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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 MARCH 31, 2001
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, 24,425,675 shares outstanding at May 1,
2001.
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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
March 31, 2001 and 2000 and December 31, 2000 3
Consolidated Statement of Income - Unaudited
Three months ended March 31, 2001 and 2000 4
Consolidated Statement of Cash Flows - Unaudited
Three months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II - OTHER INFORMATION 15
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 16
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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
MARCH 31, December 31, March 31,
(DOLLARS IN THOUSANDS) 2001 2000 2000
====================================================================================================================================
ASSETS
Cash and Due From Banks $ 87,806 $ 84,166 $ 84,237
Short-Term Investments 13,555 12,378 1,732
Mortgage Loans Held for Sale 4,392 8,243 13,731
Securities Available for Sale 1,639,388 1,876,509 1,686,192
Loans:
Consumer 2,015,861 2,026,013 2,313,211
Commercial Business 340,819 356,041 361,810
Real Estate -- Construction 267,875 265,918 191,225
Real Estate -- Mortgage 690,240 725,799 482,001
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TOTAL LOANS 3,314,795 3,373,771 3,348,247
Less: Allowance for Loan Losses 42,832 40,660 41,051
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NET LOANS 3,271,963 3,333,111 3,307,196
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Premises and Equipment, Net 47,351 45,805 43,876
Accrued Interest Receivable 45,250 48,844 47,530
Other Assets 142,674 95,492 63,013
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TOTAL ASSETS $ 5,252,379 $ 5,504,548 $ 5,247,507
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LIABILITIES
Deposits:
Noninterest-Bearing $ 351,031 $ 327,334 $ 311,893
Interest-Bearing 3,457,184 3,627,436 3,470,419
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TOTAL DEPOSITS 3,808,215 3,954,770 3,782,312
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Borrowings 1,097,775 1,122,806 1,083,889
Other Liabilities 54,354 43,592 38,833
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TOTAL LIABILITIES 4,960,344 5,121,168 4,905,034
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Corporation-Obligated Mandatorily Redeemable Capital Securities - 67,969 68,068
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 29,858,017,
29,708,943 and 26,251,384 Shares; at March 31, 2001,
December 31, 2000 and March 31, 2000, respectively 29,858 29,709 26,251
Capital Surplus 252,854 251,184 203,755
Retained Earnings 115,400 109,593 110,010
Net Accumulated Other Comprehensive Income (3,896) (10,695) (44,684)
Treasury Stock at Cost - 5,457,126, 3,861,969 and 1,177,432 Shares at
March 31, 2001, December 31, 2000 and March 31, 2000, respectively (102,181) (64,380) (20,927)
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TOTAL STOCKHOLDERS' EQUITY 292,035 315,411 274,405
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,252,379 $ 5,504,548 $ 5,247,507
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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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 2001 2000
=====================================================================================================================
INTEREST INCOME
Interest and Fees on Loans $ 66,528 $ 67,821
Interest on Securities 30,340 29,633
Tax-Advantaged Interest 552 514
Interest on Short-Term Investments 85 46
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TOTAL INTEREST INCOME 97,505 98,014
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INTEREST EXPENSE
Interest on Deposits 42,330 42,695
Interest on Borrowings 18,324 14,900
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TOTAL INTEREST EXPENSE 60,654 57,595
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NET INTEREST INCOME 36,851 40,419
Less: Provision for Loan Losses 7,175 4,300
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 29,676 36,119
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 13,638 10,374
Mortgage Banking Activities 261 811
Commissions and Fees 1,204 1,388
Net Securities Gains 5,967 79
Other Non-Interest Income 2,467 1,717
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TOTAL NON-INTEREST INCOME 23,537 14,369
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 17,952 17,164
Occupancy Expense, Net 3,423 3,190
Furniture and Equipment Expense 2,584 2,451
External Processing Fees 4,506 3,789
Capital Securities Expense - 984
Other Non-Interest Expense 7,413 7,451
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TOTAL NON-INTEREST EXPENSE 35,878 35,029
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INCOME BEFORE INCOME TAXES 17,335 15,459
Income Tax Expense 5,610 4,594
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INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 11,725 10,865
