UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For Fiscal Year Ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
Commission File Number 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1518642
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 EAST LEXINGTON STREET, BALTIMORE, MARYLAND 21202
----------------------------------------------------
(Address of Principal Executive Offices)
(410) 277-7000
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of February 1, 2001 was $617,350,926. For
purposes of this calculation, officers and directors of the registrant are
considered affiliates.
At February 1, 2001, the Registrant had 25,727,958 shares of $1.00 par value
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(Part III)
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 60
PART III
Item 10. Directors and Executive Officers of the Registrant 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and Management 61
Item 13. Certain Relationships and Related Transactions 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
Signatures 63
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Statments contained in this Form 10-K 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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2
PART I
ITEM 1. BUSINESS
Provident Bankshares Corporation ("the Corporation"), a Maryland
corporation, was organized in 1987 by the management of Provident Bank ("the
Bank"), and registered as a bank holding company under the Bank Holding Company
Act of 1956. Through a reorganization dated December 22, 1987, the Corporation
became the sole stockholder of the Bank. The reorganization allowed the Bank to
convert from a Maryland chartered mutual savings bank, the form in which it had
operated since 1886, to a Maryland chartered stock commercial bank. At December
31, 2000, the Bank was the second largest commercial bank chartered under the
laws of the State of Maryland in terms of assets.
For the discussion regarding lending and investment activities as well as
sources of funds of the Corporation, see pages 13 through 19.
Mortgage Banking Activities
Provident Mortgage Corp. ("PMC"), a subsidiary of the Bank, was formed in
1992 to offer a broad range of mortgage lending products to consumers and
thereby enhance the Corporation's mortgage banking operations. During the fourth
quarter of 2000, the Corporation made a decision to reposition its mortgage
operations by offering mortgages to its retail customers through an outsourced
loan origination process and to no longer seek loan production from realtors and
brokers. As a result, the mortgage lending operations of the Bank's subsidiary,
Provident Mortgage Corp. are being phased out.
Banking Services Activities
Provident Investment Center, Inc. ("PIC"), a subsidiary of the Bank,
provides consumers a competitive range of banking products, such as purchased
annuities and mutual funds.
Insurance Activities
BankSure Insurance Corporation ("BankSure"), a subsidiary of the Bank,
offers insurance products to the Bank's loan customers and thereby enhances the
Bank's lending product lines. PIC also offers a variety of life insurance
products and services, as agent.
Employees
At December 31, 2000, the Corporation and its subsidiaries had 1,594
full-time equivalent employees. The Corporation currently maintains what
management considers to be a comprehensive, competitive employee benefits
program. Employees are not represented by a collective bargaining unit and
management considers its relationship with its employees to be good.
Competition
The Corporation encounters substantial competition in all areas of its
business. There are six commercial banks based in Maryland with deposits in
excess of $1 billion. Additionally, there are five banks with deposits in excess
of $1 billion operating in Maryland which have headquarters in other states. The
Bank also faces competition from savings and loan associations, savings banks,
mortgage banking companies, credit unions, insurance companies, consumer finance
companies, money market and mutual funds and various other financial services
firms.
Current federal law allows the acquisition of banks by bank holding
companies nationwide. Further, federal and Maryland law permit interstate
banking. Recent legislation has broadened the extent to which financial services
companies, such as investment banks and insurance companies, may control
commercial banks. As a consequence of these developments, competition in the
Bank's principal market may increase, and a consolidation of financial
institutions in Maryland may occur.
3
Regulation
The Corporation is registered as a bank holding company, under the Bank
Holding Company Act of 1956. As such, the Corporation is subject to regulation
and examination by the Federal Reserve Board, and is required to file periodic
reports and any additional information that the Federal Reserve Board may
require. The Bank Holding Company Act imposes certain restrictions upon the
Corporation regarding the acquisition of substantially all of the assets of or
direct or indirect ownership or control of any bank of which it is not already
the majority owner; or, with certain exceptions, of any company engaged in
non-banking activities.
