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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 numberof shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 25,518,948 shares outstanding at
November 1, 1999.
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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, 1999 and 1998 and December 31, 1998 3
Consolidated Statement of Income - Unaudited
Three and Nine months Ended September 30, 1999 and 1998 4
Consolidated Statement of Cash Flows - Unaudited
Nine months Ended September 30, 1999 and 1998 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 14
PART II - OTHER INFORMATION 14
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 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
September 30, December 31, September 30,
(DOLLARS IN THOUSANDS) 1999 1998 1998
====================================================================================================================================
ASSETS
Cash and Due From Banks $ 76,211 $ 74,365 $ 65,151
Short-Term Investments 1,319 198 10,067
Mortgage Loans Held for Sale 67,877 224,707 141,015
Securities Available for Sale 1,323,419 1,198,511 1,321,821
Loans:
Consumer 2,423,814 2,154,557 2,170,054
Commercial Business 392,311 375,930 354,848
Real Estate -- Construction 134,745 124,445 136,828
Real Estate -- Mortgage 388,861 445,279 464,036
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Total Loans 3,339,731 3,100,211 3,125,766
Less: Allowance for Loan Losses 40,105 42,739 39,943
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Net Loans 3,299,626 3,057,472 3,085,823
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Premises and Equipment, Net 41,570 40,459 40,460
Accrued Interest Receivable 44,954 40,466 41,214
Other Assets 59,366 39,719 89,211
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Total Assets $ 4,914,342 $ 4,675,897 $ 4,794,762
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LIABILITIES
Deposits:
Noninterest-Bearing $ 255,562 $ 252,024 $ 210,501
Interest-Bearing 3,400,753 3,167,533 3,025,800
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Total Deposits 3,656,315 3,419,557 3,236,301
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Short-Term Borrowings 234,227 145,363 421,703
Long-Term Debt 662,733 735,239 757,274
Other Liabilities 38,884 40,423 48,040
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Total Liabilities 4,592,159 4,340,582 4,463,318
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Corporation-Obligated Mandatorily Redeemable Capital Securities 39,155 39,238 39,238
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 26,146,114, 24,811,256 and 24,786,977 Shares; at September 30,
1999, December 31, 1998 and September 30, 1998, respectively 26,146 24,811 24,787
Capital Surplus 202,347 172,239 171,879
Retained Earnings 95,141 103,496 96,791
Net Accumulated Other Comprehensive Income (28,637) 5,308 7,780
Treasury Stock at Cost - 626,266 Shares at September 30, 1999,
525,766 at December 31, 1998 and 489,566 at September 30, 1998 (11,969) (9,777) (9,031)
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Total Stockholders' Equity 283,028 296,077 292,206
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Total Liabilities and Stockholders' Equity $ 4,914,342 $ 4,675,897 $ 4,794,762
====================================================================================================================================
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,
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1999 1998
============================================================================================================================
INTEREST INCOME
Interest and Fees on Loans $ 67,135 $ 59,132 $ 191,869 $ 171,955
Interest on Securities 22,225 23,695 63,626 60,164
Tax-Advantaged Interest 582 600 1,747 2,179
Interest on Short-Term Investments 20 51 80 160
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Total Interest Income 89,962 83,478 257,322 234,458
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INTEREST EXPENSE
Interest on Deposits 38,694 33,262 109,292 94,462
Interest on Short-Term Borrowings 3,117 5,648 9,338 14,460
Interest on Long-Term Debt 10,360 11,917 30,737 28,955
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Total Interest Expense 52,171 50,827 149,367 137,877
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Net Interest Income 37,791 32,651 107,955 96,581
Less: Provision for Loan Losses 3,215 2,195 7,935 8,244
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Net Interest Income after Provision for Loan Losses 34,576 30,456 100,020 88,337
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 8,982 7,560 24,928 21,197
Mortgage Banking Activities 1,639 3,078 8,273 8,657
Commissions and Fees 1,269 1,000 4,133 3,247
Net Securities Gains -- 1,587 312 3,521
Other Non-Interest Income 3,419 2,722 8,856 8,084
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Total Non-Interest Income 15,309 15,947 46,502 44,706
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NON-INTEREST EXPENSE
Salaries and Employee Benefits 16,799 15,867 49,935 45,454
Occupancy Expense, Net 2,836 2,660 8,384 7,673
Furniture and Equipment Expense 2,371 2,033 6,589 5,874
