1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD
COMMISSION FILE NUMBER 0-16421
PROVIDENT BANKSHARES CORPORATION
-------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1518642
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
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(Address of Principal Executive Offices)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Report)
(410) 277-7000
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 26,475,393 shares outstanding at
November 1, 2000.
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PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition - Unaudited
September 30, 2000 and 1999 and December 31, 1999 3
Consolidated Statement of Income - Unaudited
Three and nine month periods ended September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows - Unaudited
Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION 14
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 15
EXHIBIT INDEX 16
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
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PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
September 30, December 31, September 30,
(DOLLARS IN THOUSANDS) 2000 1999 1999
==================================================================================================================================
ASSETS
Cash and Due From Banks $ 80,013 $ 90,840 $ 76,211
Short-Term Investments 17,843 1,759 1,319
Mortgage Loans Held for Sale 18,392 30,535 67,877
Securities Available for Sale 2,027,827 1,671,507 1,323,419
Loans:
Consumer 2,094,636 2,204,943 2,423,814
Commercial Business 351,015 363,059 392,311
Real Estate -- Construction 233,981 151,875 134,745
Real Estate -- Mortgage 700,656 464,242 388,861
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TOTAL LOANS 3,380,288 3,184,119 3,339,731
Less: Allowance for Loan Losses 40,396 39,780 40,105
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Net Loans 3,339,892 3,144,339 3,299,626
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Premises and Equipment, Net 45,431 44,277 41,570
Accrued Interest Receivable 52,097 46,507 44,954
Other Assets 117,773 64,713 59,366
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Total Assets $ 5,699,268 $ 5,094,477 $ 4,914,342
==================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 314,717 $ 264,252 $ 255,562
Interest-Bearing 3,702,679 3,544,276 3,400,753
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Total Deposits 4,017,396 3,808,528 3,656,315
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Borrowings 1,264,245 928,441 896,960
Other Liabilities 43,226 43,747 38,884
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Total Liabilities 5,324,867 4,780,716 4,592,159
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Corporation-Obligated Mandatorily Redeemable Capital Securities 67,951 39,162 39,155
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STOCKHOLDERS' EQUITY
Preferred Stock (Par Value $.01) Authorized 1,000 Shares, Issued 899 Shares - - -
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 29,649,881, 26,225,752 and 26,146,114 Shares; at September 30,
2000, December 31, 1999 and September 30, 1999, respectively 29,650 26,226 26,146
Capital Surplus 251,234 203,364 202,347
Retained Earnings 101,788 102,587 95,141
Net Accumulated Other Comprehensive Income (33,295) (44,323) (28,637)
Treasury Stock at Cost - 2,591,797, 693,866, and 626,266 Shares at
September 30, 2000, December 31, 1999 and September 30, 1999, respectively (42,927) (13,255) (11,969)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 306,450 274,599 283,028
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Total Liabilities and Stockholders' Equity $ 5,699,268 $ 5,094,477 $ 4,914,342
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These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
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(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
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INTEREST INCOME
Interest and Fees on Loans $ 74,056 $ 67,135 $ 212,496 $ 191,869
Interest on Securities 32,814 22,225 93,090 63,626
Tax-Advantaged Interest 523 582 1,556 1,747
Interest on Short-Term Investments 90 20 182 80
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TOTAL INTEREST INCOME 107,483 89,962 307,324 257,322
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INTEREST EXPENSE
Interest on Deposits 46,546 38,694 131,714 109,292
Interest on Borrowings 20,605 13,477 55,305 40,075
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TOTAL INTEREST EXPENSE 67,151 52,171 187,019 149,367
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NET INTEREST INCOME 40,332 37,791 120,305 107,955
Less: Provision for Loan Losses 3,285 3,215 20,620 7,935
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 37,047 34,576 99,685 100,020
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 11,275 8,982 30,628 24,928
Mortgage Banking Activities 1,042 1,639 2,873 8,273
Commissions and Fees 1,069 1,269 3,748 4,133
Net Securities Gains - - 7,858 312
Other Non-Interest Income 3,762 3,561 10,789 9,133
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TOTAL NON-INTEREST INCOME 17,148 15,451 55,896 46,779
