1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PERSUANT 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
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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, 24,548,394 shares outstanding at
August 4, 1998.
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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--
June 30, 1998 and 1997 and December 31, 1997 3
Consolidated Statement of Income--
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows--
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II - OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 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
Provident Bankshares Corporation and Subsidiaries
June 30, December 31, June 30,
(dollars in thousands) 1998 1997 1997
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ASSETS
Cash and Due From Banks $ 64,373 $ 68,580 $ 68,321
Short-Term Investments 399 350 3,487
Mortgage Loans Held for Sale 99,138 66,925 27,018
Securities Available for Sale 1,483,083 983,241 981,393
Securities Held to Maturity (Market Value
$95,313 at June 30, 1997) - - 94,871
Loans:
Consumer 1,817,656 1,667,094 1,418,234
Commercial Business 314,791 288,289 302,709
Real Estate -- Construction 119,984 125,080 125,476
Real Estate -- Mortgage 496,844 620,605 637,154
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Total Loans 2,749,275 2,701,068 2,483,573
Less: Allowance for Loan Losses 38,731 36,861 32,069
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Net Loans 2,710,544 2,664,207 2,451,504
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Premises and Equipment, Net 39,391 37,402 36,838
Accrued Interest Receivable 34,899 31,032 26,614
Other Assets 65,550 75,002 28,746
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Total Assets $ 4,497,377 $ 3,926,739 $ 3,718,792
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LIABILITIES
Deposits:
Noninterest-Bearing $ 230,156 $ 196,178 $ 192,914
Interest-Bearing 2,684,520 2,558,337 2,306,620
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Total Deposits 2,914,676 2,754,515 2,499,534
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Short-Term Borrowings 342,101 347,291 603,705
Long-Term Debt 780,503 469,077 324,381
Other Liabilities 132,923 85,674 35,311
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Total Liabilities 4,170,203 3,656,557 3,462,931
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Corporation-Obligated Mandatorily Redeemable Capital Securities 39,289 - -
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 24,736,963, 23,284,896 and 23,075,084 Shares;
at June 30, 1998, December 31, 1997 and June 30, 1997 24,737 23,285 23,076
Capital Surplus 171,161 131,191 125,474
Retained Earnings 90,203 113,463 109,249
Net Accumulated Other Comprehensive Income 4,274 4,733 552
Treasury Stock at Cost - 228,066 Shares (2,490) (2,490) (2,490)
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Total Stockholders' Equity 287,885 270,182 255,861
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Total Liabilities and Stockholders' Equity $ 4,497,377 $ 3,926,739 $ 3,718,792
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These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Six Months Ended
June 30, June 30,
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(in thousands, except per share data) 1998 1997 1998 1997
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INTEREST INCOME
Interest and Fees on Loans $ 56,743 $ 49,210 $ 112,823 $ 95,862
Interest on Securities 19,815 17,923 36,494 35,701
Tax-Advantaged Interest 696 1,923 1,579 3,871
Interest on Short-Term Investments 30 50 84 160
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Total Interest Income 77,284 69,106 150,980 135,594
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INTEREST EXPENSE
Interest on Deposits 31,153 25,124 61,200 48,674
Interest on Short-Term Borrowings 4,202 8,594 8,812 17,074
Interest on Long-Term Debt 9,739 4,905 17,038 9,808
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Total Interest Expense 45,094 38,623 87,050 75,556
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Net Interest Income 32,190 30,483 63,930 60,038
Less: Provision for Loan Losses 3,074 2,053 6,049 2,887
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Net Interest Income after Provision for Loan Losses 29,116 28,430 57,881 57,151
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 7,379 6,051 13,637 11,568
Mortgage Banking Activities 3,995 2,002 5,579 4,180
Commissions and Fees 1,063 981 2,247 1,928
Net Securities Gains 725 267 1,934 338
Other Non-Interest Income 2,829 1,564 5,362 3,189
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Total Non-Interest Income 15,991 10,865 28,759 21,203
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 15,230 13,903 29,587 27,650
Occupancy Expense, Net 2,531 2,448 5,013 4,842
Furniture and Equipment Expense 1,931 1,809 3,841 3,617
External Processing Fees 3,549 3,001 6,807 5,899
Capital Securities Expense 690 -- 690 --
Other Non-Interest Expense 6,730 5,748 12,344 11,703
