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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
COMMISSION FILE NUMBER 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1518642
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
Number)
114 East Lexington Street, Baltimore, Maryland 21202
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(Address of Principal Executive Offices)
Not Applicable
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(Former Name, former Address and Former Fiscal Year if
Changed Since Last Report)
(410) 277-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 24,267,762 shares outstanding at
November 9, 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
September 30, 1998 and 1997 and December 31, 1997 3
Consolidated Statement of Income - Unaudited
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statement of Cash Flows - Unaudited
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION 13
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 14
EXHIBIT INDEX 15
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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
September 30, December 31, September 30,
(dollars in thousands) 1998 1997 1997
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ASSETS
Cash and Due From Banks $ 65,151 $ 68,580 $ 60,792
Short-Term Investments 10,067 350 2,526
Mortgage Loans Held for Sale 141,015 66,925 35,074
Securities Available for Sale 1,321,821 983,241 944,124
Loans:
Consumer 2,170,054 1,667,094 1,555,096
Commercial Business 354,848 288,289 282,332
Real Estate -- Construction 136,828 125,080 131,101
Real Estate -- Mortgage 464,036 620,605 631,693
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Total Loans 3,125,766 2,701,068 2,600,222
Less: Allowance for Loan Losses 39,943 36,861 35,197
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Net Loans 3,085,823 2,664,207 2,565,025
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Premises and Equipment, Net 40,460 37,402 37,165
Accrued Interest Receivable 41,214 31,032 28,292
Other Assets 89,211 75,002 27,452
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Total Assets $ 4,794,762 $ 3,926,739 $ 3,700,450
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LIABILITIES
Deposits:
Noninterest-Bearing $ 210,501 $ 196,178 $ 176,390
Interest-Bearing 3,025,800 2,558,337 2,479,522
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Total Deposits 3,236,301 2,754,515 2,655,912
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Short-Term Borrowings 421,703 347,291 373,283
Long-Term Debt 757,274 469,077 374,105
Other Liabilities 48,040 85,674 37,977
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Total Liabilities 4,463,318 3,656,557 3,441,277
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Corporation-Obligated Mandatorily Redeemable Capital Securities 39,238 - -
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 24,786,977, 23,284,896 and 22,908,750 Shares;
at September 30, 1998, December 31, 1997 and September 30, 1997 24,787 23,285 22,909
Capital Surplus 171,879 131,191 126,615
Retained Earnings 96,791 113,463 107,191
Net Accumulated Other Comprehensive Income 7,780 4,733 4,948
Treasury Stock at Cost - 489,566 Shares at September 30, 1998 and
228,066 Shares at December 31, 1997 and September 30, 1997 (9,031) (2,490) (2,490)
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Total Stockholders' Equity 292,206 270,182 259,173
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Total Liabilities and Stockholders' Equity $ 4,794,762 $ 3,926,739 $ 3,700,450
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These financial statements should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
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(in thousands, except per share data) 1998 1997 1998 1997
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INTEREST INCOME
Interest and Fees on Loans $ 59,132 $ 53,469 $ 171,955 $ 149,331
Interest on Securities 23,695 16,192 60,164 51,892
Tax-Advantaged Interest 600 1,737 2,179 5,608
Interest on Short-Term Investments 51 77 160 238
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Total Interest Income 83,478 71,475 234,458 207,069
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INTEREST EXPENSE
Interest on Deposits 33,262 27,612 94,462 76,286
Interest on Short-Term Borrowings 5,648 7,156 14,460 24,230
Interest on Long-Term Debt 11,917 5,144 28,955 14,952
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Total Interest Expense 50,827 39,912 137,877 115,468
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Net Interest Income 32,651 31,563 96,581 91,601
Less: Provision for Loan Losses 2,195 4,330 8,244 7,217
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Net Interest Income after Provision for Loan Losses 30,456 27,233 88,337 84,384
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 7,560 6,384 21,197 17,952
Mortgage Banking Activities 3,078 1,469 8,657 5,649
Commissions and Fees 1,000 920 3,247 2,848
Net Securities Gains 1,587 230 3,521 568
Other Non-Interest Income 2,722 1,706 8,084 4,895
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Total Non-Interest Income 15,947 10,709 44,706 31,912
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 15,867 13,663 45,454 41,313
Occupancy Expense, Net 2,660 2,541 7,673 7,383
Furniture and Equipment Expense 2,033 1,881 5,874 5,498
External Processing Fees 3,612 3,299 10,419 9,198
Merger Related Expenses -- 10,047 -- 10,047
Capital Securities Expense 839 -- 1,529 --
Other Non-Interest Expense 6,608 5,603 18,952 17,306