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 17,456 16,936 52,759 50,134
Occupancy Expense, Net 3,213 2,836 9,547 8,384
Furniture and Equipment Expense 2,534 2,371 7,476 6,589
External Processing Fees 4,095 3,763 12,152 11,192
Capital Securities Expense 1,537 774 4,008 2,445
Other Non-Interest Expense 8,460 6,824 23,328 20,005
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TOTAL NON-INTEREST EXPENSE 37,295 33,504 109,270 98,749
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INCOME BEFORE INCOME TAXES 16,900 16,523 46,311 48,050
Income Tax Expense 5,545 5,218 14,846 15,430
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INCOME BEFORE EXTRAORDINARY ITEM 11,355 11,305 31,465 32,620
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 770 -
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NET INCOME $ 11,355 $ 11,305 $ 32,235 $ 32,620
====================================================================================================================================
BASIC EARNINGS PER SHARE
Income Before Extraordinary Item $ 0.44 $ 0.42 $ 1.21 $ 1.22
Net Income 0.44 0.42 1.23 1.22
====================================================================================================================================
DILUTED EARNINGS PER SHARE
Income Before Extraordinary Item $ 0.43 $ 0.41 $ 1.18 $ 1.18
Net Income 0.43 0.41 1.20 1.18
====================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
(IN THOUSANDS)
Nine Months Ended September 30, 2000 1999
==========================================================================================================================
OPERATING ACTIVITIES
Net Income $ 32,235 $ 32,620
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 16,904 24,715
Provision for Loan Losses 20,620 7,935
Provision for Deferred Income Tax 7,201 2,018
Realized Net Securities Gains (7,858) (312)
Loans Originated or Acquired and Held for Sale (130,922) (499,513)
Proceeds from Sales of Loans Held for Sale 143,985 660,783
Gain on Sales of Loans Held for Sale (920) (4,440)
Other Operating Activities (9,640) (175)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 39,370 191,011
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NET CASH PROVIDED BY OPERATING ACTIVITIES 71,605 223,631
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INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 159,992 161,081
Proceeds on Sales of Securities Available for Sale 80,429 22,820
Purchases of Securities Available for Sale (191,011) (368,810)
Loan Originations and Purchases Less Principal Collections (368,032) (270,268)
Purchases of Bank Owned Life Insurance (50,799) -
Proceeds from Business Acquisition 2,451 -
Purchases of Premises and Equipment (5,913) (6,879)
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NET CASH USED BY INVESTING ACTIVITIES (372,883) (462,056)
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FINANCING ACTIVITIES
Net Increase in Deposits 35,438 236,758
Net Increase in Short-Term Borrowings 222,237 88,864
Proceeds from Long-Term Debt 309,500 16,000
Payments and Maturities of Long-Term Debt (249,306) (88,506)
Proceeds from Issuance of Capital Securities 30,000 -
Issuance of Stock 1,285 1,616
Purchase of Treasury Stock (29,672) (2,192)
Cash Dividends on Common Stock (12,947) (11,148)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 306,535 241,392
- --------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 5,257 2,967
Cash and Cash Equivalents at Beginning of Year 92,599 74,563
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 97,856 $ 77,530
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES
- --------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 137,172 $ 100,838
Income Taxes Paid 7,617 7,616
Stock Dividend 20,087 29,827
Stock Issued for Acquired Company 29,922 -
Loans Securitized and Converted to Securities Available for Sale 309,998 -
These financial statements should be read in conjunction with the accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the consolidated financial statements
and notes thereto included in the Provident Bankshares Corporation's ("the
Corporation") Annual Report on Form 10-K for the year ended December 31, 1999 as
filed with the Securities and Exchange Commission on February 17, 2000.
NOTE B - ACQUISITION
On August 31, 2000 the Corporation completed its acquisition of Harbor
Federal Bancorp, the parent of Harbor Federal Savings Bank, exchanging
approximately 2 million shares of common stock based on the exchange ratio of
1.256 shares of Provident common stock for each outstanding share of Harbor
Federal. The purchase method of accounting was used for the acquisition,
accordingly the impact to the results of operations, for the one month since the
date of acquisition included in the accompanying consolidated financial
statements, is not material. The acquired assets and liabilities were
consolidated at their respective fair values of $248 million and $229 million,
respectively. The acquisition resulted in approximately $14 million of
intangible assets. Pro forma financial information has not been presented, as
the pro forma impact on consolidated operations is not significant.