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Total Non-Interest Expense 30,661 26,909 58,282 53,711
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Income Before Taxes 14,446 12,386 28,358 24,643
Income Tax Expense 4,721 4,392 9,328 8,720
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Net Income $ 9,725 $ 7,994 $ 19,030 $ 15,923
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Per Share Amounts:
Net Income -- Basic $ 0.40 $ 0.34 $ 0.78 $ 0.67
Net Income -- Diluted 0.38 0.33 0.75 0.65
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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
Six Months Ended
June 30,
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(in thousands) 1998 1997
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Operating Activities:
Net Income $ 19,030 $ 15,923
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 11,609 3,692
Provision for Loan Losses 6,049 2,887
Provision for Deferred Income Tax Benefit (2,372) (1,419)
Realized Net Securities Gains (1,934) (338)
Loans Originated or Acquired and Held for Sale (399,420) (150,373)
Proceeds from Sales of Loans 423,357 161,046
Gain on Sales of Loans (4,044) (1,383)
Other Operating Activities (1,961) 3,826
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Total Adjustments 31,284 17,938
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Net Cash Provided (Used) by Operating Activities 50,314 33,861
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Investing Activities:
Principal Collections and Maturities of Securities Available for Sale 116,548 77,480
Principal Collections and Maturities of Securities Held to Maturity -- 5,953
Proceeds on Sales of Securities Available for Sale 252,798 78,884
Purchases of Securities Held to Maturity -- (14,611)
Purchases of Securities Available for Sale (813,592) (166,720)
Loan Originations and Purchases Less Principal Collections (109,657) (230,911)
Purchases of Premises and Equipment (5,385) (3,362)
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Net Cash Used by Investing Activities (559,288) (253,287)
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Financing Activities:
Net Increase in Deposits 160,161 213,390
Net Increase (Decrease) in Short-Term Borrowings (5,190) 1,270
Proceeds from Long-Term Debt 371,825 47,000
Payments and Maturities of Long-Term Debt (60,399) (51,136)
Proceeds from Capital Securities 39,289 --
Issuance of Common Stock 5,071 2,897
Cash Dividends on Common Stock (5,941) (3,685)
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Net Cash Provided by Financing Activities 504,816 209,736
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Decrease in Cash and Cash Equivalents (4,158) (9,690)
Cash and Cash Equivalents at Beginning of Year 68,930 81,498
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Cash and Cash Equivalents at End of Period $ 64,772 $ 71,808
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Supplemental Disclosures
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Interest Paid, Net of Amount Capitalized $ 49,313 $ 38,277
Income Taxes Paid 4,652 5,345
Stock Dividend 36,350 14,606
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
JUNE 30, 1998
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 six month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997 as
filed with the Securities and Exchange Commission on March 19, 1998.
NOTE B - PER SHARE INFORMATION
The Corporation adopted Statement of Financial Accounting Standards No.
128 - "Earnings Per Share" ("SFAS No. 128") on December 31, 1997. SFAS No. 128
requires the Corporation to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128. The following table
presents a summary of per share data and amounts for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
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(dollars in thousands, except per share data) 1998 1997 1998 1997
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Qualifying Net Income $ 9,725 $ 7,994 $ 19,030 $ 15,923
Basic EPS Shares 24,496 23,745 24,417 23,712
Basic EPS $ 0.40 $ 0.34 $ 0.78 $ 0.67
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Dilutive Shares 1,054 667 1,113 685
Diluted EPS Shares 25,550 24,412 25,530 24,397
Diluted EPS $ 0.38 $ 0.33 $ 0.75 $ 0.65
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NOTE C - INVESTMENT SECURITIES
The Corporation's investment portfolio is divided among three categories:
securities held to maturity, securities available for sale and trading account
securities. Debt securities that the Corporation has the intent and ability to
hold to maturity are included in securities held to maturity and, accordingly,
are carried at cost adjusted for amortization of premiums and accretion of
discounts using the interest method. Securities available for sale are reported
at fair value with any unrealized appreciation or depreciation in value
reported, net of applicable taxes, directly as a separate component of
stockholders' equity as accumulated other comprehensive income and therefore,
has no effect on the financial results of the Corporation's operations.
