SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
September 30, 1999 No. 1-8019
PROVIDENT FINANCIAL GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0982792
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common
stock, without par value, outstanding at October 29, 1999 is
42,680,758.
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
(Dollars in Thousands)
September 30, December 31,
1999 1998
(Unaudited)
------------ -----------
ASSETS
Cash and Noninterest Bearing Deposits $244,300 $267,441
Federal Funds Sold and Reverse Repurchase Agreements 140,625 60,000
Trading Account Securities 57,683 50,333
Investment Securities Available for Sale
(amortized cost - $1,777,791 and $1,528,008) 1,710,022 1,514,153
Loans and Leases (Net of Unearned Income):
Corporate Lending:
Commercial 3,700,765 3,270,675
Mortgage 416,064 436,127
Construction 511,064 437,563
Lease Financing 244,658 243,722
Consumer Lending:
Instalment 447,040 621,357
Residential - Held for Sale 156,766 190,707
Lease Financing 418,221 423,354
---------- ----------
Total Loans and Leases 5,894,578 5,623,505
Reserve for Loan and Lease Losses (84,569) (75,907)
---------- ----------
Net Loans and Leases 5,810,009 5,547,598
Leased Equipment 189,975 167,006
Premises and Equipment 83,907 78,621
Other Assets 755,306 449,835
---------- ----------
$8,991,827 $8,134,987
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest Bearing $1,010,958 $669,840
Interest Bearing 5,319,969 4,657,481
---------- ----------
Total Deposits 6,330,927 5,327,321
Short-Term Debt 655,916 807,503
Long-Term Debt 794,633 934,294
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures 220,021 98,879
Accrued Interest and Other Liabilities 248,528 263,136
---------- ----------
Total Liabilities 8,250,025 7,431,133
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, 43,473,745 and 43,345,149 Issued 12,843 12,805
Capital Surplus 228,296 224,745
Retained Earnings 567,783 489,751
Treasury Stock, 801,800 and 572,700 Shares (30,070) (21,425)
Accumulated Other Comprehensive Income/(Loss) (44,050) (9,022)
---------- ----------
Total Shareholders' Equity 741,802 703,854
---------- ----------
$8,991,827 $8,134,987
========== ==========
See notes to consolidated financial statements.
3
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Interest Income:
Interest and Fees on Loans and Leases $143,906 $138,310 $411,204 $388,798
Interest on Investment Securities 26,086 24,185 76,343 74,351
Other Interest Income 666 3,257 3,479 5,088
-------- -------- -------- --------
Total Interest Income 170,658 165,752 491,026 468,237
Interest Expense:
Interest on Deposits:
Savings and Demand Deposits 14,011 13,375 40,355 36,602
Time Deposits 47,588 42,538 132,376 129,237
-------- -------- -------- --------
Total Interest on Deposits 61,599 55,913 172,731 165,839
Interest on Short-Term Debt 14,826 22,355 44,952 53,547
Interest on Long-Term Debt 11,151 10,841 34,444 32,374
Interest on Junior Subordinated Debentures 4,524 2,166 8,916 6,497
-------- -------- -------- --------
Total Interest Expense 92,100 91,275 261,043 258,257
-------- -------- -------- --------
Net Interest Income 78,558 74,477 229,983 209,980
Provision for Loan and Lease Losses 16,435 9,500 37,385 19,500
-------- -------- -------- --------
Net Interest Income After Provision
for Loan and Lease Losses 62,123 64,977 192,598 190,480
Noninterest Income:
Service Charges on Deposit Accounts 8,197 6,878 23,328 20,079
Other Service Charges and Fees 17,294 11,211 50,064 31,033
Operating Lease Income 10,328 9,487 29,560 27,946
Warrant Gains 7,978 - 9,147 12,367
Gain on Sales of Loans and Leases 28,096 23,134 73,912 49,086
Security Gains/(Losses) (107) 4,061 (1) 9,777
Other 3,947 1,957 13,207 12,976
-------- -------- -------- --------
Total Noninterest Income 75,733 56,728 199,217 163,264
Noninterest Expense:
Salaries, Wages and Benefits 38,225 31,493 107,622 92,399
Depreciation on Operating Lease Equipment 6,183 5,503 16,486 16,027
Occupancy 4,400 4,628 12,956 12,539
Equipment Expense 5,834 5,755 16,989 14,769
Professional Fees 5,910 4,958 14,530 13,272
Charges and Fees 3,527 4,008 10,696 10,009
Other 16,310 14,610 48,069 47,475
-------- -------- -------- --------
Total Noninterest Expense 80,389 70,955 227,348 206,490
-------- -------- -------- --------
Income Before Income Taxes 57,467 50,750 164,467 147,254
Applicable Income Taxes 20,253 17,730 57,972 51,184
-------- -------- -------- --------
Net Income $37,214 $33,020 $106,495 $96,070
======== ======== ======== ========
Per Common Share:
Basic Earnings Per Share $.87 $.76 $2.48 $2.22
Diluted Earnings Per Share .84 .73 2.40 2.13
Cash Dividends Declared .22 .20 .66 .60
See notes to consolidated financial statements.
4
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands)
Retained
Earnings
Including
Reserve for Accumulated
Retirement Other
Preferred Common Capital of Capital Treasury Comprehensive Comprehensive
Stock Stock Surplus Securities Stock Income/(Loss) Total Income
--------- ------- -------- ---------- -------- ------------- -------- -------------
Balance at January 1, 1998 $7,000 $12,482 $196,617 $410,107 $- $135 $626,341
Net Income 96,070 96,070 $96,070
Dividends Paid on:
Preferred Stock (593) (593)
Common Stock (25,852) (25,852)
Exercise of Stock Options 291 24,348 24,639
Purchase of Treasury Stock (10,850) (10,850)
Change in Unrealized
Gains (Losses) on
Marketable Securities 5,337 5,337 5,337
Realization of Deferred
Tax Benefit 286 286 286
------ ------- -------- -------- --------- -------- -------- --------
Balance at September 30, 1998 $7,000 $12,773 $221,251 $479,732 ($10,850) $5,472 $715,378 $101,693
====== ======= ======== ======== ========= ======== ======== ========
Balance at January 1, 1999 $7,000 $12,805 $224,745 $489,751 ($21,425) ($9,022) $703,854
Net Income 106,495 106,495 $106,495
Dividends Paid on:
Preferred Stock (653) (653)
Common Stock (27,810) (27,810)
Exercise of Stock Options 38 2,938 2,976
Purchase of Treasury Stock (8,645) (8,645)
Distribution of Contingent
Shares for Prior Year
Acquisition 131 131
Change in Unrealized
Gains (Losses) on
Marketable Securities (35,028) (35,028) (35,028)
Realization of Deferred
Tax Benefit 482 482 482
------ ------- -------- -------- --------- -------- -------- --------
Balance at September 30, 1999 $7,000 $12,843 $228,296 $567,783 ($30,070) ($44,050) $741,802 $71,949
====== ======= ======== ======== ========= ======== ======== ========
See notes to consolidated financial statements.
