Provident Bankshares (PBKS) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x    Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2006

Commission File Number 0-16421

PROVIDENT BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Maryland	52-1518642
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

114 East Lexington Street, Baltimore, Maryland 21202

(Address of Principal Executive Offices)

(410) 277-7000

(Registrant’s Telephone Number, Including Area Code)

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 by check mark whether the Registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At August 2, 2006, the Registrant had 32,754,700 shares of $1.00 par value common stock outstanding.

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Statements of Condition - Unaudited June 30, 2006 and 2005 and December 31, 2005	4
Condensed Consolidated Statements of Income - Unaudited Three and six month periods ended June 30, 2006 and 2005	5
Condensed Consolidated Statements of Cash Flows - Unaudited Six month periods ended June 30, 2006 and 2005	6
Notes to Condensed Consolidated Financial Statements - Unaudited	7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.Controls and Procedures	44
PART II - OTHER INFORMATION
Item 1.Legal Proceedings	44
Item 1A.Risk Factors	44
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.Defaults upon Senior Securities	45
Item 4.Submission of Matters to a Vote of Security Holders	45
Item 5.Other Information	46
Item 6.Exhibits	46
SIGNATURES	47

Forward-looking Statements

This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the “Corporation”) (including, without limitation, the Corporation’s 2005 Annual Report to Stockholders) and oral communications made from time to time by authorized officers of the Corporation, may contain statements relating to the future results of the Corporation (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “intend” and “potential.” Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Corporation, including earnings growth determined using U.S. generally accepted accounting principles (“GAAP”); revenue growth in retail banking, lending and other areas; origination volume in the Corporation’s consumer, commercial and other lending businesses; asset quality and levels of non-performing assets;

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current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these statements, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Corporation cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: the factors identified in the Corporation’s Form 10-K for the fiscal year ended December 31, 2005 under the headings “Forward-Looking Statements” and “Item 1A. Risk Factors,” prevailing economic conditions, either nationally or locally in some or all areas in which the Corporation conducts business or conditions in the securities markets or the banking industry; changes in interest rates, deposit flows, loan demand, real estate values and competition, which can materially affect, among other things, consumer banking revenues, revenues from sales on non-deposit investment products, origination levels in the Corporation’s lending businesses and the level of defaults, losses and prepayments on loans made by the Corporation, whether held in portfolio or sold in the secondary markets; changes in the quality or composition of the loan or investment portfolios; the Corporation’s ability to successfully integrate any assets, liabilities, customers, systems and management personnel the Corporation may acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames; the Corporation’s timely development of new and competitive products or services in a changing environment, and the acceptance of such products or services by customers; operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which it is highly dependent; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; risks and uncertainties related to mergers and related integration and restructuring activities; conditions in the securities markets or the banking industry; changes in the quality or composition of the investment portfolio; litigation liabilities, including costs, expenses, settlements and judgments; or the outcome of other matters before regulatory agencies, whether pending or commencing in the future; and other economic, competitive, governmental, regulatory and technological factors affecting the Corporation’s operations, pricing, products and services. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Company’s control. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the date of this report, and, except as may be required by applicable law or regulation, the Corporation assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Condition

(dollars in thousands, except per share and share amounts)	June 30, 2006			December 31, 2005			June 30, 2005
	(Unaudited)						(Unaudited)
Assets:
Cash and due from banks	$	136,499		$	159,474		$	150,487
Short-term investments		2,582			3,992			5,973
Mortgage loans held for sale		13,485			8,169			5,595
Securities available for sale		1,768,966			1,794,086			1,945,625
Securities held to maturity		129,089			111,269			112,449
Loans		3,759,295			3,695,381			3,623,791
Less allowance for loan losses		44,700			45,639			46,583
Net loans		3,714,595			3,649,742			3,577,208
Premises and equipment, net		65,090			65,893			63,770
Accrued interest receivable		34,527			31,766			28,935
Goodwill		254,855			254,855			256,190
Intangible assets		9,865			10,765			11,685
Other assets		279,673			265,915			249,198
Total assets	$	6,409,226		$	6,355,926		$	6,407,115
Liabilities:
Deposits:
Noninterest-bearing	$	806,765		$	860,023		$	931,421
Interest-bearing		3,343,805			3,264,444			3,104,284
Total deposits		4,150,570			4,124,467			4,035,705
Short-term borrowings		734,230			647,752			677,241
Long-term debt		860,484			920,022			1,032,334
Accrued expenses and other liabilities		39,823			33,190			34,496
Total liabilities		5,785,107			5,725,431			5,779,776
Stockholders’ Equity:
Common stock (par value $1.00) authorized 100,000,000 shares; issued 41,703,144, 41,386,297 and 41,040,258 shares at June 30, 2006, December 31, 2005 and June 30, 2005, respectively		41,703			41,386			41,040
Additional paid-in capital		572,475			565,239			556,753
Retained earnings		240,621			221,290			202,306
Net accumulated other comprehensive loss		(34,215	)		(17,283	)		(2,057	)
Treasury stock at cost - 8,913,855, 8,453,179 and 8,174,441 shares at June 30, 2006, December 31, 2005 and June 30, 2005, respectively		(196,465	)		(180,137	)		(170,703	)
Total stockholders’ equity		624,119			630,495			627,339
Total liabilities and stockholders’ equity	$	6,409,226		$	6,355,926		$	6,407,115

The accompanying notes are an integral part of these statements.

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Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Income - Unaudited

	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in thousands, except per share data)	2006			2005		2006			2005
Interest Income:
Loans, including fees	$	64,831		$	52,514	$	125,978		$	103,018
Investment securities		24,732			24,360		48,684			48,681
Tax-advantaged loans and securities		904			335		1,710			654
Short-term investments		111			64		190			107
Total interest income		90,578			77,273		176,562			152,460
Interest Expense:
Deposits		18,987			12,756		36,053			24,084
Short-term borrowings		10,034			4,819		18,582			9,292
Long-term debt		9,170			10,305		18,292			20,975
Total interest expense		38,191			27,880		72,927			54,351
Net interest income		52,387			49,393		103,635			98,109
Less provision for loan losses		824			2,222		1,142			3,797
Net interest income after provision for loan losses		51,563			47,171		102,493			94,312
Non-Interest Income:
Service charges on deposit accounts		23,942			21,761		45,994			41,110
Commissions and fees		1,670			1,314		3,278			2,524
Net gains (losses)		203			706		743			(70	)
Derivative gains (losses) on swaps		(554	)		3,921		(1,157	)		101
Net cash settlement on swaps		238			1,074		528			2,653
Other non-interest income		5,906			4,408		10,244			9,910
Total non-interest income		31,405			33,184		59,630			56,228
Non-Interest Expense:
Salaries and employee benefits		27,168			25,719		54,800			48,417
Occupancy expense, net		5,659			6,289		11,388			11,563
Furniture and equipment expense		3,923			3,612		7,770			7,076
External processing fees		5,134			5,125		10,101			10,322
Other non-interest expense		11,911			10,212		22,527			21,053
Total non-interest expense		53,795			50,957		106,586			98,431
Income before income taxes		29,173			29,398		55,537			52,109
Income tax expense		9,150			9,421		17,256			16,382
Net income	$	20,023		$	19,977	$	38,281		$	35,727
Net Income Per Share Amounts:
Basic	$	0.61		$	0.61	$	1.16		$	1.08
Diluted		0.60			0.60		1.15			1.06

The accompanying notes are an integral part of these statements.

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Provident Bankshares Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows – Unaudited

	Six Months Ended June 30,
(in thousands)	2006			2005
Operating Activities:
Net income	$	38,281		$	35,727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,573			13,080
Provision for loan losses		1,142			3,797
Provision for deferred income tax		368			255
Net (gains) losses		(743	)		70
Net derivative losses (gains)		1,157			(101	)
Originated loans held for sale		(50,385	)		(32,963	)
Proceeds from sales of loans held for sale		45,334			34,167
Net decrease (increase) in accrued interest receivable and other assets		(12,067	)		3,665
Net increase (decrease) in accrued expenses and other liabilities		6,633			(4,035	)
Total adjustments		3,012			17,935
Net cash provided by operating activities		41,293			53,662
Investing Activities:
Principal collections and maturities of securities available for sale		114,260			173,995
Principal collections and maturities of securities held to maturity		—			1,026
Proceeds from sales of securities available for sale		86,603			263,383
Purchases of securities available for sale		(198,985	)		(210,694	)
Purchases of securities held to maturity		(18,992	)		—
Loan originations and purchases less principal collections		(67,674	)		(67,946	)
Purchases of premises and equipment		(6,136	)		(6,477	)
Net cash provided (used) by investing activities		(90,924	)		153,287
Financing Activities:
Net increase in deposits		26,435			256,082
Net increase (decrease) in short-term borrowings		86,478			(240,652	)
Proceeds from long-term debt		255,000			30,000
Payments and maturities of long-term debt		(316,043	)		(203,853	)
Proceeds from issuance of stock		7,553			4,252
Tax benefits associated with share based payments		1,101			—
Purchase of treasury stock		(16,328	)		(13,150	)
Cash dividends paid on common stock		(18,950	)		(17,490	)
Net cash provided (used) by financing activities		25,246			(184,811	)
Increase (decrease) in cash and cash equivalents		(24,385	)		22,138
Cash and cash equivalents at beginning of period		163,466			134,322
Cash and cash equivalents at end of period	$	139,081		$	156,460
Supplemental Disclosures:
Interest paid, net of amount credited to deposit accounts	$	48,511		$	36,074
Income taxes paid		15,857			6,100

The accompanying notes are an integral part of these statements.

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Provident Bankshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2006

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Provident Bankshares Corporation (“the Corporation”), a Maryland corporation, is the bank holding company for Provident Bank (“the Bank”), a Maryland chartered stock commercial bank. The Bank serves individuals and businesses through a network of banking offices and ATMs in Maryland, Virginia, and southern York County, Pennsylvania. Related financial services are offered through its wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and leases through Court Square Leasing and Provident Lease Corporation.

The accounting and reporting policies of the Corporation conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices within the banking industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2006. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (“SEC”) on March 16, 2006.

Principles of Consolidation and Basis of Presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The Condensed Consolidated Financial Statements of the Corporation are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value and intangible assets associated with mergers, other than temporary impairment of investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, stock-based compensation, derivative financial instruments, recourse liabilities, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the audited Consolidated Financial Statements or in the notes to the audited Consolidated Financial Statements as included in the Corporation’s 2005 Annual Report on Form 10-K. It is at least reasonably possible that each of the Corporation’s estimates could change in the near term or that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could be material to the Corporation’s unaudited Condensed Consolidated Financial Statements.

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Derivative Financial Instruments

The Corporation uses various derivative financial instruments as part of its interest rate risk management strategy to mitigate the exposure to changes in market interest rates. The derivative financial instruments used separately or in combination are interest rate swaps and caps. Derivative financial instruments are required to be measured at fair value and recognized as either assets or liabilities in the financial statements. Fair value represents the payment the Corporation would receive or pay if the item were sold or bought in a current transaction. Fair values are generally based on market quotes. The accounting for changes in fair value (gains or losses) of a derivative is dependent on whether the derivative is designated and qualifies for hedge accounting. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Corporation assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated derivative. SFAS No. 133 requires an assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair value hedge or cash flow hedge. Derivatives are included in other assets and other liabilities in the Consolidated Statements of Condition.

Fair Value Hedges—For derivatives designated as fair value hedges, the derivative instrument and related hedge item are marked-to-market through the related interest income or expense, as applicable, except for the ineffective portion which is recorded in non-interest income.

Cash Flow Hedges—For derivatives designated as cash flow hedges, mark-to-market adjustments are recorded net of income taxes as a component of other comprehensive income (“OCI”) in stockholders’ equity, except for the ineffective portion which is recorded in non-interest income. Amounts recorded in OCI are recognized into earnings concurrent with the hedged items’ impact on earnings.

Non-Designated Derivatives—Certain economic hedges are not designated as cash flow or as fair value hedges for accounting purposes. As a result, changes in the fair value are recorded in non-interest income in the Consolidated Statements of Income. Interest income or expense related to non-designated derivatives is also recorded in non-interest income.

All qualifying relationships between hedging instruments and hedged items are fully documented by the Corporation. Risk management objectives, strategies and the projected effectiveness of the chosen derivatives to hedge specific risks are also documented. At inception of the hedging relationship and periodically as required under SFAS No. 133, the Corporation evaluates the effectiveness of its hedging instruments. For hedges qualifying for “short-cut” treatment at inception, the ongoing effectiveness testing includes a review of the hedge and the hedged item to determine if the hedge continues to qualify for short-cut treatment. An assumption of no hedge ineffectiveness is allowed for derivatives qualifying for short-cut treatment. For all other derivatives qualifying for hedge accounting, a quantitative assessment of the effectiveness of the hedge is required at each reporting date. The Corporation performs effectiveness testing quarterly for all of its hedges. The Corporation uses benchmark interest rates such as LIBOR to hedge the interest rate risk associated with interest-earning assets or interest-bearing liabilities. Using benchmark rates and complying with specific criteria set forth in SFAS No.133, the Corporation has concluded that, for qualifying hedges, changes in fair value or cash flows that are attributable to risks being hedged will be highly effective at the hedge’s inception and on an ongoing basis.

