<page> 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 JUNE 30, 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
- ------------------------------------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
----------------------------------------------------
(Address of Principal Executive Offices)
Not Applicable
--------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Report)
(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 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, 25,738,179 shares outstanding at August
1, 2001.
<page> 2
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition - Unaudited
June 30, 2001 and 2000 and December 31, 2000 3
Consolidated Statement of Income - Unaudited
Three month and six month periods ended June 30, 2001 and 2000 4
Consolidated Statement of Cash Flows - Unaudited
Six months ended June 30, 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 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
PART II - OTHER INFORMATION 20
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 22
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.
2
<page> 3
<table>
<caption>
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
JUNE 30, December 31, June 30,
(DOLLARS IN THOUSANDS) 2001 2000 2000
====================================================================================================================================
(Restated) (Restated)
<s> <c> <c> <c>
ASSETS
Cash and Due From Banks $ 90,820 $ 84,166 $ 112,077
Short-Term Investments 7,919 12,378 1,767
Mortgage Loans Held for Sale 4,571 8,243 14,884
Securities Available for Sale 1,803,242 1,876,509 1,711,987
Loans:
Consumer 1,679,289 2,017,436 2,413,074
Commercial Business 351,596 356,041 341,874
Real Estate -- Construction 289,294 265,918 208,885
Real Estate -- Mortgage 650,914 725,799 540,906
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 2,971,093 3,365,194 3,504,739
Less: Allowance for Loan Losses 35,310 38,374 41,102
- ------------------------------------------------------------------------------------------------------------------------------------
NET LOANS 2,935,783 3,326,820 3,463,637
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 45,713 45,805 44,338
Accrued Interest Receivable 40,084 47,281 48,449
Other Assets 242,538 98,241 85,052
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,170,670 $ 5,499,443 $ 5,482,191
====================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 365,425 $ 327,334 $ 317,883
Interest-Bearing 3,215,377 3,627,436 3,602,473
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 3,580,802 3,954,770 3,920,356
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings 1,177,701 1,190,775 1,252,850
Other Liabilities 126,412 43,592 43,882
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,884,915 5,189,137 5,217,088
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 31,322,737,
29,708,943 and 27,524,445 Shares; at June 30, 2001,
December 31, 2000 and June 30, 2000, respectively 31,323 29,709 27,524
Capital Surplus 283,146 251,184 222,806
Retained Earnings 84,593 104,488 94,205
Net Accumulated Other Comprehensive Income (7,248) (10,695) (47,166)
Treasury Stock at Cost - 5,626,926, 3,861,969 and 1,983,532 Shares
at June 30, 2001, December 31, 2000 and June 30, 2000, respectively (106,059) (64,380) (32,266)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 285,755 310,306 265,103
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,170,670 $ 5,499,443 $ 5,482,191
====================================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
</table>
3
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<table>
<caption>
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
==================================================================================================================
(Restated) (Restated)
<s> <c> <c> <c> <c>
INTEREST INCOME
Interest and Fees on Loans $ 60,484 $ 70,337 $ 127,401 $ 137,386
Interest on Securities 27,670 30,643 58,010 60,276
Tax-Advantaged Interest 576 519 1,128 1,033
Interest on Short-Term Investments 92 46 177 92
- ------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 88,822 101,545 186,716 198,787
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 37,935 42,473 80,265 85,168
Interest on Borrowings 16,378 21,287 34,702 37,171
- ------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 54,313 63,760 114,967 122,339
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 34,509 37,785 71,749 76,448
Less: Provision for Loan Losses 4,895 13,035 13,070 17,335
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 29,614 24,750 58,679 59,113
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 15,389 12,589 29,027 22,963
Mortgage Banking Activities 172 1,020 433 1,831
Commissions and Fees 1,166 1,291 2,370 2,679
Net Securities Gains 1,622 7,779 7,589 7,858
Other Non-Interest Income 2,289 1,700 4,756 3,417
- ------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 20,638 24,379 44,175 38,748
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 18,047 18,139 35,999 35,303
Occupancy Expense, Net 3,254 3,144 6,677 6,334
Furniture and Equipment Expense 2,559 2,491 5,143 4,942
External Processing Fees 3,953 4,268 8,459 8,057
Other Non-Interest Expense 10,764 7,417 18,177 14,868
- ------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 38,577 35,459 74,455 69,504
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 11,675 13,670 28,399 28,357
Income Tax Expense 3,640 4,610 9,039 8,932
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8,035 9,060 19,360 19,425
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 770
Cumulative Effect of Change
in Accounting Principle, Net - - (1,160) -
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,035 $ 9,060 $ 18,200 $ 20,195
==================================================================================================================
BASIC EARNINGS PER SHARE
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.31 $ 0.33 $ 0.74 $ 0.70
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change
in Accounting Principle, Net - - (0.04) -
- ------------------------------------------------------------------------------------------------------------------
Net Income 0.31 0.33 $ 0.70 $ 0.73
==================================================================================================================
DILUTED EARNINGS PER SHARE
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.30 $ 0.32 $ 0.71 $ 0.69
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change
in Accounting Principle, Net - - (0.04) -
- ------------------------------------------------------------------------------------------------------------------
Net Income 0.30 0.32 $ 0.67 $ 0.72
==================================================================================================================
These financial statements should be read in conjunction with the accompanying notes.