Extraordinary Item -- Gain on Debt Extinguishment, Net - 770
Cumulative Effect of Change in Accounting Principle, Net (1,160) -
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 10,565 $ 11,635
=====================================================================================================================
BASIC EARNINGS PER SHARE
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.47 $ 0.41
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (0.05) -
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 0.42 $ 0.44
=====================================================================================================================
DILUTED EARNINGS PER SHARE
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.45 $ 0.40
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (0.05) -
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 0.40 $ 0.43
=====================================================================================================================
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)
Three Months Ended March 31, 2001 2000
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OPERATING ACTIVITIES
Net Income $ 10,565 $ 11,635
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 8,968 4,373
Provision for Loan Losses 7,175 4,300
Provision for Deferred Income Tax (Benefit) (966) 4,848
Realized Net Securities Gains (5,967) (79)
Loans Originated or Acquired and Held for Sale (7,057) (47,782)
Proceeds from Sales of Loans Held for Sale 11,042 64,804
Gain on Sales of Loans Held for Sale (134) (218)
Other Operating Activities (35,236) (8,877)
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TOTAL ADJUSTMENTS (22,175) 21,369
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (11,610) 33,004
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INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 84,306 39,365
Proceeds on Sales of Securities Available for Sale 378,224 18,602
Purchases of Securities Available for Sale (212,117) (74,099)
Loan Originations and Purchases Less Principal Collections 50,288 (169,472)
Purchases of Premises and Equipment (3,979) (1,794)
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 296,722 (187,398)
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FINANCING ACTIVITIES
Net Decrease in Deposits (146,555) (26,216)
Net Increase (Decrease) in Short-Term Borrowings (175,991) 239,163
Proceeds from Long-Term Debt 90,302 50,000
Payments and Maturities of Long-Term Debt (7,311) (133,715)
Proceeds from Issuance of Capital Securities - 30,000
Issuance of Stock 1,819 416
Purchase of Treasury Stock (37,801) (7,672)
Cash Dividends on Common Stock (4,758) (4,212)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (280,295) 147,764
- --------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,817 (6,630)
Cash and Cash Equivalents at Beginning of Year 96,544 92,599
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,361 $ 85,969
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SUPPLEMENTAL DISCLOSURES
- --------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 42,990 $ 45,674
Income Taxes Paid 1,472 121
Reclassify Trust Preferred Securities to Borrowings 67,969 -
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
MARCH 31, 2001
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 three month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. 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, 2000 as
filed with the Securities and Exchange Commission on March 9, 2001.
NOTE B - ACQUISITION
On August 31, 2000 the Corporation completed its acquisition of Harbor
Federal Bancorp, the parent of Harbor Federal Savings Bank, issuing
approximately 2.1 million shares of common stock valued at approximately $29.6
million. The purchase method of accounting was used for the acquisition,
accordingly, the purchase price was allocated to the fair value of net assets
acquired. This allocation resulted in $8.1 million of goodwill and $2.5 million
of deposit based intangibles, which are being amortized over twenty and seven
years, respectively. The results of operations from the date of acquisition are
included in the accompanying consolidated financial statements.
NOTE C - ACCOUNTING FOR DERIVATIVES
SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement establishes the accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. All derivatives are required to be measured at fair
value and recognized as either assets or liabilities in the financial
statements. The accounting for changes in fair value (gains or losses) of a
derivative is dependent on the intended use of the derivative and its
designation. Derivatives may be used to: 1) hedge exposure to change in the fair
value of a recognized asset or liability or a firm commitment, referred to as a
fair value hedge, 2) hedge exposure to variable cash flows of a recognized asset
or liability or of a forecasted transaction, referred to as a cash flow hedge,
or 3) hedge foreign currency exposure. The Corporation only engages in fair
value and cash flow hedges.