The Bank is subject to supervision, regulation and examination by the Bank
Commissioner of the State of Maryland and the Federal Deposit Insurance
Corporation. Asset growth, deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfer, management practices and other aspects of operations are subject to
regulation by the appropriate federal and state supervisory authorities. The
Bank is also subject to various regulatory requirements of the Federal Reserve
Board applicable to FDIC insured depository institutions.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions to become a "financial holding company" and thereby
engage in a broader array of financial activities than previously permitted.
Such activities can include insurance underwriting and investment banking. The
Gramm-Leach-Bliley Act also authorizes banks to engage through "financial"
subsidiaries in certain of the activities permitted for financial holding
companies. To date, the Corporation has not elected financial holding company
status.
Monetary Policy
The Corporation and the Bank are affected by fiscal and monetary policies
of the federal government, including those of the Federal Reserve Board, which
regulates the national money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques available to the Federal Reserve
Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank
deposits. These techniques are used in varying combinations to influence the
overall growth of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans and paid on deposits. The effect of
governmental policies on the earnings of the Corporation and the Bank cannot be
predicted.
ITEM 2. PROPERTIES
In December 1990, the Bank sold its corporate headquarters located at 114
East Lexington Street, Baltimore, Maryland, and simultaneously leased back these
facilities for an initial twelve year lease term. This lease was renegotiated in
2000 and expires in 2012.
The majority of the Bank's 98 offices are located in the
Baltimore/Washington metropolitan area and southern Pennsylvania. The Bank owns
15 and leases 83 of its offices. Most of these leases provide for the payment of
property taxes and other costs by the Bank and include one or more renewal
options ranging from five to ten years. Some of the leases also contain a
purchase option.
In 2000, the Bank renewed a long-term agreement to lease a one-story
building large enough to consolidate operations and support functions which
expires in 2003. The Bank currently leases all of the building's 80,000 square
feet of space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operation. Also,
refer to Note 12 of Item 8.--"Financial Statements and Supplementary Data" on
page 44.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Provident Bankshares Corporation is traded
over-the-counter and is quoted in the NASDAQ National Market. Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The NASDAQ symbol is PBKS. The trading range of Provident's common
stock for the years 2000 and 1999 is shown in Table 6 - Consolidated Quarterly
Results of Operations, Market Prices and Dividends contained in Management's
Discussion and Analysis (Item 7). At February 1, 2001, there were approximately
3,300 holders of record of the Corporation's common stock.
For the year 2000, the Corporation declared and paid dividends of $.674 per
share of common stock outstanding. Declarations or payments of dividends are
subject to a determination by the Corporation's Board of Directors, which takes
into account the Corporation's financial condition, results of operations,
economic conditions and other factors, including the regulation restrictions
which affect the payment of dividends by the Bank to the Corporation.
ITEM 6. SELECTED FINANCIAL DATA
Table 1
Year Ended December 31,
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(dollars in thousands, except per share data) 2000 1999 1998 1997(1) 1996
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Interest Income (tax-equivalent) $ 415,535 $ 353,341 $ 319,240 $ 280,167 $ 248,311
Interest Expense 253,119 204,261 187,509 156,718 137,354
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Net Interest Income (tax-equivalent) 162,416 149,080 131,731 123,449 110,957
Provision for Loan Losses 23,877 11,570 12,027 9,953 10,011
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Net Interest Income after Provision for Loan Losses 138,539 137,510 119,704 113,496 100,946
Non-Interest Income 66,921 61,147 56,143 42,119 44,533
Net Securities Gains 8,499 312 6,749 2,337 5,556
Merger Related Expenses/1/ -- -- -- 10,047 --
Non-Interest Expense 148,368 132,656 123,062 108,263 110,347
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Income Before Income Taxes 65,591 66,313 59,534 39,642 40,688
Income Tax Expense (tax-equivalent) 21,551 22,163 20,504 14,683 14,500