</table>
4
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<table>
<caption>
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
(IN THOUSANDS)
Six Months Ended June 30 2001 2000
===========================================================================================================================
(Restated)
<s> <c> <c>
OPERATING ACTIVITIES
Net Income $ 18,200 $ 20,195
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 18,535 11,418
Provision for Loan Losses 13,070 17,335
Provision for Deferred Income Tax (Benefit) (1,095) 4,857
Realized Net Securities Gains (7,589) (7,858)
Loans Originated or Acquired and Held for Sale (18,520) (84,433)
Proceeds from Sales of Loans Held for Sale 22,393 100,623
Gain on Sales of Loans Held for Sale (201) (539)
Other Operating Activities (8,644) (25,707)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 17,949 15,696
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,149 35,891
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 234,426 99,256
Proceeds on Sales of Securities Available for Sale 454,775 26,454
Purchases of Securities Available for Sale (366,683) (164,480)
Loan Originations and Purchases Less Principal Collections 81,363 (342,812)
Purchases of Premises and Equipment (4,750) (4,520)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 399,131 (386,102)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits (373,968) 111,828
Net Increase (Decrease) in Short-Term Borrowings (86,340) 213,068
Proceeds from Long-Term Debt 90,000 290,000
Payments and Maturities of Long-Term Debt (16,579) (216,592)
Issuance of Stock 4,917 645
Purchase of Treasury Stock (41,679) (19,011)
Cash Dividends on Common Stock (9,436) (8,482)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (433,085) 371,456
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,195 21,245
Cash and Cash Equivalents at Beginning of Year 96,544 92,599
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,739 $ 113,844
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES
- ---------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Credited to Deposit Accounts $ 86,193 $ 91,840
Income Taxes Paid 12,501 1,604
Loans Securitized and Converted to Securities Available for Sale 238,874 -
Stock Dividend 28,659 20,095
These financial statements should be read in conjunction with the accompanying notes.
</table>
5
<page> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 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 and six month periods ended June 30, 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 -SIGNIFICANT ACCOUNTING POLICIES
LOAN AND ALLOWANCE FOR LOAN LOSSES
- -----------------------------------
All interest on loans is accrued at the contractual rate and credited
to income based upon the principal amount outstanding. The Corporation defers
and amortizes certain loan fees and costs over the life of the loan using the
interest method. Net amortization of these fees and costs are recognized into
interest income as a yield adjustment and are, accordingly reported as Interest
and Fees on Loans in the Consolidated Statement of Income.
Management places a commercial loan in non-accrual status and
discontinues the accrual of interest and reverses previously accrued but unpaid
interest when the quality of a commercial credit has deteriorated to the extent
that collectibility of all interest and/ or principal cannot be reasonably
expected or when it is 90 days past due unless the loan is well secured and in
the process of collection. At times commercial loans secured by real estate are
charged-off and the underlying collateral is repossessed. At the time of
repossession, the loan is reclassified as other real estate owned and carried at
fair market value less cost to sell (net realizable value). The difference
between the loan balance and the net realizable value at time of foreclosure is
recorded as a charge-off. Other real estate owned is evaluated periodically for
impairment of value. Impairment of value is recognized through a charge to
earnings.