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The aggregate amortized cost and market values of the investment securities portfolio at June 30, were as follows:
June 30, 1998
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Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
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Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 45,287 $ 30 $ -- $ 45,317
Mortgage-Backed Securities 1,395,224 8,020 1,208 1,402,036
Municipal Securities 21,035 512 29 21,518
Other Debt Securities 14,467 -- 255 14,212
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Total Securities Available for Sale $ 1,476,013 $ 8,562 $ 1,492 $ 1,483,083
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June 30, 1997
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Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
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Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 74,646 $ 128 $ 503 $ 74,271
Mortgage-Backed Securities 857,281 6,001 4,645 858,637
Municipal Securities 18,875 287 150 19,012
Other Debt Securities 29,647 26 200 29,473
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Total Securities Available for Sale 980,449 6,442 5,498 981,393
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Securities Held to Maturity
U.S. Treasury and Government
Agencies and Corporations 31,479 194 1 31,672
Mortgage-Backed Securities 63,392 722 473 63,641
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Total Securities Held to Maturity 94,871 916 474 95,313
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Total Investment Securities Portfolio $ 1,075,320 $ 7,358 $ 5,972 $ 1,076,706
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At June 30, 1998 a net unrealized gain of $4.3 million was reflected as
Accumulated Other Comprehensive Income which is reflected separately as a
component of Stockholders' Equity in the Consolidated Statement of Condition as
compared to a net unrealized gain of $4.7 million at December 31, 1997. For
details regarding investment securities at December 31, 1997, refer to Note 3 of
the Consolidated Financial Statements incorporated in the Corporation's 10-K
filed March 19, 1998.
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NOTE D - SERVICING ASSETS
Effective January 1, 1997, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 125 - "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 requires the Corporation to carry any retained interest in a
transferred asset on the Statement of Condition as a servicing asset. In the
case of the Corporation, the servicing assets represent the fair value of the
servicing contracts associated with the purchase or origination and subsequent
securitization of the mortgage loans. Servicing assets are amortized in
proportion to and over the period of estimated net servicing income. Servicing
assets are evaluated periodically for impairment based on their fair value and
impairment, if any, is recognized through a valuation allowance and a charge to
operations. At June 30, 1998 no valuation allowance was required.
The following is an analysis of servicing asset balance, net of
accumulated amortization, during the period ended June 30, 1998:
June 30,
(in thousands) 1998
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Balance at January 1, 1998 $1,984
Additions 6,261
Amortization 235
Sales of Servicing Assets 7,704
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Balance at June 30, 1998 $ 306
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NOTE E - CONTINGENT LIABILITIES
In April 1997, a judgment stemming from a lawsuit alleging that Provident
Bank of Maryland ("Provident" or the "Bank") had failed to fully honor a letter
of credit was entered against Provident in the amount of $5.2 million, exclusive
of post-judgment interest. This decision reversed an earlier court holding in
favor of Provident. The Bank has appealed the decision. Management, in
consultation with legal counsel, is of the opinion that there exists a
significant possibility that the award will be reversed or substantially altered
at the appellate level. The ultimate outcome of the case will not have a
material adverse effect on the Corporation's financial statements.
NOTE F - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"). SFAS No. 130 establishes requirements for the
disclosure of comprehensive income in interim financial statements.