When it is determined that a derivative is not, or ceases to be effective as a hedge, the Corporation discontinues hedge accounting prospectively. When a fair value hedge is discontinued due to ineffectiveness, the Corporation continues to carry the derivative on the Consolidated Statements of Condition at its fair value as a non-designated derivative, but discontinues marking-to-market the hedged asset or liability for changes in fair value. Any previous mark-to-market adjustments recorded to the hedged item are amortized over the remaining life of the asset or liability. All ineffective portions of fair value hedges are reported in and affect net income immediately. When a cash flow hedge is discontinued due to termination of the derivative, the Corporation continues to carry the previous mark-to-market adjustments in accumulated OCI and recognizes the amount into earnings in the same period or periods during which the hedged item affects earnings. If the cash flow hedge is discontinued due to ineffectiveness, the derivative is considered a non-designated derivative and continues to be marked-to-market in the Consolidated Statements of Condition as an asset or liability, and marked-to-market through current period earnings in the Consolidated Statements of Income and not through OCI.

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Counter-party credit risk associated with derivatives is controlled by dealing with well-established brokers that are highly rated by credit rating agencies and by establishing exposure limits for individual counter-parties. Market risk on interest rate swaps is minimized by using these instruments as hedges and by continually monitoring the positions to ensure ongoing effectiveness. For significant derivative positions, credit risk is controlled by entering into bilateral collateral agreements with brokers, in which the parties pledge collateral to indemnify the counter-party in the case of default. The Corporation’s hedging activities and strategies are monitored by the Bank’s Asset / Liability Committee (“ALCO”) as part of its oversight of the treasury function.

Share-Based Payment

Prior to January 1, 2006, the Corporation applied the intrinsic value based method of accounting for its fixed-plan stock options as prescribed by Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, and accordingly, did not record compensation costs for grants of stock options to employees when the initial exercise price equaled the fair market value on the grant date. However, the Corporation did record compensation costs for restricted share grants over the respective vesting periods equal to the fair market value of the common shares on the date of each grant.

Effective January 1, 2006, the Corporation adopted SFAS No.123(R) “Share-Based Payment” that requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and nonemployees. Under the provisions of SFAS No. 123(R), the Corporation has applied the modified prospective method of adoption, and therefore, results for prior periods have not been restated.

On December 30, 2005, the Corporation approved the accelerated vesting of all outstanding, unvested stock options of the Corporation’s common stock granted through 2005. As a result, the stock options, that otherwise would have vested during 2006 and thereafter, became immediately exercisable. The acceleration of vesting eliminated compensation expense that the Corporation would otherwise be required to recognize upon adoption of SFAS No. 123(R). Accordingly, the Corporation will not recognize any compensation cost associated with those stock options in periods subsequent to December 31, 2005.

Compensation cost for stock options granted after January 1, 2006 and restricted share grants are recognized as non-interest expense in the Condensed Consolidated Statements of Income on a straight-line basis over the vesting period of each stock option and restricted share grant. Compensation cost for stock options includes the impact of an estimated forfeiture rate. The impact of forfeitures on the restricted share grants is recorded as they occur.

At June 30, 2006, no stock options had vesting conditions linked to the performance of the Corporation. The tax benefits associated with tax deductions in excess of compensation costs are recognized as a financing activity in the Condensed Consolidated Statements of Cash Flows.

Prior to the adoption of SFAS 123(R), the Corporation applied APB No. 25 to account for its stock-based awards, and the disclosure-only provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation”, as amended (“SFAS 123”), to present stock-based compensation disclosure. Under APB No. 25, because the exercise price of the Corporation’s stock options equaled the market price of the underlying stock on the date of grant, the stock options had no intrinsic value and therefore no compensation expense was recognized. The following table details the pro forma effects on net income and earnings per share for the three and six months ended June 30, 2005 had compensation expense been recorded based on the fair value method under SFAS No. 123, utilizing the Black-Scholes option valuation model:

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(in thousands, except per share data)	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net Income:
Net income as reported	$	19,977		$	35,727
Addition for total stock-based compensation expense included in reported net income, net of tax		522			551
Deduction for total stock-based compensation expense determined under fair value based method for all awards, net of tax		(1,021	)		(1,528	)
Pro forma net income	$	19,478		$	34,750
Basic Earnings Per Share:
As reported	$	0.61		$	1.08
Pro forma		0.59			1.05
Diluted Earnings Per Share:
As reported	$	0.60		$	1.06
Pro forma		0.58			1.03

Other Changes in Accounting Principles

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which is effective for accounting changes and corrections of errors made in years beginning after December 15, 2005. SFAS No. 154 provides guidance on the accounting for and reporting accounting changes and error corrections. The adoption of SFAS No. 154 did not have any impact on the results of operations of the Corporation.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”), which will be effective for all financial instruments acquired and issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The statement eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments will be accounted for on a similar basis regardless of the form of the financial instrument. It also provides for an election of fair value measurement on an instrument-by-instrument basis in cases where a derivative would otherwise have to be bifurcated. The adoption of SFAS No. 155 is not expected to have any impact on the results of operations of the Corporation. As of June 30, 2006, the Corporation did not have any hybrid financial instruments that are impacted by this statement.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets– an amendment of FASB Statement No. 140 (“SFAS No. 156”), which will be effective for an entity’s first fiscal year that begins after September 15, 2006. The statement establishes the accounting for all separately recognized servicing assets and liabilities which require that they be initially recorded at fair value. The statement permits, but does not require, subsequent measurement of the separately recognized servicing assets and liabilities at fair value. The adoption of SFAS No. 156 is not expected to have any impact on the results of operations of the Corporation. Currently, the Corporation does not retain servicing rights for loans they sell to third parties.

In April 2006, the FASB issued FASB Staff Position FIN No. 46(R)-6 “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, an interpretation of FIN No. 46(R) “Consolidation of Variable Based Entities”. This new interpretation is effective prospectively for all entities that the Corporation has initial involvement with beginning after June 15, 2006. Additionally, this guidance also applies to events requiring reconsideration of existing relationships maintained by the Corporation under FIN No. 46(R). The application of this guidance did not have any impact on the results of operations of the Corporation.

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In June 2006, the FASB issued FASB Staff Position FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which will be effective as of the beginning of the first fiscal year beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements. FIN No. 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition. The Corporation is still evaluating the impact on the results of operations from the application of this recent guidance.

NOTE 2—INVESTMENT SECURITIES

The following table presents the aggregate amortized cost and fair values of the investment securities portfolio as of the dates indicated:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2006
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	74,626	$	—	$	2,144	$	72,482
Mortgage-backed securities		915,033		210		46,762		868,481
Municipal securities		86,528		60		2,624		83,964
Other debt securities		742,571		2,931		1,463		744,039
Total securities available for sale		1,818,758		3,201		52,993		1,768,966
Securities held to maturity:
Other debt securities		129,089		441		2,115		127,415
Total securities held to maturity		129,089		441		2,115		127,415
Total investment securities	$	1,947,847	$	3,642	$	55,108	$	1,896,381
December 31, 2005
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	78,936	$	—	$	1,706	$	77,230
Mortgage-backed securities		1,061,541		1,109		27,873		1,034,777
Municipal securities		58,736		129		548		58,317
Other debt securities		622,701		2,193		1,132		623,762
Total securities available for sale		1,821,914		3,431		31,259		1,794,086
Securities held to maturity:
Other debt securities		111,269		307		1,495		110,081
Total securities held to maturity		111,269		307		1,495		110,081
Total investment securities	$	1,933,183	$	3,738	$	32,754	$	1,904,167
June 30, 2005
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	85,544	$	—	$	886	$	84,658
Mortgage-backed securities		1,303,419		6,059		10,804		1,298,674
Municipal securities		12,555		264		—		12,819
Other debt securities		547,645		2,200		371		549,474
Total securities available for sale		1,949,163		8,523		12,061		1,945,625
Securities held to maturity:
Other debt securities		112,449		360		733		112,076
Total securities held to maturity		112,449		360		733		112,076
Total investment securities	$	2,061,612	$	8,883	$	12,794	$	2,057,701

11

At June 30, 2006, a net unrealized after-tax loss of $28.8 million on the securities portfolio was reflected in net accumulated other comprehensive loss. This compared to a net unrealized after-tax gain of $1.5 million at June 30, 2005 and a net unrealized after-tax loss of $14.9 million at December 31, 2005.

Management reviews the investment portfolio on a periodic basis to determine the cause of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other than temporary in nature. Considerations such as recoverability of invested amount over a reasonable period of time, the length of time the security is in a loss position and receipt of amounts contractually due, for example, are applied in determining other than temporary impairment. At June 30, 2006, the unrealized losses contained within the Corporation’s investment portfolio were considered temporary because the declines in fair value were due to changes in market interest rates, not in estimated cash flows of the underlying debt securities.

For further details regarding investment securities at December 31, 2005, refer to Notes 1 and 4 of the Consolidated Financial Statements in the Corporation’s Form 10-K for the year ended December 31, 2005.

NOTE 3—LOANS

A summary of loans outstanding as of the dates indicated is shown in the table below.

(in thousands)	June 30, 2006		December 31, 2005		June 30, 2005
Residential real estate:
Originated and acquired residential mortgage	$	387,156	$	452,853	$	570,851
Home equity		970,600		900,985		798,461
Other consumer:
Marine		392,541		412,643		426,155
Other		26,583		32,793		33,677
Total consumer		1,776,880		1,799,274		1,829,144
Commercial real estate:
Commercial mortgage		458,615		485,743		491,768
Residential construction		486,410		414,803		320,918
Commercial construction		320,342		312,399		310,511
Commercial business		717,048		683,162		671,450
Total commercial		1,982,415		1,896,107		1,794,647
Total loans	$	3,759,295	$	3,695,381	$	3,623,791

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

The following table reflects the activity in the allowance for loan losses for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2006		2005			2006		2005
Balance at beginning of period	$	44,754	$	45,639		$	45,639	$	46,169
Provision for loan losses		824		2,222			1,142		3,797
Less loans charged-off, net of recoveries:
Originated and acquired residential mortgage		89		127			420		768
Home equity		15		(1	)		134		(2	)
Marine and other consumer		268		262			539		252
Commercial construction		—		(67	)		—		(67	)
Commercial business		506		957			988		2,432
Net charge-offs		878		1,278			2,081		3,383
Balance at end of period	$	44,700	$	46,583		$	44,700	$	46,583

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NOTE 5—INTANGIBLE ASSETS

The table below presents an analysis of the goodwill and deposit-based intangible activity for the six months ended June 30, 2006.

(in thousands)	Goodwill		Accumulated Amortization			Net Goodwill
Balance at December 31, 2005	$	255,477	$	(622	)	$	254,855
Balance at June 30, 2006	$	255,477	$	(622	)	$	254,855
(in thousands)	Deposit-based Intangible		Accumulated Amortization			Total
Balance at December 31, 2005	$	15,429	$	(4,664	)	$	10,765
Amortization expense		—		(900	)		(900	)
Balance at June 30, 2006	$	15,429	$	(5,564	)	$	9,865

NOTE 6—DEPOSITS

The table below presents a summary of deposits as of the dates indicated:

(in thousands)	June 30, 2006		December 31, 2005		June 30, 2005
Interest-bearing deposits:
Interest-bearing demand	$	638,691	$	618,129	$	587,796
Money market		613,753		597,086		601,836
Savings		672,934		695,946		750,991
Direct time certificates of deposit		924,109		888,510		795,478
Brokered certificates of deposit		494,318		464,773		368,183
Total interest-bearing deposits		3,343,805		3,264,444		3,104,284
Noninterest-bearing deposits		806,765		860,023		931,421
Total deposits	$	4,150,570	$	4,124,467	$	4,035,705

NOTE 7—SHORT-TERM BORROWINGS

The table below presents a summary of short-term borrowings as of the dates indicated:

(in thousands)	June 30, 2006		December 31, 2005		June 30, 2005
Securities sold under repurchase agreements	$	335,900	$	370,515	$	355,065
Federal funds purchased		366,000		185,000		180,000
Federal Home Loan Bank advances - variable rate		30,000		90,000		140,000
Other short-term borrowings		2,330		2,237		2,176
Total short-term borrowings	$	734,230	$	647,752	$	677,241

13

NOTE 8—LONG-TERM DEBT

The table below presents a summary of long-term debt as of the dates indicated:

(in thousands)	June 30, 2006		December 31, 2005		June 30, 2005
Federal Home Loan Bank advances - fixed rate	$	63,539	$	196,537	$	163,117
Federal Home Loan Bank advances - variable rate		660,000		585,520		715,000
Junior Subordinated Debentures		136,945		136,715		142,342
Term repurchase agreements		—		1,250		11,875
Total long-term debt	$	860,484	$	920,022	$	1,032,334

On July 15, 2005, the Corporation redeemed $5.0 million in aggregate principal amount of 11% Junior Subordinated Debentures issued to Southern Financial Capital Trust I. These Junior Subordinated Debentures were callable beginning July 15, 2005 and had a final stated maturity date of July 15, 2030.

NOTE 9—STOCKHOLDERS’ EQUITY

Plan Description and Adoption of SFAS No. 123(R)

The Corporation issues nonqualified stock options and restricted share grants to certain of its employees and directors pursuant to the 2004 Equity Compensation Plan (“the Plan”), which has been approved by the shareholders. The Plan allows for a maximum of 12.5 million shares of common stock to be issued. At June 30, 2006, 4.7 million shares were available to be granted by the Corporation.

Stock Option Plan

Stock options (“options”) are granted with an exercise price equal to the market price of the Corporation’s shares at the date of the grant. Options granted subsequent to January 1, 2005 vest based on four years of continuous service and have eight year contractual terms. Options issued in 2004 and prior and in 2005 have contractual terms of ten years and eight years from the date of grant, respectively. As discussed in Note 1, the Corporation accelerated the vesting period for all options granted prior to December 30, 2005. Accordingly, no compensation expense relating to these options has been recognized in the three or six months ended June 30, 2006.

All options provide for accelerated vesting upon a change in control (as defined in the Plan). Stock options exercised result in the issuance of new shares.