Consumer credit secured by residential property is evaluated for
collectibility at 120 days past due. If the loan is in a first lien position and
the ratio of the loan to collateral value, less cost to sell, exceeds 90% the
loan will be placed in non-accrual status and all accrued but unpaid interest
will be reversed against interest income. If the loan is in a junior lien
position, all other liens will be considered in calculating the loan to value
ratio. Generally, no loan will continue to accrue interest after reaching 210
days past due. In general, charge-offs of delinquent loans secured by
residential real estate will be recognized when losses are reasonably estimable
and probable. No later than 180 days delinquent, any portion of an outstanding
loan balance in excess of the collateral's net realizable balance will be
charged-off. Subsequent to any partial charge-offs, loans will be carried in
non-accrual status until the collateral is liquidated or the loan is charged-off
in its entirety. Properties with partial charge-offs will be periodically
evaluated to determine whether additional charge-offs are warranted. Subsequent
to the liquidation of the property, any deficiencies between proceeds and the
recorded balance of the loan will result in additional charge-offs. Any excess
proceeds will be recognized as a loan recovery.
6
<page> 7
Generally, non-residential secured closed end consumer loans that
become past due 120 days are charged-off in full. Unsecured open-end consumer
loans will be charged-off in full at 180 days past due.
Individual loans are considered impaired when, based on available
information, it is probable that the Corporation will be unable to collect
principal and interest when due in accordance with the contractual terms of the
loan agreement. All non-accrual loans and troubled debt restructurings are
considered impaired loans. The measurement of impaired loans may be based on the
present value of expected cash flows discounted at the historical effective
interest rate, the market price of the loan or based on the fair value of the
underlying collateral.
Restructured loans are considered impaired in the year of
restructuring. In subsequent years each restructured loan is evaluated for
impairment. The allowance for loan losses includes reserves for the impaired
loans.
Collections of interest and principal on all loans in non-accrual
status and/or considered impaired are generally applied as a reduction to the
outstanding principal balance of the loan. Once future collectibility has been
established, interest income may be recognized on a cash basis.
The Corporation's allowance for loan losses is based on management's
continuing review and evaluation of the loan portfolio and intended to maintain
an allowance adequate to absorb probable inherent losses on outstanding loans.
The level of the allowance is based on an evaluation of the risk characteristics
of the loan portfolio and considers such factors as past loan loss experience,
non-accrual and delinquent trends, the financial condition of the borrower,
current economic conditions and other relevant factors. Adjustments to the
allowance due to changes in measurement of impaired loans are incorporated in
the provision for loan losses.
NOTE C - RESTATEMENT OF PREVIOUSLY REPORTED RESULTS OF OPERATIONS
In connection with the issuance of its second quarter results, the
Corporation restated earnings for the first quarter of 2001 and the year ended
December 31, 2000 (and the associated quarters in 2000). The restatement is the
result of a review of delinquent loans and loans that were 120 days or more past
due in its $1.5 billion acquired second mortgage loan portfolio. The review
discovered previously unidentified losses in the portfolio which should have
been recognized in prior periods. Accordingly, those prior periods have been
restated to reflect this information. Adjustments to the Statement of Income for
amounts previously reported affect interest income for the reversal of accrued
interest on loans that should have been placed on non-accrual status, write-offs
of related loan premiums on acquired loans, and provisions for loan losses to
establish an adequate allowance for loan losses in those periods in which
additional charge-offs should have occurred.
7
<page> 8
The table below provides a reconcilement reflecting adjustments, net of
tax, of net income and earnings per share for the periods indicated.
Accordingly, capital has been adjusted for the adjustment to net income.
Additionally, the table indicates the additional charge-offs during those
periods and selected other pertinent balances as reported and as restated.