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For the
Corporation, nonowner equity changes are comprised of unrealized gains or losses
on debt securities that will be accumulated with net income in determining
comprehensive income. This statement does not impact the historical financial
results of the Corporation's operations and is effective for years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Adoption of this standard
did 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 Six Months Ended
June 30, June 30,
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(in thousands) 1998 1997 1998 1997
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Net Income $ 9,725 $ 7,994 $ 19,030 $ 15,923
Other Comprehensive Income:
Unrealized Holding Gains (Losses) During the Period 1,106 13,493 1,175 3,526
Less: Reclassification Adjustment for Gains Included in
Net Income (725) (267) (1,934) (338)
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Other Comprehensive Income, Before Tax 381 13,226 (759) 3,188
Income Tax (Benefit) Related to Items of Other Comprehensive Income 150 5,223 (300) 1,263
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Other Comprehensive Income, After Tax 231 8,003 (459) 1,925
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Comprehensive Income $ 9,956 $ 15,997 $ 18,571 $ 17,848
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NOTE G - FUTURE ACCOUNTING DISCLOSURE REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." The statement
becomes effective for fiscal years beginning after June 15, 1999 and will not be
applied retroactively. The statement establishes accounting and reporting
standards for derivative instruments and hedging activity. Under the standard,
all derivatives must be measured at fair value and recognized as either assets
or liabilities in the financial statements.
The accounting for changes in fair value (gains and 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 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 flow of forecasted
transactions, referred to as a cash flow hedge, 3) hedge foreign currency
exposure.
The corporation only engages in fair value and cash flow hedges. In both
types of hedges, the effective portions of the hedges, although included in
earnings, do not affect corporate net income. Ineffective portions of hedges are
reported in and affect net earnings immediately. Derivatives not designed as a
hedging instrument have the changes in their fair value recognized in earnings
in the period of change. Management is currently assessing the potential impact
of SFAS No. 133 on future corporate operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
EARNINGS SUMMARY
Provident Bankshares Corporation recorded net income for the quarter ended
June 30, 1998 of $9.7 million or $.40 per share basic and $.38 diluted. This
represented a 21.7% increase in net income over the same period a year ago. Net
income for the quarter ended June 30, 1997 was $8.0 million or $.34 per share
basic and $.33 diluted. The higher earnings in 1998 were mainly due to loan
growth and increased fee income. Average consumer loans outstanding grew $503
million as total average loans increased 17% to $2.77 billion. Non-interest
income growth was driven by a 20% increase in fee based services on higher
account volume. Operating expenses net of capital securities expenses increased
11.4 percent from the second quarter of 1997. This increase is associated with
continued network expansion, upgrading of branch technology and increased
mortgage banking business. There was a $3.1 million provision for loan losses
during the quarter with net charge-offs of $2.1 million. The $1.0 million
increase in provision is mainly related to the growth in loans.
NET INTEREST INCOME
Growth in average earning assets offset in part by a higher cost of
liabilities raised tax-equivalent net interest income to $32.5 million for the
second quarter of 1998, a $1.75 million increase over the prior year.
Provident's interest income on earning assets rose $8.2 million from the
second quarter of 1997, the result of a $551 million expansion in average
earning asset balances. Growth in total average earning assets was provided by
increases of $503 million in consumer loans, $77.4 million in investment and
$65.8 million in mortgage loans held for sale. Real estate mortgages decreased
$96.3 million mainly driven by a $52 million loan sale during the second
quarter. The yield declined 25 basis points to 7.63% versus 7.88% the prior
year.
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Total interest expense for the second quarter of 1998 was $6.5 million
above a year ago, the combined result of an increase of 11 basis points in the
average rate paid and a $451 million increase in the average outstanding balance
of interest-bearing liabilities. Included in this increase were $345 million in
brokered deposits, $39 million in money market certificates of deposits, $55
million in interest bearing demand/money market deposits and $62 million in
individual retirement account deposits. Savings and direct certificates of
deposit declined $5 million and $75 million, respectively. Borrowed money
increased $30 million.