NOTE C - EXTRAORDINARY ITEM
During the first quarter, the Corporation liquidated $78 million of Federal
Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net gain of
$770 thousand, or $.02 per share, after taxes of $415 thousand was recognized.
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NOTE D - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for
the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Net Income Before Extraordinary Item $ 11,355 $ 11,305 $ 31,465 $ 32,620
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 770 -
- ----------------------------------------------------------------------------------------------------------------------------
Net Income 11,355 11,305 $ 32,235 $ 32,620
============================================================================================================================
BASIC
Basic EPS Shares 26,060 26,853 26,292 26,789
Net Income Before Extraordinary Item $ 0.44 $ 0.42 $ 1.21 $ 1.22
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 0.02 -
- ----------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.44 0.42 $ 1.23 $ 1.22
============================================================================================================================
DILUTED
Dilutive Shares (principally stock options) 538 827 541 879
Diluted EPS Shares 26,598 27,680 26,833 27,668
Net Income Before Extraordinary Item $ 0.43 $ 0.41 $ 1.18 $ 1.18
Extraordinary Item -- Gain on Debt Extinguishment, Net - - 0.02 -
- ----------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.43 0.41 $ 1.20 $ 1.18
============================================================================================================================
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NOTE E - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities portfolio at September 30, were
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 86,067 $ 1,055 $ 40 $ 87,082
Mortgage-Backed Securities 1,826,498 5,435 37,268 1,794,665
Municipal Securities 26,615 171 214 26,572
Other Debt Securities 139,866 17 20,375 119,508
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 2,079,046 $ 6,678 $ 57,897 $ 2,027,827
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 39,358 $ - $ 46 $ 39,312
Mortgage-Backed Securities 1,166,583 1,441 35,378 1,132,646
Municipal Securities 26,778 214 293 26,699
Other Debt Securities 138,075 1 13,314 124,762
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,370,794 $ 1,656 $ 49,031 $ 1,323,419
- ------------------------------------------------------------------------------------------------------------------------
At September 30, 2000 a net unrealized loss of $33.3 million was reflected
as Net Accumulated Other Comprehensive Income which is reflected separately as a
component of Stockholders' Equity in the Consolidated Statement of Condition and
therefore has no effect on the financial results of the Corporation's
operations. This compares to a net unrealized loss of $28.6 million at September
30, 1999. For details regarding investment securities at December 31, 1999,
refer to Notes 1 and 3 of the Consolidated Financial Statements incorporated in
the Corporation's 10-K filed February 17, 2000.
During the third quarter of 2000 the Corporation securitized $310 million of
purchased consumer loans. The resulting securities are reflected as investment
securities available for sale.
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NOTE F - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For financial
statements presented for the Corporation, the only nonowner equity change is
comprised of unrealized gains or losses on available for sale debt securities
that will be accumulated with net income from operations. This change does not
have an impact on the Corporation's results of operations.
Presented below is a reconcilement of net income to comprehensive income
indicating the components of other comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
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(IN THOUSANDS) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 11,355 $ 11,305 $ 32,235 $ 32,620
Other Comprehensive Income (Loss):
Unrealized Holding Gain (Loss) on Debt Securities 21,344 (12,100) 24,830 (55,843)
Less: Reclassification Adjustment for Gains Included in Net Income - - 7,858 312
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax 21,344 (12,100) 16,972 (56,155)
Income Tax (Benefit) Related to Items of Other Comprehensive Income 7,473 (4,786) 5,944 (22,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), After Tax 13,871 (7,314) 11,028 (33,945)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 25,226 $ 3,991 $ 43,263 $ (1,325)
- ------------------------------------------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
EARNINGS SUMMARY
Provident Bankshares Corporation recorded net income for the quarter ended
September 30, 2000 of $11.4 million or $.44 per share basic and $.43 per share
diluted. Net income for the quarter ended September 30, 1999 was $11.3 million
or $.42 per share basic and $.41 per share diluted. Tax equivalent net interest
income increased 6.9% driven by higher average interest earning assets of $610
million. Non-interest income increased $1.7 million for the quarter driven
mainly by higher service charges on deposit accounts. Operating expenses net of
capital securities expenses increased 9.3% from the third quarter of 1999. This
increase is associated with continued network expansion, as the branch network
has expanded to 96 branches as of September 30, 2000 compared to 72 branches as
of September 30, 1999.