The Corporation uses a variety of derivative financial instruments as part
of its interest rate risk management strategy to manage its interest rate risk
exposure. This strategy aims to stabilize net interest income through periods of
changing interest rates. Derivative products in use by the Corporation are
interest rate swaps and caps or floors, used separately or in combination. These
derivatives are used to suit the particular hedge objective and all qualify as
hedges. Risks in these hedge transactions involve nonperformance by
counterparties under the terms of the contract (counterparty credit risk) and
the possibility that interest rate movements or general market volatility could
result in a loss in effectiveness and necessitate the recognition of a loss
(market risk). Counterparty credit risk is controlled by dealing with
well-established brokers that are highly rated by independent sources and by
establishing exposure limits for individual counterparties. Additionally, credit
risk is controlled by entering into bilateral collateral agreements with
brokers. These are agreements in which the parties pledge collateral to
indemnify the counterparty in the case of default. Market risk on interest rate
swaps is minimized by using these instruments as hedges and continually
monitoring the positions to ensure
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on-going effectiveness. Additionally, the Corporation generally engages only in
hedges which are highly effective. The Corporation's hedging activities are
monitored by its Asset/Liability Committee (ALCO) as part of the committee's
oversight of the treasury function which is responsible for implementing the
hedging strategies. ALCO is responsible for reviewing hedging strategies that
are developed through financial analysis and modeling.
All relationships between hedging instruments and hedged items are
documented by the Corporation. Risk management objectives, strategies and the
use of certain types of derivatives used to hedge specific risks are also
documented. At inception, and on an ongoing basis if necessary, the Corporation
assesses whether the hedges have been highly effective in offsetting changes in
the fair value or cash flows of hedged items and whether those derivatives may
be expected to remain highly effective in future periods. Derivatives retained
by the Corporation to hedge exposures met the requisite effectiveness criteria
necessary to qualify for the short cut method. Under the short cut method, an
entity may conclude that the change in the derivative's fair value is equal to
the change in the hedge item's fair value attributable to the hedged risk,
resulting in no ineffectiveness. The Corporation uses benchmark interest rates
such as LIBOR or constant maturity treasury rates to hedge the interest rate
risk associated with interest earning asset or interest bearing liabilities.
Using these benchmark rates and complying with specific criteria set forth in
SFAS No. 133, the Corporation has concluded that changes in fair value or cash
flows that are attributable to risks being hedged will be completely offset at
the hedges 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 will
continue to carry the derivative on the balance sheet at its fair value but
cease to adjust the hedged asset or liability for changes in value. The
Corporation did not discontinue any hedges in the first quarter 2001.
The Corporation uses derivatives to hedge the interest rate risks inherent
with its funding costs. Fair value hedges which meet the criteria of SFAS No.
133 for effectiveness have changes in the fair value of the derivative and the
designated hedged item recognized in earnings. At March 31, 2001, the
derivatives designated as fair value hedges were proven to be effective.
Accordingly, the designated hedges and the associated hedged items were marked
to fair value by an equal and offsetting amount of $4.2 million, resulting in no
net earnings impact for the three months ended March 31, 2001. Cash flow hedges
have the effective portion of changes in the fair value of the derivative
recorded in other comprehensive income (OCI). At March 31, 2001, the Corporation
has recorded the fair value of derivatives of $648 thousand, net of taxes, in
OCI to reflect the effective portion of cash flow hedges. Amounts recorded in
OCI are recognized into earnings concurrent with the impact of the hedged item
on earnings.
All ineffective portions of hedges are reported in and affect net earnings
immediately. For the three months ending March 31, 2001, the Corporation had no
material ineffective portions of hedges. The Corporation expects that any
amounts which will be reclassified from other comprehensive income to earnings
over the next twelve months will be immaterial.
Gains and losses on derivatives that arose prior to the initial
application of SFAS No. 133 and that were previously deferred as adjustments of
the carrying amount of hedged items were not adjusted and accordingly were not
included in the transition adjustment described below.
ADOPTION OF SFAS NO. 133
- ------------------------
The adoption of SFAS No. 133 resulted in a pre-tax reduction of net
earnings of $1.8 million ($1.2 million after-tax). This represented the
difference between the derivative's previous carrying amount and the fair value
of the derivatives at January 1, 2001. Subsequent to the adoption of SFAS No.