<table>
<caption>
Three Months Ended Six Months Three Months Six Months
-------------------------------
(dollars in thousands, March 31, June 30, Ended June 30, Ended March 31, Ended June 30,
--------------- -------------- ---------------- ------------------- -----------------
except per share data) 2000 2000 2000 2001 2001
- ---------------------------------------------------------------------------------------- ------------------- -----------------
<s> <c> <c> <c> <c> <c>
As Reported Net Income $ 11,635 $ 9,245 $ 20,880 $ 10,565 $ 18,200
Increase to the Provision for Loan
Losses, net - - - (652) -
Reversal of Accrued but
Uncollected Interest Income and Write-off
of Loan Related Premium, net (500) (185) (685) 252 -
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Total Decrease in Net Income (500) (185) (685) (400) -
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Total Restated Net Income $ 11,135 $ 9,060 $ 20,195 $ 10,165 $ 18,200
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Earnings Per Share - Basic
As Reported $ 0.42 $ 0.34 $ 0.76 $ 0.40 $ 0.70
As Restated 0.40 0.33 0.73 0.39 0.70
Earnings Per Share - Diluted
As Reported $ 0.41 $ 0.33 $ 0.74 $ 0.39 $ 0.67
As Restated 0.39 0.32 0.72 0.37 0.67
Loan Charge-offs, net of recoveries
As Reported $ 3,029 $ 7,372 $ 10,401 $ 5,003 $ 15,444
As Restated 4,176 8,502 12,678 7,242 15,444
Reserve for Loan Losses
As Reported $ 41,051 $ 46,714 $ 46,714 $ 42,832 $ 35,310
As Restated 36,569 41,102 41,102 39,307 35,310
Loans
As Reported $ 3,348,247 $ 3,510,548 $ 3,510,548 $ 3,314,795 $2,971,093
As Restated 3,343,609 3,504,739 3,504,739 3,303,901 2,971,093
Stockholders' Equity
As Reported $ 274,405 $ 265,788 $ 265,788 $ 292,035 $ 285,755
As Restated 273,905 265,103 265,103 286,530 285,755
All per share amounts for periods prior to the three months ended June 30, 2001 have been given the effect of the 5% stock
dividend paid in May, 2001.
</table>
8
<page> 9
NOTE D - 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 E - 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 on-going effectiveness.
Additionally, the Corporation 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, 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. Several of the
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 to hedge the interest rate risk associated with
interest earning assets 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.
9
<page> 10
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 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 June 30, 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 $2.0 million, resulting in no
net earnings impact for the three months ended June 30, 2001. Cash flow hedges
have the effective portion of changes in the fair value of the derivative
recorded in other comprehensive income (OCI). At June 30, 2001, the Corporation
has recorded the fair value of derivatives of $521 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 June 30, 2001, the Corporation
had no ineffective portions of hedges.
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. At adoption of SFAS No. 133, OCI
reflected a $452 thousand loss, net of tax, to recognize the net fair value of
the derivatives used in its cash flow hedges on that date.
NOTE F - 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.
10
<page> 11
NOTE G - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for
the periods indicated:
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Net Income Before Extraordinary Item $ 8,035 $ 9,060 $ 19,360 $ 19,425
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 770
Cumulative Effect of Change in Accounting Principle, Net - - (1,160) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 8,035 9,060 18,200 20,195
===================================================================================================================================
BASIC
Basic EPS Shares 25,546 27,483 25,989 27,629
Net Income Before Extraordinary Item $ 0.31 $ 0.33 $ 0.74 $ 0.70
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change in Accounting Principle, Net - - (0.04) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.31 0.33 0.70 0.73
===================================================================================================================================
DILUTED
Dilutive Shares (principally stock options) 961 525 1,001 539
Diluted EPS Shares 26,507 28,008 26,990 28,168
Net Income Before Extraordinary Item $ 0.30 $ 0.32 $ 0.71 $ 0.69
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change in Accounting Principle, Net - - (0.04) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share 0.30 0.32 0.67 0.72
===================================================================================================================================
</table>
11
<page> 12
NOTE H - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment
securities portfolio were as follows:
<table>
<caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
JUNE 30, 2001
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 83,948 $ 1 $ 1,767 $ 82,182
Mortgage-Backed Securities 1,570,232 11,581 8,644 1,573,169
Municipal Securities 24,669 700 1 25,368
Other Debt Securities 134,743 77 12,297 122,523
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,813,592 $ 12,359 $ 22,709 $ 1,803,242
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2000
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 83,869 $ 172 $ 132 $ 83,909
Mortgage-Backed Securities 1,537,772 2,633 52,745 1,487,660
Municipal Securities 26,618 127 432 26,313
Other Debt Securities 136,291 - 22,186 114,105
- ------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,784,550 $ 2,932 $ 75,495 $ 1,711,987
- ------------------------------------------------------------------------------------------------------------------------
</table>
At June 30, 2001 a net unrealized loss on securities available for sale
of $7.2 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 $47.2
million at June 30, 2000. For details regarding investment securities at
December 31, 2000, refer to Notes 1 and 3 of the Consolidated Financial
Statements incorporated by reference from the Corporation's 10-K filed March 9,
2001.
12
<page> 13
NOTE I - 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.