External Processing Fees 3,763 3,612 11,192 10,419
Capital Securities Expense 774 839 2,445 1,529
Other Non-Interest Expense 6,819 6,608 19,927 18,952
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Total Non-Interest Expense 33,362 31,619 98,472 89,901
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Income Before Income Taxes 16,523 14,784 48,050 43,142
Income Tax Expense 5,218 4,884 15,430 14,212
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Net Income $ 11,305 $ 9,900 $ 32,620 $ 28,930
============================================================================================================================
PER SHARE AMOUNTS:
Net Income -- Basic $ 0.44 $ 0.39 $ 1.28 $ 1.13
Net Income -- Diluted 0.43 0.37 1.24 1.08
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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
(IN THOUSANDS)
Nine Months Ended September 30, 1999 1998
=============================================================================================================
OPERATING ACTIVITIES
Net Income $ 32,620 $ 28,930
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 24,715 19,217
Provision for Loan Losses 7,935 8,244
Provision for Deferred Income Tax (Benefit) 2,018 (2,697)
Realized Net Securities Gains (312) (3,521)
Loans Originated or Acquired and Held for Sale (499,513) (656,909)
Proceeds from Sales of Loans 660,783 587,680
Gain on Sales of Loans (4,440) (4,861)
Other Operating Activities (175) (11,760)
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TOTAL ADJUSTMENTS 191,011 (64,607)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 223,631 (35,677)
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INVESTING ACTIVITIES
Principal Collections and Maturities of Securities Available for Sale 161,081 179,178
Proceeds on Sales of Securities Available for Sale 22,820 446,403
Purchases of Securities Available for Sale (368,810) (1,010,444)
Loan Originations and Purchases Less Principal Collections (270,268) (438,702)
Purchases of Premises and Equipment (6,879) (8,201)
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NET CASH USED BY INVESTING ACTIVITIES (462,056) (831,766)
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FINANCING ACTIVITIES
Net Increase in Deposits 236,758 481,786
Net Increase in Short-Term Borrowings 88,864 74,412
Proceeds from Long-Term Debt 16,000 475,380
Payments and Maturities of Long-Term Debt (88,506) (187,183)
Proceeds from Capital Securities -- 39,289
Issuance of Common Stock 1,616 5,840
Purchase of Treasury Stock (2,192) (6,541)
Cash Dividends on Common Stock (11,148) (9,252)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 241,392 873,731
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INCREASE IN CASH AND CASH EQUIVALENTS 2,967 6,288
Cash and Cash Equivalents at Beginning of Year 74,563 68,930
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,530 $ 75,218
=============================================================================================================
SUPPLEMENTAL DISCLOSURES
- -------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 100,838 $ 80,212
Income Taxes Paid 7,616 12,426
Stock Dividend 29,827 36,350
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, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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, 1998 as
filed with the Securities and Exchange Commission on March 3, 1999.
NOTE B - PER SHARE INFORMATION
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) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Qualifying Net Income $ 11,305 $ 9,900 $ 32,620 $ 28,930
Basic EPS Shares 25,597 25,702 25,533 25,496
Basic EPS $ 0.44 $ 0.39 $ 1.28 $ 1.13
- -----------------------------------------------------------------------------------------------------------------------------
Dilutive Shares (principally stock options) 828 1,054 879 1,113
Diluted EPS Shares 26,425 26,756 26,412 26,609
Diluted EPS $ 0.43 $ 0.37 $ 1.24 $ 1.08
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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, 1999
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 39,358 $ -- $ 46 $ 39,312
Mortgage-Backed Securities 1,166,583 1,441 35,378 1,132,646
Municipal Securities 26,778 214 293 26,699
Trust Preferred Securities 136,114 -- 13,204 122,910
Other Debt Securities 1,961 1 110 1,852
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Total Securities Available for Sale $ 1,370,794 $ 1,656 $ 49,031 $ 1,323,419
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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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At September 30, 1999, a net unrealized loss of $28.6 million was
reflected as Net Accumulated Other Comprehensive Income which is reflected
separately as a component of Stockholders' Equity in the Consolidated Statement
of Condition and therefore has no effect on the financial results of the
Corporation's operations. This compares to a net unrealized gain of $7.8 million
at September 30, 1998. For details regarding investment securities at December
31, 1998, refer to Notes 1 and 4 of the Consolidated Financial Statements
incorporated in the Corporation's 10-K filed March 3, 1999.