On the date of each grant, the fair value of each award is estimated using the Black-Scholes option pricing model based on assumptions made by the Corporation as follows:

• Dividend yield is based on the dividend rate of the Corporation’s stock at the date of the grant

• Risk-free interest rate is based on the U.S. Treasury zero-coupon bond rate with a term equaling the expected life of the granted options

• Expected volatility is based on the historical volatility of the Corporation’s stock price

• Expected life represents the period of time that granted options are expected to be outstanding based on historical trends

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Below is a tabular presentation of the option pricing assumptions and the estimated fair value of the options using these assumptions.

	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
Weighted average dividend yield		3.14	%		3.14	%
Weighted average risk-free interest rate		4.58	%		4.59	%
Weighted average expected volatility		19.92	%		19.90	%
Weighted average expected life		5.25 years			5.25 years
Weighted average fair values of options granted	$	6.50		$	6.49

The Corporation recognized compensation expense related to options of $116 thousand for the three months ended June 30, 2006 and $173 thousand for the six months ended June 30, 2006. For the three months ended June 30, 2006 and 2005, the intrinsic value of options exercised was $767 thousand and $502 thousand, respectively. The intrinsic value of options exercised for the six months ended June 30, 2006 and 2005 was $3.4 million and $1.4 million, respectively. Unrecognized compensation cost related to non-vested options is $1.7 million at June 30, 2006 and is expected to be recognized over a weighted average period of 3.7 years.

The following table presents a summarization of the activity related to options for the period indicated:

	Common Shares		Weighted Average Exercise Price		Weighted Average Contractual Remaining Life (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding at January 1, 2006	2,345,870		$	25.65
Granted	289,440		$	36.03
Exercised	(252,211	)	$	22.15
Cancelled or expired	(9,198	)	$	18.29
Options outstanding at June 30, 2006	2,373,901		$	27.31	5.97	$	21,607
Options exercisable at June 30, 2006	2,088,143		$	26.12	5.74	$	21,499

Restricted Stock Awards

The Corporation issues restricted stock grants, in the form of new shares, to its directors and certain key employees. The restricted share grants are issued at the fair market value of the common shares on the date of each grant. The Corporation grants shares of restricted stock to directors of the Corporation as part of director compensation, as such, the restricted share grants vest immediately. An expense of $210 thousand for fully vested restricted stock granted to directors was recorded in the second quarter of 2006. The restricted stock grants to the directors may only be exercised six months subsequent to their departure from the board of directors. The restricted stock grants to employees vest ratably over four years. The Corporation recorded expense related to the employee awards of $198 thousand and $308 thousand for the three and six months ended June 30, 2006, respectively.

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The following table presents a summarization of the activity related to restricted share grants for the period indicated:

	Common Shares		Weighted Average Grant Fair Value
Unvested at January 1, 2006	31,550		$	33.66
Awards granted	64,722		$	35.81
Vested	(7,812	)	$	36.30
Cancelled	(1,411	)	$	36.00
Unvested at June 30, 2006	87,049		$	34.98

At June 30, 2006, unrecognized compensation cost related to non-vested restricted share grants was $2.6 million and is expected to be recognized over a weighted average period of 3.4 years.

NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS

Fair value hedges that meet the criteria for effectiveness have changes in the fair value of the derivative and the designated hedged item recognized in earnings. At and during all periods presented, the derivatives designated as fair value hedges were determined to be effective. Accordingly, the designated hedges and the associated hedged items were marked to fair value by an equal and offsetting amount of $574 thousand and $27 thousand for the six months ended June 30, 2006 and 2005, respectively. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive loss. For the six months ended June 30, 2006, the Corporation recorded a decrease in fair value of derivatives of $3.1 million compared to an increase of $269 thousand for the same period in 2005, net of taxes, in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. Amounts recorded in net accumulated other comprehensive loss are recognized into earnings concurrent with the impact of the hedged item on earnings. For the six months ended June 30, 2006, the ineffective portion of a cash flow hedge resulted in a $4 thousand charge to earnings. For the six months ended June 30, 2005, the Corporation had no ineffective hedges.

Non-designated derivatives, which are interest rate swaps, are marked to market and the gains or losses are recorded in non-interest income at the end of each reporting period. These non-designated derivatives represent interest rate protection on the Corporation’s net interest income but do not meet the requirements to receive hedge accounting treatment. For the three months ended June 30, 2006 and 2005, the Corporation recorded a net loss of $554 thousand and a net gain of $3.9 million, respectively, to reflect the change in value of the non-designated interest rate swaps. For the six months ended June 30, 2006 and 2005, the Corporation recorded a net loss of $1.2 million and a net gain of $101 thousand, respectively. The net cash settlements on the interest rate swaps are recorded in non-interest income. Net cash settlements on interest rate swaps were $238 thousand and $1.1 million for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, net cash settlements on interest rate swaps were $528 thousand and $2.7 million, respectively. The decrease in net cash settlements resulted from the decline in the notional amount of non-designated interest rate swaps the Corporation has on during the comparable periods along with the impact of rising interest rates on the value of these swaps.

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The table below presents the Corporation’s open derivative positions as of the dates indicated:

(in thousands) Derivative Type	Objective	Notional Amount		Credit Risk Amount		Market Risk
June 30, 2006
Designated Derivatives
Interest rate swaps:
Pay fixed/receive variable	Hedge borrowing cost	$	25,000	$	313	$	313
Receive fixed/pay variable	Hedge investment rate risk		247,363		—		(5,809	)
Receive fixed/pay variable	Hedge borrowing cost		29,900		—		(574	)
Interest rate caps/corridors	Hedge borrowing cost		140,000		1,876		1,876
Total designated derivatives			442,263		2,189		(4,194	)
Non-designated Derivatives
Interest rate swaps:
Receive fixed/pay variable			40,000		1,857		1,857
Total non-designated derivatives			40,000		1,857		1,857
Total derivatives		$	482,263	$	4,046	$	(2,337	)
December 31, 2005
Designated Derivatives
Interest rate swaps:
Receive fixed/pay variable	Hedge borrowing cost	$	57,900	$	—	$	(657	)
Interest rate caps/corridors	Hedge borrowing cost		165,000		1,155		1,155
Total designated derivatives			222,900		1,155		498
Non-designated Derivatives
Interest rate swaps:
Pay fixed/receive variable			70,000		1,450		1,450
Receive fixed/pay variable			40,000		3,235		3,235
Total non-designated derivatives			110,000		4,685		4,685
Total derivatives		$	332,900	$	5,840	$	5,183
June 30, 2005
Designated Derivatives
Interest rate swaps:
Pay fixed/receive variable	Hedge borrowing cost	$	95,000	$	1,092	$	1,091
Pay fixed/receive variable	Hedge loan rate risk		30,044		363		(198	)
Receive fixed/pay variable	Hedge borrowing cost		57,900		173		171
Interest rate caps/corridors	Hedge borrowing cost		300,000		1,490		1,490
Total designated derivatives			482,944		3,118		2,554
Non-designated Derivatives
Interest rate swaps:
Pay fixed/receive variable			60,000		546		(24	)
Receive fixed/pay variable			368,500		5,641		3,287
Total non-designated derivatives			428,500		6,187		3,263
Total derivatives		$	911,444	$	9,305	$	5,817

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NOTE 11—CONTINGENCIES AND OFF BALANCE SHEET RISK

Commitments

Commitments to extend credit in the form of consumer, commercial real estate and business loans at the date indicated were as follows:

(in thousands)	June 30, 2006
Commercial business and real estate	$	993,940
Consumer revolving credit		705,854
Residential mortgage credit		22,288
Performance standby letters of credit		132,853
Commercial letters of credit		1,350
Total loan commitments	$	1,856,285

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements.

Litigation

The Corporation is involved in various legal actions that arise in the ordinary course of its business. In May 2006, the Corporation settled litigation with a former employee for alleged breach of an executed employment contract for $1.3 million. This expense is included in other non-interest expense in the Condensed Consolidated Statements of Income. All other active lawsuits entail amounts which management believes, in the aggregate, are immaterial to the financial condition and the results of operations of the Corporation.

NOTE 12—NET GAINS (LOSSES)

Net gains (losses) include the following components for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2006			2005		2006			2005
Net gains (losses):
Securities sales	$	171		$	659	$	693		$	(217	)
Asset sales		240			47		380			198
Debt extinguishment		(208	)		—		(330	)		(51	)
Net gains (losses)	$	203		$	706	$	743		$	(70	)

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NOTE 13—EARNINGS PER SHARE

The following table presents a summary of per share data and amounts for the periods indicated.

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share data)	2006		2005		2006		2005
Net income	$	20,023	$	19,977	$	38,281	$	35,727
Basic EPS shares		32,785		32,939		32,863		32,984
Basic EPS	$	0.61	$	0.61	$	1.16	$	1.08
Dilutive shares		348		586		371		632
Diluted EPS shares		33,133		33,525		33,234		33,616
Diluted EPS	$	0.60	$	0.60	$	1.15	$	1.06
Antidilutive shares		289		863		289		434

NOTE 14—COMPREHENSIVE INCOME

Presented below is a reconciliation of net income to comprehensive income including the components of other comprehensive loss for the periods indicated.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2006			2005			2006			2005
Net income	$	20,023		$	19,977		$	38,281		$	35,727
Other comprehensive gain (loss):
Net unrealized gains (losses) on derivatives		(1,741	)		(1,518	)		(4,945	)		416
Net unrealized holding gains (losses) on debt securities		(10,315	)		18,380			(22,610	)		(1,181	)
Less reclassification adjustment for gains (losses) realized in net income		171			641			288			(116	)
Other comprehensive income (loss), before tax		(12,227	)		16,221			(27,843	)		(649	)
Related income tax expense (benefit)		(4,586	)		5,678			(10,911	)		(227	)
Other comprehensive income (loss), after tax		(7,641	)		10,543			(16,932	)		(422	)
Comprehensive income	$	12,382		$	30,520		$	21,349		$	35,305

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NOTE 15—EMPLOYEE BENEFIT PLANS

The actuarially estimated net benefit cost includes the following components for the periods indicated:

	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	Qualified Pension Plan						Postretirement Benefits						Non-qualified Pension Plan
(in thousands)	2006			2005			2006			2005			2006		2005
Service cost - benefits earned during the period	$	842		$	271		$	72		$	11		$	36	$	89
Interest cost on projected benefit obligation		908			346			58			7			153		249
Expected return on plan assets		(1,444	)		(398	)		—			—			—		—
Net amortization and deferral of loss (gain)		117			44			(107	)		3			182		105
Subtotal		423			263			23			21			371		443
Reversal of liability		—			—			—			—			—		—
Net pension cost included in employee benefits expense	$	423		$	263		$	23		$	21		$	371	$	443
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	Qualified Pension Plan						Postretirement Benefits						Non-qualified Pension Plan
(in thousands)	2006			2005			2006			2005			2006		2005
Service cost - benefits earned during the period	$	1,683		$	575		$	144		$	50		$	73	$	164
Interest cost on projected benefit obligation		1,817			733			115			34			305		458
Expected return on plan assets		(2,888	)		(843	)		—			—			364		—
Net amortization and deferral of loss		234			94			(213	)		16			—		193
Subtotal		846			559			46			100			742		815
Reversal of liability		—			—			—			(1,641	)		—		—
Net pension cost included in employee benefits expense	$	846		$	559		$	46		$	(1,541	)	$	742	$	815

On March 31, 2005, the Corporation announced that the pension plan would be frozen for new entrants. Employees who were already participants in the plan were not affected by this change. Also on March 31, 2005, the Corporation communicated to retirees under the age of 65 currently receiving postretirement health care benefits that these benefits would be eliminated and no longer offered, effective January 1, 2006. Postretirement life insurance benefits continue to be provided to retirees. This action resulted in the reversal of the actuarially determined liability of $1.6 million at March 31, 2005 associated with health care benefits.

No contributions were made to the qualified pension plan in the six months ended June 30, 2006 and 2005, respectively. The minimum required contribution in 2006 for the qualified plan is estimated to be zero. The decision to contribute further amounts is dependent on other factors including the actual investment performance of the plan assets and the requirements of the Internal Revenue Code. Given these uncertainties, the Corporation is not able to reliably estimate the maximum deductible contribution or the amount that will be contributed in 2006 to the qualified plan. For the unfunded non-qualified pension and postretirement benefit plans, the Corporation will contribute the minimum required amount in 2006, which is equal to the benefits paid under the plans.

NOTE 16—BUSINESS SEGMENT INFORMATION

The Corporation’s lines of business are structured according to the channels through which its products and services are delivered to its customers. For management purposes the lines are divided into the following segments: Consumer Banking, Commercial Banking, and Treasury and Administration.

The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident Bank. The Bank offers its services to customers in the key urban areas of Baltimore, Washington and Richmond through 91 traditional and 63 in-store banking offices in Maryland, Virginia and southern York County, Pennsylvania. Additionally, the Bank offers its customers 24-hour banking services through 254 bank owned ATMs, telephone banking and the Internet. The Bank is also a member of the MoneyPass network which provides more than 14,000 ATMs

20

nationwide to its customers with free access. Consumer banking services include a broad array of small business and consumer loan, deposit and investment products offered to retail and commercial customers through the retail branch network and direct channel sales center. Commercial Banking provides an array of commercial financial services including asset-based lending, equipment leasing, real estate financing, cash management and structured financing to middle market commercial customers. Treasury and Administration is comprised of balance sheet management activities that include managing the investment portfolio, discretionary funding, utilization of derivative financial instruments and optimizing the Corporation’s equity position.