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Total Non-Interest Expense 31,619 37,034 89,901 90,745
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Income Before Taxes 14,784 908 43,142 25,551
Income Tax Expense 4,884 882 14,212 9,602
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Net Income $ 9,900 $ 26 $ 28,930 $ 15,949
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Per Share Amounts:
Net Income -- Basic $ 0.40 $ 0.00 $ 1.18 $ 0.67
Net Income -- Diluted 0.39 0.00 1.13 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
Nine Months Ended
September 30,
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(in thousands) 1998 1997
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Operating Activities:
Net Income $ 28,930 $ 15,949
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 19,217 5,825
Provision for Loan Losses 8,244 7,217
Provision for Deferred Income Tax Benefit (2,697) (3,808)
Realized Net Securities Gains (3,521) (568)
Loans Originated or Acquired and Held for Sale (656,909) (245,172)
Proceeds from Sales of Loans 587,680 247,514
Gain on Sales of Loans (4,861) (2,060)
Other Operating Activities (11,760) 11,024
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Total Adjustments (64,607) 19,972
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Net Cash Provided (Used) by Operating Activities (35,677) 35,921
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Investing Activities:
Principal Collections and Maturities of Securities Available for Sale 179,178 120,037
Principal Collections and Maturities of Securities Held to Maturity -- 13,130
Proceeds on Sales of Securities Available for Sale 446,403 210,249
Purchases of Securities Held to Maturity -- (15,259)
Purchases of Securities Available for Sale (1,010,444) (208,233)
Loan Originations and Purchases Less Principal Collections (438,702) (353,013)
Purchases of Premises and Equipment (8,201) (5,321)
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Net Cash Used by Investing Activities (831,766) (238,410)
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Financing Activities:
Net Increase in Deposits 481,786 369,768
Net Increase (Decrease) in Short-Term Borrowings 74,412 (229,152)
Proceeds from Long-Term Debt 475,380 97,000
Payments and Maturities of Long-Term Debt (187,183) (51,412)
Proceeds from Capital Securities 39,289 --
Issuance of Common Stock 5,840 3,871
Purchase of Treasury Stock (6,541) --
Cash Dividends on Common Stock (9,252) (5,766)
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Net Cash Provided by Financing Activities 873,731 184,309
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Increase (Decrease) in Cash and Cash Equivalents 6,288 (18,180)
Cash and Cash Equivalents at Beginning of Year 68,930 81,498
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Cash and Cash Equivalents at End of Period $ 75,218 $ 63,318
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Supplemental Disclosures
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Interest Paid, Net of Amount Capitalized $ 80,212 $ 56,737
Income Taxes Paid 12,426 11,101
Stock Dividend 36,350 14,606
Transfer of Securities Held to Maturity to Securities Available for Sale -- 88,318
These financial statements should be read in conjunction with the accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 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 nine month period ended September 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
required 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 Nine Months Ended
September 30, September 30,
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(dollars in thousands, except per share data) 1998 1997 1998 1997
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Qualifying Net Income $ 9,900 $ 26 $ 28,930 $ 15,949
Basic EPS Shares 24,486 23,812 24,439 23,746
Basic EPS $ 0.40 $ 0.00 $ 1.18 $ 0.67
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Dilutive Shares 936 981 1,057 784
Diluted EPS Shares 25,422 24,793 25,496 24,530
Diluted EPS $ 0.39 $ 0.00 $ 1.13 $ 0.65
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NOTE C - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment
securities portfolio at September 30, were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
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September 30, 1998
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 45,957 $ 43 $ -- $ 46,000
Mortgage-Backed Securities 1,127,701 15,107 155 1,142,653
Municipal Securities 26,791 981 -- 27,772
Other Debt Securities 108,502 101 3,207 105,396
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Total Securities Available for Sale $ 1,308,951 $ 16,232 $ 3,362 $ 1,321,821
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September 30, 1997
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 54,291 $ 35 $ 165 $ 54,161
Mortgage-Backed Securities 836,364 9,976 1,961 844,379
Municipal Securities 18,872 430 9 19,293
Other Debt Securities 26,414 -- 123 26,291
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Total Securities Available for Sale 935,941 10,441 2,258 944,124
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At September 30, 1998 a net unrealized gain of $7.8 million was reflected
as 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 gain of $4.9 million at September
30, 1997. For details regarding investment securities at December 31, 1997,
refer to Notes 1 and 3 of the Consolidated Financial Statements incorporated in
the Corporation's 10-K filed March 19, 1998.