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Net Income $ 8,035 $ 9,060 $ 18,200 $ 20,195
Other Comprehensive Income (Loss):
Loss on Derivatives Due to SFAS No. 133 Transition - - (452) -
Gain (Loss) on Derivatives Recognized in Other Comprehensive Income 188 - (349) -
Unrealized Holding Gain (Loss) on Debt Securities (3,722) 3,964 13,693 3,486
Less: Reclassification Adjustment for Gains Included in Net Income 1,622 7,779 7,589 7,858
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax (5,156) (3,815) 5,303 (4,372)
Income Tax (Benefit) Related to Items of Other Comprehensive Income (1,804) (1,333) 1,856 (1,529)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), After Tax (3,352) (2,482) 3,447 (2,843)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 4,683 $ 6,578 $ 21,647 $ 17,352
- ------------------------------------------------------------------------------------------------------------------------------------
</table>
NOTE J - SECURITIZATION OF LOANS
SIGNIFICANT ACCOUNTING POLICIES
The Corporation securitizes second mortgage loans out of its acquired
loan portfolio with FNMA, and the respective securities are placed in the
securities portfolio. The retention of the securities represents a retained
interest. No gain or loss is recorded on these transactions until the securities
are sold. The securities are valued at fair market value along with the
Corporation's remaining securities. These loans were sold with full recourse
back to the Bank for any credit and interest losses, collectively referred to as
losses. The recourse exposure based on the expected losses on these loans over
the life of the loans is recognized as a liability. The recourse liability is
evaluated periodically for adequacy by estimating the recourse liability based
on the present valuation of estimated future losses. This estimate determines if
additional amounts need to be provided to the recourse reserve to absorb losses
on the securitized loans through a charge to earnings. Any loans that are
determined to be losses by FNMA are charged against the recourse reserve.
13
<page> 14
VALUATION OF RETAINED INTERESTS
The Corporation determined the current fair value of the retained
interest using certain key assumptions and the sensitivity of the projected cash
flows to immediate 10 percent and 20 percent adverse changes in those
assumptions. The results are presented in the table below as of June 30, 2001.
Retained
(in thousands) FNMA Securities
- --------------------------------------------------------------------------------
Carrying Amount/Fair Value of Retained Interests $691,611
Weighted-Average Life in Years 2.5
Annual Prepayment Assumption 28.2%
Impact on Fair Value of 10% Adverse Change $ (3,297)
Impact on Fair Value of 20% Adverse Change (4,651)
Annual Cash Flow Discount Rate 6.87%
Impact on Fair Value of 10% Adverse Change $(11,783)
Impact on Fair Value of 20% Adverse Change (25,623)
Credit losses do not affect the valuation due to FNMA's full recourse to
the Corporation for losses on loans collaterallizing the securities.
The sensitivities presented above are hypothetical and are presented for
informational purposes only. As the amounts indicate, the fair values due to a
variation in any assumption generally cannot be extrapolated because the
relationship of the change in any assumption to the change in fair value may not
be linear. The effect of a change in a particular assumption on the fair value
of the retained interest is calculated without considering the changes in other
assumptions. However, changes in one assumption may result in changes in
another.
RECOURSE RESERVE
At June 30, 2001, based on the current evaluation, it was determined
that the recourse liability required an additional $1.9 million to cover
estimated losses. Accordingly, this charge was taken in the second quarter of
2001 to increase the recourse liability to $4.2 million at June 30, 2001. At
June 30, 2001 the principal balance of loans securitized or purchased with
recourse amounted to $659.3 million. Principal balances of loans 90 days or more
past due was $2.2 million at June 30, 2001. Net losses during the six month
period ending June 30, 2001 were $434 thousand.
NOTE K - FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142")
which are effective July 1, 2001 and January 1, 2002, respectively, for the
Corporation. SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Under SFAS 142,
amortization of goodwill, including goodwill recorded in past business
combinations, will discontinue upon adoption of this standard. In addition,
goodwill recorded as a result of business combinations completed during the
six-month period ending December 31, 2001 will not be amortized. All goodwill
and intangible assets will be tested for impairment in accordance with the
provisions of the statement. The Company is currently reviewing the provisions
of SFAS 141 and SFAS 142 and assessing the impact of adoption.
14
<page> 15
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 net operating earnings for the quarter
ended June 30, 2001 of $8.0 million, or $.30 per share on a diluted basis. This
is a decrease of 11.3% from $9.1 million, or $.32 per diluted share in the 2000
comparable quarter.
