[PROVIDENT BANKSHARES CORPORATION LETTERHEAD]
February 10, 2006
Dear Shareholder:
As I reflect on the Bank's performance over the past few years and consider our
outlook, I am very pleased with our progress and am extremely optimistic about
our future. Despite a number of external challenges, the Provident Team's
accomplishments in 2005 were outstanding, and we are beginning our 120th
anniversary year excited about our opportunities as the right size bank in this
market. I will share some highlights of 2005, update you on our strategies, and
discuss our outlook for the year ahead.
2005 FINANCIAL HIGHLIGHTS
Provident Bankshares reported record earnings for 2005 of $73 million or $2.17
per diluted share. These record earnings were largely a result of strong loan
and deposit growth throughout the Bank's franchise. Net income for the fourth
quarter was $19 million or earnings per share of $0.57 for the quarter. The
financial results reflect the Company's continued progress in growing core loans
and deposits and replacing wholesale assets and funding.
Unlike many others in our industry, Provident continued to produce quarterly
improvements in the net interest margin, which rose to 3.59% for the fourth
quarter 2005 as compared to 3.40% in the fourth quarter 2004. Over the same
period, return on assets also improved, increasing to 1.19% from 1.16%.
Asset quality remains strong due to our credit policies, our strategy of
shifting the balance sheet to core loan portfolios and the current favorable
credit conditions. Net charge-offs declined by $3.4 million, or 38%, to a record
low of $5.5 million, or 0.15% of average loans in 2005.
We posted these solid results in an environment of rising interest rates,
competitive pressures and retroactive application of accounting rules, which
precipitated a restatement of our 2004 and 2005 reported earnings in November of
2005. While frustrated by the need to restate earnings, I realize that these
types of adjustments represent the current public accounting climate in our
country.
UPDATE ON BUSINESS LINE PERFORMANCE
Our success in 2005 was driven by the consistent execution of our corporate
strategies.
o Maximize Provident's position as the right size bank in the marketplace
o Grow and deepen consumer and small business relationships in Maryland and
Virginia
o Grow and deepen commercial and real estate relationships in Maryland and
Virginia
o Move from a product driven organization to a customer relationship focused
sales culture
o Create a high performance culture that focuses on employee development
and retention
I would like to briefly elaborate on our progress with these strategies by
sharing a few highlights of the year's performance: the introduction of Benefit
Banking, home equity lending and real estate lending.
Benefit Banking was introduced late last year to support the organization's
efforts to move from a product driven organization to a customer relationship
focused sales culture. This program rewards the Bank's retail customers who
choose Provident to be their primary bank. Early results for this initiative are
very positive.
Home equity lending is a key component of our strategy to grow and deepen
consumer relationships in Maryland and Virginia. In 2005, home equity loan
balances and new business production reached record levels. The strong housing
market and focused selling efforts drove the size of average loan/line
commitments up 22% over 2004. The contribution of our Virginia franchise
continues to grow; in fact, home equity production from our Virginia traditional
branch network increased approximately $41 million from last year.
Real estate lending has long been a core competency for Provident, and
attracting and retaining the region's established builders and developers is an
important aspect of the Bank's strategy to grow and deepen commercial and real
estate relationships in Maryland and Virginia. Real estate lending in both
states was strong, with average loan balances up 54% and 66%, respectively. We
bank the most respected area builders and have grown key relationships in
market, as well as in adjacent markets to support current clients and to take
advantage of new opportunities.
OUTLOOK FOR 2006
Consistent execution of our key strategies and focus on transforming our balance
sheet has produced excellent results, and that will continue to be the case in
2006 and beyond. I believe that we are poised for continued solid growth in the
attractive markets we serve.
The mid-Atlantic corridor of Baltimore, Washington and Richmond offers
tremendous growth opportunity for Provident. The job markets of these areas
continue to outpace much of the United States, due in part, to the federal
government's spending on defense and technology. We are also encouraged by the
positive trends in this region's real estate market. Early indications are that
the housing market is returning to a more sustainable growth level after its
recent exuberance. In the Baltimore - Richmond corridor, the commercial real
estate market strengthened in 2005. Office vacancy rates are at or below the
national rate in the Baltimore, Washington and Richmond metro areas.
We are well positioned for the strong growth in the Washington metro area and in
central Virginia due to our expansion over the last several years in those areas
and are seeing the benefits of our acquisition of Virginia-based Southern
Financial in 2004. Across our markets, we anticipate solid contributions from
our established consumer and commercial business lines and from newer
initiatives such as small business. We expect this to translate into loan growth
of 10 to 12%, with consumer loan business growing more rapidly than our
commercial portfolio, and deposit growth of 6 to 8%, with more of the growth in
percentage terms with the commercial customer. Our branch expansion will be more
restrained with one traditional and two in-store locations planned. We plan to
deploy more of our capital resources to renovate existing locations. We expect
fee income to grow in the 8 to 9% range and plan to limit expense growth to less
than 6%.