NET INTEREST INCOME
Growth in average earning assets raised tax-equivalent net interest income
to $40.6 million for the third quarter of 2000, a $2.6 million increase over the
prior year. The net interest margin for the quarter decreased 15 basis points
from the same quarter last year. The primary factors included the leverage of
capital issued in the first quarter of 2000 and the purchase of $50 million of
bank owned life insurance (BOLI) which increased non-interest income. On August
31, 2000, the Corporation completed the acquisition of Harbor Federal Savings
Bank, which added $244 million of earning assets and $172 million of deposits.
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Provident's tax equivalent interest income rose $17.6 million from the
third quarter of 1999, the result of a $610 million expansion in average earning
assets and a 47 basis point increase in yield. Growth in total average earning
assets was provided by increases of $137 million in commercial real estate
loans, $183 million in residential mortgage loans. Average consumer loans were
down $105 million from the third quarter of 1999 due in large part to the
securitization of $683 million in loans in the fourth quarter of 1999 and third
quarter 2000. Mortgage loans held for sale and commercial business loans
declined $56 million and $41 million, respectively. Investments increased $493
million mainly due to the securitization noted above. The yield on earning
assets for the third quarter of 2000 was 7.90% compared to 7.43% for the third
quarter of 1999.
Total interest expense for the third quarter of 2000 was $15.0 million
above a year ago, the combined result of an increase of $570 million in the
average outstanding balance of interest-bearing liabilities and a 68 basis point
increase in rate paid. Included in this increase were $141 million in matched
maturity brokered deposits, $52 million in interest bearing demand/money market
deposits and $101 million in certificates of deposits. Savings deposits and IRA
deposits decreased $7 million and $13 million, respectively. Short term borrowed
money increased $338 million while long term borrowings declined $56 million.
Management monitors the level of earnings at risk due to interest rate
volatility through the simulation of multiple interest rate scenarios. Interest
rate risk products such as interest rate swaps, caps and floors are acquired as
effective protection against the negative effects should certain scenarios that
create earnings volatility occur. This risk avoidance costs increased interest
expense and decreased net interest income by $423 thousand for the quarter
ending September 30, 2000. Included in this net interest income decrease was the
amortization of closed positions, which decreased interest expense by $159
thousand for the current quarter. Without the amortization of closed positions,
off-balance sheet positions reduced net interest income by $582 thousand.
Management does not speculate on future interest rate movements. At
September 30, 2000, the forward markets indicated that short-term interest rates
will decrease 30 basis points and long-term rates will remain unchanged over the
next twelve months. The Corporation's analysis indicates that if management does
not adjust its September 30, 2000 off-balance sheet positions and the forward
yield curve assumptions occur, off-balance sheet positions, including
amortization of closed positions, would increase net interest income by $173
thousand over the next twelve months. This compares to an increase of $282
thousand should interest rates remain unchanged. However, yields and rates on
hedged balance sheet assets and liabilities would change by a corresponding
amount. Amortization of closed positions will increase net interest income by
$203 thousand over the next twelve months. Thus, without amortization of closed
positions, net interest income would decrease $30 thousand over the next twelve
months if the forward yield curve assumptions occur and $79 thousand if rates
remain unchanged.
As of January 1, 2001, the Corporation will adopt Financial Accounting
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). At adoption date this statement will require the
Corporation to record all derivative instruments on the balance sheet at their
fair value. This initial mark to market at adoption will be reflected as a
transition adjustment. Shortly after adoption the Corporation plans to close the
derivative instruments that will not qualify for the shortcut method under SFAS
No. 133 which is not expected to result in a material gain or loss. The adoption
of SFAS No. 133 is not expected to adversely impact the earnings from continuing
operations of the Corporation in 2001.