During the second quarter of 2001, a review of delinquencies and
charge-offs in the $1.5 billion acquired loan portfolio, identified
approximately $13.8 million in previously unidentified pre-tax losses through
June 30, 2001, of which $8.5 million related to periods prior to the second
quarter of 2001. As a result of these findings, the Company will amend and
refile certain 2000 financial statement filings on Forms 10-K and 10-Q, as well
as its first quarter 2001 financial statements on Form 10-Q. See Note C in the
Corporation's second quarter 10-Q for selected financial data noting the impact
of these changes on selected periods presented.
Net interest margin for the 2001 second quarter was 2.89%, compared to
2.90% for the same quarter of 2000. Non-interest income (excluding securities
gains) was up $2.4 million or 14.6% for the 2001 second quarter. There were $1.6
million in securities gains during the 2001 second quarter compared to $7.8
million in the same period a year ago. The Company's non-interest expense
(excluding an increase in the recourse reserve on securities retained on loan
securitization transactions - See Note J) increased by 3.5%, up $1.2 million
from the same quarter last year.
NET INTEREST INCOME
Tax equivalent net interest income fell by $3.3 million to $34.8
million for the second quarter of 2001, as compared to the second quarter of
2000. Net interest margin for the 2001 second quarter was 2.89%, compared to
2.90% in the second quarter of 2000.
Provident's tax equivalent interest income fell $12.7 million from the
second quarter of 2000, caused by a combination of $459 million in lower earning
assets and 35 basis points reduction in yield. The reduction in earning assets
was mainly in investments of $161 million and $518 million in acquired second
mortgage loan portfolio. This reduction is consistent with the Company's
strategy to replace wholesale assets and liabilities with core products. Growth
in core assets was driven by increases in Commercial Construction loans of $65.7
million, $21 million in Residential Construction, and $18.2 million in
Commercial Mortgage. The increase in residential mortgage loans is partially
attributable to the acquisition of Harbor Federal Bancorp during the third
quarter of 2000. Consumer loans declined $530 million due to the securitization
of $324 million of second mortgage loans during the third quarter of 2000 and
$239 million during the second quarter of 2001. Mortgage loans held for sale
declined $28.5 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 7.40% compared to 7.75% for the second quarter of 2000.
Total interest expense for the second quarter of 2001 was $9.5 million
less than a year ago, the combined result of a decrease of $349 million in the
average outstanding balance of interest-bearing liabilities and a 44 basis point
decrease in rate paid. This decrease is associated with lower wholesale funding
sources consistent with the strategy to shift to more core assets and
liabilities. Borrowings declined $218 million, brokered deposits declined $298
million and money market CD's declined $54 million. Direct certificates of
deposits increased $128 million and interest-bearing demand deposits/money
market deposits increased $81 million. Non-interest bearing
15
<page> 16
demand deposits increased $44 million. The increases in core deposits are
attributable to the continued expansion of our branch network as well as the
acquisition of Harbor Federal Bancorp during the third quarter of 2000.
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 resulting in a
Statement of Income transition adjustment loss of $1.2 million after tax. The
Corporation closed the derivative instruments that did not qualify for the
shortcut method under SFAS No. 133 at the time of adoption. 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, 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 $4.9 million provision for loan losses, with
net charge-offs of $8.2 million for the second quarter of 2001, compared to a
provision of $13.0 million and net charge-offs of $8.5 million for the same
period of 2000. The majority of the decrease in the provision for loan losses is
mainly related to the losses taken in the second quarter of 2000 associated with
syndicated health care credits. Provident has been closely monitoring its health
care industry credits where the operators have had to adjust to changes in
Medicare reimbursement policies. During the second quarter of 2001, the Company
wrote down its last remaining non-performing health care credit. The Company has
obtained a contract of sale on the nursing home related to this loan and expects
to exit the credit without any additional losses. The Corporation continues to
emphasize loan quality and closely monitors potential problem credits in the
commercial loan portfolio. The review of the acquired second mortgage portfolio
noted above accounted for $2.2 million of the total charge-offs during the
second quarter of 2001. In addition, organizational and policy changes have been
made in the consumer loan area, particularly in the acquired second mortgage
portfolio to more closely monitor potential problem loans. 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 June 30, 2001 was
$35.3 million, compared to $41.1 million a year ago. At June 30, 2001, the
allowance represented 1.19% of total loans and 126% of non-performing loans.
Total non-performing loans were $28.1 million at June 30, 2001 and $27.5 million
at June 30, 2000. Non-performing loans as a percent of loans outstanding as of
June 30, 2001 were .95%.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $19.0
million in the second quarter of 2001 compared to $16.6 million for the second
quarter of 2000. This increase was driven by deposit product revenues, which
increased $2.8 million. The increase in deposit fees was driven by continued
growth in account volume. Other non-interest income was up $589 thousand mainly
associated with Banked Owned Life Insurance. Mortgage banking income declined
$848 thousand as the Corporation made a 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.