NOTE D - SERVICING ASSETS
The Corporation carries any retained interest in a transferred asset on
the Statement of Condition as a servicing asset. 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, 1999 a
valuation allowance was not required.
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The following is an analysis of the servicing asset balance, net of
accumulated amortization, during the period ended September 30, 1999:
September 30,
(IN THOUSANDS) 1999
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Balance at January 1, 1999 $ 2,608
Additions 12,298
Amortization 93
Sales of Servicing Assets 13,216
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Balance at September 30, 1999 $ 1,597
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NOTE E - 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") to establish requirements for the disclosure of
comprehensive income in financial statements. Comprehensive income is defined as
net income plus transactions and other occurrences which are the result of
nonowner changes in equity. For financial statements presented for the
Corporation, nonowner equity changes are only comprised of unrealized gains or
losses on available for sale 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. Changes in the balance of Net Accumulated Other Comprehensive Income
in the Stockholders' Equity section of the Statement of Condition are the direct
result of changes in the unrealized gains (losses) on available for sale debt
securities.
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) 1999 1998 1999 1998
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Net Income $ 11,305 $ 9,900 $ 32,620 $ 28,930
Other Comprehensive Income:
Unrealized Holding Gain (Loss) on Debt Securities (12,100) 7,386 (55,843) 8,561
Less: Reclassification Adjustment for Gains Included in Net Income -- 1,587 312 3,521
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, Before Tax (12,100) 5,799 (56,155) 5,040
Income Tax (Benefit) Related to Items of Other Comprehensive Income (4,786) 2,293 (22,210) 1,993
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, After Tax (7,314) 3,506 (33,945) 3,047
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Comprehensive Income $ 3,991 $ 13,406 $ (1,325) $ 31,977
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NOTE F - FUTURE ACCOUNTING DISCLOSURE REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement becomes
effective for fiscal years beginning after June 15, 2000 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 changes in the
fair value of a recognized asset or liability or a firm commitment, referred to
as a fair value hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as a cash flow hedge, or 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, if included in earnings,
would 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, 1999 of $11.3 million or $.44 per share basic and $.43 diluted.
Net income for the quarter ended September 30, 1998 was $9.9 million or $.39 per
share basic and $.37 diluted. The higher earnings in 1999 were mainly due to
higher net interest income from continued loan growth. Average total loans
outstanding grew $416 million or 14.3% to $3.33 billion. Non-interest income,
net of securities gains, increased $949,000 or 6.6% from the third quarter of
1998. Operating expenses increased 5.5% from the third quarter of 1998. This
increase is associated with continued network expansion and upgrading of branch
technology. There was a $3.2 million provision for loan losses during the
quarter with net charge-offs of $1.8 million.
NET INTEREST INCOME
Growth in average earning assets raised tax-equivalent net interest income
to $38.0 million for the third quarter of 1999, a $5.0 million increase over the
prior year. The net interest margin for the quarter increased 20 basis points,
primarily due to a higher yield on consumer loans and a lower cost of funds.
Provident's tax equivalent interest income rose $6.4 million from the
third quarter of 1998, the net result of a $353 million expansion in average
earning asset balances and the increase of 20 basis points in yield. Consumer
loans increased by $483 million and commercial business loans by $57 million.
Real estate mortgages decreased $122 million due to a $119 million residential
loan sale during the first quarter of 1999.
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Total interest expense for the third quarter of 1999 was $1.3 million
above a year ago, the result of an increase of $309 million in the average
outstanding balance of interest-bearing liabilities offset in part by a 24 basis
point drop in rate paid. Included in this increase were $448 million in matched
maturity brokered deposits, $82 million in interest bearing demand/money market
deposits and $38 million in money market certificates of deposits. Savings
declined $2.1 million and direct certificates of deposit decreased $6.8 million.
Borrowed money decreased $234 million.
Management reviews interest rate risk continually. These reviews include
thorough regular evaluation of multiple possible change scenarios by way of
simulation modeling which identify potential for unacceptable risk exposure to
future earnings. Management acts to mitigate identified risk through the use of
financial derivatives. As a result of financial derivative transactions
undertaken to insulate the bank from interest rate risks, net interest income
decreased $833 thousand for the quarter and $933 thousand for the nine months
ending September 30, 1999.