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PROVISION FOR LOAN LOSSES
The Corporation recorded a $3.3 million provision for loan losses, with net
charge-offs of $9.1 million for the third quarter of 2000, compared to a
provision of $3.2 million and net charge-offs of $1.8 million for the same
period of 1999. The increase in charge-offs was due to the write-down of a
significant portion of an existing $15 million non-performing health care credit
provided for during the second quarter of 2000. The Corporation continues to
emphasize loan quality and closely monitors potential problem credits. Senior
managers meet at least monthly to review the credit quality of the loan
portfolios and at least quarterly with executive management to review the
adequacy of the allowance for loan losses. The allowance for loan losses at
September 30, 2000 was $40.4 million, compared to $40.1 million a year ago. At
September 30, 2000, the allowance represented 1.20% of total loans and 209% of
non-performing loans. Total non-performing loans were $19.3 million at September
30, 2000, up from $9.5 million as of September 30, 1999, but down from the $26.2
million level at June 30, 2000. Non-performing loans as a percent of loans
outstanding as of September 30, 2000 were .57% as compared to .29% as of
September 30, 1999.
NON-INTEREST INCOME
Non-interest income totaled $17.1 million in the third quarter of 2000
compared to $15.5 million for the third quarter of 1999. This increase was
driven by higher service charges on deposit accounts, which increased $2.3
million offset in part by lower mortgage banking income and lower commission and
fees. The increase in deposit service fees was driven by higher account volume.
Mortgage banking originations totaled $91 million during the third quarter of
2000 compared to $137 million during the same quarter of 1999. Sales of mortgage
loans resulted in $384 thousand in gains for the third quarter of 2000 as
compared to $636 thousand for the same period in 1999. The lower commissions and
fees were attributable mainly to lower investment product sales.
NON-INTEREST EXPENSE
Third quarter non-interest expense was $37.3 million, compared to $33.5
million for the same period last year. Salaries and benefits increased $520
thousand, mainly related to the expansion of the bank's branch network. The
branch network expansion also contributed to increased occupancy costs of $377
thousand, furniture and equipment expense of $163 thousand and $332 thousand in
external processing fees related to increased account volume. During the first
quarter of 2000, $30 million of trust preferred capital securities were issued
resulting in the increase in capital securities expense. All other expenses
increased a total of $1.6 million mainly associated with increases in marketing
expenses, communication expenses and personnel expenses, which also were
associated with network expansion. Provident has increased its branch network
to 96 branches from 72 since September 30, 1999.
INCOME TAXES
Provident recorded income tax expense of $5.5 million on income before
taxes of $16.9 million, an effective tax rate of 32.8%. During the third quarter
of 1999, Provident's tax expense was $5.2 million on pre-tax income of $16.5
million, an effective tax rate of 31.6%. The change in effective tax rate is the
result of lower state tax benefits for 2000 versus 1999.
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FINANCIAL REVIEW FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ending September 30, 2000, net income was $32.2 million
or $1.23 per share basic and $1.21 diluted, compared to $32.6 million or $1.22
per share basic and $1.18 per share diluted for the nine months ended September
30, 1999. The lower earnings in 2000 were mainly due to the increase in loan
loss provision to address the write down of a significant portion of an existing
$15 million non-performing health care credit and the sale of another health
care credit.
Tax-equivalent net interest income increased 11.4% or $12.4 million. The
$12.4 million increase in tax-equivalent net interest income for 2000 was the
result of a $542 million increase in average earning assets over the prior year.
Net interest margin decreased by 1 basis point.
The provision for loan losses increased $12.3 million to $20.6 million in
2000. The increase in loan loss provision as noted above was to address the
write down of a significant portion of an existing $15 million non-performing
health care credit and the sale of another health care credit. The allowance for
loan losses ended the quarter at $40.4 million or 1.20% of loans outstanding,
the same ratio as September 30, 1999.
Non-interest income, excluding net securities gains, increased $1.6
million, mainly related to a $5.7 million increase in deposit service charges.
The increase in deposit service fees was driven by higher account volume.
Mortgage banking income declined $5.4 million as originations totaled $258
million through the third quarter of 2000 compared to $644 million during the
same period of 1999. Sales of mortgage loans resulted in $931 thousand in gains
for the nine months ending September 30, 2000 as compared to $4.4 million for
the same period in 1999. The lower commissions and fees were attributable mainly
to lower investment product sales. Net securities gains were $7.9 million in
2000 and $312 thousand in 1999.
Provident's non-interest expense, excluding capital securities expenses,
rose 9.3% in 2000 over 1999. Salaries and employee benefits increased $2.6
million attributable to merit increases and new branches. The branch network
expansion also contributed to increased occupancy costs of $1.2 million,
furniture and equipment expense of $887 thousand and $960 thousand in external
processing fees related to increased account volume. During the first quarter of
2000, $30 million of trust preferred capital securities were issued resulting in
the increase in capital securities expense. All other expenses increased a total
of $3.3 million mainly associated with increases in marketing expenses,
communication expenses, personnel expense and net losses associated with deposit
accounts. These increases are also associated with branch network expansion.