5
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended September 30,
------------------------------
1999 1998
----------- ---------
Operating Activities:
Net Income $106,495 $96,070
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan and Lease Losses 37,385 19,500
Amortization of Goodwill 1,165 1,279
Other Amortization and Accretion (13,365) (11,107)
Depreciation of Leased Equipment and
Premises and Equipment 31,303 28,177
Realized Investment Security (Gains) Losses 1 (9,777)
Proceeds from Sale of Loans Held for Sale 1,768,599 908,362
Origination of Loans Held for Sale (1,732,915) (903,069)
Realized Gains on Residential Loans Held for Sale (52,430) (30,405)
(Increase) Decrease in Net Trading Account Securities 15,078 (8,736)
Increase in Interest Receivable (19,612) (5,664)
Increase in Other Assets (8,520) (84,692)
Increase in Interest Payable 2,205 9,228
Increase (Decrease) in Other Liabilities (54,882) 87,702
---------- ----------
Net Cash Provided By Operating Activities 80,507 96,868
---------- ----------
Investing Activities:
Investment Securities Available for Sale:
Proceeds from Sales 290,371 3,056,006
Proceeds from Maturities and Prepayments 175,863 550,077
Purchases (541,813) (3,773,460)
Increase in Receivables Due From Securitization Trusts (230,988) (79,946)
Proceeds from Sale-Leaseback Transaction 671,880 170,600
Net Increase in Loans and Leases (1,100,732) (855,564)
Net Increase in Operating Lease Equipment (39,454) (47,689)
Net Increase in Premises and Equipment (20,104) (22,400)
---------- ----------
Net Cash Used In Investing Activities (794,977) (1,002,376)
---------- ----------
Financing Activities:
Net Increase in Deposits of Securitization Trusts 214,410 77,300
Net Increase in Deposits 789,196 328,802
Net Increase (Decrease) in Short-Term Debt (174,015) 276,308
Principal Payments on Long-Term Debt (145,236) (43,244)
Proceeds From Issuance of Long-Term Debt and
Company's Junior Subordinated Debentures 121,118 240,711
Cash Dividends Paid (28,463) (26,445)
Purchase of Treasury Stock (8,645) (10,850)
Proceeds from Exercise of Stock Options 2,976 24,639
Net Increase in Other Equity Items 613 286
---------- ----------
Net Cash Provided By Financing Activities 771,954 867,507
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 57,484 (38,001)
Cash and Cash Equivalents at Beginning of Period 327,441 276,241
---------- ----------
Cash and Cash Equivalents at End of Period $384,925 $238,240
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $258,838 $249,030
Income Taxes 43,258 22,465
Non-Cash Activity:
Transfer of Loans and Premises and Equipment to
Other Real Estate 3,631 1,596
Residual Interest in Securitized Assets Created from
the Sale of Loans 155,240 67,361
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.
The financial statements presented herein should be read in
conjunction with the financial statements and notes thereto included
in Provident's 1998 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 (in thousands except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- -------- -------
Basic:
Net Income $37,214 $33,020 $106,495 $96,070
Less Preferred Stock Dividends (218) (198) (653) (593)
------- ------- -------- -------
Income Available to Common Shareholders 36,996 32,822 105,842 95,477
Weighted-Average Common Shares Outstanding 42,637 43,097 42,627 42,912
------- ------- -------- -------
Basic Earnings Per Share $0.87 $0.76 $2.48 $2.22
======= ======= ======== =======
Diluted:
Net Income $37,214 $33,020 $106,495 $96,070
Weighted-Average Common Shares Outstanding 42,637 43,097 42,627 42,912
Assumed Conversion of:
Convertible Preferred Stock 988 988 988 988
Dilutive Stock Options (Treasury Stock Method) 845 951 828 1,109
------- ------- -------- -------
Dilutive Potential Common Shares 44,470 45,036 44,443 45,009
------- ------- -------- -------
Diluted Earnings Per Share $0.84 $0.73 $2.40 $2.13
======= ======= ======== =======
7
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SPECIAL CHARGES AND EXIT COSTS
- ---------------------------------------
In connection with its effort to improve upon the efficiency of its
operations, Provident incurred pre-tax special charges and exit costs
of $22 million during the fourth quarter of 1998. These expenses
consisted of a reengineering project, known as the Performance
Optimization Project, which is expected to enable Provident to
undertake new revenue generating initiatives without significantly
increasing expenses, and the discontinuance of operations of its
MeritValu and Free Market Partner business units.
No changes have been made to the original estimated special charges
and exit costs. All activity during 1999 related to cash payments for
severance benefits and professional fees. As of September 30, 1999, a
$3.4 million liability balance remained, relating primarily to future
severance payments.
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.
8
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 1999
follow (in thousands):
Subsidiary Total Assets
------------------------------------------- ------------
Provident Auto Leasing Company $544,374
Provident Auto Rental Corp. 1998-1 26,472
Provident Auto Rental Corp. 1998-2 24,980
Provident Auto Rental Company, LLP 1999-PRU 91,502
Provident Lease Receivables Corporation 69,813
NOTE 6. LINE OF BUSINESS REPORTING
- -----------------------------------
Selected information is included in the following table for
Provident's three major lines of business (in millions):
Total Revenue Net Income Average Assets
--------------- -------------- ---------------
1999 1998 1999 1998 1999 1998
------ ------ ----- ----- ------ ------
Three Months Ended September 30:
Corporate Banking $67.1 $64.6 $18.8 $25.0 $4,604 $4,010
Retail Banking 59.9 44.8 11.5 3.8 1,556 1,577
Provident Consumer
Financial Services 32.7 17.2 10.1 3.1 680 570
Corporate Center (5.4) 4.6 (3.2) 1.1 2,314 1,944
------ ------ ------ ----- ------ ------
$154.3 $131.2 $37.2 $33.0 $9,154 $8,101
====== ====== ====== ===== ====== ======
Nine Months Ended September 30:
Corporate Banking $182.2 $179.8 $59.2 $68.3 $4,381 $3,867
Retail Banking 160.1 128.7 23.8 10.7 1,645 1,470
Provident Consumer
Financial Services 87.5 47.8 26.0 8.4 619 455
Corporate Center (0.6) 16.9 (2.5) 8.7 2,259 1,940
------ ------ ------ ----- ------ ------
$429.2 $373.2 $106.5 $96.1 $8,904 $7,732
====== ====== ====== ===== ====== ======
Descriptions of these business lines along with variance analyses are
included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Lines".
9
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Forward Looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements that are
subject to numerous assumptions, risks or uncertainties. 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; the ability to achieve the cost reductions and
revenue enhancements anticipated from the Performance Optimization
Project; consummation of significant business combinations or
divestitures; unforeseen business risks related to Year 2000 computer
system issues; and significant changes in accounting, tax, or
regulatory practices or requirements and factors noted in connection
with forward looking statements. 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 (dollars in thousands except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 % Change 1999 1998 % Change
------- ------- -------- -------- -------- --------
Net Interest Income $78,558 $74,477 5% $229,983 $209,980 10%
Noninterest Income 75,733 56,728 34 199,217 163,264 22
Total Revenue 154,291 131,205 18 429,200 373,244 15
Provision for Loan
and Lease Losses 16,435 9,500 73 37,385 19,500 92
Noninterest Expense 80,389 70,955 13 227,348 206,490 10
Net Income 37,214 33,020 13 106,495 96,070 11
Diluted Earnings per Share 0.84 0.73 15 2.40 2.13 13
Return on Average Equity 20.56% 18.51% 19.89% 18.91%
Return on Average Assets 1.63% 1.63% 1.59% 1.66%
Efficiency Ratio 52.05% 55.78% 52.95% 56.78%
10
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings per share increased 15% to $.84 during the current quarter,
versus $.73 reported during the same period in 1998. For the nine
months ended September 30, 1999, earnings per share was $2.40, an
increase of 13%, compared to $2.13 reported in 1998. The increase in
earnings per share for both the quarter and the year to date periods
was due to strong revenue growth as well as continued emphasis on
expense control.