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 September 30, 1998 no valuation allowance was required.
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The following is an analysis of servicing asset balance, net of
accumulated amortization, during the period ended September 30, 1998:
September 30,
(in thousands) 1998
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Balance at January 1, 1998 $ 1,984
Additions 10,304
Amortization 280
Sales of Servicing Assets 10,235
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Balance at September 30, 1998 $ 1,773
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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 Nine Months Ended
September 30, September 30,
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(in thousands) 1998 1997 1998 1997
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Net Income $ 9,900 $ 26 $ 28,930 $ 15,949
Other Comprehensive Income:
Unrealized Holding Gains (Losses) During the Period 7,386 7,470 8,561 10,996
Less: Reclassification Adjustment for Gains Included in
Net Income (1,587) (230) (3,521) (568)
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Other Comprehensive Income, Before Tax 5,799 7,240 5,040 10,428
Income Tax (Benefit) Related to Items of Other Comprehensive Income 2,293 2,861 1,993 4,124
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Other Comprehensive Income, After Tax 3,506 4,379 3,047 6,304
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Comprehensive Income $ 13,406 $ 4,405 $ 31,977 $ 22,253
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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 September 30, 1998 of $9.9 million or $.40 per share basic and $.39
diluted. Net income for the quarter ended September 30, 1997 excluding merger
related expenses was $8.7 million or $.37 per share basic and $.35 diluted.
Reported earnings for the third quarter of 1997 were $26 thousand. The higher
earnings in 1998 were mainly due to loan growth and increased fee income.
Average consumer loans outstanding grew $479 million as total average loans
increased 14.3% to $2.91 billion. Non-interest income growth was driven by a
18.4% increase in fee based services on higher account volume and mortgage
banking business. Operating expenses net of capital securities and merger
related expenses increased 14.1 percent from the third quarter of 1997. This
increase is associated with continued network expansion, upgrading of branch
technology and increased mortgage banking business. There was a $2.2 million
provision for loan losses during the quarter with net charge-offs of $983
thousand.
NET INTEREST INCOME
Growth in average earning assets offset in part by a higher cost of
liabilities raised tax-equivalent net interest income to $32.9 million for the
third quarter of 1998, a $1.1 million increase over the prior year. The net
interest margin for the quarter declined 61 basis points from the same quarter
last year. The primary factors were declining interest rates and a flattened
treasury yield curve which compressed spreads and increased prepayments on
mortgages. In addition, leveraging the proceeds of the trust preferred capital
securities issued in the second quarter decreased the spread while increasing
earnings per share.
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Provident's interest income rose $12.0 million from the third quarter of
1997, the result of a $890 million expansion in average earning asset balances.
Growth in total average earning assets was provided by increases of $479 million
in consumer loans, $458 million in securities, $69 million in mortgage loans
held for sale and $39 million in commercial business loans. Real estate
mortgages decreased $117 million partly due to a $52 million sale during the
second quarter of loans susceptible to prepayments. The yield declined 53 basis
points to 7.45% versus 7.98% the prior year.
Total interest expense for the third quarter of 1998 was $10.9 million
above a year ago, the combined result of an increase of 11 basis points in the
average rate paid and a $792 million increase in the average outstanding balance
of interest-bearing liabilities. Included in this increase were $370 million in
matched maturity brokered deposits, $74 million in interest bearing demand/money
market deposits and $62 million in individual retirement account deposits.
Savings and direct certificates of deposit declined $1.5 million and $81
million, respectively. Borrowed money increased $361 million.
As a result of off-balance sheet transactions undertaken to insulate the
bank from interest rate risks, interest income increased by $184 thousand and
interest expense decreased by $79 thousand, for a total increase of $263
thousand in net interest income for the quarter ending September 30, 1998.