In closing, I am pleased to note that total return (dividends plus capital
appreciation) on our common stock was greater than 61% from the end of 2002
through December 31, 2005. Further, on January 20, 2006, the Board of Directors
of Provident Bankshares Corporation declared a quarterly cash dividend of $0.285
per share. This is the forty-ninth consecutive quarterly dividend increase. The
quarterly cash dividend will be paid on February 10, 2006 to stockholders of
record at the close of business on January 30, 2006. Thank you for your
investment in Provident Bankshares and for your continued trust and confidence.
Sincerely,
/s/ Gary N. Geisel
Gary N. Geisel
Chairman and Chief Executive Officer
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
FINANCIAL SUMMARY
(DOLLARS IN THOUSANDS,EXCEPT PER SHARE DATA) Three Months Ended Three Months Ended
December 31, September 30,
------------------------------------------ --------------------------
2005 2004 % Change 2005 % Change
-------------- ------------- ----------- ------------- ----------
SUMMARY INCOME STATEMENTS:
Net interest income $ 50,508 $ 49,038 3.0 % $ 50,093 0.8 %
Provision for loan losses 400 1,505 (73.4) 826 (51.6)
Non-interest income 28,544 28,790 (0.9) 27,737 2.9
Net gains (losses) 478 824 (42.0) 884 (45.9)
Derivative gains (losses) (1,261) (204) - (3,207) (60.7)
Non-interest income, excluding total gains (losses) 29,327 28,170 4.1 30,060 (2.4)
Total revenue, excluding total gains (losses) 79,835 77,208 3.4 80,153 (0.4)
Non-interest expense 51,657 48,951 5.5 50,649 2.0
Merger expense - 275 - - -
Non-interest expense, excluding merger expense 51,657 48,676 6.1 50,649 2.0
Income tax expense 8,025 8,519 (5.8) 8,102 (1.0)
Net income 18,970 18,853 0.6 18,253 3.9
SHARE DATA:
Basic earnings per share $ 0.58 $ 0.57 1.8 % $ 0.55 5.5 %
Diluted earnings per share 0.57 0.56 1.8 0.54 5.6
Cash dividends paid per share 0.280 0.260 7.7 0.275 1.8
Book value per share 19.14 18.68 2.5 19.05 0.5
Weighted average shares - basic 32,904,879 33,161,703 (0.8) 32,939,059 (0.1)
Weighted average shares - diluted 33,560,110 33,941,261 (1.1) 33,640,029 (0.2)
Common shares outstanding 32,933,118 33,102,385 (0.5) 32,963,053 (0.1)
SELECTED RATIOS:
Return on average assets 1.19 % 1.16 % 1.14 %
Return on average equity 12.06 12.16 11.47
Return on average common equity 11.77 12.23 11.41
Net yield on average earning assets (t/e basis) 3.59 3.40 3.55
Efficiency ratio 64.51 62.89 63.08
Leverage ratio 8.40 8.29 8.24
Tier I risk-based capital ratio 10.94 11.82 10.85
Total risk-based capital ratio 11.93 12.89 11.86
END OF PERIOD BALANCES:
Investment securities portfolio $ 1,905,355 $ 2,301,066 (17.2)% $ 1,941,014 (1.8)%
Total loans 3,695,381 3,559,880 3.8 3,666,758 0.8
Assets 6,354,952 6,571,416 (3.3) 6,405,013 (0.8)
Deposits 4,124,467 3,779,987 9.1 3,979,656 3.6
Stockholders' equity 630,326 618,423 1.9 627,972 0.4
Common stockholders' equity 647,778 620,058 4.5 639,854 1.2
AVERAGE BALANCES:
Investment securities portfolio $ 1,927,955 $ 2,245,879 (14.2)% $ 1,964,137 (1.8)%
Loans:
Originated and acquired residential mortgage 479,884 689,445 (30.4) 541,096 (11.3)
Home equity 879,598 676,169 30.1 831,987 5.7
Other consumer 450,264 482,613 (6.7) 460,956 (2.3)
Commercial real estate 1,210,952 992,934 22.0 1,138,972 6.3
Commercial business 649,191 663,491 (2.2) 662,337 (2.0)
Total loans 3,669,889 3,504,652 4.7 3,635,348 1.0
Earning assets 5,614,502 5,766,038 (2.6) 5,611,818 0.0
Assets 6,330,442 6,463,566 (2.1) 6,334,883 (0.1)
Deposits:
Noninterest-bearing 816,635 804,657 1.5 814,400 0.3
Interest-bearing 3,200,304 2,960,711 8.1 3,090,705 3.5
Total deposits 4,016,939 3,765,368 6.7 3,905,105 2.9
Stockholders' equity 623,954 616,616 1.2 631,422 (1.2)
Common stockholders' equity 639,588 613,328 4.3 634,905 0.7