133, the Corporation closed the derivative instruments that did not qualify for
the shortcut method under SFAS No. 133. This did not result in a material gain
or loss. Additionally amounts recorded in OCI at transition are not expected to
materially affect earnings of the Corporation in the next twelve months. The
remaining derivatives retained by the Corporation to hedge exposures met the
criteria necessary to qualify for the shortcut method. Under the shortcut
method, an entity may conclude that the change in the derivative's fair value is
equal to the change in the hedge item's fair value attributable to the hedged
risk, resulting in no ineffectiveness.
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NOTE D - EXTRAORDINARY ITEM
During the first quarter 2000, the Corporation liquidated $78 million of
Federal Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net
gain of $770 thousand, or $.03 per share, after taxes of $415 thousand was
recognized.
NOTE E - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for
the periods indicated:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31 2001 2000
- ---------------------------------------------------------------------------------------------
Net Income Before Extraordinary Item $ 11,725 $ 10,865
Extraordinary Item -- Gain on Debt Extinguishment, Net - 770
Cumulative Effect of Change in Accounting Principle, Net (1,160) -
- ---------------------------------------------------------------------------------------------
Net Income 10,565 11,635
=============================================================================================
BASIC
Basic EPS Shares 25,125 26,620
Net Income Before Extraordinary Item $ 0.47 $ 0.41
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (0.05) -
- ---------------------------------------------------------------------------------------------
Net Income Per Share 0.42 0.44
=============================================================================================
DILUTED
Dilutive Shares (principally stock options) 966 522
Diluted EPS Shares 26,091 27,142
Net Income Before Extraordinary Item $ 0.45 $ 0.40
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (.05) -
- ---------------------------------------------------------------------------------------------
Net Income Per Share 0.40 0.43
=============================================================================================
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NOTE F - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities portfolio at March 31, were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 118,930 $ 14 $ 439 $ 118,505
Mortgage-Backed Securities 1,365,975 12,529 3,552 1,374,952
Municipal Securities 24,671 685 - 25,356
Other Debt Securities 134,819 53 14,297 120,575
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Total Securities Available for Sale $ 1,644,395 $ 13,281 $ 18,288 $ 1,639,388
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March 31, 2000
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 81,014 $ 119 $ 151 $ 80,982
Mortgage-Backed Securities 1,510,939 3,229 55,476 1,458,692
Municipal Securities 26,621 138 428 26,331
Other Debt Securities 136,363 - 16,176 120,187
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,754,937 $ 3,486 $ 72,231 $ 1,686,192
- ------------------------------------------------------------------------------------------------------------------------
At March 31, 2001 a net unrealized loss on securities available for sale of $3.3
million was reflected as a component of 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 on securities available for sale of $44.7 million at March 31,
2000. For details regarding investment securities at December 31, 2000, refer to
Notes 1 and 3 of the Consolidated Financial Statements incorporated in the
Corporation's 10-K filed March 9, 2001.
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NOTE G - 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, nonowner equity changes are comprised
of unrealized gains or losses on available for sale debt securities and recorded
gains or losses on derivatives utilized in cash flow hedges. These nonowner
equity changes will be accumulated with net income from operations to determine
comprehensive income. 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
March 31,
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 10,565 $ 11,635
Other Comprehensive Income (Loss):
Gain (Loss) on Derivatives Recognized in Other Comprehensive Income (989) -
Amount Reclassified out of Other Comprehensive Income Included in Net Income - -
Unrealized Holding Gain (Loss) on Debt Securities 17,415 (478)
Less: Reclassification Adjustment for Gains Included in Net Income 5,967 79
- ---------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax 10,459 (557)
Income Tax (Benefit) Related to Items of Other Comprehensive Income 3,660 (196)
- ---------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), After Tax 6,799 (361)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 17,364 $ 11,274
- ---------------------------------------------------------------------------------------------------------------------
NOTE H - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
The Corporation also reclassified the Corporation-Obligated Mandatorily
Redeemable Trust Preferred Securities into the long-term debt classification in
the financial statements. While this reclassification has no impact on the
earnings of the Corporation, it is considered a change in accounting principle.