As a result of off-balance sheet transactions undertaken to insulate the
bank from interest rate risks, interest income increased by $95 thousand and
interest expense increased by $42 thousand, for a total increase of $53 thousand
in net interest income for the quarter ending June 30, 1998. Included in this
net interest income increase was the amortization of closed positions which
reduced interest income by $54 thousand and increased interest expense by $469
thousand (a net decrease of $523 thousand) for the current quarter. Without the
amortization of closed positions, off-balance sheet positions increased net
interest income $576 thousand for the current quarter.
The forward yield curve indicates that short-term rates will decrease by 3
basis points and long term rates will increase 3 basis points over the next
twelve months. The Corporation's analysis indicates that if management does not
adjust its June 30, 1998 off-balance sheet positions and the forward yield curve
assumptions occur, off-balance sheet positions, including amortization of closed
positions, would increase net interest income by $1.0 million over the next
twelve months. This compares to an increase in net interest income of $732
thousand should interest rates remain unchanged. Amortization of closed
positions will reduce net interest income $1.13 million over the next twelve
months. Thus, without amortization of closed positions, net interest income
would increase $2.13 million over the next twelve months if the forward yield
curve assumptions occur and $1.86 million if rates remain unchanged.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $3.1 million provision for loan losses for the
quarter, with net charge-offs of $2.1 million for the second quarter of 1998
compared to $842 thousand for the same period of 1997. The Corporation continues
to emphasize loan quality and closely monitors potential problem credits. Senior
managers meet at least monthly to review the credit quality of the loan
portfolios and at least quarterly with executive management to review the
adequacy of the allowance for loan losses. The allowance for loan losses at June
30, 1998 was $38.7 million, up from the $32.1 million a year ago. At June 30,
1998, the allowance represented 1.41% of total loans and 283% of non-performing
loans. Total non-performing loans were $13.7 million at June 30, 1998.
Non-performing loans as a percent of loans outstanding as of June 30, 1998 were
.50%.
In April of 1997, a judgment stemming from a lawsuit alleging that
Provident Bank of Maryland had failed to fully honor a letter of credit was
entered against Provident in the amount of $5.2 million, exclusive of
post-judgment interest. This decision reversed an earlier court holding in favor
of Provident. The Bank has appealed the decision. Management, in consultation
with legal counsel, is of the opinion that there exists a significant
possibility that the award will be reversed or substantially altered at the
appellate level. The ultimate outcome of the case will not have a material
adverse effect on the Corporation's financial statements.
NON-INTEREST INCOME
Non-interest income exclusive of securities gains totaled $15.3 million in
the second quarter of 1998 compared to $10.6 million in 1997. This increase was
driven by a $2.0 million increase in mortgage banking activities, a $1.3 million
increase in deposit service fees driven by higher account volume and loan fees
increased $1.1 million. Mortgage banking income was driven by increased
originations which totaled $218 million during the second quarter of 1998
compared to $71 million during the same quarter of 1997. Sales of mortgage loans
resulted in $2.6 million in gains for the second quarter of 1998 as compared to
$662 thousand for the same period in 1997.
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NON-INTEREST EXPENSE
Second quarter non-interest expense was $30.7 million, compared to $26.9
million for the same period last year. Salaries and benefits increased $1.3
million mainly related to merit increases and incentives associated with
increased mortgage originations. Occupancy costs increased $83 thousand over
last year and furniture and equipment expense increased $122 thousand. These
increases were required by branch network expansion and upgrades of technology.
External processing fees increased $548 thousand due to increased account
volume. During the second quarter of 1998, $40 million of capital securities
were issued resulting in $690 thousand in related expenses for the quarter. All
other expenses increased a total of $982 thousand mainly associated with a $826
thousand increase in marketing expenses.
INCOME TAXES
Provident recorded income tax expense of $4.7 million on income before
taxes of $14.5 million, an effective tax rate of 32.7%. During the second
quarter of 1997, Provident's tax expense was $4.4 million on pre-tax income of
$12.4 million, an effective tax rate of 35.5%. The decrease in the effective tax
rate is primarily due to lower state income tax expense.