Provident recorded an income tax expense of $14.8 million for the nine
months ended September 30, 2000 based on pre-tax income of $46.3 million, which
represented an effective tax rate of 32.1%, the same for the year to date period
in 1999.
The Corporation also recognized an extraordinary gain from debt
extinguishment of $770 thousand, net of taxes, during the first quarter of 2000.
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FINANCIAL CONDITION
Total assets of the Corporation increased $605 million from December 31,
1999 to September 30, 2000. The Corporation completed the acquisition of Harbor
Federal Savings Bank on August 31, 2000 with total assets of $253 million. Total
loans increased $196 million as real estate construction loans were up $82
million and real estate mortgage loans were up $236 million. Commercial business
loans were down $12 million ending the quarter at $351 million. Consumer loans
were down $110 million due mainly to the securitization of $310 million during
the third quarter of 2000. Total deposits ended the quarter at $4.02 billion, an
increase of $209 million over the December 31, 1999 level. Core deposits
increased $296 million from December 31, 1999 as non-interest bearing demand
increased $26 million and interest bearing demand/money market increased $102
million. Direct certificates of deposits and savings deposits also increased
$150 million and $26 million, respectively. Borrowings increased $336 million
from December 31, 1999 ending the quarter at $1.26 billion. In February 2000,
the Corporation issued $30 million of trust preferred capital securities, which
were outstanding as of September 30, 2000. A subsidiary trust of the Corporation
issued these capital securities and the Corporation received the proceeds by
issuing junior subordinated debentures to the trust. These capital securities
are considered tier 1 capital for regulatory purposes. Total trust preferred
capital securities, as of September 30, 2000, was $70 million.
The primary sources of liquidity at September 30, 2000 were loans held for
sale and investments available for sale, which totaled $2.05 billion. This
represents 38% of total liabilities compared to 36% at December 31, 1999. At
September 30, 2000, total stockholders' equity was $306.5 million, a $31.9
million increase over December 31, 1999. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$528 thousand was raised through the dividend reinvestment plan, $398 thousand
from the exercise of stock options, while capital increased $11.0 million during
the third quarter of 2000 as a result of the reduction in unrealized losses on
securities available for sale. During the third quarter of 2000, the Corporation
also repurchased 682,000 shares totaling $10.7 million. The acquisition of
Harbor Federal Savings Bank also contributed $29 million to stockholders'
equity. At quarter-end the leverage ratio was 7.06% and total stockholders'
equity represented 10.19% of risk adjusted assets. These ratios exceed the
minimum requirements of the current leverage capital and risk-based capital
standards established by regulatory agencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 1999, see "Interest
Sensitivity Management" and Note 11 to the Consolidated Financial Statements in
the Corporation's Form 10-K filed with the Commission on February 17, 2000. The
market risk of the Corporation has not experienced any material changes as of
September 30, 2000 from December 31, 1999. Additionally, refer to "Net Interest
Income" in Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional quantitative and qualitative
discussions about market risk at September 30, 2000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation (1)
(3.2) Fourth Amended and Restated By-Laws of Provident Bankshares
Corporation (3)
(4.1) Stockholder Protection Rights Plan, as amended (2)
(27) Financial Data Schedule
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
July 13, 2000 - Press release regarding the Company's
announcement that it will take a second quarter charge to
address health care loans.
July 24, 2000 - Transcript of July 20, 2000 telephone
conference with financial analysts.
August 31, 2000 - Provident Bankshares Corporation completed
its acquisition of Harbor Federal Bancorp.
(1) Incorporated by reference from Provident's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Provident's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, filed with the Commission on August
14, 1998.
(3) Incorporated by reference from Providents's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, filed with the Commission on May
10, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION
--------------------------------
Registrant
November 14, 2000 /s/ Peter M. Martin
-----------------------------------------------
Peter M. Martin
President, Chairman and Chief Executive Officer
November 14, 2000 /s/ Dennis A. Starliper
--------------------------
Dennis A. Starliper
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
(27) Financial Data Schedule
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