Total revenue (net interest income plus noninterest income) increased
18% during the third quarter of 1999 over the third quarter of 1998,
and 15% for the first nine months of 1999 over the first nine months
of 1998. For the nine-month periods, net interest income increased by
$20.0 million, or 10%, as a result of strong growth in the lending
portfolio. Noninterest income increased $36.0 million, or 22%,
primarily due to additional fees received in the areas of loan
servicing, deposit accounts, ATM, credit card and trust, and gains
recognized on the sale of nonconforming residential and prime home
equity loans. Partially offsetting these higher revenues was a decline
in security gains.
Total average assets for the first three quarters of 1999 grew $1.2
billion, or 15%. The increase was primarily in the lending portfolio,
which experienced a growth of approximately $654 million in average
assets during this time period. In addition, loans and leases, which
had been sold with servicing retained, increased from $2.3 billion at
September 30, 1998 to $5.3 billion at September 30, 1999.
Noninterest expense was $80.4 million for the third quarter of 1999 as
compared to $71.0 million for the same period in 1998. For the first
nine months of 1999 and 1998, noninterest expense was $227.3 million
and $206.5 million, respectively. The ratio of noninterest expense to
tax equivalent revenue ("efficiency ratio") was 52.05% for the third
quarter of 1999 compared to 55.78% for the third quarter of 1998. For
the first nine months of 1999 and 1998, the efficiency ratio was
52.95% and 56.78%, respectively. For purposes of calculating the
efficiency ratio, tax equivalent revenue excludes security gains or
losses.
The improvement in the 1999 efficiency ratios was a result of higher
revenues and increased control of expenses. During 1998, management
took specific steps to slow the growth of expenses. First, a
reengineering project, referred to as the Performance Optimization
Project ("POP"), was initiated with areas being identified where
productivity could be improved. Implementation of the POP process
began at the end of 1998 with cost savings expected to occur during
1999 and the first half of the year 2000. Second, those business units
where the prospect for future revenue growth did not justify current
operating losses were terminated. Operating expenses (noninterest
expense less unusual and significant expenses) reported for the first
nine months of 1999 increased 10%, from that reported in the third
quarter of 1998 while total revenues excluding security gains
increased 18%.
11
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Lines
- --------------
The following table summarizes total revenue, net income and average
assets by major lines of business for the three-month and nine-month
periods ending September 30, 1999 and 1998 (dollars in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ------ ------
Total Revenue:
Corporate Banking $67.1 $64.6 4% $182.2 $179.8 1%
Retail Banking 59.9 44.8 34 160.1 128.7 24
Provident Consumer
Financial Services 32.7 17.2 90 87.5 47.8 83
Corporate Center (5.4) 4.6 - (0.6) 16.9 -
------ ------ ------ ------
$154.3 $131.2 18 $429.2 $373.2 15
====== ====== ====== ======
Net Income:
Corporate Banking $18.8 $25.0 -25% $59.2 $68.3 -13%
Retail Banking 11.5 3.8 203 23.8 10.7 122
Provident Consumer
Financial Services 10.1 3.1 226 26.0 8.4 210
Corporate Center (3.2) 1.1 - (2.5) 8.7 -
------ ------ ------ ------
$37.2 $33.0 13 $106.5 $96.1 11
====== ====== ====== ======
Average Assets:
Corporate Banking $4,604 $4,010 15% $4,381 $3,867 13%
Retail Banking 1,556 1,577 (1) 1,645 1,470 12
Provident Consumer
Financial Services 680 570 19 619 455 36
Corporate Center 2,314 1,944 19 2,259 1,940 16
------ ------ ------ ------
$9,154 $8,101 13 $8,904 $7,732 15
====== ====== ====== ======
Key components of the management reporting process follows:
- - 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.
- - 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.
- - Provision for Loan and Lease Losses: Business lines are charged for
provision based upon the size and composition of its loan/lease
portfolio. The difference between the actual provision and its
allocation to the business lines is charged/credited to "Corporate
Center".
12
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - 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.
- - "Corporate Center": Corporate Center includes revenue and expenses
not allocated to the primary business lines, interest and gain/loss
on the sale of investment securities, and any unusual business
revenues and expenses.
Business line descriptions and fluctuation analysis follows:
- - Corporate banking is a provider of credit products and cash
management services to commercial customers. The group includes
Commercial Lending, serving middle market clients in the Midwest;
Provident Capital Corp., a national financier of business expansions,
re-capitalizations, and provider of asset based lending services;
Commercial Mortgage, a provider of construction and permanent
mortgage financing within Provident's franchise market; Information
Leasing Corporation (ILC), a national small ticket equipment leasing
company; and Provident Commercial Group, a national lessor of large
equipment.
Corporate Banking is the company's largest line of business
contributing approximately 50% of the Bank's net income. Net income
in Corporate Banking declined by $6.2 million and $9.1 million for
the three and nine-month periods ending September 30, 1999, compared
to the same time periods in 1998. Year-to-date results were
adversely affected by higher loan loss provision and an increase in
expenses of $4.3 million due to the start-up of several new
businesses.
Provident Capital Funding, headquartered in Atlanta, is a national
originator of commercial real estate loans for unaffiliated loan
syndicators and was established during the first quarter of 1999.
The assets of Capstone Realty Advisors, LLC were purchased in the
third quarter of 1999. Capstone is a Cleveland-based commercial
mortgage loan originator ($400 million annually) and servicer ($1.3
billion). Provident Capital Funding and Capstone give Provident a
national platform to generate fee income from the commercial real
estate finance business. Corporate lending offices were also opened
in Indianapolis, Chicago and Baltimore. All of these initiatives
are expected to contribute to revenue and net-income growth in 2000.
Growth in average assets was 15% and 13% over the respective three
and nine-month periods ending September 30, 1998. The positive
impact of this loan growth on the net interest margin was partially
offset by interest spread compression in late 1998 and early 1999.
Margin pressures moderated during the second and third quarter of
1999 and fee-based revenue began to increase.
13
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - 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. Net income for the three-month and nine-
month periods ending September 30, 1999 increased $7.7 million and
$13.1 million, respectively, over the comparable periods in 1998.
The increased profits during 1999 were driven by a variety of
factors. First, auto lease production grew significantly as Retail
Banking expanded the number of auto dealerships which make Provident
lease financing products available to their customers. Auto lease
managed assets increased $733 million, or 79%, since September 30,
1998. As a result of enhanced credit scoring and risk-adjusted
pricing systems implemented by Retail Banking, direct and indirect
instalment loans and leases have experienced a significant decline
in net charge-offs. Net charge-offs to total instalment loans and
leases declined from 1.34% during the first nine months of 1998 to
.91% during the first nine months of 1999. Total managed loans and
leases for Retail Banking grew approximately $816 million, or 43%,
since September 30, 1998.
Retail Banking also benefited from higher levels of deposits during
the current year. Average core deposits grew by 15% since the third
quarter of 1998 and 18% (annualized) since the fourth quarter of
1998. Significant contribution came from the Florida franchise as
average core deposits grew by 69% since the third quarter of 1998.
To further capitalize on the Florida deposit growth, Provident
announced plans to open five Financial Centers in Manatee County,
Florida by June 2000.
Noninterest income increased $18.4 million during the first nine
months of 1999 as compared to the same period in 1998. During 1999,
$200 million of credit card loans and $126 million of home equity
loans were securitized, realizing a gain of $3.5 million and $4.3
million, respectively. Also during 1999, operating lease income
increased $3.9 million as a result of executing sale-leaseback
transactions. Additional factors that contributed to higher net
income in 1999 include higher fees from loan servicing, brokerage,
fund management and trust. Combined, these fees increased
approximately $7.5 million during the first nine months of 1999 as
compared to the same period in 1998.