There were $1.6 million in securities gains during the 2001 second
quarter compared to $7.8 million in the same period a year ago.
16
<page> 17
NON-INTEREST EXPENSE
Second quarter non-interest expense was $38.6 million, compared to $35.5
million for the same period last year. Salaries and benefits decreased $92
thousand, which reflects the Company's continued focus on operating expense
control and anticipated expense reductions from lines of business exited last
year. Occupancy expense increased $110 thousand and furniture and equipment
expense increased $68 thousand. The branch network expansion contributed to
these increases. External processing fees declined $315 thousand mainly related
to changes in contractual terms of the servicing agreement. During the second
quarter of 2001, the Company recorded $1.9 million to increase the existing
recourse reserve related to $659 million of mortgage backed securities which is
part of the $1.5 billion acquired second mortgage portfolio. All other expenses
increased $1.5 million, majority of which is associated with goodwill
amortization and marketing expenses.
INCOME TAXES
Provident recorded income tax expense of $3.6 million on income before
taxes of $11.7 million, an effective tax rate of 31.2%. During the second
quarter of 2000, Provident's tax expense was $4.6 million on pre-tax income of
$13.7 million, an effective tax rate of 33.7%. The change in effective tax rate
is the result higher tax advantage assets in the second quarter of 2001 compared
to same quarter last year.
FINANCIAL REVIEW FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the six months ending June 30, 2001, net income before extraordinary
item and cumulative effect of change in accounting principle was $19.4 million
or $.74 per share basic and $.71 diluted, compared to $19.4 million or $.70 per
share basic and $.69 per share diluted for the six months ended June 30, 2000.
As a result of a one-time transition adjustment of $1.2 million (net of taxes)
SFAS No. 133 net income for the six months ending June 30, 2001 is $18.2
million, or $.67 per diluted share. The Corporation, like many institutions,
adopted this mandatory accounting standard in the first quarter of 2001.
The $4.7 million decrease in tax-equivalent net interest income for
2001 was the result of a 3.5% or $179 million decrease in average earning assets
over the prior year. Net interest margin dropped by 7 basis points caused by a
decline of 19 basis points in yields and a 17 basis point decrease in costs of
interest-bearing liabilities.
The provision for loan losses decreased $4.3 million to $13.1 million in
2001. The allowance for loan losses ended the quarter at $35.3 million or 1.19%
of loans outstanding.
Non-interest income, excluding net securities gains, increased 18% to
$36.6 million. Deposit service charges rose $6.1 million over the prior year to
$29.0 million, mortgage banking declined $1.4 million to $433 thousand, and
commissions and fees decreased 12% to $2.4 million. Net securities gains were
$7.6 million in 2001 and $7.9 million in 2000.
Provident's non-interest expense, excluding recourse liability expense,
rose 4.4% in 2001 over 2000. Salaries and employee benefits increased $696
thousand attributable to merit increases and new branches. Occupancy costs grew
$343 thousand or 5.4% and furniture and equipment expense increased $201
thousand or 4.1% due to branch network expansion. External processing increased
$402 thousand due to increased account volumes. All other expenses net of
recourse liability increased $1.4 million, majority of which is associated with
goodwill amortization and marketing expenses.
Provident recorded an income tax expense of $9.0 million in first half
of 2001 based on pre-tax income of $28.4 million, which represented an effective
tax rate of 31.8%. This compares with a 31.5% effective tax rate for same period
of 2000.
17
<page> 18
FINANCIAL CONDITION
Total assets of the Corporation decreased $329 million from December
31, 2000 to June 30, 2001 as a result of deleveraging associated with the
Corporation's continued use of its stock buyback authority. The Corporation
repurchased 169,800 shares during the quarter. Securities available for sale
have declined $73 million from December 31, 2000 as a result of this
deleveraging. Consumer loans have declined $338 million from December 31, 2000
as the Company securitized approximately $239 million of acquired second
mortgages during the second quarter of 2001. Commercial business loans declined
$4.4 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. Both of these
transactions took place during the first quarter of 2001. This decision was made
to limit exposure to syndicated national credits. Also during the second quarter
of 2001, the Company wrote down its last remaining non-performing health care
credit. Real estate mortgage loans have declined $75 million, $66 million from
residential mortgage loans. Residential mortgage loans declined as the
Corporation made a 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 $9 million decline in commercial mortgage loans was
attributable to payoffs.