FINANCIAL REVIEW FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997
For the six months ending June 30, 1998, net income was $19.03 million or
$.78 per share-basic and $.75 diluted, compared to $15.92 million or $.67 per
share basic and $.65 diluted for six months ended June 30, 1997. This
improvement in earnings was attributable to a $4.01 million rise in tax
equivalent net-interest income and a $7.56 million increase in non-interest
income. These increases more than offset a $4.57 million increase in operating
expense and a $3.16 million increase in the provision for loan losses.
The $4.01 million increase in tax-equivalent net interest income for 1998
was the result of a $465 million increase in average earning assets over the
prior year. Net interest margin dropped by 21 basis points caused by a decline
of 14 basis points in yields and a 13 basis point increase in costs on
interest-bearing liabilities.
The provision for loan losses increased $3.16 million to $6.05 million in
1998. The increase was the result of overall loan growth in the loan portfolios
of $266 million.
Non-interest income, excluding net securities gains (losses), increased
29% to $26.8 million. Deposit service charges rose $2.1 million over the prior
year to $13.6 million, mortgage banking activities were up $1.4 million to $5.6
million, and commissions and fees were up 17% to $2.2 million.
Provident's non-interest expense rose 8.5% in 1998 over 1997. Salaries and
employee benefits increased $1.9 million attributable to merit increases and new
branches. Commissions were up associated with increased activity within
Provident Mortgage Corp. Occupancy costs grew $171 thousand or 3.5% over 1997.
Total furniture and equipment expense increased $224 thousand due to upgrading
of technology in the bank's office automation and branch platform systems.
External processing increased $908 thousand due to increased account volumes.
Provident recorded an income tax expense of $9.3 million in 1998 based on
pre-tax income of $28.36 million, which represented an effective tax rate of
32.9%. This compares with a 35.4% effective tax rate for 1997.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the Corporation's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
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miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions.
The Corporation utilizes a third party processor for the majority of its
data processing requirements. Provident is working with this servicer as well as
with all of the Corporation's other significant suppliers of data processing
software and hardware. The Corporation presently believes that timely
modifications to existing software and or hardware will neutralize the Year 2000
Issue.
The Corporation will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Corporation plans to complete the Year 2000 project by December 31, 1998. The
total cost of the Year 2000 project is not expected to exceed $1.0 million and
is not expected to have a material effect on the results of operations.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
FINANCIAL CONDITION
Total assets of the Corporation increased $571 million from December 31,
1997 to June 30, 1998 as investments increased $500 million and loan balances
increased $48 million. Consumer loans were up $151 million and commercial
business loans were up $27 million from December 31, 1997. Real estate
construction loans declined $5 million and real estate mortgage loans $124
million. The decline in mortgage loans was primarily related to the sale of
loans during the quarter. Total deposits ended the quarter at $2.9 billion, an
increase of $160 million over the December 31, 1997 level. Non-interest bearing
deposits increased $34 million from December 31, 1997 while interest bearing
deposits increased $126 million. Borrowings increased $306 million from December
31, 1997 ending the quarter at $1.12 billion. In April 1998, the Corporation
issued $40 million of trust capital securities, which were outstanding as of
June 30, 1998. A subsidiary trust of the Corporation issued these capital
securities, and the Corporation received the proceeds by issuing junior
subordinated debentures to the trust. These capital securities are considered
tier 1 capital for regulatory purposes.
The primary source of liquidity at June 30, 1998 were loans held for sale
and investments available for sale, which totaled $1.6 billion. This represents
38% of total liabilities compared to 29% at December 31, 1997.
At quarter-end, the leverage ratio was 7.70% and total stockholders'
equity represented 11.31% of risk adjusted assets. These ratios exceed the
minimum requirements of the current leverage capital and risk-based capital
standards established by regulatory agencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 1997, see "Interest
Sensitivity Management" and Note 13 to the Consolidated Financial Statements in
the Corporation's Form 10-K filed with the Commission on March 19, 1998. The
market risk of the Corporation has not experienced any significant changes as of
June 30, 1998. 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, 1998.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities and Use of Proceeds - See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition - Financial Condition" for a discussion of the Capital
Trust Securities issued by a subsidiary of the Corporation.