14
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - Provident Consumer Financial Services originates conforming and
nonconforming residential loans to consumers and short-term
financing to mortgage originators and brokers. Net income for
Consumer Financial Services increased $7.0 million during the third
quarter of 1999 as compared to the same quarter in 1998. Net income
through the first nine months of 1999 increased $17.6 million as
compared to the same time period in 1998 due primarily to strong
nonconforming loan production in 1999.
Industry consolidation has allowed Provident to expand its volume
during 1999. During the third quarter of 1999, Consumer Financial
Services securitized and sold nonconforming loans totaling $601
million resulting in the recognition of a $17.0 million gain, a gain
to loans sold ratio of 2.83%. During the third quarter of 1998, $275
million of loans were securitized and sold resulting in a $8.6
million gain, a gain to loans sold ratio of 3.14%. Profitability
suffered as the nonconforming market did not immediately adjust to
the rising interest rates experienced in mid-1999. With the recent
pricing stability, it is expected that profitability will return to
early 1999 levels.
Revenues also increased due to growth in loan servicing fees from
$3.0 million in the first nine months of 1998 to $13.1 million in
the first nine months of 1999. Operating expenses increased during
1999 due primarily to increased staffing associated with the higher
volume of loans being generated and serviced by this business unit.
15
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Interest Income
- -------------------
Net interest income for the nine months ended September 30, 1999,
increased $20.0 million compared to the first nine months of 1998.
Interest income rose $22.8 million for the nine months ended September
30, 1999 compared to the first nine months of 1998. The increase in
interest income was primarily due to an increase in average earning
assets of $823 million, or 12%. This increase was partially offset by
a 52 basis point decrease in the average yield on earning assets from
8.75% to 8.23%. The largest portion of the increase in average earning
assets from the first nine months of 1998 to the first nine months of
1999 occurred in the average balance of commercial loans. Interest
expense for the nine months ended September 30, 1999, increased by
$2.8 million from the first nine months of 1998, due principally to a
higher level of interest rates and a 12% increase in total interest
bearing liabilities. The increase in interest bearing liabilities was
principally due to a $590 million increase in interest bearing
deposits, primarily savings accounts and time certificates.
Net Interest Margin
- -------------------
Net interest margin represents net interest income as a percentage of
total interest earning assets. For the third quarter of 1999, the net
interest margin, on a tax-equivalent basis, was 3.83% compared to
3.93% for the same period in 1998. This decrease was driven by changes
in rates and volumes of earning assets and the corresponding funding
sources. The following table details the components of the change in
net interest income (on a tax-equivalent basis) by major category of
interest earning assets and interest bearing liabilities for the
three-month and nine-month periods ended September 30, 1999 and 1998.
16
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
--------- -------- --------- -------- --------- ------- -------- ---------
(Dollars in Millions)
Assets:
Loans and Leases:
Corporate Lending:
Commercial $3,639 8.83% $3,290 9.21% $3,450 8.71% $3,064 9.28%
Mortgage 411 8.73 447 10.06 417 8.67 447 9.49
Construction 485 8.20 374 8.77 472 8.06 340 8.86
Lease Financing 326 9.69 378 9.42 286 9.83 358 10.88
------ ----- ------ ----- ------ ----- ------ -----
Total Corporate Lending 4,861 8.81 4,489 9.28 4,625 8.71 4,209 9.40
Consumer Lending:
Residential 411 10.86 206 8.78 384 10.17 215 8.92
Installment 563 9.97 690 9.91 586 10.04 647 10.05
Lease Financing 581 8.50 559 8.25 630 8.21 500 8.01
------ ----- ------ ----- ------ ----- ------ -----
Total Consumer Lending 1,555 9.66 1,455 9.11 1,600 9.35 1,362 9.12
------ ----- ------ ----- ------ ----- ------ -----
Total Loans and Leases 6,416 9.02 5,944 9.24 6,225 8.87 5,571 9.34
Investment Securities 1,666 6.22 1,462 6.57 1,665 6.14 1,498 6.64
Trading Account Securities 50 4.24 93 5.50 69 5.28 63 5.51
Federal Funds Sold and Reverse
Repurchase Agreements 11 4.94 33 5.57 20 4.86 24 5.54
------ ----- ------ ----- ------ ----- ------ -----
Total Earning Assets 8,143 8.32 7,532 8.73 7,979 8.23 7,156 8.75
Cash and Noninterest
Bearing Deposits 227 193 229 189
Other Assets 784 376 696 387
------ ------ ------ ------
Total Assets $9,154 $8,101 $8,904 $7,732
====== ====== ====== ======
Liabilities and
Shareholders' Equity:
Deposits:
Demand Deposits $278 1.85 $259 2.22 $276 1.85 $265 2.19
Savings Deposits 1,234 4.09 1,154 4.10 1,271 3.84 1,032 4.18
Time Deposits 3,557 5.31 2,948 5.73 3,359 5.27 3,019 5.72
------ ----- ------ ----- ------ ----- ------ -----
Total Deposits 5,069 4.82 4,361 5.09 4,906 4.71 4,316 5.14
Short-Term Debt:
Federal Funds Purchased and
Repurchase Agreements 972 5.04 1,335 5.64 1,033 4.82 1,048 5.57
Commercial Paper 195 5.03 232 5.76 210 4.86 228 5.76
Short-Term Notes Payable 2 4.76 2 5.55 1 4.67 2 5.88
------ ----- ------ ----- ------ ----- ------ -----
Total Short-Term Debt 1,169 5.04 1,569 5.65 1,244 4.83 1,278 5.60
Long-Term Debt 794 5.57 703 6.12 835 5.52 687 6.30
Junior Subordinated Debentures 220 8.16 99 8.69 141 8.45 99 8.79
------ ----- ------ ----- ------ ----- ------ -----
Total Interest Bearing
Liabilities 7,252 5.04 6,732 5.38 7,126 4.90 6,380 5.41
Noninterest Bearing Deposits 905 548 772 537
Other Liabilities 273 107 292 138
Shareholders' Equity 724 714 714 677
------ ------ ------ ------
Total Liabilities and
Shareholders' Equity $9,154 $8,101 $8,904 $7,732
====== ====== ====== ======
Net Interest Spread 3.28% 3.35% 3.33% 3.34%
====== ====== ====== ======
Net Interest Margin 3.83% 3.93% 3.86% 3.93%
====== ====== ====== ======
17
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Provision and Allowance for Loan and Lease Losses
- -------------------------------------------------
The provision for loan and lease losses was $37.4 million and $19.5
million for the first nine months of 1999 and 1998, respectively. The
increase in the provision was the result of growth in the lending
portfolio and higher net charge-offs.