The financial performance of each business segment is monitored using an internal profitability measurement system. This system utilizes policies that ensure the results reflect the economics for each segment compiled on a consistent basis. Line of business information is based on management accounting practices that support the current management structure and is not necessarily comparable with similar information for other financial institutions. This profitability measurement system uses internal management accounting policies that generally follow the policies described in Note 1. The Corporation’s funds transfer pricing system utilizes a matched maturity methodology that assigns a cost of funds to earning assets and a value to the liabilities of each business segment with an offset in the Treasury and Administration business segment. The provision for loan losses is charged to the consumer and commercial segments based on actual charge-offs with the balance to the Treasury and Administration segment. Operating expense is charged on a fully absorbed basis. Income tax expense is calculated based on the segment’s fully taxable equivalent income and the Corporation’s effective tax rate. Revenues from no individual customer exceeded 10% of consolidated total revenues.

The table below summarizes results by each business segment for the periods indicated.

Three Months Ended June 30,	2006									2005
(in thousands)	Commercial Banking		Consumer Banking		Treasury and Administration			Total		Commercial Banking		Consumer Banking		Treasury and Administration		Total
Net interest income	$	15,655	$	28,687	$	8,045		$	52,387	$	15,394	$	27,603	$	6,396	$	49,393
Provision for loan losses		512		278		34			824		902		249		1,071		2,222
Net interest income after provision for loan losses		15,143		28,409		8,011			51,563		14,492		27,354		5,325		47,171
Non-interest income		5,081		25,931		393			31,405		3,426		23,664		6,094		33,184
Non-interest expense		6,498		38,534		8,763			53,795		5,664		37,754		7,539		50,957
Income (loss) before income taxes		13,726		15,806		(359	)		29,173		12,254		13,264		3,880		29,398
Income tax expense (benefit)		4,305		4,958		(113	)		9,150		3,941		4,267		1,213		9,421
Net income (loss)	$	9,421	$	10,848	$	(246	)	$	20,023	$	8,313	$	8,997	$	2,667	$	19,977
Total assets	$	2,015,274	$	3,068,881	$	1,325,071		$	6,409,226	$	1,741,494	$	3,085,079	$	1,580,542	$	6,407,115
Six Months Ended June 30,	2006									2005
	Commercial Banking		Consumer Banking		Treasury and Administration			Total		Commercial Banking		Consumer Banking		Treasury and Administration		Total
Net interest income	$	30,240	$	56,065	$	17,330		$	103,635	$	30,241	$	53,808	$	14,060	$	98,109
Provision for loan losses		862		799		(519	)		1,142		2,418		197		1,182		3,797
Net interest income after provision for loan losses		29,378		55,266		17,849			102,493		27,823		53,611		12,878		94,312
Non-interest income		9,839		49,994		(203	)		59,630		6,976		44,891		4,361		56,228
Non-interest expense		12,928		76,865		16,793			106,586		11,370		72,892		14,169		98,431
Income (loss) before income taxes		26,289		28,395		853			55,537		23,429		25,610		3,070		52,109
Income tax expense (benefit)		8,168		8,823		265			17,256		7,366		8,051		965		16,382
Net income (loss)	$	18,121	$	19,572	$	588		$	38,281	$	16,063	$	17,559	$	2,105	$	35,727
Total assets	$	2,015,274	$	3,068,881	$	1,325,071		$	6,409,226	$	1,741,494	$	3,085,079	$	1,580,542	$	6,407,115

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Provident Bankshares Corporation (“the Corporation”), a Maryland corporation, is the holding company for Provident Bank (“Provident” or “the Bank”), a Maryland chartered stock commercial bank. At June 30, 2006, the Bank was the second largest independent commercial bank, in asset size, headquartered in Maryland, with $6.4 billion in assets. Provident is a regional bank serving Maryland and Virginia, with emphasis on the key urban centers within these states – the Baltimore, Washington, D.C. and Richmond metropolitan areas.

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Provident’s principal business is to acquire deposits from individuals and businesses and to use these deposits to fund loans to individuals and businesses. Provident focuses on providing its products and services to three segments of customers – individuals, small businesses and middle market businesses. The Corporation offers consumer and commercial banking products and services through the Consumer Banking group and the Commercial Banking group. Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company (“PIC”) and leases through Court Square Leasing and Provident Lease Corporation.

Provident’s mission is to exceed customer expectations by delivering superior service, products and banking convenience. Every employee’s commitment to serve the Bank’s customers in this fashion will assist in establishing Provident as the primary bank of choice of individuals, families, small businesses and middle market businesses throughout its chosen markets. To achieve this mission and to improve financial fundamentals, the strategic priorities of the organization are to:

Maximize Provident’s position as the right size bank in the marketplace.Provident’s position as the second largest bank headquartered in Maryland provides a unique opportunity as the “right size” bank in its market areas, or footprint. The Bank provides the service of a community bank combined with the convenience and wide array of products and services that a strong regional bank offers. In addition, the 63 in-store banking offices throughout its footprint reinforce its right size strategy through convenient locations, hours and a full line of products and services. Provident currently has 154 banking offices concentrated in the Baltimore-Washington, D.C. corridor and beyond to Richmond, Virginia. Of the 154 banking offices, 44% are located in the Greater Baltimore region and 56% are located in the Greater Washington, D.C. and Central Virginia regions, reflecting the successful development of the Bank into a highly competitive regional commercial bank. Provident also offers its customers 24-hour banking services through ATMs, telephone banking and the Internet. The Bank’s network of 254 ATMs enhances the banking office network by providing customers increased opportunities to access their funds. In addition, the Bank is a member of the MoneyPass network which provides more than 14,000 ATMs nationwide to our customers with free access.

Profitably grow and deepen customer relationships in all four key market segments: Commercial, Commercial Real Estate, Consumer and Small Business. Consumer banking continues to be an important component of the Bank’s strategic priorities. Consumer banking services include a broad array of consumer and small business loan, lease, deposit and investment products offered to consumer and commercial customers through Provident’s banking office network and ProvidentDirect, the Bank’s direct channel sales center. The small business segment is further supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients. Commercial banking is the other key component to the Corporation’s regional presence in its market area. The Commercial Banking group provides customized banking solutions to middle market commercial and real estate customers. The Bank has an experienced team of relationship managers with expertise in real estate and business lending to companies in various industries in the region. It also has a suite of cash management products managed by responsive account teams that deepen customer relationships through consistently priced deposit based services, responsive service and maintenance of frequent personal contact with each customer.

Consistently execute a higher-performance, customer relationship-focused sales culture.The Corporation’s transition to a customer relationship driven sales culture requires deepening relationships through cross-selling and the continuing emphasis on retention of valued customers. The Bank has segmented its customers to better understand and anticipate their financial needs and provide Provident’s sales force with a targeted approach to customers and prospects. The successful execution of this strategic priority will be centered on the right size bank commitment - providing the service of a community bank combined with the convenience and wide array of products and services that a strong regional bank offers.

Sustain a culture that attracts and retains employees who provide the differentiating “Provident Way” customer experience.Provident has always placed a high priority on its employees and has approached employee development and training with renewed emphasis. Employee development is viewed as a critical part of executing Provident’s strategic priority as the right size bank and transforming the Company’s sales culture with a focus on the employee’s development and approach with Provident’s customers.

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Expand delivery (branch and non-branch) within the footprint; supplement with acquisitions within pricing discipline. Provident continues to evaluate expansion opportunities within the regions that it serves. In addition, Provident will supplement growth opportunities with acquisitions if it is a strategic fit and is within the company’s pricing model.

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries for the periods indicated. This discussion and tabular presentations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and Notes as well as the other information herein.

The Condensed Consolidated Financial Statements of the Corporation are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis, and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of fair value and intangible assets associated with mergers, other than temporary impairment of investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, stock-based compensation, derivative financial instruments, recourse liabilities, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its Condensed Consolidated Financial Statements: allowance for loan losses, other than temporary impairment of investment securities, derivative financial instruments, goodwill and intangible assets, asset prepayment rates, and income taxes. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the notes to the unaudited Condensed Consolidated Financial Statements. It is at least reasonably possible that each of the Corporation’s estimates could change in the near term or that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could be material to the unaudited Condensed Consolidated Financial Statements.

Overview of Income and Expenses

Income

The Corporation has two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income – which is the income that the Corporation earns on its loans and investments—and interest expense—which is the interest that is paid on its deposits and borrowings.

The second principal source of pre-tax income is non-interest income—the revenue received from providing products and services. The majority of the non-interest income comes from service charges on deposit accounts. The Corporation also earns revenue from insurance commissions, mortgage banking fees and other fees and charges.

The Corporation recognizes gains or losses as a result of sales of investment securities or the disposition of loans, foreclosed property or fixed assets. These gains and losses are not a regular part of the Corporation’s income. In addition, the Corporation also recognizes gains or losses on its non-designated derivative financial instruments.

Expenses

The expenses the Corporation incurs in operating its business consist of salaries and employee benefits expense, occupancy expense, furniture and equipment expense, external processing fees, deposit insurance premiums, advertising expenses, and other miscellaneous expenses.

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Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, payroll taxes, and expenses for health care, retirement and other employee benefits.

Occupancy expense, which are fixed or variable costs associated with building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and cost of utilities.

Furniture and equipment and external processing include fees paid to third-party data processing services and expenses and depreciation charges related to office and banking equipment. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of related assets. Estimated lives are 2 to 40 years for building and lease hold improvements, and 2 to 15 years for furniture and equipment.

Other expenses include expenses for advertising, attorneys, accountants and consultants, fees paid to directors franchise taxes, charitable contributions, insurance, office supplies, postage, telephone, merger expense and other miscellaneous operating expenses.

FINANCIAL CONDITION

The financial condition of the Corporation reflects the continued improvement in financial fundamentals through the consistent execution of the Bank’s strategic priorities and the balance sheet transition towards growing loans and deposits in the Bank’s core business segments. Strong growth in customer based core portfolios (loans other than the Company’s originated and acquired residential mortgage loans) was financed by run-off in the Bank’s non-core or wholesale portfolio (originated and acquired residential mortgages). The expanded market presence experienced over the past few years has been successful in growing and deepening relationships across the Corporation’s key major markets of Greater Baltimore, Greater Washington and Central Virginia. The successful efforts have led to growth in average loans of $154.3 million, or 4.3%, and average deposits of $133.8 million, or 3.4%, over the second quarter of 2005. At June 30, 2006, total assets were $6.4 billion, which is consistent with the periods ended December 31, 2005 and June 30, 2005. Over the past 12 months, growth in internally generated loan portfolios has replaced a decline in non-core or wholesale loans (originated and acquired residential mortgages) and investment securities as the Corporation continues to execute its strategy of transitioning the balance sheet towards core assets and away from wholesale assets.

Lending

Total average loan balances increased to $3.7 billion in the second quarter of 2006, an increase of $154.3 million, or 4.3%, from the second quarter 2005 (“prior year quarter”). The following table summarizes the composition of the Bank’s average loans for the periods indicated.

	Three Months Ended June 30,					$ Variance			% Variance
(dollars in thousands)	2006			2005
Residential real estate:
Originated and acquired residential mortgage	$	403,284		$	603,975	$	(200,691	)	(33.2	)%
Home equity		946,382			772,558		173,824		22.5
Other consumer:
Marine		392,952			427,921		(34,969	)	(8.2	)
Other		28,090			34,830		(6,740	)	(19.4	)
Total consumer		1,770,708			1,839,284		(68,576	)	(3.7	)
Commercial real estate:
Commercial mortgage		461,554	��		478,074		(16,520	)	(3.5	)
Residential construction		508,328			287,238		221,090		77.0
Commercial construction		295,740			293,357		2,383		0.8
Commercial business		692,819			676,863		15,956		2.4
Total commercial		1,958,441			1,735,532		222,909		12.8
Total loans	$	3,729,149		$	3,574,816	$	154,333		4.3

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Strong loan growth in the Corporation’s core loan portfolios (loans other than the Company’s originated and acquired residential mortgage loans) more than replaced continued strategic reductions in non-core or wholesale portfolios (originated and acquired residential mortgages). The average loan balances of loans other than originated and acquired residential mortgage loans increased in the aggregate, $355.0 million, or 12.0%, over the same quarter in 2005. This increase was a result of the Corporation’s expanded presence and successful marketing efforts to grow its home equity and residential and commercial construction as well as the commercial business loan portfolios. As a result, total average loans increased by 4.3% and was mainly driven by an increase of $173.8 million in average home equity loans, $221.1 million in average residential construction loans and $16.0 million in average commercial business loans. These increases more than offset planned reductions in originated and acquired residential mortgage loans of $200.7 million.

The home equity loan suite of products has been a key component of the Bank’s strategy to deepen its consumer relationships. This marketing strategy resulted in the $173.8 million, or 22.5%, increase in home equity average balances, continuing the growth of $199.8 million, or 34.9%, that occurred in second quarter 2005. The production of direct consumer loans, primarily home equity loans and lines, are generated by the Bank’s retail banking offices, phone center and internet units. The strong growth in home equity lending was partially offset by a decline in marine and other consumer loans. Management has chosen to restrict marine lending loan growth due to low pricing margins in the industry.

Commercial banking is the other key component to the Corporation’s regional presence in its market area. Average total commercial loans increased $222.9 million, or 12.8%, compared to the 2005 quarter. Commercial business loans increased by $16.0 million while residential and commercial construction loans posted increases from prior year of $221.1 million and $2.4 million, respectively, reflecting strong regional demand for construction loans in the Bank’s markets. This growth has occurred within the Corporation’s market footprint and is a reflection of the commercial banking group’s ability to deepen historical lending relationships with seasoned borrowers in familiar markets. These expanded relationships and associated risks are managed through a strong level of loan administration and credit monitoring by an experienced lending staff. The result is a well-balanced mix of revenue sources between consumer and commercial loan products with $1.8 billion, or 47.5%, in consumer loans, and $1.9 billion, or 52.5%, in commercial loans. Geographically, average loan balances of $1.4 billion originated in the Greater Washington and Central Virginia regions represent 36.4% of total average loans in the second quarter of 2006.

