six
months of 2000.
At June 30, 2000 the Parent had not drawn any of its $200 million in
general purpose lines of credit with unaffiliated banks. Additionally
the Parent had approximately $111.3 million in cash, interest earning
deposits and federal funds sold to meet its liquidity needs.
35
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The responsibility of monitoring and managing market and liquidity risk
is assigned to the Asset Liability Committee ("ALCO"). The main
component of market risk is the risk of loss in the value of financial
instruments that may result from the changes in interest rates. ALCO is
bound to guidelines stated in the relevant policies approved by the
Board of Directors.
In addition to the natural balance sheet hedges, ALCO utilizes
off-balance sheet instruments to manage interest rate risk on and off
its balance sheet. Interest rate swaps are the most widely used tools
to manage interest rate risk. Provident has used off-balance sheet
tools effectively for a number of years and believes it has developed
the appropriate expertise and knowledge to achieve a sound interest
rate risk management process.
Provident uses an earnings simulation model to analyze net interest
income sensitivity to movements in interest rates. Given an
instantaneous and permanent change in the pricing of all interest rate
sensitive assets, liabilities and off-balance sheet financial
agreements of Provident, net interest income would change by the
following over the next 12-month period: increase 0.77% for a 100 basis
point decrease; increase 1.16% for a 200 basis point decrease; decrease
0.80% for a 100 basis point increase; and decrease 1.63% 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.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 27.1 - Financial Data Schedule for June 30, 2000
Exhibit 27.2 - Restated Financial Data Schedule for
June 30, 1999
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
36
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Provident Financial Group, Inc.
-------------------------------
Registrant
Date: August 10, 2000 \s\ Christopher J. Carey
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Christopher J. Carey
Executive Vice President and
Chief Financial Officer
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