The following table shows the progression of the reserve for loan and
lease losses and selected reserve ratios (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- -------- -------
Balance at Beginning of Period $80,122 $75,472 $75,907 $71,980
Provision for Loan and Lease Losses 16,435 9,500 37,385 19,500
Loans and Leases Charged Off (16,097) (10,274) (38,462) (23,134)
Recoveries 4,109 1,747 9,739 8,099
------- ------- ------- -------
Balance at End of Period $84,569 $76,445 $84,569 $76,445
======= ======= ======= =======
Reserve for Loan and Lease Losses
as a Percent of:
Nonperforming Loans 139.04% 172.13%
Nonperforming Assets 130.86% 163.97%
Total Loans and Leases 1.43% 1.35%
18
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 nine-month periods ended
September 30, 1999 and 1998 (dollars in thousands):
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
---------------------------- ----------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
Offs (annualized) Offs Offs (annualized) Offs
-------- ----------- ------- -------- ----------- --------
Corporate Lending:
Commercial $9,972 1.10% 83.1% $4,383 0.53% 51.3%
Mortgage - - - (115) (0.10) (1.3)
Construction - - - - - -
Lease Financing 630 0.77 5.3 1,967 2.08 23.1
------- ----- ------ -----
Net Corporate Lending 10,602 0.87 88.4 6,235 0.56 73.1
Consumer Lending:
Residential 139 0.14 1.2 (2) - -
Installment 855 0.61 7.1 1,549 0.90 18.2
Lease Financing 392 0.27 3.3 745 0.53 8.7
------- ----- ------ -----
Net Consumer Lending 1,386 0.36 11.6 2,292 0.63 26.9
------- ----- ------ -----
Net Charge-Off's $11,988 0.76 100.0 $8,527 0.58 100.0
======= ===== ====== =====
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
---------------------------- ----------------------------
Pctg of Pctg of Pctg of Pctg of
Average Total Average Total
Net Net Net Net Net Net
Charge- Loans Charge- Charge- Loans Charge-
Offs (annualized) Offs Offs (annualized) Offs
-------- ----------- ------- -------- ----------- --------
Corporate Lending:
Commercial $19,114 0.74% 66.5% $5,386 0.23% 35.7%
Mortgage - - - (1,344) (0.40) (8.9)
Construction - - - - - -
Lease Financing 3,287 1.53 11.4 3,000 1.12 20.0
------- ----- ------ -----
Net Corporate Lending 22,401 0.65 77.9 7,042 0.22 46.8
Consumer Lending:
Residential 341 0.12 1.2 83 0.05 0.6
Installment 4,728 1.08 16.5 5,264 1.08 35.0
Lease Financing 1,253 0.27 4.4 2,646 0.71 17.6
------- ----- ------ -----
Net Consumer Lending 6,322 0.53 22.1 7,993 0.78 53.2
------- ----- ------ -----
Net Charge-Off's $28,723 0.62 100.0 $15,035 0.37 100.0
======= ===== ====== =====
19
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nonperforming Assets
- --------------------
Nonperforming assets at September 30, 1999 were $64.6 million compared
to $45.3 million and $46.6 million as of December 31, 1998 and
September 30, 1998, respectively. The composition of nonperforming
assets over the past five quarters is provided in the following table
(dollars in thousands).
1999 1998
--------------------------- -----------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Nonaccrual Loans:
Corporate Lending:
Commercial $49,250 $41,828 $33,210 $34,544 $20,719
Mortgage 1,109 335 335 335 335
Construction - - - - -
Lease Financing 2,926 6,724 7,162 4,002 10,732
------- ------- ------- ------- -------
Total Corporate Lending 53,285 48,887 40,707 38,881 31,786
Consumer Lending:
Installment - - - - -
Residential 5,983 6,446 4,900 3,692 3,674
Lease Financing - - - - -
------- ------- ------- ------- -------
Total Consumer Lending 5,983 6,446 4,900 3,692 3,674
------- ------- ------- ------- -------
Total Nonaccrual Loans 59,268 55,333 45,607 42,573 35,460
Renegotiated Loans 1,557 1,565 1,577 - 8,950
------- ------- ------- ------- -------
Total Nonperforming Loans 60,825 56,898 47,184 42,573 44,410
Other Real Estate 3,801 2,717 2,430 2,735 2,211
------- ------- ------- ------- -------
Total Nonperforming Assets $64,626 $59,615 $49,614 $45,308 $46,621
======= ======= ======= ======= =======
Loans 90 Days Past Due
Still Accruing $17,536 $23,280 $12,364 $9,219 $13,443
Nonperforming Loans to
Total Loans and Leases 1.03% 0.97% 0.79% 0.76% 0.78%
Nonperforming Assets to:
Total Loans, Leases and
Other Real Estate 1.10% 1.02% 0.84% 0.81% 0.82%
Total Assets 0.72% 0.70% 0.57% 0.56% 0.56%
The increase in nonperforming assets since December 31, 1998, has been
primarily the result of adding four corporate loans and leases to
nonaccrual totaling $22.2 million.
20
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Noninterest Income
- ------------------
The following table details the components of noninterest income and
their change for the third quarter and first nine-month periods of
1999 and 1998 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ Pctg ----------------- Pctg
1999 1998 Change 1999 1998 Change
------- ------- ------ ------- ------- ------
Service Charges on
Deposit Accounts $8,197 $6,878 19.2% $23,328 $20,079 16.2%
Other Service Charges
and Fees 17,294 11,211 54.3 50,064 31,033 61.3
Operating Lease Income 10,328 9,487 8.9 29,560 27,946 5.8
Warrant Gains 7,978 - - 9,147 12,367 (26.0)
Gain on Sales of
Loans and Leases 28,096 23,134 21.4 73,912 49,086 50.6
Security Gains (107) 4,061 (102.6) (1) 9,777 (100.0)
Other 3,947 1,957 101.7 13,207 12,976 1.8
------- ------- -------- --------
Total Noninterest Income $75,733 $56,728 33.5 $199,217 $163,264 22.0
======= ======= ======== ========
Noninterest income for the three-month and nine-month periods ended
September 30, 1999 increased by $19.0 million and $36.0 million,
respectively, over the comparable periods in 1998. Explanations for
significant changes in noninterest income by category follow:
- - Service charges on deposit accounts increased $1.3 million and $3.2
million in the quarterly and nine-month comparisons. The increases
for both periods were a result of pricing and volume increases on
corporate and personal demand deposit accounts. Also ATM surcharges
have risen due to the placement of ATMs in Wal-mart and Sam's Club
stores. Since September 30, 1998, an additional 210 ATMs have been
placed in service bringing the total number of Provident ATMs to
434.
- - Other service charges and fees increased $6.1 million and $19.0
million in the quarterly and nine-month comparisons. The higher
revenue was primarily due to increases in loan servicing fees, from
the nonconforming, warehouse lending and auto leasing business,
credit card fees and trust fees.
- - Provident's Corporate Banking business line from time to time
acquires equity warrants as part of the lending fee structure
established with customers. Warrant gains increased by $8.0 million
in the quarterly comparison.
- - Other income increased $2.0 million in the quarterly comparison
primarily due to gains realized on the sale of equipment lease
residuals and an increase in other miscellaneous income.
21
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - Gain on sales of loans and leases increased $5.0 million and $24.8
million in the quarterly and nine-month comparisons. The following
table provides detail of the gain on sales recognized during the
third quarter and first nine-month periods of 1999 and 1998 (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- -------
Cash Gains -- Loan and Lease Sales:
Equipment Lease Securitization $6,250 $13,429 $13,164 $13,429
Conforming Residential Whole Loan Sales 296 1,022 1,570 2,886
Nonconforming Residential Whole Loan Sales - 46 174 290
Credit Card Whole Loan Sales - - - 3,485
Other Loan Sales 34 (2) 498 1,767
------- ------- ------- -------
6,580 14,495 15,406 21,857
------- ------- ------- -------
Non-cash Gains -- Loan and Lease Sales:
Nonconforming Residential Loan
Securitizations 16,991 8,639 50,686 27,229
Prime Home Equity Loan Securitizations 4,279 - 4,279 -
Credit Card Loan Securitizations 246 - 3,541 -
------- ------- ------- -------
21,516 8,639 58,506 27,229
------- ------- ------- -------
$28,096 $23,134 $73,912 $49,086
======= ======= ======= =======
Significant loan and lease sales occurring in 1999 and 1998 follow:
- - During the first nine months of 1999, $1.6 billion of
nonconforming residential loans were sold resulting in non-cash
gains of $50.7 million, a gain to loans sold ratio of 3.11%.