The forward yield curve indicates that short-term rates will increase by
19 basis points and long-term rates will increase by 10 basis points over the
next twelve months. The Corporation's analysis indicates that if management does
not adjust its September 30, 1999 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 $321
thousand over the next twelve months. This compares to a decrease of $74
thousand should interest rates remain unchanged. Thus, if the forward yield
curve assumptions occur, off-balance sheet positions as of September 30, 1999
would improve net interest income $395 thousand over the next twelve months.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $3.2 million provision for loan losses, with
net charge-offs of $1.8 million for the third quarter of 1999, compared to a
provision of $2.2 million and net charge-offs of $983 thousand for the same
period of 1998. The increase in the provision for loan losses was the result of
higher outstanding loan balances. 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, 1999 was $40.1
million, compared to $39.9 million for September 30, 1998. At September 30,
1999, the allowance represented 1.20% of total loans and 421% of non-performing
loans. Total non-performing loans were $9.5 million at September 30, 1999, down
from $15.5 million as of September 30, 1998. Non-performing loans declined to
.29% of loans outstanding as of September 30, 1999 from .50% as of September 30,
1998.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $15.3 million
in the third quarter of 1999, $949 thousand higher than the third quarter of
1998. Deposit service fees driven by higher account volume increased $1.4
million, or 19%, while commission and fees increased $269 thousand, or 27%.
Income from mortgage banking activities decreased $1.4 million. Sales of
mortgage loans resulted in $636 thousand in gains for the third quarter of 1999
as compared to $1.6 million for the same period in 1998. Mortgage originations
totaled $137 million during the third quarter of 1999 compared to $273 million
during the same quarter of 1998.
There were no gains from the sale of securities for the quarter compared
to $1.6 million gain for the same quarter in 1998.
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NON-INTEREST EXPENSE
Third quarter non-interest expense was $33.4 million, compared to $31.6
million for the same period last year, an increase of 5.5%. Salaries and
benefits increased $932 thousand mainly related to merit increases and higher
health care costs. Branch network expansion and upgrades of technology increased
occupancy costs $176 thousand and furniture and equipment cost $338 thousand.
External processing fees increased $151 thousand due to increased account
volume. All other expenses increased a total of $211 thousand.
INCOME TAXES
Provident recorded income tax expense of $5.2 million on income before
taxes of $16.5 million, an effective tax rate of 31.6%. During the third quarter
of 1998, Provident's tax expense was $4.9 million on pre-tax income of $14.8
million, an effective tax rate of 33.0%. The change in effective tax rate is due
to the recognition of a state income tax benefit.
FINANCIAL REVIEW FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine months ending September 30, 1999, net income was $32.6
million or $1.28 per share basic and $1.24 diluted, compared to $28.9 million or
$1.13 per share basic and $1.08 per share diluted for the nine months ended
September 30, 1998. This improvement in earnings was attributable to a $11.2
million rise in tax equivalent net-interest income and a $1.8 million increase
in non-interest income. These increases more than offset a $8.6 million increase
in operating expense. The provision for loan losses declined $309 thousand
compared to the third quarter of 1998.
The $11.2 million increase in tax-equivalent net interest income for 1999
was the result of a $601 million increase in average earning assets over the
prior year. Net interest margin dropped by 8 basis points caused by a decline of
33 basis points in yields and a 28 basis point decrease in costs of
interest-bearing liabilities.
The provision for loan losses decreased $309 thousand to $7.9 million in
1999. The allowance for loan losses ended the quarter at $40.1 million or 1.20%
of loans outstanding.
Non-interest income, excluding net securities gains, increased 12% to
$46.2 million. Deposit service charges rose $3.7 million over the prior year to
$24.9 million, mortgage banking declined $384 thousand to $8.3 million, and
commissions and fees increased 27% to $4.1 million. Net securities gains were
$312 thousand in 1999 and $3.5 million in 1998.
Provident's non-interest expense, excluding capital securities expenses,
rose 8.7% in 1999 over 1998. Salaries and employee benefits increased $4.5
million attributable to merit increases and new branches. Occupancy costs grew
$711 thousand or 9.3% over 1998. Total furniture and equipment expense increased
$715 thousand due to upgrading of technology in the bank's office automation and
branch platform systems. External processing increased $773 thousand due to
increased account volumes. All other expenses increased $975 thousand, most of
which is associated with increased communication and professional fees.
Provident recorded an income tax expense of $15.4 million in 1999 based on
pre-tax income of $48.1 million, which represented an effective tax rate of
32.1%. This compares with a 32.9% effective tax rate for 1998.