Included in this net interest income increase was the amortization of closed
positions which reduced net interest income by $565 thousand for the current
quarter. Without the amortization of closed positions, off-balance sheet
positions increased net interest income $829 thousand for the current quarter.
The forward yield curve indicates that short-term rates will decrease by
100 basis points and long-term rates will decrease by 10 basis points over the
next twelve months. The Corporation's analysis indicates that if management does
not adjust its September 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 $5.1
million over the next twelve months. This compares to an increase of $3.8
million should interest rates remain unchanged. Amortization of closed positions
will reduce net interest income by $743 thousand over the next twelve months.
Thus, without amortization of closed positions, net interest income would
increase $5.8 million over the next twelve months if the forward yield curve
assumptions occur and $4.5 million if rates remain unchanged.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $2.2 million provision for loan losses for
the quarter, with net charge-offs of $983 thousand for the third quarter of
1998, compared to net charge-offs of $1.2 million 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 September 30, 1998 was $39.9 million, up from the
$35.2 million a year ago. At September 30, 1998, the allowance represented 1.28%
of total loans and 258% of non-performing loans. Total non-performing loans were
$15.5 million at September 30, 1998. Non-performing loans as a percent of loans
outstanding as of September 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 $14.4
million in the third quarter of 1998 compared to $10.5 million in 1997. This
increase was driven by a $1.6 million increase in mortgage banking activities, a
$1.2 million increase in deposit service fees and a $554 thousand growth in loan
fees. Mortgage banking income was strengthened by increased originations of $273
million during the third quarter of 1998, compared to $90 million in 1997. Sales
of mortgage loans resulted in $1.6 million in gains for the third quarter of
1998 as compared to $581 thousand for the same period in 1997.
Net gains on sale of securities were $1.6 million for the quarter
compared to $230 thousand in 1997.
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NON-INTEREST EXPENSE
Third quarter non-interest expense was $31.6 million, compared to $37.0
million for the same period last year, which included $10.0 million for merger
related expenses. Salaries and benefits increased $2.2 million mainly related to
merit increases and incentives associated with increased mortgage originations.
Occupancy costs increased $119 thousand over last year and furniture and
equipment expense increased $152 thousand. These increases were required by
branch network expansion and upgrades of technology. External processing fees
increased $313 thousand due to increased account volume. During the second
quarter of 1998, $40 million of trust preferred capital securities were issued
resulting in $839 thousand in related expenses for the quarter. All other
expenses increased a total of $1.0 million mainly associated with a $305
thousand increase in communication expenses, $297 thousand increase in
consulting fees, $204 thousand in personnel expenses and $186 thousand in
marketing expenses.
INCOME TAXES
Provident recorded income tax expense of $4.9 million on income before
taxes of $14.8 million, an effective tax rate of 33.0%. During the third quarter
of 1997, Provident's tax expense was $882 thousand on pre-tax income of $908
thousand, the result of non-deductible merger related expenses.
FINANCIAL REVIEW FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the nine months ending September 30, 1998, net income was $28.9
million or $1.18 per share basic and $1.13 diluted. Net income for the nine
months ended September 30, 1997, excluding merger related expenses of $10.0
million, was $24.5 million or $1.03 per share basic and $1.00 diluted. Reported
earnings for the third quarter of 1997 were $15.9 million or $.67 per share
basic and $.65 diluted. This improvement in earnings was attributable to a $5.1
million rise in tax equivalent net-interest income and a $12.8 million increase
in non-interest income. These increases more than offset a $9.2 million increase
in operating expense and a $1.0 million increase in the provision for loan
losses.
The $5.1 million increase in tax-equivalent net interest income for 1998
was the result of a $608 million increase in average earning assets over the
prior year. Net interest margin dropped by 35 basis points caused by a decline
of 27 basis points in yields and a 12 basis point increase in costs on
interest-bearing liabilities.
The provision for loan losses increased $1.0 million to $8.2 million in
1998. The increase was the result of overall loan growth in the loan portfolios
of $526 million from September 30, 1997.
Non-interest income, excluding net securities gains (losses), increased
31% to $41.2 million. Deposit service charges rose $3.2 million over the prior
year to $21.2 million, mortgage banking activities were up $3.0 million to $8.7
million, and commissions and fees were up 14% to $3.2 million. Net securities
gains were $3.5 million in 1998 and $568 thousand in 1997.