During the first nine months of 1998, $710 million of
nonconforming residential loans were sold producing non-cash
gains of $27.2 million, a gain to loans sold ratio of 3.84%. The
lower gain to loans sold ratio for 1999 was due primarily to the
narrowing of interest rate spreads between rates received from
borrowers and rates paid to investors.
- - Prime home equity loans of $126.1 million were securitized and
sold in the third quarter of 1999, resulting in a non-cash gain
of $4.3 million.
- - Credit card receivables of $200.0 million were securitized and
sold during 1999, generating a non-cash gain of $3.5 million.
- - Equipment leases totaling $223.8 million were sold during 1999,
resulting in cash gains of $13.2 million. During 1998, $211.3
million of equipment leases were sold, resulting in a cash gain
of $13.4 million.
- - A cash gain of $3.2 million was recognized on the sale of $38.3
million in credit card whole loans during the first quarter of
1998.
22
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
Provident Consumer Financial Services business line, have been
securitized and sold on a quarterly basis since 1996. Major
characteristics of these nonconforming loans include: 56% with an "A"
credit grade and 28% with a "B" credit grade; 67% with full
documentation; 67% have prepayment penalties; 96% are secured by first
mortgages; 91% are owner occupied; and, on average, have a 79% loan-
to-value ratio.
Loan sales through securitizations permit Provident to enhance
operating profits, provide for immediate cash flows to fund additional
loan originations, and provide for future cash flows generated by the
payment differentials between interest paid by the borrowers and
interest remitted to the investors. Total loans securitized and sold
were $601 million and $275 million in the third quarter of 1999 and
1998, respectively. The methodology used by Provident to calculate
gains on 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 actual timing of principal
payments by mortgage 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.
- In traditional 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.
- Beginning with the March 1998 securitization, Provident has
provided credit enhancement in the form of a cash reserve
account. Therefore Provident does not experience delays in cash
receipts. The spread is not subordinated to the losses. Losses
are absorbed directly in the cash reserve account instead of
reducing the net spread. In addition the cash reserve account is
placed in a noninterest bearing checking account at Provident,
whereby no cash outlay is experienced in the funding of the
account.
5) The gain is calculated by taking the present value of the net spread
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.
23
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The present value of these net cash flows, referred to as retained
interest in securitized assets ("RISA"), are included with investment
securities on the consolidated balance sheets. Components of the RISA
and the underlying assumptions follow:
Nonconforming Prime
Residential Home Equity
------------- -----------
Estimated Cash Flows of Underlying Loans,
Net of Payments to Certificate Holders $444,209 $32,507
Less:
Estimated Credit Loss (1) (23,564) (1,372)
Servicing and Insurance Expense (48,938) (4,563)
Discount to Present Value (63,217) (3,362)
-------- -------
Carrying Value of Retained Interest in
Securitized Assets $308,490 $23,210
======== =======
Nonconforming Residential Prime Home Equity
--------------------------------- ------------------
Third Quarter Weighted Weighted
1999 Average Average
Transaction (All Transactions) (All Transactions)
------------- ------------------ ------------------
Assumptions Used:
Prepayment Speed (2):
Initial Rate 13.17% 11.80% 10.98%
Peak Rate 35.00% 31.86% 27.07%
Calculated Weighted Average Life
of the Loan Portfolios 2.4 Years 2.8 Years 2.1 Years
Estimated Credit Losses (3):
Annual Basis 1.10% 1.08% 0.20%
Percentage of Original Balance 2.70% 3.02% 0.41%
Discount Rate 12.00% 11.82% 10.13%
<FN>
(1) The estimated credit loss reflects loan securitizations for 1996 and 1997 only.
Beginning in 1998, a cash reserve is funded at the beginning of each securitization,
separate from the cash flows of the loan payments. As of September 30, 1999, an
additional $62.7 million and $1.1 million has been estimated as losses from the 1998
and 1999 nonconforming residential and prime home equity securitizations, respectively.
Total balance sheet reserves related to all securitized asset classes including
equipment leases, auto leases and credit cards were $99.2 million as of September
30, 1999.
(2) Provident applies an annual prepayment model that adjusts the monthly speeds to account
for declining loan balances. This approach is a conservative approach and results in
higher assumptions for prepaid cash flow and lower gains when compared with a monthly
unadjusted prepayment curve. 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.
(3) 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>
24
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management makes estimates and assumptions when recording non-cash
loan sale gains. However, management believes it is making
conservative assumptions as to anticipated prepayment speeds and
credit losses. No assurance can be given that the level of loan
originations and acquisitions, along with a favorable interest rate
market, will continue to permit the recognition of such gains on sales
of loans in the future. No assurance can be given that Provident will
be able to securitize and sell such loans at levels previously
experienced. Provident's ability to securitize and sell such loans is
mainly dependent upon outside factors over which Provident has no
control, such as interest levels, the condition of markets for
securitized loans, general market conditions and similar factors.
Noninterest Expense
- -------------------
The following table details the components of noninterest expense and
their change for the third quarter and first nine-month periods of
1999 and 1998 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ Pctg ------------------ Pctg
1999 1998 Change 1999 1998 Change
-------- ------- ------ -------- ------- ------
Salaries, Wages and Benefits $38,225 $31,493 21.4% $107,622 $92,399 16.5%
Depreciation on
Operating Lease Equipment 6,183 5,503 12.4 16,486 16,027 2.9
Occupancy 4,400 4,628 (4.9) 12,956 12,539 3.3
Equipment Expense 5,834 5,755 1.4 16,989 14,769 15.0
Professional Fees 5,910 4,958 19.2 14,530 13,272 9.5
Charges and Fees 3,527 4,008 (12.0) 10,696 10,009 6.9
Other 16,310 14,610 11.6 48,069 47,475 1.3
------- ------- -------- --------
Total Noninterest Expense $80,389 $70,955 13.3 $227,348 $206,490 10.1
======= ======= ======== ========
Noninterest expense for the three-month and nine-month periods ended
September 30, 1999 increased 13.3% and 10.1%, respectively, over the
comparable periods in 1998. This follows increases of 20.7% and 26.2%
when comparing the three-month and nine-month periods ended September
30, 1998 over the comparable periods in 1997. The decline in the
growth rate of noninterest expenses is principally the result of the
Performance Optimization Project and the discontinuing of operations
of the MeritValu and Free Market Partner business units.
Explanations for significant changes in noninterest expense between
the three-month and nine-month period in 1999 and 1998 follow:
- - Salaries, wages and benefits increased $6.7 million and $15.2
million in the quarterly and nine-month comparisons. The increase
for both the three-month and nine-month comparisons were due
primarily to increased staffing of the Provident Consumer Financial
Services and Corporate Banking business lines combined with
increases in performance based incentives and benefit plan expenses.
25
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - Depreciation on operating lease equipment increased $.7 million in
the quarterly comparison due primarily to the increase in leased
equipment.
- - Equipment expense increased $2.2 million for the nine-month period
due to higher depreciation expense primarily in technology areas,
branches, ATMs and Provident Consumer Financial Services.