Prospectively, the expense incurred on these instruments will be included in
interest expense rather than non-interest expense. These securities will
continue to qualify as regulatory capital.
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 reported operating earnings for the quarter ended
March 31, 2001 of $11.7 million, or $.45 per share on a diluted basis. This is
an increase of 7.9% from $10.9 million, or $.40 per diluted share in the 2000
comparable quarter. This also represented a 12.5% increase in diluted earnings
per share.
As a result of a one-time transition adjustment of $1.2 million (net of
taxes) for Statement of Financial Accounting Standards No. 133 "Accounting of
Derivative Instruments and Hedging Activities," ("SFAS No. 133") net income is
$10.6 million, or $.40 per diluted share. The Corporation, like many
institutions, adopted this mandatory accounting standard in the first quarter of
2001.
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Exclusive of the accounting change, return on average common equity was
15.34% for the first quarter 2001, compared to 14.72% in the same quarter a year
ago and 15.42% from the prior quarter. Return on average assets was .88% for the
quarter ending March 31, 2001, compared to .90% for the quarter ending March 31,
2000 and .89% for the quarter ending December 31, 2000.
Net interest margin for the 2001 first quarter was 2.91%, a decrease from
3.04% in the fourth quarter of 2000. This margin decline was largely the result
of two one-time events: the reclassification of trust preferred stock interest
from non-interest expense to interest expense, and the accelerated reversal of
$1.4 million in accrued interest to comply with the new FFIEC policy for
consumer credit that required the reclassification of previously unclassified
second mortgages as non-performing loans.
Non-interest income (excluding securities gains) was up $3.3 million or
23.0% for the 2001 first quarter. There were $6.0 million in securities gains
during the 2001 first quarter compared to $79 thousand in the same period a year
ago. Securities gains were taken mainly as part of Provident's program to hedge
accelerated prepayments on the second mortgage portfolio. The Company's
non-interest expense increased by 2.4%, up $849 thousand from the same quarter
last year.
NET INTEREST INCOME
A lower net interest margin offset in part by growth in average earning
assets resulted in lower tax-equivalent net interest income. Tax equivalent net
interest income fell by $3.6 million to $37.1 million for the first quarter of
2001, as compared to the first quarter of 2000. Net interest margin for the 2001
first quarter was 2.91%, a decrease from 3.23% in the first quarter of 2000.
This margin decline was largely the result of two one-time events: the
reclassification of trust preferred stock interest from non-interest expense to
interest expense, and the accelerated reversal of $1.4 million in accrued
interest to comply with the new FFIEC policy for consumer credit that required
the reclassification of previously unclassified second mortgages as
non-performing loans.
Provident's tax equivalent interest income fell $495 thousand from the
first quarter of 2000, the result of the $1.4 million interest reversal noted
above. Growth in total average earning assets was provided by increases of $231
million in residential mortgage loans and $121 million in commercial real estate
loans. The increase in residential mortgage loans is partially attributable to
the acquisition of Harbor Federal Bancorp during the third quarter of 2000. The
increase in commercial real estate loans was made up of $77 million in
commercial construction, $24 million in commercial mortgage and $21 million in
residential construction loans. Consumer loans declined $222 million due to the
securitization of $324 million of second mortgage loans during the third quarter
of 2000. Mortgage loans held for sale declined $36 million as the Bank made the
decision during the fourth quarter of 2000 to reposition its mortgage operations
by offering mortgages to its retail customers through an outsourced loan
origination process and no longer will seek loan production from realtors and
brokers. The yield on earning assets was 7.67% compared to 7.81% for the first
quarter of 2000.