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Asset Quality

The following table presents information with respect to non-performing assets and 90-day delinquencies as of the dates indicated.

(dollars in thousands)	June 30, 2006			December 31, 2005
Non-Performing Assets:
Originated and acquired residential mortgage	$	7,851		$	7,340
Home equity		145			243
Other consumer		133			315
Commercial mortgage		1,370			1,437
Commercial business		14,696			16,336
Total non-accrual loans		24,195			25,671
Total renegotiated loans		—			—
Total non-performing loans		24,195			25,671
Total other assets and real estate owned		2,177			1,787
Total non-performing assets	$	26,372		$	27,458
90-Day Delinquencies:
Originated and acquired residential mortgage	$	3,470		$	5,131
Home equity		306			251
Other consumer		1,293			1,069
Residential real estate construction		—			118
Commercial business		789			1,551
Total 90-day delinquencies	$	5,858		$	8,120
Asset Quality Ratios:
Non-performing loans to loans		0.64	%		0.69	%
Non-performing assets to loans		0.70	%		0.74	%
Allowance for loan losses to loans		1.19	%		1.24	%
Net charge-offs in quarter to average loans		0.09	%		0.09	%
Allowance for loan losses to non-performing loans		184.75	%		177.78	%

The asset quality within the Corporation’s loan portfolio continues to remain strong in the second quarter of 2006. Strong asset quality within the Corporation’s loan portfolio is a reflection of management’s credit policies and strategy of shifting the balance sheet to core loan portfolios. In addition, regional credit conditions remained favorable for the second quarter 2006. Non-performing assets were $26.4 million at June 30, 2006, a 4.0% decrease, or $1.1 million, from the level at December 31, 2005. The decrease in non-performing assets was due mainly to the $1.6 million decrease in commercial business loans, partially offset by a $901 thousand increase in non-performing originated and acquired mortgages and other real estate owned loans during the quarter. Non-performing commercial business loans include $843 thousand of loans that have U.S. government guarantees.

The level of non-performing assets to total loans was 0.70% at June 30, 2006 compared to 0.74% at December 31, 2005. The level of 90-day delinquent loans declined during the same period, decreasing $2.3 million, or 27.9%, to $5.9 million from the $8.1 million level at December 31, 2005 and $7.1 million at June 30, 2005. Overall, the asset quality ratios of the Corporation remain favorable, but no assurances can be given regarding the level of non-performing assets in the future.

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Allowance for Loan Losses

The Corporation maintains an allowance for loan losses (“the allowance”), which is intended to be management’s best estimate of probable inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous loan losses. The provisions for loan losses are charges to earnings to bring the total allowance to a level considered necessary by management.

The allowance is based on management’s continuing review and evaluation of the loan portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Corporation combines estimates of the allowances needed for loans analyzed individually and on a pooled basis. The allocated component of the allowance is supplemented by an unallocated component.

The portion of the allowance that is allocated to individual internally criticized and non-accrual loans is determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporation’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances that may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a risk rating based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan.

In addition to being used to categorize risk, the Bank’s internal ten-point risk rating system is used to determine the allocated allowance for the commercial portfolio. Reserve factors, based on the actual loss history for a 5-year period for criticized loans, are assigned. If the factor, based on loss history for classified credits is lower than the minimum established factor, the higher factor is applied. For loans with satisfactory risk profiles, the factors are based on the rating profile of the portfolio and the consequent historic losses of bonds with equivalent ratings.

For the consumer portfolios, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, historical rolling loss rates for homogenous pools of loans in these portfolios provide the basis for the allocated reserve. For any portfolio where the Bank lacks sufficient historic experience, industry loss rates are used. If recent history is not deemed to reflect the inherent losses existing within a portfolio, older historic loss rates during a period of similar economic or market conditions are used.

The Bank’s credit administration group adjusts the indicated loss rates based on qualitative factors. Factors that are considered in adjusting loss rates include risk characteristics, credit concentration trends and general economic conditions, including job growth and unemployment rates. For commercial and real estate portfolios, additional factors include the level and trend of watched and criticized credits within those portfolios; historic loss rates, commercial real estate vacancy, absorption and rental rates; and the number and volume of syndicated credits, construction loans, or other portfolio segments deemed to carry higher levels of risk. Upon completion of the qualitative adjustments, the overall allowance is allocated to the components of the portfolio based on the adjusted loss factors.

The unallocated component of the allowance exists to mitigate the imprecision inherent in management’s estimates of expected credit losses and includes its determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors that may not have been fully considered in the allocated allowance. The relationship of the unallocated component to the total allowance may fluctuate from period to period. Although management has allocated the majority of the allowance to specific loan categories, the evaluation of the allowance is considered in its entirety.

Lending management meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance. The Corporation has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its reviews to executive management and the Audit Committee of the Board of Directors. Such reviews also assist management in establishing the level of the allowance.

Management believes that it uses the relevant information available to make determinations about the allowance and that it has established its existing allowance in accordance with GAAP. If circumstances differ substantially from the

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assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.

The FDIC examines the Bank periodically and, accordingly, as part of this examination, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon their review, the regulators may from time to time require reserves in addition to those previously provided.

At June 30, 2006, the allowance was $44.7 million, or 1.19%, as a percentage of total loans outstanding, compared to an allowance at December 31, 2005 of $45.6 million, or 1.24%, as a percentage of total loans outstanding. The allowance coverage of 184.75% of non-performing loans at June 30, 2006 compared to 177.78% at December 31, 2005. Portfolio-wide net charge-offs represented 0.09% of average loans in second quarter 2006, compared to 0.14% in second quarter 2005 and 0.13% from the first quarter 2006.

Deposits

The following table summarizes the composition of the Corporation’s average deposit balances for the periods indicated.

	Three Months Ended June 30,				$ Variance			% Variance
(dollars in thousands)	2006		2005
Transaction accounts:
Noninterest-bearing	$	800,183	$	817,408	$	(17,225	)	(2.1	)%
Interest-bearing		579,131		578,274		857		0.1
Savings/money market:
Savings		683,347		760,314		(76,967	)	(10.1	)
Money market		619,840		596,023		23,817		4.0
Certificates of deposit:
Direct		919,265		788,218		131,047		16.6
Brokered		460,527		388,210		72,317		18.6
Total deposits	$	4,062,293	$	3,928,447	$	133,846		3.4
Deposits by source:
Consumer	$	2,717,879	$	2,717,827	$	52		0.0
Commercial		883,887		822,410		61,477		7.5
Brokered		460,527		388,210		72,317		18.6
Total deposits	$	4,062,293	$	3,928,447	$	133,846		3.4

Average deposits increased $133.8 million, or 3.4%, in the second quarter 2006 over the same quarter last year. Consumer deposits remained flat at $2.7 billion, while commercial deposits experienced growth of $61.5 million, or 7.5%. Increased competition with non-banks in the current rising rate environment is the main reason for consumer deposits remaining flat from the prior year quarter. The primary reason for the commercial deposit growth was the increase in certificates of deposit in the Greater Washington and Central Virginia regions. In addition, brokered deposits issued also increased from $388.2 million to $460.5 million as they provide a less expensive alternative to funding loan growth as compared to other borrowing.

Geographically, average customer deposits in the Greater Washington and Central Virginia regions represent 39.0% of total customer deposits. The Bank currently has 87 retail banking offices in this market, or 56% of total banking offices.

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Treasury Activities

The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate and liquidity risk, and optimizing capital utilization. In managing the investment portfolio to achieve its stated objective, the Corporation invests predominately in U.S. Treasury and Agency securities, mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), corporate bonds and municipal bonds.

At June 30, 2006, the investment portfolio totaled $1.9 billion, or 30% of total assets. The portfolio declined $160.0 million from June 30, 2005, reflecting management’s strategy to de-emphasize wholesale assets. Management also continued its strategy of reducing mortgage-backed securities (MBS) in favor of asset-backed securities (ABS) and municipal bonds, to increase the portfolio’s profitability, increase the floating rate portion of the portfolio, and better diversify risk. MBS were reduced from 63% to 47% of total investments over the past 12 months, while floating rate ABS, fixed rate ABS, and municipal bonds have increased to 32%, 5%, and 4.5%, respectively, of total investments. The ABS portfolio consists of Aaa, Aa and single A rated pooled trust preferred securities, and Aa and single A rated home equity securities. The municipal bond portfolio consists of geographically diversified Aaa rated securities.

Other debt securities primarily include investments in single issuer corporate bonds rated investment-grade by Moody’s or S&P, single or double ‘A’ rated home equity ABS, and U.S. Treasury, Agency, and municipal securities. Typically, management classifies securities as available for sale to maximize management flexibility, although securities may be purchased with the intention of holding to maturity.

The primary risk in the investment portfolio is duration risk. Duration measures the expected change in the market value of an investment for a 100 basis point (or 1%) change in interest rates. The higher an investment’s duration, the longer the time until its rate is reset to current market rates. The Bank’s risk tolerance, as measured by the duration of the investment portfolio, is typically between 2% and 3.5%. In the current economic environment, the duration is targeted for the middle of that range. Another risk in the investment portfolio is credit risk. At June 30, 2006, over 60% of the entire investment portfolio was rated AAA, 38% was investment grade below AAA, and 1% was rated below investment grade or was not rated.

Investment securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. The Corporation had a limited number of securities in a continuous loss position for 12 months or more at June 30, 2006. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, no other than temporary impairment was recorded at June 30, 2006.

Treasury borrowings totaled $1.75 billion on June 30, 2006. Borrowings rose $91 million from December 2005 to June 2006, to fund core loan growth. Comparing monthly average balances, June 2006 borrowings rose $152.2 million from December 2005, from $1.67 billion to $1.82 billion. Short-term borrowings rose $343.9 million while long-term borrowings were reduced by $197.4 million, as management took advantage of lagging rate increases in the Fed Funds market by increasing this segment of its borrowing portfolio. In addition, brokered CDs were increased by $5.4 million.

Provident’s funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding availability to meet current and future borrowing requirements, and to contribute to interest rate risk management goals through match-funding loan and investment activity. Management utilizes a variety of sources to raise borrowed funds at competitive rates, including federal funds purchased (“fed funds”), Federal Home Loan Bank (“FHLB”) borrowings, securities sold under repurchase agreements (“repos”), and brokered and jumbo certificates of deposit (“CDs”). FHLB borrowings and repos typically are borrowed at rates approximating the LIBOR rate for the equivalent term because they are secured with investments or high quality real estate loans. Fed funds, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate. Brokered CDs are generally added when market conditions permit issuance at rates favorable to other funding sources.

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The Corporation formed wholly owned statutory business trusts in 1998, 2000 and 2003. In 2004, the Corporation acquired three wholly owned statutory business trusts from Southern Financial as part of the merger. In all cases, the trusts issued trust preferred securities that were sold to outside third parties. The junior subordinated debentures issued by the Corporation to the trusts are presented net of unamortized issuance costs as long-term debt in the Condensed Consolidated Statements of Condition and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations. Any of the junior subordinated debentures are redeemable at any time in whole, but not in part, from the date of issuance on the occurrence of certain events. On July 15, 2005, the Corporation redeemed $5 million aggregate value of Junior Subordinated Debentures issued to Southern Financial Capital Trust I at an annual rate of 11%. There are no issuances callable in 2006.

Liquidity

An important component of the Bank’s asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales, borrowings and interest received. Management believes the Bank has sufficient liquidity to meet future funding needs.

The Bank’s chief source of liquidity is the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. The Bank’s primary sources for raising secured borrowings are the FHLB and securities broker/dealers. At June 30, 2006, $1.1 billion of secured borrowings were employed, with sufficient collateral available to immediately raise an additional $1.0 billion. An excess liquidity position of $591.3 million remains after covering $442.3 million of unsecured funds that mature in the next three months. Additionally, over $290.0 million of assets are maintained as collateral with the Federal Reserve that is available as a contingent funding source.

The Bank also has several sources of unsecured funding that it uses routinely. At June 30, 2006, the Bank possessed over $900.0 million of unsecured overnight borrowing capacity, of which $366.0 million was in use. The Bank also accesses the brokered CD market when the pricing of CDs is favorable to other secured or unsecured sources. Additionally, the Corporation has access to public and private debt markets, and most recently issued $71 million of trust preferred securities in December 2003.

As an alternative to raising secured funds, the Bank can raise liquidity through asset sales. At June 30, 2006, over $500.0 million of the Bank’s investment portfolio was immediately saleable at a market value equaling or exceeding its amortized cost basis. Additionally, over a 90-day time frame, a majority of the Bank’s $1.8 billion consumer loan portfolio is saleable under normal conditions.

A significant use of the Corporation’s liquidity is the dividends it pays to shareholders. The Corporation is a one-bank holding company that relies upon the Bank’s performance to generate capital growth through Bank earnings. A portion of the Bank’s earnings is passed to the Corporation in the form of cash dividends. As a commercial bank under the Maryland Financial Institution Law, the Bank may declare cash dividends from undivided profits or, with the prior approval of the Commissioner of Financial Regulation, out of paid-in capital in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes. These dividends paid to the holding company are utilized to pay dividends to stockholders, repurchase shares and pay interest on junior subordinated debentures. The Corporation and the Bank, in declaring and paying dividends, are also limited insofar as minimum capital requirements of regulatory authorities must be maintained. The Corporation and the Bank comply with such capital requirements. If the Corporation or the Bank were unable to comply with the minimum capital requirements, it could result in regulatory actions that could have a material impact on the Corporation.