- - Professional fees increased $1.0 million in the quarterly comparison
and $1.3 million in the nine-month comparison. The increase for the
quarterly comparison was due principally to higher legal expenses
related to lending activities combined with consultant fees in
information technology. The increase in the nine-month comparison
was due primarily for the reasons given in the quarterly comparison
along with increased temporary employment fees and fees related to
credit card operations.
- - Charges and fees decreased $.5 million during the third quarter of
1999 primarily due to lower loan origination costs within the Retail
Banking business line.
- - Significant items within other noninterest expense for the third
quarter and first nine months of 1999 include marketing expense of
$2.3 million and $6.6 million, respectively, data processing expense
of $1.9 million and $5.9 million, respectively, and franchise tax
expense of $1.9 million and $5.7 million, respectively.
Financial Condition
- -------------------
Short-Term Investments and Investment Securities
- ------------------------------------------------
Federal funds sold and reverse repurchase agreements increased $80.6
million since December 31, 1998. 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 are purchased with the intention of
recognizing short-term profits. These securities are carried at fair
value with realized and unrealized gains and losses reported in other
noninterest income. Trading account securities increased from $50.3
million at December 31, 1998 to $57.7 million at September 30, 1999.
26
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Securities purchased with the intention of being held for indefinite
periods of time are classified as investment securities available for
sale. These securities increased $195.9 million during 1999 of which
$116.2 million was a result of the change in the RISA balances. An
increase in collateralized mortgage obligations was the primary reason
for the remainder of the increase in investment securities. A
discussion of RISAs is included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Noninterest Income".
Loans and Leases
- ----------------
As of September 30, 1999 total loans and leases were $5.9 billion
compared to $5.6 billion at December 31, 1998. During the first nine
months of 1999, $1.6 billion of nonconforming residential loans,
$671.9 million of auto leases, $223.8 million of corporate lease
financings, $200.0 million of credit card loans and $126.1 million of
home equity loans were securitized and sold. As a result of loans and
leases being sold with servicing retained, total managed loans and
leases not reflected on the balance sheet grew from $3.2 billion at
December 31, 1998 to $5.3 billion at September 30, 1999.
The following table shows the composition of the commercial loan
category by industry type at September 30, 1999 (dollars in millions):
Amount on
Type Amount % Nonaccrual
-------------------------------- -------- --- ----------
Manufacturing $803.1 22 $20.4
Service Industries 744.1 20 16.7
Real Estate Operators/Investment 384.2 10 0.1
Retail Trade 355.1 9 2.6
Finance & Insurance 322.7 9 0.2
Wholesale Trade 257.3 7 2.3
Transportation/Utilities 215.2 6 0.7
Construction 147.1 4 1.5
Automobile Dealers 97.3 3 -
Residential Warehouse Lending 21.8 1 2.6
Other 352.9 9 2.2
-------- --- -----
Total $3,700.8 100 $49.3
======== === =====
27
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The composition of the commercial mortgage and construction loan
categories by property type at September 30, 1999 is shown in the
following table (dollars in millions):
Amount on
Type Amount % Nonaccrual
-------------------------------- -------- --- ----------
Office/Warehouse $203.5 22 $-
Shopping/Retail 185.3 20 0.3
Residential Development 184.2 20 0.5
Apartments 122.2 13 -
Land 43.2 5 -
Auto Sales and Service 27.1 3 -
Hotels/Motels 22.7 2 -
Industrial Plants 15.8 2 -
Churches 14.0 1 -
Health Facilities 7.5 1 -
Other Commercial Properties 101.6 11 0.3
------ --- ----
Total $927.1 100 $1.1
====== === ====
The following table shows the composition of the instalment loan
category by loan type at September 30, 1999 (dollars in millions):
Type Amount %
-------------------------------- ------- ---
Indirect Instalment $313.8 70
Credit Card 48.8 11
Credit Lines 25.3 6
Home Equity 24.2 5
Direct Instalment 17.9 4
Other Consumer Loans 17.0 4
------ ---
Total $447.0 100
====== ===
Other Assets
- ------------
Other assets increased $305.5 million, or 68% since December 31, 1998.
The increase is due primarily to the increase in receivables due from
securitization trusts. Since March 1998, Provident has provided for
credit enhancements to its securitizations in the form of cash reserve
accounts that are funded prior to closing. Generally, the cash reserve
accounts are deposited at Provident. Cash reserve accounts totaled
$364.8 million and $133.8 million as of September 30, 1999 and
December 31, 1998, respectively.
28
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Generally, credit losses are absorbed directly in these cash reserve
accounts. The remaining funds not used to cover such losses are
returned to Provident at the termination of the securitization.
Provident estimates the amount of credit losses based upon past
experience. Assumptions used to calculate the estimated credit losses
are provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Noninterest Income". The
estimates for securitized credit losses, which reduce the recorded
level of the cash reserve accounts, were $72.5 million and $28.9
million as of September 30, 1999 and December 31, 1998.
Deposits
- --------
Noninterest bearing deposits increased $341.1 million, or 51%, during
the first nine months of 1999. As noted above, the cash reserve
accounts, used as credit enhancements for its securitizations, are
deposited in noninterest bearing checking accounts at Provident. As of
September 30, 1999 and December 31, 1998, these cash reserve accounts
totaled $346.0 million and $131.6 million, respectively.
Interest bearing deposits increased $662.5 million to $5.3 billion
during the first nine months of 1999. Retail certificates of deposit
contributed significantly to this growth.
Average core deposits for the third quarter of 1999 grew by 13% since
the fourth quarter of 1998, with significant contribution coming from
Provident Bank of Florida.
Borrowed Funds
- --------------
Short-term debt decreased $151.6 million, or 19%, to $655.9 million
during the first nine months of 1999. The decrease was due to a $68.1
million decrease in commercial paper combined with an $83.5 million
decrease in federal funds purchased and repurchase agreements.
Long-term debt decreased $139.7 million, or 15%, during the first nine
months of 1999. The decrease is primarily attributable to the maturity
of a $100 million Federal Home Loan Bank advance.
During the second quarter of 1999, Provident established Provident
Capital Trust II. Capital Trust II issued capital securities of $125
million of preferred stock to the public and $3.9 million of common
stock to Provident. Proceeds from the issuance of the capital
securities were invested in Provident's 8.75% junior subordinated
debentures, due 2029.
29
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital Resources and Adequacy
- ------------------------------
Total shareholders' equity at September 30, 1999 was $741.8 million
compared to $703.9 million at December 31, 1998. The change in the
equity balance primarily relates to net income exceeding dividends by
$78.0 million, treasury stock purchases of $8.6 million and a decrease
in the market value of investment securities classified as available
for sale of $35.0 million (net of deferred income taxes).
The quarterly common dividend rate was increased from $.20 per share
to $.22 per share beginning with the first quarter of 1999.
In August 1998, Provident announced that it would purchase up to 1
million shares, or approximately 2.3%, of its common stock. The
purchases were to be made from time-to-time in open market or in
privately negotiated transactions at the discretion of management. The
buyback plan was subsequently cancelled in August, 1999. Total shares
purchased under the buy-back program were 801,800 shares.
The following table of ratios is important for the analysis of capital
adequacy:
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
------------------ -----------------
Average Shareholders' Equity to Average Assets 8.02% 8.73%
Dividend Payout to Net Earnings 26.73 30.72
Tier 1 Leverage Ratio 10.48 9.00
Tier 1 Capital to Risk-Weighted Assets 9.66 8.55
Total Risk-Based Capital To Risk-Weighted Assets 11.75 11.15
Capital expenditures planned by Provident for building improvements
and furniture and equipment in 1999 are currently estimated to be
approximately $26 million. Included in this amount are projected
capital expenditures for the purchase of data processing hardware and
software, facility renovations, branch additions/renovations and ATMs.