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IMPACT OF THE YEAR 2000 ISSUE
Management initiated the process of preparing computer systems and
applications for the Year 2000 in September, 1996. 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 has completed the testing phase using both internal and
external resources to test the software and hardware for Year 2000 compliance.
Testing did not lead to any adverse events.
The Corporation relies on M & I Data Services, Inc., a third party
processor for the majority of its data processing requirements. Provident worked
with all of its significant data processing software and hardware suppliers, to
make certain they will be Year 2000 compliant. A due diligence approach was used
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 total costs associated with becoming Year 2000 compliant are expected
to be less than $1.0 million and are not expected to have a material effect on
the results of operations. As of September 30, 1999, the Corporation had spent
approximately $900 thousand to become Year 2000 compliant. Money to fund Year
2000 compliance will come from normal operating cash flow. Expenses associated
with Year 2000 compliance will directly reduce otherwise reported net income of
the Corporation in the period incurred.
As an additional precaution, the Corporation has developed a contingency
plan in case of unanticipated problems within or outside of the corporation.
Management believes the contingency plan will permit Provident to continue to
operate until normal operations can be restored even if some systems fail. 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. The most reasonably likely worst case
Year 2000 scenarios foreseeable at this time would include the Bank temporarily
not being able to process, in some combination, various types of customer
transactions. Unanticipated problems of third parties (including loan customers)
resulting from Year 2000 issues could also have an undeterminable negative
impact on the Corporation.
The costs of the project 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 assurance that these estimates will be
achieved and actual results could differ from those plans. Specific factors that
might cause 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.
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FINANCIAL CONDITION
Total assets of the Corporation increased $238 million from December 31,
1998 to September 30, 1999 as investments increased $125 million and loan
balances increased $240 million offset in part by lower loans held for sale.
Consumer loans were up $269 million and commercial business loans were up $16
million from December 31, 1998. Real estate construction loans increased $10
million and real estate mortgage loans declined $56 million. The sale of
mortgage loans in the first quarter contributed to the decline. Total deposits
ended the quarter at $3.7 billion, an increase of $237 million over the December
31, 1998 level. Non-interest bearing deposits increased $4 million from December
31, 1998 while interest-bearing deposits increased $233 million. Borrowings
increased $16 million from December 31, 1998 ending the quarter at $897 million.
In April 1998, the Corporation issued $40 million of trust preferred capital
securities, which were outstanding as of September 30, 1999. 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 sources of liquidity at September 30, 1999 were loans held for
sale and investments available for sale, which totaled $1.4 billion. This
represents 30% of total liabilities compared to 33% at December 31, 1998.
At quarter-end, the leverage ratio was 7.08% and total stockholders'
equity represented 10.35% of risk adjusted assets. These ratios exceed the
minimum requirements of the current leverage capital and risk-based capital
standards established by regulatory agencies.
PENDING LEGISLATION
Legislation recently enacted by Congress eliminates many Federal and state
law barriers to affiliations among banks and other financial services providers.
The legislation, which takes effect 120 days after the date of enactment,
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation, preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various Federal and state financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless they are well-capitalized, well-managed and maintain a rating under the
Community Reinvestment Act of 1977 of at least "satisfactory" among all
affiliates.
The President is expected to sign the legislation into law in the very
near future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 1998, see
"Interest Sensitivity Management" and Note 12 to the Consolidated Financial
Statements in the Corporation's Form 10-K filed with the Commission on March 3,
1999. The market risk of the Corporation has not experienced any significant
changes as of September 30, 1999 from December 31, 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, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation (1)
(3.2) Third Amended and Restated By-Laws of Provident
Bankshares Corporation (2)
(4.1) Stockholder Protection Rights Plan, as amended (3)
(11) Statement re: Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation during the
quarter ended September 30, 1999.
(1) Incorporated by reference from Provident's Registration Statement on
Form S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Provident's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, filed with the Commission on
August 12, 1999.
(3) Incorporated by reference from Provident's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, filed with the Commission on
August 14, 1998.
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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 10, 1999 /s/ Peter M. Martin
-----------------------------------------------
Peter M. Martin
President, Chairman and Chief Executive Officer
November 10, 1999 /s/ R. Wayne Hall
------------------
R. Wayne Hall
Treasurer
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EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
(11) Statement re: Computation of Per Share Earnings
(27) Financial Data Schedule
16