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Income Before Extraordinary Item 44,040 44,150 39,030 24,959 26,188
Extraordinary Item--Gain on Debt Extinguishment, net 770 -- -- -- --
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Net Income $ 44,810 $ 44,150 $ 39,030 $ 24,959 $ 26,188
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Per Share Amounts:
Basic--Net Income Before Extraordinary Item $ 1.68 $ 1.65 $ 1.45 $ .95 $ 1.01
--Net Income 1.71 1.65 1.45 .95 1.01
Diluted--Net Income Before Extraordinary Item $ 1.64 $ 1.60 $ 1.40 $ .92 $ .97
--Net Income 1.67 1.60 1.40 .92 .97
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Cash Dividends Paid $ .67 $ .57 $ .47 $ .38 $ .30
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Tax-Equivalent Adjustment/2/ $ 983 $ 964 $ 1,133 $ 1,055 $ 832
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Total Assets $5,504,548 $5,094,477 $4,675,897 $3,926,739 $3,485,618
Total Stockholders' Equity 315,411 274,599 296,077 270,182 238,798
Total Common Equity/3/ 326,106 318,922 290,769 265,449 240,171
Return on Average Assets .82% .90% .90% .68% .79%
Return on Average Equity 16.17 15.46 13.75 9.90 11.53
Return on Average Common Equity 14.03 14.61 13.99 9.91 11.41
Stockholders' Equity to Assets 5.73 5.39 6.33 6.88 6.85
Average Equity to Average Assets 5.09 5.83 6.52 6.89 6.85
Dividend Payout Ratio 40.41 34.47 32.35 40.04 29.58
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/1/ Merger Related Expenses--Exclusive of after-tax merger-related expenses
incurred during 1997, net income would have been $33.6 million. Return on
average assets and return on average equity for 1997 would have been .92%
and 13.33%, respectively. Basic earnings per share and diluted earnings per
share would have been $1.28 and $1.23, respectively.
/2/ Tax-advantaged income has been adjusted to a tax-equivalent basis using the
combined statutory federal and state income tax rate in effect of 35% in
2000 and 1999, and 39.55% for 1998 through 1996.
/3/ Common Equity excludes net accumulated other comprehensive income which is
comprised of unrealized gains or losses on available for sale securities.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Review
The principal objective of this Financial Review is to provide an overview
of the financial condition and results of operations of Provident Bankshares
Corporation and its subsidiaries for the three years ended December 31, 2000.
This discussion and tabular presentations should be read in conjunction with the
accompanying financial statements and notes.
Provident Bankshares Corporation ("the Corporation"), through its wholly
owned subsidiary, Provident Bank ("the Bank"), offers consumer and commercial
banking services. Provident operates in the dynamic Baltimore-Washington
corridor through a network of 98 offices in Maryland, Northern Virginia, and
southern York County, PA. The Bank offers related financial services through its
wholly owned subsidiaries. Mutual funds, annuities and insurance products are
offered through Provident Investment Center Inc. (PIC) and leases through Court
Square Leasing and Provident Lease Corp. During 1997, the Corporation acquired
First Citizens Financial Corporation and the acquisition was accounted for as
pooling-of-interests. Accordingly, results for the reporting periods have been
restated. During 2000, the Corporation acquired Harbor Federal Bancorp and the
acquisition was accounted for as a purchase. Results have been included in
operations prospectively.
The Corporation recorded net income in 2000 of $44.8 million or $1.67 per
share/diluted, a 1.5% increase in net income and 4.4% increase in diluted
earnings per share over 1999. Tax equivalent net interest income grew 8.9%,
non-interest income grew 22.7% while non-interest expense increased 11.8%. The
provision for loan losses more than doubled from 1999 recognizing the
deterioration in the health care portfolio. The Corporation also recognized an
extraordinary gain from debt extinguishment of $770 thousand, net of taxes.
These variances are discussed in more detail beginning on the following pages.
Results of Operations
Net Interest Income
The Corporation's principal source of revenue is net interest income, the
difference between interest income on earning assets and interest expense on
deposits and borrowings. Interest income, for purposes of analysis, is presented
on a tax-equivalent basis to recognize associated tax benefits. This
presentation provides a basis for comparison of yields with taxable earning
assets. The discussion on net interest income should be read in conjunction with
Table 2--"Analysis of Changes in Net Interest Income" and Table 3--"Consolidated
Average Balances, Interest Income and Expense and Yields and Rates."