Provident's non-interest expense, excluding capital securities and
merger related expenses, rose 9.5% in 1998 over 1997. Salaries and employee
benefits increased $4.1 million attributable to merit increases, new branches,
and incentives associated with increased mortgage originations. Occupancy costs
grew $290 thousand or 3.9% over 1997. Total furniture and equipment expense
increased $376 thousand due to upgrading of technology in the bank's office
automation and branch platform systems. External processing increased $1.2
million due to increased account volumes. All other expenses increased $1.6
million, most of which is associated with increased marketing, advertising and
promotional expenses.
Provident recorded an income tax expense of $14.2 million in 1998 based
on pre-tax income of $43.1 million, which represented an effective tax rate of
32.9%. This compares with a 37.6% effective tax rate for 1997. The change is
mainly associated with non-deductible merger expenses experienced with the
merger of First Citizens Financial Corporation during the third quarter of 1997.
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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 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 to neutralize the Year 2000 Issue. In addition, many
non-Year 2000 projects have had the effect of eliminating potential problems.
The Corporation is utilizing both internal and external resources to
reprogram, or replace, and test the software and hardware for Year 2000
modifications. As part of the testing, dates greater than December 31, 1999 are
entered into systems. No adverse events have been noted during the testing. The
Corporation plans to complete the Year 2000 project by June 30, 1999. 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. As of September
30, 1998, the Corporation has incurred approximately $275,000 related to the
Year 2000 project. Funding of the Year 2000 project costs will come from normal
operating cash flow. Expense associated with the Year 2000 Issue will directly
reduce otherwise reported net income of the Corporation in the period incurred.
The Corporation is also in the process of assessing the Year 2000
readiness of significant customers. This assessment utilizes a due diligence
approach to develop general risk control guidelines to assist in identifying
material customers, evaluating their preparedness, assessing Year 2000 customer
risk and implementing controls to manage the risk.
The Corporation is developing contingency plans for the processes that
may not process information reliably and accurately after December 31, 1999.
Based on preliminary planning during the development of the contingency plan,
management believes that the Corporation will be able to continue to operate in
the Year 2000 even if some systems fail. We believe that the Corporation will be
able to operate until normal operations can be restored. These plans include the
capability to process off-line and transport the data to our third party
processor by the most effective and efficient means available. These procedures
could require changing schedules and hiring of temporary staff, which would
increase the cost of the operations. Because of a concerted effort between the
Corporation and the third party processor, the most reasonably likely worst case
Year 2000 scenarios foreseeable at this time would be a temporary malfunction
that could be corrected quickly.
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 from those plans.
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FINANCIAL CONDITION
Total assets of the Corporation increased $868 million from December 31,
1997 to September 30, 1998 as investments increased $339 million and loan
balances increased $425 million. Consumer loans were up $503 million and
commercial business loans were up $67 million from December 31, 1997. Real
estate construction loans increased $12 million and real estate mortgage loans
declined $157 million. The sale of mortgage loans contributed to the decline.
Total deposits ended the quarter at $3.2 billion, an increase of $482 million
over the December 31, 1997 level. Non-interest bearing deposits increased $14
million from December 31, 1997 while interest bearing deposits increased $467
million. Borrowings increased $363 million from December 31, 1997 ending the
quarter at $1.18 billion. In April 1998, the Corporation issued $40 million of
trust preferred capital securities, which were outstanding as of September 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 September 30, 1998 were loans held
for sale and investments available for sale, which totaled $1.46 billion. This
represents 33% of total liabilities compared to 29% at December 31, 1997.
At quarter-end, the leverage ratio was 7.06% and total stockholders'
equity represented 10.18% 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 September 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 September 30, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.2) Provident Bankshares Corporation Second Amended and
Restated Bylaws
(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 September 30, 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
November 13, 1998 /s/ Peter M. Martin
-------------------
Peter M. Martin
President, Chairman and Chief Executive
Officer
November 13, 1998 /s/ R. Wayne Hall
-----------------
R. Wayne Hall
Treasurer
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EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
(3.2) Provident Bankshares Corporation Second Amended and Restated Bylaws 16
(11) Statement re: Computation of Per Share Earnings 31
(27) Financial Data Schedule 32
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