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Contractual Obligations, Commitments and Off Balance Sheet Arrangements

The Corporation has various contractual obligations, such as long-term borrowings, that are recorded as liabilities in the Condensed Consolidated Financial Statements. Other items, such as certain minimum lease payments for the use of banking and operations offices under operating lease agreements, are not recognized as liabilities in the Condensed Consolidated Financial Statements, but are required to be disclosed. Each of these arrangements affects the Corporation’s determination of sufficient liquidity.

The following table summarizes significant contractual obligations at June 30, 2006 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings.

	Contractual Payments Due by Period
(in thousands)	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
Lease obligations	$	13,083	$	24,297	$	21,253	$	30,228	$	88,861
Long-term debt		320,122		373,131		27,510		139,721		860,484
Total	$	333,205	$	397,428	$	48,763	$	169,949	$	949,345

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and structure of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at June 30, 2006 were as follows:

(in thousands)	June 30, 2006
Commercial business and real estate	$	993,940
Consumer revolving credit		705,854
Residential mortgage credit		22,288
Performance standby letters of credit		132,853
Commercial letters of credit		1,350
Total loan commitments	$	1,856,285

Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Obligations also take the form of commitments to purchase loans. At June 30, 2006, the Corporation did not have any firm commitments to purchase loans.

Risk Management

The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, earnings and the market value of assets and liabilities are subject to fluctuations, which arise due to changes in the level and directions of interest rates. Management’s objective is to minimize the fluctuation in the net interest margin caused by changes in interest rates using cost-effective strategies and tools. The Bank manages several forms of interest rate risk, including asset/liability mismatch, basis risk, and prepayment risk.

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The Corporation purchases amortizing loan pools and investment securities in which the underlying assets are residential mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from borrowers’ elections to refinance the underlying mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments. The prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections. Basis risk exists as a result of having much of the Bank’s earning assets priced using either the Prime rate or the U.S. Treasury yield curve, while much of the liability portfolio, which finances earning assets, is priced using the CD yield curve or LIBOR yield curve. These different yield curves typically do not move in lock-step with one another.

Measuring and managing interest rate risk is a dynamic process that management performs continually to meet the objective of maintaining a stable net interest margin. This process relies chiefly on simulation modeling of shocks to the balance sheet under a variety of interest rate scenarios, including parallel and non-parallel rate shifts, such as the forward yield curves for both short and long term interest rates. The results of these shocks are measured in two forms: first, the impact on the net interest margin and earnings over one and two year time frames; and second, the impact on the market value of equity. In addition to measuring the basis risks and prepayment risks noted above, simulations also quantify the earnings impact of rate changes and the cost / benefit of hedging strategies.

The following table shows the anticipated effect on net interest income in parallel shift (up or down) interest rate scenarios. These shifts are assumed to begin on July 1, 2006 for the June 30, 2006 data and on January 1, 2006 for the December 31, 2005 data and evenly increase or decrease over a 6-month period. The effect on net interest income would be for the next twelve months. Given the interest environment in the periods presented, a 200 basis point drop in rate is unlikely and has not been shown.

The projected outcomes presented below are based on a balance sheet growth forecast and parallel shifts in interest rates, i.e. all interest rates moving by the same amount. Management models many non-parallel rate change scenarios as well, including several yield-curve flattening scenarios. The results of each scenario differ; however, the results below are an accurate indication of the magnitude and direction of the Corporation’s interest rate risk.

Interest Rate Scenario	At June 30, 2006 Projected Percentage Change in Net Interest Income		At December 31, 2005 Projected Percentage Change in Net Interest Income
-100 basis points	-4.10	%	-3.40	%
No change	—		—
+100 basis points	+1.40	%	+1.80	%
+200 basis points	+2.40	%	+3.20	%

The percentage changes displayed in the table above relate to the Corporation’s projected net interest income. Management’s intent is for derivative interest income to mitigate risk to the Corporation’s net interest income stemming from changes in interest rates. For comparison purposes, these projections include all interest earned on derivatives in net interest income. The analysis includes the interest income and expense relating to non-designated interest rate swaps that is classified in non-interest income as net cash settlement on swaps.

The isolated modeling environment, assuming no action by management, shows that the Corporation’s net interest income volatility is less than 4.2% under the assumed single direction scenarios. The Corporation’s one-year forward earnings are slightly asset sensitive, which will result in net interest income moving in the same direction as future interest rates. Management pays close attention to the risk of continued flattening of the yield curve. Short-term interest rates, such as the Fed Funds rate, have increased approximately 200 basis points over the past year while long-term rates have risen about 140 basis points. Further yield curve flattening is possible, either through further increases in short-term rates, further decreases in long-term rates, or both. Management routinely models several yield curve flattening scenarios as part of its interest rate risk management function, and this modeling discloses little risk under most yield curve flattening scenarios. Management is also focused on the potential for interest rates to begin falling in the near future, and is pursuing strategies to reduce the exposure to net interest margin from falling interest rates.

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Management employs the investment, borrowings, and derivatives portfolios in implementing the Bank’s interest rate strategy. As noted above, mitigating yield curve flattening risk has been a significant element of interest rate risk management. To protect the Bank from rising short-term interest rates, over $600 million of the investment portfolio reprices semiannually or more frequently. In the borrowings portfolio, over $240 million of funds reset their rates with long-term interest rates, such as the 10-year constant maturity swap rate, to protect the net interest margin from falling long-term interest rates. The interest expense associated with these borrowings declines when long-term interest rates decline. Additionally, $342 million of interest rate swaps were in force to reduce interest rate risk, and $140 million of interest rate caps were employed specifically to protect against rising interest rates in the future.

In addition to managing interest rate risk, which applies to both assets and liabilities, the Corporation must understand and manage risks specific to lending. Much of the fundamental lending business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. Each consumer and residential lending product has a generally predictable level of credit loss based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans with medium credit loss experience are primarily secured products such as auto and marine loans. Unsecured loan products such as personal revolving credit have the highest credit loss experience; therefore the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending varies significantly, as losses as a percentage of outstanding loans can shift widely from period to period and are particularly sensitive to changing economic conditions. Generally improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet debt service requirements. However, this improvement in operating cash flow is often at least partially offset by rising interest rates often seen in an improving economic environment. In addition, changing economic conditions often impact various business segments differently, giving rise to the need to manage industry concentrations within the loan portfolio. Further discussion relating to asset quality is presented in a “Financial Condition – Asset Quality.”

Other lending risks include liquidity risk and specific risk. The liquidity risk of the Corporation arises from its obligation to make payment in the event of a customer’s contractual default. The evaluation of specific risk is a basic function of underwriting and loan administration, involving analysis of the borrower’s ability to service debt as well as the value of pledged collateral. In addition to impacting individual lending decisions, this analysis may also determine the aggregate level of commitments the Corporation is willing to extend to an individual customer or a group of related customers. 

Capital Resources

Total stockholders’ equity was $624.1 million at June 30, 2006, a decrease of $6.4 million from December 31, 2005. The change in stockholders’ equity for the period was attributable to $38.3 million in earnings that was partially offset by dividends paid of $18.9 million. Net accumulated other comprehensive loss increased by $16.9 million during the period primarily due to the impact of rising interest rates on the market value of the debt securities portfolio. Capital was also increased by $7.6 million associated with the exercise of vested stock options and share-based payments and by $16.3 million from the repurchase of 461 thousand shares of the Corporation’s common stock at an average price of $35.44. The Corporation is authorized to repurchase an additional 777 thousand shares under its stock repurchase program.

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The Corporation is required to maintain minimum amounts and ratios of core capital to adjusted quarterly average assets (“leverage ratio”) and of tier 1 and total regulatory capital to risk-weighted assets. The actual regulatory capital ratios and required ratios for capital adequacy purposes under FIRREA and the ratios to be categorized as “well capitalized” under prompt corrective action regulations are summarized in the following table.

(dollars in thousands)	June 30, 2006			December 31, 2005
Total equity capital per consolidated financial statements	$	624,119		$	630,495
Qualifying trust preferred securities		129,000			129,000
Minimum pension liablity		(1,196	)		(1,196	)
Accumulated other comprehensive loss		34,215			17,283
Adjusted capital		786,138			775,582
Adjustments for tier 1 capital:
Goodwill and disallowed intangible assets		(264,902	)		(265,794	)
Total tier 1 capital		521,236			509,788
Adjustments for tier 2 capital:
Allowance for loan losses		44,700			45,639
Allowance for letter of credit losses		547			467
Total tier 2 capital adjustments		45,247			46,106
Total regulatory capital	$	566,483		$	555,894
Risk-weighted assets	$	4,727,590		$	4,645,900
Quarterly regulatory average assets		6,113,915			6,070,270
							Minimum Regulatory Requirements		To be “Well Capitalized”
Ratios:
Tier 1 leverage		8.53	%		8.40	%	4.00	%	5.00	%
Tier 1 capital to risk-weighted assets		11.03			10.97		4.00		6.00
Total regulatory capital to risk-weighted assets		11.98			11.97		8.00		10.00

As of June 30, 2006, the Corporation is considered “well capitalized” for regulatory purposes.

RESULTS OF OPERATIONS

For Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Financial Highlights

Provident reported net income of $20.0 million, or $0.60 per diluted share, in the quarter ended June 30, 2006 compared to $20.0 million and $0.60 per diluted share in second quarter 2005. However, net income for the second quarter of 2006 included a derivative valuation loss of $554 thousand while the prior year quarter contained a $3.9 million derivative valuation gain. These non-cash amounts represent the change in the value of certain derivatives that are used to mitigate the impact of changing interest rates. Changes in the value of these derivatives are required to be reflected in earnings. Excluding the change in the derivative valuations, the financial results of second quarter 2006 reflect the Company’s continued improvement in financial fundamentals through the consistent execution of the Bank’s strategic priorities and transition of the balance sheet. The Corporation’s key performance measurements such as return on assets, return on common equity and net interest margin were 1.26%, 12.32% and 3.74%, respectively, in the quarter ended June 30, 2006 compared to 1.25%, 12.84%, and 3.48%, respectively, compared to the prior year quarter. The financial results in the second quarter of 2006 reflect the Corporation’s continued commitment to produce positive core results by executing the basic strategies of broadening its presence and customer base in the Greater Washington and Central Virginia regions, growing commercial business in all markets, and enhancing core business results in all markets.

Solid loan growth of $355.0 million in the Corporation’s core business segments provided continued improvement in the quantity as well as quality of the Corporation’s earnings. This improvement was accomplished on a lower level of average earning assets, debt and a higher level of capital. Earnings for the current quarter include an increase of $3.0 million in net interest income, a $1.4 million decrease in provision for loan losses, a decrease in non-interest income of $1.8 million, an increase of $2.8 million in non-interest expense and a $271 thousand decrease in income tax expense, resulting in a slight increase of $46 thousand in net income from second quarter 2005.

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The financial results reflect the continued balance sheet transition toward growing loans and deposits in core business segments. An overview of the strategies is discussed on pages 22 and 23 of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Asset quality continues to remain strong, as non-performing assets to loans were 0.70% and charge-offs to average loans were 0.09% for the quarter.

Net Interest Income

The Corporation’s principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings. Interest income is presented on a tax-equivalent basis to recognize associated tax benefits in order to provide a basis for comparison of yields with taxable earning assets. The following table presents information regarding the average balance of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average balances, however, accrued interest income has been excluded from these loans. The tables on the following pages also analyze the reasons for the changes from year-to-year in the principal elements that comprise net interest income. Rate and volume variances presented for each component will not total the variances presented on totals of interest income and interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing liabilities.

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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income

Three Months Ended June 30, 2006 and 2005

	Three Months Ended June 30, 2006						Three Months Ended June 30, 2005
(dollars in thousands) (tax-equivalent basis)	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
Assets:
Interest-earning assets:
Originated and acquired residential	$	403,284	$	6,154	6.12	%	$	603,975	$	8,828	5.86	%
Home equity		946,382		15,872	6.73			772,558		10,578	5.49
Marine		392,952		5,153	5.26			427,921		5,410	5.07
Other consumer		28,090		568	8.11			34,830		752	8.66
Commercial mortgage		461,554		8,126	7.06			478,074		7,288	6.11
Residential construction		508,328		10,675	8.42			287,238		4,714	6.58
Commercial construction		295,740		5,685	7.71			293,357		4,424	6.05
Commercial business		692,819		12,559	7.27			676,863		10,721	6.35
Total loans		3,729,149		64,792	6.97			3,574,816		52,715	5.91
Loans held for sale		10,352		171	6.63			5,888		87	5.93
Short-term investments		8,219		111	5.42			9,952		64	2.58
Taxable investment securities		1,838,992		24,732	5.39			2,106,576		24,360	4.64
Tax-advantaged investment securities		83,800		1,258	6.02			12,564		245	7.82
Total investment securities		1,922,792		25,990	5.42			2,119,140		24,605	4.66
Total interest-earning assets		5,670,512		91,064	6.44			5,709,796		77,471	5.44
Less: allowance for loan losses		44,750						45,582
Cash and due from banks		123,662						142,561
Other assets		623,024						622,158
Total assets	$	6,372,448					$	6,428,933
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	579,131		647	0.45		$	578,274		414	0.29
Money market deposits		619,840		4,052	2.62			596,023		2,517	1.69
Savings deposits		683,347		588	0.35			760,314		546	0.29
Direct time deposits		919,265		8,324	3.63			788,218		4,905	2.50
Brokered time deposits		460,527		5,376	4.68			388,210		4,374	4.52
Short-term borrowings		878,716		10,034	4.58			754,225		4,819	2.56
Long-term debt		743,706		9,170	4.95			1,090,621		10,305	3.79
Total interest-bearing liabilities		4,884,532		38,191	3.14			4,955,885		27,880	2.26
Noninterest-bearing demand deposits		800,183						817,408
Other liabilities		35,794						31,775
Stockholders’ equity		651,939						623,865
Total liabilities and stockholders’ equity	$	6,372,448					$	6,428,933
Net interest-earning assets	$	785,980					$	753,911
Net interest income (tax-equivalent)				52,873						49,591
Less: tax-equivalent adjustment				486						198
Net interest income			$	52,387					$	49,393
Net yield on interest-earning assets					3.74	%					3.48	%