In addition, on July 15, 1998, the Corporation's Board of
Directors authorized an amendment of the Corporation's Stockholder
Protection Rights Plan dated as of January 18, 1995 between
Provident Bankshares Corporation and Provident Bank of Maryland,
as Rights Agent, regarding the definition of the exercise price.
The Agreement is included herein as Exhibit 4.1.
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 15, 1998.
PROPOSAL I
Election of Directors.
The following persons were elected as directors at the 1998
Annual Meeting of Stockholders. The corresponding votes for each
director and their terms of office which continue until the
respective Annual Meeting of Stockholders is reflected below.
For % Withheld %
--- - -------- -
1999 Annual Meeting:
Enos K. Fry 19,893,472 98.6 281,644 1.4
Herbert W. Jorgensen 19,895,025 98.6 280,091 1.4
2001 Annual Meeting:
Robert B. Barnhill, Jr. 19,905,356 98.7 269,760 1.3
Melvin A. Bilal 19,896,429 98.6 278,687 1.4
Ward B. Coe, III 19,890,176 98.6 284,940 1.4
M. Jenkins Cromwell, Jr. 19,887,567 98.6 287,549 1.4
Frederick W. Meier 19,905,268 98.7 269,848 1.3
Sister Rosemarie Nassif 19,881,416 98.5 293,700 1.5
The following persons continue to serve as directors until the
1999 Annual Meeting of Stockholders: Charles W. Cole, Jr., Barbara
B. Lucas, Francis G. Riggs, and Carl W. Stern; until the 2000
Annual Meeting of Stockholders: Dr. Calvin W. Burnett, Pierce B.
Dunn, Mark K. Joseph, Peter M. Martin, and Shela K. Riggs.
PROPOSAL II
The Stockholders approved the amendment to the Sixth Article of
the Corporation's Articles of Incorporation, authorizing the
Corporation to issue a total of 105,000,000 shares of stock with
16,665,614 (82.6%) shares cast in favor, 3,409,873 (16.9%) shares
cast against and 99,629 (.5%) abstaining.
PROPOSAL III
The Stockholders approved the amendment of the Stock Option Plan
to increase the number of shares available under the Plan by
500,000 on a "post split" basis with 15,992,867 (79.3%) shares
cast in favor, 4,059,599 (20.1%) shares cast against and 122,650
(.6%) abstaining.
PROPOSAL IV
The Stockholders ratified the selection of Coopers & Lybrand LLP
as independent auditors for 1998, with 20,075,862 (99.5%) shares
cast in favor, 32,905 (.2%) shares cast against and 66,349 (.3%)
abstaining.
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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) Provident Bankshares Corporation Articles of Incorporation,
as amended *
(3.2) Provident Bankshares Corporation Amended and Restated Bylaws
(4.1) Stockholder Protection Rights Agreement dated as of
January 18, 1995 between Provident Bankshares Corporation and
Provident Bank of Maryland, as Rights Agent, as amended
(11) Statement re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the
quarter ended June 30, 1998.
* Incorporated by reference from the Corporation's Form S-8 (File No.
333-58881) filed with the Securities and Exchange Commission on July
10, 1998.
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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
August 14, 1998 /s/ Peter M. Martin
-------------------
Peter M. Martin
President, Chairman and Chief
Executive Officer
August 14, 1998 /s/ R. Wayne Hall
-----------------
R. Wayne Hall
Treasurer
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EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
(3.1) Provident Bankshares Corporation Articles of Incorporation, as amended * --
(3.2) Provident Bankshares Corporation Amended and Restated Bylaws 16
(4.1) Stockholder Protection Rights Agreement dated as of January 18, 1995 32
between Provident Bankshares Corporation and Provident Bank of
Maryland, as Rights Agent, as amended
(11) Statement re: Computation of Per Share Earnings 81
(27) Financial Data Schedule 82
* Incorporated by reference from the Corporation's Form S-8 (File No. 333-58881) filed with the
Securities and Exchange Commission on July 10, 1998.
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