Total interest expense for the first quarter of 2001 was $3.1 million
above a year ago, the combined result of an increase of $167 million in the
average outstanding balance of interest-bearing liabilities and a 12 basis point
increase in rate paid. Included in this increase were $134 million in direct
certificates of deposits and $83 million in interest-bearing demand deposit
accounts. The increases are attributable to the continued expansion of our
branch network as well as the acquisition of Harbor Federal Bancorp. Brokered
deposits decreased $179 million as long-term debt increased $194 million.
Short-term borrowings declined $102 million.
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The Corporation maintains an overall interest rate risk-management
strategy that incorporates the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by interest rate
volatility. Management monitors the level of earnings at risk due to interest
rate volatility through the simulation of multiple interest rate scenarios. As
of January 1, 2001, the Corporation adopted SFAS No. 133. This statement
required the Corporation to mark to market all derivative instruments as a
transition adjustment. This transition adjustment was a $1.2 million after tax
loss. The Corporation closed the derivative instruments that will not qualify
for the shortcut method under SFAS No. 133. Under the shortcut method, an entity
may conclude that the change in the derivative's fair value is equal to the
change in the hedged item's fair value attributable to the hedged risk,
resulting in no ineffectiveness. Therefore, the adoption of SFAS No. 133 is not
expected to adversely impact the earnings from continuing operations of the
Corporation in 2001.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $7.2 million provision for loan losses, with
net charge-offs of $5.0 million for the first quarter of 2001, compared to a
provision of $4.3 million and net charge-offs of $3.0 million for the same
period of 2000. The majority of the increase in the provision for loan losses is
mainly related to the loss taken on the sale of a syndicated health care credit.
The increase in charge-offs from $3.0 million to $5.0 million is also related to
the above noted sale. 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. Provident has been closely monitoring its health care industry
credits where the operators have had to adjust to changes in Medicare
reimbursement policies. Charge-offs from health care credits may be incurred in
future quarters as a result of continuing challenges in the health care sector.
However, management believes reserves are adequate for such an event. The entire
health care portfolio represents less than 1.5% of Provident's total loans. To
further limit its exposure to national syndicated credits; the Company elected
to sell a large national credit that had been performing as agreed at
approximately face value. The allowance for loan losses at March 31, 2001 was
$42.8 million, compared to $41.1 million a year ago. At March 31, 2001, the
allowance represented 1.29% of total loans and 165% of non-performing loans.
Total non-performing loans were $26 million at both March 31, 2001 and 2000.
Non-performing loans as a percent of loans outstanding as of March 31, 2001 were
.79%. A one-time addition of $12 million was made to non-performing loans to
conform to a new FFIEC policy on consumer loans. While there has been no change
in the underlying fundamentals of Provident's consumer loan portfolio, the new
FFIEC policy required the reclassification of previously unclassified second
mortgages as non-performing loans.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $17.6 million
in the first quarter of 2001 compared to $14.3 million for the first quarter of
2000. This increase was driven by deposit product revenues, which increased $3.3
million. The increase in deposit fees was driven by continued growth in account
volume. Other non-interest income was up $750 thousand mainly associated with
Banked Owned Life Insurance. Mortgage banking income declined $550 thousand as
the Corporation made a decision during the fourth quarter to reposition its
mortgage operations by offering mortgages to its retail customers through an
outsourced loan origination process and no longer will seek loan production from
realtors and brokers.
There were $6.0 million in securities gains during the 2001 first quarter
compared to $79 thousand in the same period a year ago. Securities gains were
taken mainly as part of Provident's program to offset accelerated prepayments on
the second mortgage portfolio.
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NON-INTEREST EXPENSE
First quarter non-interest expense was $35.9 million, compared to $35.0
million for the same period last year. Salaries and benefits increased $788
thousand mainly related to merit increases and the expansion of the bank's
branch network. The branch network expansion also contributed to increased
occupancy costs of $233 thousand, furniture and equipment expense of $133
thousand and $717 thousand in external processing fees related to increased
account volume. During the first quarter of 2001 capital securities expense of
$1.4 million was classified as interest expense compared to $984 thousand in the
first quarter of 2000 as non-interest expense. The prior period was not
reclassified.