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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)

Three Months Ended June 30, 2006 and 2005

	2006 Quarter to 2005 Quarter Increase/(Decrease)										2006/2005 Income/Expense Variance Due to Change In
(dollars in thousands) (tax-equivalent basis)	Average Balance			% Change		Income/ Expense			% Change		Average Rate			Average Volume
Assets:
Interest-earning assets:
Originated and acquired residential	$	(200,691	)	(33.2	)%	$	(2,674	)	(30.3	)%	$	373		$	(3,047	)
Home equity		173,824		22.5			5,294		50.0			2,646			2,648
Marine		(34,969	)	(8.2	)		(257	)	(4.8	)		196			(453	)
Other consumer		(6,740	)	(19.4	)		(184	)	(24.5	)		(45	)		(139	)
Commercial mortgage		(16,520	)	(3.5	)		838		11.5			1,097			(259	)
Residential construction		221,090		77.0			5,961		126.5			1,588			4,373
Commercial construction		2,383		0.8			1,261		28.5			1,225			36
Commercial business		15,956		2.4			1,838		17.1			1,580			258
Total loans		154,333		4.3			12,077		22.9
Loans held for sale		4,464		75.8			84		96.6			11			73
Short-term investments		(1,733	)	(17.4	)		47		73.4			60			(13	)
Taxable investment securities		(267,584	)	(12.7	)		372		1.5			3,687			(3,315	)
Tax-advantaged investment securities		71,236		567.0			1,013		413.5			(69	)		1,082
Total investment securities		(196,348	)	(9.3	)		1,385		5.6
Total interest-earning assets		(39,284	)	(0.7	)		13,593		17.5			14,130			(537	)
Less: allowance for loan losses		(832	)	(1.8	)
Cash and due from banks		(18,899	)	(13.3	)
Other assets		866		0.1
Total assets	$	(56,485	)	(0.9	)
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	857		0.1			233		56.3			233			—
Money market deposits		23,817		4.0			1,535		61.0			1,431			104
Savings deposits		(76,967	)	(10.1	)		42		7.7			101			(59	)
Direct time deposits		131,047		16.6			3,419		69.7			2,504			915
Brokered time deposits		72,317		18.6			1,002		22.9			163			839
Short-term borrowings		124,491		16.5			5,215		108.2			4,311			904
Long-term debt		(346,915	)	(31.8	)		(1,135	)	(11.0	)		2,653			(3,788	)
Total interest-bearing liabilities		(71,353	)	(1.4	)		10,311		37.0			10,718			(407	)
Noninterest-bearing demand deposits		(17,225	)	(2.1	)
Other liabilities		4,019		12.6
Stockholders’ equity		28,074		4.5
Total liabilities and stockholders’ equity	$	(56,485	)	(0.9	)
Net interest-earning assets	$	32,069		4.3
Net interest income (tax-equivalent)							3,282		6.6		$	3,412		$	(130	)
Less: tax-equivalent adjustment							288		145.5
Net interest income						$	2,994		6.1

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The net interest income, on a tax-equivalent basis, increased 26 basis points to 3.74% and was driven by the continuation of the balance sheet transitioning and by the solid growth in core lending activities. Management’s strategy to replace lower net interest-earning assets with higher net interest-earning assets continues to be very successful. The Corporation has seen solid loan growth in its home equity and residential and commercial construction loan portfolios as well as commercial business since the same period a year ago. Growth in these portfolios was partially offset by planned declines in non-core investment securities and originated and acquired residential portfolios. Overall, average earning assets decreased $39.3 million to $5.7 billion which was mainly attributable to the $196.3 million reduction in investment securities that was partially offset by net loan growth of $154.3 million. The yields on investments and loans grew 76 and 106 basis points, respectively. The yield increase in the portfolio was mainly the result of the rising interest rate environment over the past year and the Corporation’s greater emphasis on variable rate securities. Interest-bearing liabilities decreased $71.4 million while the average rate paid increased 88 basis points. The increase in the average rate paid was primarily due to rising interest rates and the mix of interest-bearing liabilities. Interest expense was slightly impacted from a $17.2 million decrease in average noninterest-bearing demand deposit balances during the quarter.

The 6.44% yield on earning assets increased from 5.44% in the second quarter 2005 as a result of rising interest rates and its product mix of loans that more than offset the increased funding costs of 3.14%. Net interest income on a tax-equivalent basis was $52.9 million in second quarter 2006, compared to $49.6 million in second quarter 2005. Total interest income increased $13.6 million and total interest expense increased $10.3 million resulting in the growth in net interest income of $3.3 million on a tax-equivalent basis.

The Corporation has an ongoing risk management strategy of using derivative transactions to maintain a stable net interest margin. As a result of derivative transactions accounted for as hedges undertaken to mitigate the affect of interest rate risk on the Corporation, interest income increased by $24 thousand and interest expense increased by $135 thousand, for a total decrease of $111 thousand in net interest income relating to derivative transactions for the quarter ended June 30, 2006.

Future growth in net interest income will depend upon consumer and commercial loan demand, growth in deposits and the general level of interest rates.

Provision for Loan Losses

The Corporation’s continued emphasis on quality underwriting as well as aggressive management of charge-offs and potential problem loans resulted in a provision for loan losses of $824 thousand in second quarter 2006 compared to $2.2 million in second quarter 2005. Net charge-offs were $878 thousand, or 0.09% of average loans, in second quarter 2006 compared to $1.3 million, or 0.14% of average loans, in second quarter 2005. Originated and acquired residential loan net charge-offs as a percentage of average originated and acquired residential loans increased slightly, from .08% in second quarter 2005 to .09% in second quarter 2006.

Non-Interest Income

Non-interest income decreased to $31.4 million, or 5.4%, from $33.2 million in second quarter 2005. The decline in non-interest income was mainly attributable to the change in fair value of the Bank’s non-designated derivatives. The current quarter included derivative valuation losses of $554 thousand while last year, the prior year quarter had derivative valuation gains of $3.9 million. These non-cash amounts represent the change in the value of certain derivatives that are used to mitigate the impact of changing interest rates. In addition, the current quarter had a reduction of $503 thousand in net gains associated with the sale of loans, debt extinguishment and sale of securities. Excluding the total gains (losses) discussed above, non-interest income increased 11.2%, or $3.2 million.

Deposit fee income increased $2.2 million, or 10%, reflecting increases in both consumer and commercial deposit fees. Net cash settlement on swaps, representing interest income and expense on non-designated interest rate swaps, decreased $836 thousand from second quarter 2005 as a result of rising short-term interest rates and the reduction in the amount of non-designated interest rate swaps. Provident’s non-designated interest rate swaps are receive fixed/pay LIBOR positions. LIBOR rates have increased approximately 200 basis points from second quarter 2005 to second quarter 2006. Other non-interest income also benefited from increases in commissions and fees of $356 thousand, lease income of $164 thousand and income associated with a non-recurring bank owned life insurance death benefit of $1.3 million. These

38

increases in non-interest income were offset by lower mortgage banking fees of $116 thousand. Net gains were $203 thousand in second quarter 2006, compared to net gains of $706 thousand in second quarter 2005. Second quarter 2006 included investment/borrowing transactions that were focused on reducing fixed rate mortgage-backed securities to reduce interest rate risk. These transactions generated net gains of $171 thousand. The second quarter also included net gains of $142 thousand primarily from the sale mortgage loans. These gains were partially offset by losses of $208 thousand from the extinguishment of $18 million of debt in the current quarter. The second quarter 2005 included investment/borrowing transactions that were focused on reducing fixed rate mortgage-backed securities to reduce interest rate risk that generated net losses of $659 thousand. These losses were more than offset by a $1.4 million gain realized from the liquidation of an equity investment held by the Corporation that was acquired in the Southern Financial acquisition in 2004. Net derivative losses on swaps were $554 thousand in the second quarter 2006, down $4.5 million from a net derivative gain of $3.9 million in the 2005 second quarter. This decrease resulted mainly from the decline in the notional amount of non-designated interest rate swaps the Corporation had in place during the second quarter 2006 compared to the same quarter a year ago, combined with the impact of rising interest rates on the value of non-designated interest rate swaps.

Non-Interest Expense

Non-interest expense increased by $2.8 million, or 5.6%. Salaries and employee benefits increased $1.4 million, or 5.6%. This increase is mainly attributable to increased labor costs of $856 thousand from increased staffing in the branch network and operations support along with additional staffing required to meet regulatory compliance, as well as an increase of $349 thousand in costs associated with incentive and commission programs due to higher levels of production in both consumer and commercial lending for the three months ending June 30, 2006 as compared to the same period in 2005. Salaries and employee benefits expense also included an increase in health care costs of $227 thousand, pension expense of $159 thousand, 401k plan related expenses of $97 thousand and an increase in compensation expense of $130 thousand relating to the issuance of restricted stock. In addition, stock option expense declined by $408 thousand mainly due to a mutual separation agreement with an employee who departed the Company in the second quarter 2005. Occupancy expense declined $630 thousand over the prior year quarter due to a one-time $1.0 million adjustment to account for escalating lease payments in the second quarter of 2005. This one time adjustment was offset by higher rent expense relating to the increased branch network. Non-interest expense also includes an increase in marketing costs of $870 thousand relating to brand awareness. In addition, other non-interest expense also includes a settled litigation with a former employee for alleged breach of an executed employment contract for $1.3 million (see Note 11 to the Condensed Consolidated Financial Statements for discussion).

Income Taxes

The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term. The valuation allowance was approximately $2.5 million at June 30, 2006 versus $1.9 million at June 30, 2005. The valuation allowance relates to additional state operating losses that are unlikely to be realized in the foreseeable future.

The Corporation recorded income tax expense of $9.2 million based on pre-tax income of $29.2 million, representing an effective tax rate of 31.4% in second quarter 2006. In second quarter 2005, the Corporation recorded a tax expense of $9.4 million on pre-tax income of $29.4 million, an effective tax rate of 32.0%. The increase in tax exempt investments in the second quarter of 2006 compared to the same period a year ago was the significant reason for the decline in the effective tax rate.

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For Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Financial Highlights

The Corporation recorded net income of $38.3 million, or $1.15 per diluted share, for the six months ended June 30, 2006, compared to $35.7 million, or $1.06 per diluted share for the six months ended June 30, 2005. The Corporation showed improvement in its key performance measurements over six months 2005, as return on assets, return on common equity and net interest margin were 1.21%, 11.87% and 3.73%, respectively, for the six months ended June 30, 2006 compared to 1.12%, 11.60%, and 3.47%, respectively, over the prior 2005 period. Year-to-date pre-tax results included a one time legal settlement of $1.3 million and a non-recurring Bank owned life insurance death benefit of $1.3 million. The prior year includes a one time $1 million pre-tax cumulative impact relating to a modification of the Corporation’s accounting practices related to leased facilities.

Net Interest Income

Tax equivalent net interest income for the six months of 2006 increased $6.1 million to $104.6 million compared to 2005, a 6.2% increase from period to period. Interest income increased $24.6 million and interest expense increased $18.6 million. Interest-earning assets declined $62.7 million as a result of the Corporation’s balance sheet transitioning. The increase in the yield in earning assets of 94 basis points more than offset the impact from the $101.3 million decline in interest-bearing liabilities whose rate increased 82 basis points. This resulted in the net yield on earning assets increasing to 3.73% in 2006 from 3.47% in 2005.