Through September 30, 1999, approximately $21 million of these
expenditures had been made.
Stock Options
- -------------
Options to purchase 738,875 shares of Provident Common Stock were
granted during the first nine months of 1999. The options have
exercise prices ranging from $34.32 to $45.63.
30
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Off-Balance Sheet Managed Assets
- --------------------------------
Provident generally retains the servicing of the loans and leases it
securitizes and/or sells. As a result, a significant level of assets
is serviced by Provident, which do not appear on its balance sheet.
These off-balance sheet assets were primarily responsible for the
generation of $8.1 million and $1.3 million in loan servicing fees
during the third quarter of 1999 and 1998, respectively. The following
table provides a summary of these managed assets (in thousands):
September 30
-----------------------
1999 1998
---------- ----------
Residential Mortgage Loans $2,851,534 $1,433,824
Auto Leases 1,238,110 473,954
Home Equity Loans 372,433 152,011
Equipment Leases 336,267 211,276
Warehouse Lending 289,400 -
Credit Card Lending 200,000 -
---------- ----------
$5,287,744 $2,271,065
========== ==========
Off-Balance Sheet Financial Agreements
- --------------------------------------
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 September
30, 1999, these off-balance sheet instruments consisted of standby
letters of credit of $132 million, commitments to extend credit of
$2.8 billion and interest rate swaps with a notional amount of $4.9
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, federal funds sold and trading
account securities. 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. The bank notes
program was increased from $1.0 billion to $1.5 billion in July 1999.
Approximately $5.8 million of long-term debt is due to be repaid
during the remainder of 1999.
31
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The major source of liquidity for Provident on a parent-only basis
("the Parent") is dividends paid to it by its subsidiaries. Pursuant
to Federal Reserve and state banking regulations, the maximum amount
available for dividend distribution to the Parent at September 30,
1999 by its banking subsidiaries was approximately $287.2 million. The
Parent has not received any dividends from its subsidiaries during the
first nine months of 1999.
At September 30, 1999 the Parent had not drawn any of its $200 million
in general purpose lines of credit with unaffiliated banks.
Additionally the Parent had approximately $67.0 million in cash,
interest earning deposits and federal funds sold to meet its liquidity
needs.
Acquisition Activity
- --------------------
On August 3, 1999, Provident announced the signing of a definitive
agreement to acquire OHSL Financial Corp. ("OHSL") and its
subsidiaries in a merger transaction. OHSL has approximately $284
million in assets and operates six full-service banking offices in
Cincinnati, Ohio. This transaction will be accounted for as a
purchase, and accordingly, the assets acquired and liabilities assumed
will be recorded at estimated fair value. Under terms of the
agreement, OHSL shareholders will receive shares of Provident common
stock having an approximate value of $57 million. This transaction,
which has received all regulatory and shareholder approvals, is
expected to be consummated during the fourth quarter of 1999.
On August 16, 1999, Provident announced the signing of a definitive
agreement to acquire Fidelity Financial of Ohio, Inc. and its
subsidiaries in a merger transaction. Fidelity Financial has
approximately $808 million in assets and operates fifteen full-service
banking offices in the greater Cincinnati, Ohio area. This transaction
will be accounted for as a pooling-of-interests, and accordingly, the
assets acquired and liabilities assumed will be recorded at their
historical value. Under terms of the agreement, Fidelity Financial
shareholders will receive shares of Provident common stock having an
approximate value of $192 million. This transaction is expected to be
consummated in the first quarter of 2000.
On September 21, 1999, Provident completed its purchase of the assets
of Capstone Realty Advisors, LLC for $4.5 million in cash. With
headquarters in Cleveland, Ohio, and offices in Columbus and
Cincinnati, Capstone services approximately $1.3 billion in permanent,
long-term, fixed rate commercial real estate loans funded by various
life insurance companies and has annual loan production in excess of
$400 million.
32
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Market Risk Management
- ----------------------
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, OHSL and Fidelity Financial, net interest
income would change by the following over the next 12-month period:
increase 0.58% for a 100 basis point decrease; increase 1.34% for a
200 basis point decrease; decrease 0.91% for a 100 basis increase; and
decrease 1.68% 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.
Year 2000 Compliance
- --------------------
The Year 2000 Issue arose because many existing computer programs use
only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results before, during and
after January 1, 2000.
33
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Provident has been actively addressing the Year 2000 issue since 1996
as it could result in an interruption in certain normal business
activities or operations. Such interruptions could materially affect
Provident's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 issue,
including third party vendors and customers, Provident is unable to
determine at this time whether Year 2000 failures will significantly
affect Provident's results of operations, liquidity and financial
condition. Steps taken by Provident have significantly reduced the
level of uncertainty about the Year 2000 issues. The total cost of the
Year 2000 project is estimated at $10 million. During 1999, Provident
expensed $2.7 million, and since inception $9.0 million, for the
correction of this problem. The following summarizes its Year 2000
readiness.
Mainframe Applications: Provident has completed the Year 2000 code
remediation and implemented the changes into production. Additionally,
all third-party upgrades required to ensure Year 2000 compliance have
been installed. Provident has performed future date testing at an
application level throughout the conversion and upgrade process. In
addition, an integrated systems Millennium Verification Test was
executed offsite in the fourth quarter of 1998. Provident has
established a logical partition (LPAR) to allow for continued
production verification tests that include third-party and corporate
customer interfaces.
PC Applications: In early 1997, Provident established a Year 2000 PC
test lab for date simulation verification of PC software applications,
spreadsheets and databases. As of September 30, 1999, Provident
successfully upgraded where necessary, and tested, nearly 250 pieces
of software and all mission critical spreadsheets and databases.
Provident will continue to test all new software purchased and vendor
upgrades received throughout the remainder of 1999.
Environmental/Embedded Systems: Provident has solicited, and received
from vendors, the Year 2000 compliance information on its
environmental and other embedded systems. As of June 30, 1999, testing
and any required upgrades to meet Year 2000 Compliance have been
completed.
Third Party Interdependencies: Provident has solicited, and continues
to monitor, the readiness of all third party interdependencies.
Testing has been completed with all of our interdependencies including
our main interface, the Federal Reserve Bank, to verify our automated
clearinghouse (ACH), wire and daily cash settlement activity.
Vendors/Customers: Letters and questionnaires have been sent out to
significant vendors and borrowers of Provident. Both vendor and
customer responses will be actively monitored and updated throughout
1999.
34
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contingency Plans: Year 2000 business resumption contingency plans
have been developed and documented. These plans are designed to focus
on Provident's processes for achieving Year 2000 readiness with the
assumption that all business processes, functions and applications
will fail during the Year 2000 date change. These plans define
processes and comprehensive procedures covering company-wide
contingency strategies, financial business center sales and services,
and individual business units necessary to assuring continuity or
resumption of business operations in the event of Year 2000
disruptions. Master listings of external dependencies and interfaces
including corporate customers, vendors, service providers,
infrastructure and information sources are provided for within these
plans.
35
PROVIDENT FINANCIAL GROUP, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk Management".
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 27.1 - Financial Data Schedule for September 30, 1999
Exhibit 27.2 - Restated Financial Data Schedule for
September 30, 1998
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: November 12, 1999 \s\ Christopher J. Carey
--------------------------
Christopher J. Carey
Executive Vice President and
Chief Financial Officer
37