Total deposits ended the quarter at $3.6 billion, a decrease of $374
million over the December 31, 2000 level. Brokered deposits have decreased $432
million since December 31, 2000 as part of the Company's strategy to move from
wholesale funding sources to a larger mix of core deposits. Interest bearing
demand and money market accounts increased $54 million and non-interest bearing
demand increased $38 million since December 31, 2000. Direct certificates of
deposits and savings deposits also increased $2 million and $8 million,
respectively since December 31, 2000. Borrowings and debt have decreased $13
million from December 31, 2000 ending the quarter at $1.2 billion. Of this $1.2
billion, trust preferred capital securities represent $70 million.
The primary sources of liquidity at June 30, 2001 were investments
available for sale, which totaled $1.8 billion. This represents 36.9% of total
liabilities compared to 36.2% at December 31, 2000.
At June 30, 2001, total stockholders' equity was $286 million, a $24.6
million decrease over December 31, 2000. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$358 thousand was raised through the dividend reinvestment plan, $4.6 million
from the exercise of stock options, while capital decreased by $3.4 million
during the first six months of 2001 as a result of Statement of Financial
Accounting Standards No. 115. During the first six months of 2001, the
Corporation also repurchased shares totaling $41.7 million. At quarter-end, the
leverage ratio was 6.90% and total stockholders' equity represented 10.14% of
risk adjusted assets. These ratios exceed the minimum requirements of the
current leverage capital and risk-based capital standards established by
regulatory agencies.
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
18
<page> 19
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 June 30, 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 June 30, 2001.
19
<page> 20
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
The Annual Meeting of Stockholders of Provident Bankshares Corporation
was held on April 18, 2001.
PROPOSAL I
Election of Directors.
The following persons were elected as directors at the 2001
Annual Meeting of Stockholders. The corresponding votes for each
director and their terms of office which continue until the 2003
Annual Meeting of Stockholders is reflected below.
<table>
<caption>
For % Withheld %
--- - ----------- -
<s> <c> <c> <c> <c>
Melvin A. Bilal 22,319,801 97.5 570,369 2.5
Ward B. Coe III 22,326,699 97.5 563,470 2.5
Gary N. Geisel 22,347,627 97.6 542,543 2.4
Fredrick W. Meier, Jr. 22,341,316 97.6 548,853 2.4
Sister Rosmarie Nassif 22,300,859 97.4 589,310 2.6
</table>
The following persons continue to serve as directors until the
2002 Annual Meeting of Stockholders: Thomas S. Bozzuto, Charles
W. Cole, Jr., Barbara B. Lucas, Francis G. Riggs, Carl W. Stearn,
Enos K. Fry and Herbert W. Jorgensen.; until the 2003 Annual
Meeting of Stockholders: Calvin W. Burnett, Pierce B. Dunn, Mark
K. Joseph, Peter M. Martin, Sheila K. Riggs.
PROPOSAL 2.
The stockholders approved the proposed amendment to the Provident
Bankshares Corporation Amended and Restated Stock Option Plan,
with 19,044,791 (83.2%) shares cast in favor, 3,700,287 (16.2%)
shares cast against and 145,095 (.6%) abstaining.
PROPOSAL 3.
The stockholders ratified the selection of PricewaterhouseCoopers
LLP as independent auditors for 2001, with 22,751,250 (99.4%)
shares cast in favor, 82,383 (.4%) shares cast against and 56,536
(.2%) abstaining.
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)
(11.0) Statement Re: Computation of Per Share Earnings (4)
20
<page> 21
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
April 23, 2001 - Transcript of telephone conference call
on April 19, 2001 relating to the Corporation's April 18,
2001 earnings release.
July 17, 2001 - Provident Bankshares Corporation issued a
press release on July 16, 2001 announcing the release of
second quarter earnings was rescheduled.
(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 Provident's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, filed with the Commission on
May 10, 2000.
(4) Included in Note G to the Unaudited Consolidated Financial Statements on
page 11 hereof.
21
<page> 22
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
August 20, 2001 /s/ Peter M. Martin
--------------------
Peter M. Martin
Chairman and Chief Executive Officer
August 20, 2001 /s/ Dennis A. Starliper
-----------------------
Dennis A. Starliper
Chief Financial Officer
22