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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income

Six Months Ended June 30, 2006 and 2005

	Six Months Ended June 30, 2006						Six Months Ended June 30, 2005
(dollars in thousands) (tax-equivalent basis)	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
Assets:
Interest-earning assets:
Originated and acquired residential	$	421,298	$	13,037	6.24	%	$	621,811	$	18,313	5.94	%
Home equity		930,371		30,150	6.53			748,772		19,930	5.37
Marine		399,830		10,388	5.24			430,392		10,993	5.15
Other consumer		29,260		1,159	7.99			36,531		1,523	8.41
Commercial mortgage		468,416		16,043	6.91			481,265		14,460	6.06
Residential construction		478,228		19,684	8.30			273,664		8,600	6.34
Commercial construction		302,395		11,146	7.43			287,563		8,338	5.85
Commercial business		685,124		24,345	7.17			677,519		21,250	6.32
Total loans		3,714,922		125,952	6.84			3,557,517		103,407	5.86
Loans held for sale		8,923		297	6.71			5,990		175	5.89
Short-term investments		8,346		190	4.59			9,315		107	2.32
Taxable investment securities		1,844,055		48,684	5.32			2,131,641		48,681	4.61
Tax-advantaged investment securities		78,283		2,363	6.09			12,778		476	7.51
Total investment securities		1,922,338		51,047	5.35			2,144,419		49,157	4.62
Total interest-earning assets		5,654,529		177,486	6.33			5,717,241		152,846	5.39
Less: allowance for loan losses		45,071						45,815
Cash and due from banks		122,570						135,202
Other assets		623,121						624,313
Total assets	$	6,355,149					$	6,430,941
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	574,188		1,316	0.46		$	552,694		718	0.26
Money market deposits		616,983		7,687	2.51			564,773		4,427	1.58
Savings deposits		687,657		1,140	0.33			754,728		1,086	0.29
Direct time deposits		908,948		15,474	3.43			791,884		9,314	2.37
Brokered time deposits		454,506		10,436	4.63			377,990		8,539	4.56
Short-term borrowings		857,128		18,582	4.37			795,854		9,292	2.35
Long-term debt		774,508		18,292	4.76			1,137,313		20,975	3.72
Total interest-bearing liabilities		4,873,918		72,927	3.02			4,975,236		54,351	2.20
Noninterest-bearing demand deposits		795,923						800,634
Other liabilities		34,691						33,740
Stockholders’ equity		650,617						621,331
Total liabilities and stockholders’ equity	$	6,355,149					$	6,430,941
Net interest-earning assets	$	780,611					$	742,005
Net interest income (tax-equivalent)				104,559						98,495
Less: tax-equivalent adjustment				924						386
Net interest income			$	103,635					$	98,109
Net yield on interest-earning assets					3.73	%					3.47	%

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Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)

Six Months Ended June 30, 2006 and 2005

	YTD 2006 to YTD 2005 Increase/(Decrease)										2006/2005 Income/Expense Variance Due to Change In
(dollars in thousands) (tax-equivalent basis)	Average Balance			% Change		Income/ Expense			% Change		Average Rate			Average Volume
Assets:
Interest-earning assets:
Originated and acquired residential	$	(200,513	)	(32.2	)%	$	(5,276	)	(28.8	)%	$	888		$	(6,164	)
Home equity		181,599		24.3			10,220		51.3			4,832			5,388
Marine		(30,562	)	(7.1	)		(605	)	(5.5	)		186			(791	)
Other consumer		(7,271	)	(19.9	)		(364	)	(23.9	)		(73	)		(291	)
Commercial mortgage		(12,849	)	(2.7	)		1,583		10.9			1,978			(395	)
Residential construction		204,564		74.8			11,084		128.9			3,247			7,837
Commercial construction		14,832		5.2			2,808		33.7			2,359			449
Commercial business		7,605		1.1			3,095		14.6			2,854			241
Total loans		157,405		4.4			22,545		21.8
Loans held for sale		2,933		49.0			122		69.7			27			95
Short-term investments		(969	)	(10.4	)		83		77.6			95			(12	)
Taxable investment securities		(287,586	)	(13.5	)		3		0.0			7,046			(7,043	)
Tax-advantaged investment securities		65,505		512.6			1,887		396.4			(107	)		1,994
Total investment securities		(222,081	)	(10.4	)		1,890		3.8
Total interest-earning assets		(62,712	)	(1.1	)		24,640		16.1			26,334			(1,694	)
Less: allowance for loan losses		(744	)	(1.6	)
Cash and due from banks		(12,632	)	(9.3	)
Other assets		(1,192	)	(0.2	)
Total assets	$	(75,792	)	(1.2	)
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	21,494		3.9			598		83.3			569			29
Money market deposits		52,210		9.2			3,260		73.6			2,818			442
Savings deposits		(67,071	)	(8.9	)		54		5.0			156			(102	)
Direct time deposits		117,064		14.8			6,160		66.1			4,630			1,530
Brokered time deposits		76,516		20.2			1,897		22.2			142			1,755
Short-term borrowings		61,274		7.7			9,290		100.0			8,524			766
Long-term debt		(362,805	)	(31.9	)		(2,683	)	(12.8	)		5,007			(7,690	)
Total interest-bearing liabilities		(101,318	)	(2.0	)		18,576		34.2			19,704			(1,128	)
Noninterest-bearing demand deposits		(4,711	)	(0.6	)
Other liabilities		951		2.8
Stockholders’ equity		29,286		4.7
Total liabilities and stockholders’ equity	$	(75,792	)	(1.2	)
Net interest-earning assets	$	38,606		5.2
Net interest income (tax-equivalent)							6,064		6.2		$	6,630		$	(566	)
Less: tax-equivalent adjustment							538		139.4
Net interest income						$	5,526		5.6

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Provision for Loan Losses

The provision for loan losses for the first six months of 2006 was $1.1 million compared to $3.8 million for the six months of 2005 as a result of lower net charge offs and strong asset quality. Net charge-offs were $2.1 million, or 0.11% of average loans, in the first six months of 2006 compared to $3.3 million, or 0.19% of average loans, for the six months of 2005.

Non-Interest Income

Total non-interest income increased to $59.6 million for the six months ended June 30, 2006 from $56.2 million for the six months ended June 30, 2005. Deposit fee income increased $4.9 million, or 11.9%, reflecting increases mainly in consumer deposit fees. Net cash settlement on swaps, representing interest income and expense on non-designated interest rate swaps, decreased $2.1 million from six months ending June 30, 2005, as a result of rising short-term interest rates and the decline in amount of non-designated interest rate swaps. Provident’s non-designated interest rate swaps are receive fixed/pay LIBOR positions. Non-interest income benefited from increases in commissions and fees of $754 thousand and income associated with a non-recurring bank owned life insurance death benefit of $1.3 million. Net gains were $743 thousand for the six months ended June 30, 2006, compared to net losses of $70 thousand for the six months ended June 30, 2005. The six months ended June 30, 2005 included a $1.4 million gain from the liquidation of an equity investment held by the Corporation, acquired from a merger in 2004. Derivative gains (losses) on swaps declined $1.3 million, from a net gain of $101 thousand for the six months ending June 30, 2005 to a net loss of $1.2 million for the six months ending June 30, 2006. This decrease resulted from the decline in the notional amount of interest rate swaps the Corporation had in place during the six months 2006 and the impact from the rising rate environment.

Non-Interest Expense

Non-interest expense increased by $8.2 million, or 8.3%. Salaries and employee benefits had the largest change, rising $6.4 million, or 13.2%. This increase is mainly attributable to increased labor costs of $2.3 million from increased staffing in the branch network and operations support along with additional internal staffing required to meet regulatory compliance, as well as an increase of $782 thousand in costs associated with incentive and commission programs due to higher levels of production in both consumer and commercial lending. Salaries and employee benefits expense also included an increase in health care costs of $796 thousand, employment taxes of $281 thousand, the Corporation’s 401k plan of $284 thousand and stock compensation expense of $194 thousand relating to restricted stock. In addition, stock option expense declined as a result of a payment made to a former employee who departed the Company in the second quarter 2005. In addition, the six months ending June 30, 2005 included a reduction of $1.6 million relating to the termination of the Corporation’s post-retirement benefits plan. Occupancy and furniture and equipment expense increased $519 thousand reflecting the increased branch network, increased lease equipment depreciation expense associated with the leasing company’s operating leases and increased depreciation on furniture and equipment. Occupancy and facilities and equipment for the six months ended June 30, 2005 includes a one-time $1 million adjustment to account for escalating lease payments. Non-interest expense also includes a $803 thousand reduction in costs related to legal fees and regulatory compliance obligations. In the first six months of 2006, fewer hours were incurred relating to compliance with Sarbanes-Oxley Act of 2002.

Income Taxes

The Corporation recorded income tax expense of $17.3 million in the first six months of 2006 based on pre-tax income of $55.5 million, a 31.1% effective tax rate, as compared to pre-tax income of $52.1 million and an effective tax rate of 31.4% for 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding market risk at December 31, 2005, see “Interest Sensitivity Management” and Note 15 to the Consolidated Financial Statements in the Corporation’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2006. The market risk of the Corporation has not experienced any material changes as of June 30, 2006 from December 31, 2005. Additionally, refer to Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional quantitative and qualitative discussions about market risk at June 30, 2006.

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Item 4. Controls and Procedures

The Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporation’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Corporation’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Corporation’s internal control over financial reporting occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation is involved in various legal actions that arise in the ordinary course of its business. In May 2006, the Corporation settled litigation with a former employee for alleged breach of an executed employment contract for $1.3 million. This expense is included in other non-interest expense in the Condensed Consolidated Statements of Income. All other active lawsuits entail amounts which management believes, in the aggregate, are immaterial to the financial condition and the results of operations of the Corporation. All other active lawsuits entail amounts which management believes, in the aggregate, are immaterial to the financial condition and the results of operations of the Corporation.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Corporation’s business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that the Corporation faces. Additional risks and uncertainties not currently known to the Corporation or that the Corporation currently deems to be immaterial also may materially adversely affect the Corporation’s business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During 1998, the Corporation initiated a stock repurchase program for its outstanding stock. Under this plan the Corporation approved the repurchase of specific additional amounts of shares without any specific expiration date. As the Corporation fulfilled each specified repurchase amount, additional amounts were approved. On June 17, 2005, the Corporation approved an additional stock repurchase of up to 1.3 million shares from time to time subject to market conditions. Currently, the maximum number of shares remaining to be purchased under this plan is 777,189. All shares have been repurchased pursuant to the publicly announced plan. The repurchase plan will continue until it is completed or terminated by the Board of Directors. No plans expired during the three months ended June 30, 2006. The Corporation currently has no plan to terminate the stock repurchase plan prior to its expiration.

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The following table provides certain information with regard to shares repurchased by the Corporation in the second quarter of 2006.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased Under Plan	Maximum Number of Shares Remaining to be Purchased Under Plan
April 1 - April 30	151,500	$	35.06	151,500	937,189
May 1 - May 31	110,000		34.89	110,000	827,189
June 1 - June 30	50,000		36.44	50,000	777,189
Total	311,500	$	35.22	311,500	777,189

Item 3. Defaults Upon Senior Securities – None

Item 4. Submission of Matters to a Vote of Security Holders

(a) The Company held its Annual Meeting of Shareholders on May 17, 2006. Proxies were solicited with respect to such meeting under regulation 14A of the Securities and Exchange Act of 1934, as amended, pursuant to proxy materials dated April 10, 2006. Of the shares eligible to vote at the annual meeting, 33,033,602 were represented in person or by proxy.

(b) There was no solicitation in opposition to the Board nominees for directors and all of such nominees were elected as follows:

Director	No. of Votes For	%	No. of Votes Withheld	%	Broker Non-Votes	%
Pierce B. Dunn	28,953,496	95.5	1,366,658	4.5	0	0.0
Mark K. Joseph	28,951,031	95.5	1,369,123	4.5	0	0.0
Peter M. Martin	27,129,581	89.5	3,190,573	10.5	0	0.0
Pamela J. Mazza	29,712,022	98.0	608,132	2.0	0	0.0
Sheila K. Riggs	29,370,041	96.9	950,113	3.1	0	0.0
Kevin G. Byrnes	29,244,654	96.5	1,075,500	3.5	0	0.0
Donald E. Wilson	29,350,028	96.8	970,126	3.2	0	0.0

(c) Additional proposal submitted for a vote, with the following result:

Proposal	No. of Votes For	No. of Votes Against	No. of Votes Abstaining	Broker Non-Votes
Ratification of the appointment of KPMG LLP as independent registered public accounting firm for the fiscal year ending December 31, 2006	29,716,759	559,602	43,793	—

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Item 5. Other Information –

The following disclosure would otherwise have been filed on Form 8-K under the heading “Item 1.01. Entry into a Material Definitive Agreement:”

On April 25, 2006 and in connection with his retirement as an officer of Provident Bank effective May 1, 2006, Enos K. Fry entered into a Consulting Agreement (the “Agreement”) with Provident Bank pursuant to which Mr. Fry will provide business development activities for approximately 1,000 hours per year. In exchange for his services, Mr. Fry will be paid $115,000 on an annual basis. The term of the Agreement is for twelve months and may be renewed on an annual basis. The Agreement may be terminated at any time by Provident Bank or Mr. Fry. Mr. Fry’s post retirement benefits will remain unchanged.

The following disclosure would otherwise have been filed on Form 8-K under the heading “Item 1.02. Termination of a Material Definitive Agreement:”

On April 25, 2006 and as a result of the retirement of Mr. Fry as an officer of Provident Bank effective May 1, 2006, Mr. Fry’s Change in Control Agreement (the “CIC Agreement”) with Provident Bank lapsed. The CIC Agreement provided that if involuntary termination or, under certain circumstances, voluntary termination, followed a change in control of the Corporation or Provident Bank, Mr. Fry would have been entitled to receive a severance payment equal to three times his average annual compensation for the five most recent taxable years preceding termination. Under the CIC Agreement, the Corporation or Provident Bank also would have been required to continue to pay for life, health and disability coverage for 36 months following termination.

Item 6. Exhibits

The exhibits and financial statements filed as a part of this report are as follows:

(2.0)	Agreement and Plan of Reorganization between Provident Bankshares Corporation and Southern Financial Bancorp, Inc. (1)
(3.1)	Articles of Incorporation of Provident Bankshares Corporation (2)
(3.2)	Articles of Amendment to the Articles of Incorporation of Provident Bankshares Corporation (2)
(3.3)	Fifth Amended and Restated By-Laws of Provident Bankshares Corporation (3)
(10.1)	Consulting Agreement for Enos K. Fry
(11.0)	Statement re: Computation of Per Share Earnings (4)
(31.1)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(31.2)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(32.1)	Section 1350 Certification of Chief Executive Officer
(32.2)	Section 1350 Certification of Chief Financial Officer

(1) Incorporated by reference from Registrant’s Form 8-K (File No. 0-16421) filed with the Commission on November 4, 2003.

(2) Incorporated by reference from Registrant’s Registration Statement on Form S-8 (File No. 33-58881) filed with the Commission on July 10, 1998.

(3) Incorporated by reference from Registrant’s Annual Report on Form 10-K (File No. 0-16421) for the year ended December 31, 2005, filed with the Commission on March 16, 2006.

(4) Included in Note 13 to the Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	Principal Executive Officer:
August 9, 2006	By	/s/ GARY N. GEISEL
		Gary N. Geisel Chairman of the Board and Chief Executive Officer
	Principal Financial Officer:
August 9, 2006	By	/s/ DENNIS A. STARLIPER
		Dennis A. Starliper Executive Vice President and Chief Financial Officer

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EXHIBIT	DESCRIPTION
10.1	Consulting Agreement between Provident Bank and Enos K. Fry
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

48