INCOME TAXES
Provident recorded income tax expense of $5.6 million on income before
taxes of $17.3 million, an effective tax rate of 32.4%. During the first quarter
of 2000, Provident's tax expense was $4.6 million on pre-tax income of $15.5
million, an effective tax rate of 29.7%. The change in effective tax rate is the
result of the elimination during the fourth quarter of 2000 of federal and state
tax issues for which a liability had previously been provided.
FINANCIAL CONDITION
Total assets of the Corporation decreased $252 million from December 31,
2000 to March 31, 2001 as a result of deleveraging associated with the
Corporation's continued use of its stock buyback authority. The Corporation
repurchased 1.6 million shares during the quarter, including all of the
1,407,157 PBKS shares held by Mid-Atlantic Investors and its affiliates.
Securities available for sale declined $237 million as a result of this
deleveraging. Consumer loans declined $10 million as indirect auto loans
declined over $25 million due to a decision by the Corporation in the third
quarter of 2000 to exit this business. Commercial business loans declined $15
million partially due to the decision to sell a large national credit that had
been performing as agreed at approximately face value and the sale of a
syndicated health care credit that was on non-performing status. This decision
was made to limit exposure to syndicated national credits. Real Estate Mortgage
loans declined $36 million, $24 million from residential mortgage loans.
Residential mortgage loans declined as the Corporation made a decision during
the fourth quarter to reposition its mortgage operations by offering mortgages
to its retail customers through an outsourced loan origination process and no
longer will seek loan production from realtors and brokers. The $12 million
decline in commercial mortgage loans was attributable to unanticipated payoffs.
Total deposits ended the quarter at $3.81 billion, a decrease of $147
million over the December 31, 2000 level. Core deposits increased $79 million
during the quarter as non-interest bearing demand deposits increased $24 million
and interest bearing demand/money market accounts increased $46 million. Direct
certificates of deposits and savings deposits also increased $3 million and $10
million, respectively. Borrowings decreased $96 million from December 31, 2000
ending the quarter at $1.03 billion. Total trust preferred capital securities,
as of March 31, 2001 was $70 million.
The primary sources of liquidity at March 31, 2001 were loans held for
sale and investments available for sale, which totaled $1.64 billion. This
represents 33% of total liabilities compared to 37% at December 31, 2000.
At March 31, 2001, total stockholders' equity was $292 million, a $23
million decrease over December 31, 2000. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$175 thousand was raised through the dividend reinvestment plan, $1.6 million
from the exercise of stock options, while capital increased by $6.8 million
during the first quarter of 2001 as a result of Statement of Financial
Accounting Standards No. 115. During the first quarter of 2001, the Corporation
also repurchased shares totaling $37.8 million. At quarter-end, the leverage
ratio was 6.62% and total stockholders' equity represented 10.06% of risk
adjusted assets. These ratios exceed the minimum requirements of the current
leverage capital and risk-based capital standards established by regulatory
agencies.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of the federal securities laws. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identified by use of the words "believe," "expect,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's other filings with the
SEC.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this Report. Except as required
by applicable law or regulation, the Company undertakes no obligation to update
forward-looking statements to reflect events that occur after the date on which
such statements have been made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 2001, see "Interest
Sensitivity Management" and Note 12 to the Consolidated Financial Statements in
the Corporation's Form 10-K filed with the Commission on March 9, 2001. The
market risk of the Corporation has not experienced any material changes as of
March 31, 2001 from December 31, 2000. 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 March 31, 2001.
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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)
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
January 12, 2001 - Press release regarding the Company's
announcement that Gary Geisel has been named President and
Chief Operating Officer of Provident and Provident Bank.
February 20, 2001 - Press release regarding the Company's
announcement that Provident reached an agreement to buy
back all of the Provident shares held by Mid-Atlantic
Investors and its affiliates.
(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
May 11, 2001 /s/ Peter M. Martin
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Peter M. Martin
Chairman and Chief Executive Officer
May 11, 2001 /s/ Dennis A. Starliper
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Dennis A. Starliper
Chief Financial Officer
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