Tax-equivalent net interest income for 2000 increased $13.3 million, or
8.9%, from 1999 as average earning assets grew $536 million over the prior year.
Net interest margin decreased to 3.07% from 3.13% in 1999.
Provident's tax equivalent interest income increased $62.2 million, or
17.6%, during the year due to the growth in average earning assets along with a
43 basis point increase in yield. The increase in yield was mainly due to a
higher interest rate environment during 2000 compared to 1999. Average prime
rate in 2000 was 9.23% compared to 8.00% in 1999. The increase in average
earning assets resulted from a $130 million increase in the loan portfolios, a
$490 million increase in investments and an $85 million decrease in loans held
for sale. Residential and commercial mortgage loans increased $135 million and
$27 million, respectively. Commercial and residential construction loans also
increased by $72 million and $7 million, respectively. Average consumer loans
fell $79 million due to the securitization of $324 million of second mortgage
loans during the third quarter while the commercial business portfolio declined
$31 million. Interest income earned on the loan portfolio increased $28 million
reflecting higher loan outstandings. The yield on investments and loans
increased 42 basis points and 52 basis points, respectively. Interest lost from
non-accruing loans was $2.3 million compared to $735 thousand in 1999. Average
non-accrual loans for 2000 were $18.9 million compared to $5.4 million in 1999.
This increase was associated with health care credits, a majority of which were
charged off or sold during 2000.
Interest expense increased $48.9 million from 1999 resulting from a $490
million growth in average interest-bearing liabilities. The overall cost of
funds increased 49 basis points as total interest-bearing liabilities increased
53 basis points mainly due to higher rate environment. Excluding the effect of
off-balance sheet positions in each year, total costs of interest-bearing
liabilities would have increased 51 basis points. The average rate paid on
borrowed funds increased 78 basis points during 2000.
6
The increase in average interest-bearing liabilities reflects a $256
million rise in interest-bearing deposits, $132 million of which was associated
with brokered deposits. Non-interest bearing demand deposit accounts grew by $37
million or 15%. The Corporation experienced a $233 million increase in borrowed
funds.
Future growth in net interest income will depend upon consumer and
commercial loan demand, growth in deposits and the general level of interest
rates. Please refer to the section entitled "Interest Sensitivity Management" on
page 22 for further discussion of the impact of current trends on net interest
income in 2000.
Analysis of Changes in Net Interest Income
Table 2
2000/1999 1999/1998
------------------------------------------------ ------------------------------------------------
Variance Due to Change In Variance Due to Change In
--------------------------------- ----------------------------------
(in thousands) Net Increase/ Average Average Average Net Increase/ Average Average Average
(tax-equivalent basis) (Decrease) Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume
=================================================================================================================================
Interest Income from:
Loans:
Consumer $ 5,185 $11,732 $ (6,153) $ (394) $ 34,894 $ 962 $ 33,713 $ 219
Commercial Business (1,180) 1,395 (2,462) (113) 3,110 (1,573) 4,971 (288)
Real Estate--Construction 8,801 1,265 6,793 743 (272) (949) 736 (59)
Real Estate--Mortgage 14,931 1,941 12,181 809 (11,770) (2,260) (10,065) 555
Mortgage Loans Held for Sale (5,701) 1,088 (6,026) (763) 582 61 517 4
Other Short-Term Investments 153 (5) 166 (8) (126) (25) (113) 12
U.S. Treasury and Government
Agencies and Corporations 2,708 (23) 2,752 (21) (278) 18 (294) (2)
Mortgage-Backed Securities 37,146 5,957 28,897 2,292 751 (3,378) 4,326 (197)
Municipal Securities (22) (3) (19) -- 258 (28) 290 (4)
Other Debt Securities 173 140 33 -- 6,952 96 6,662 194
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Total Interest Income 62,194 20,175 39,749 2,270 34,101 (5,804) 40,644 (739)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Expense on:
Demand/Money Market Deposits 3,008 1,411 1,452 145 370 (1,697) 2,357 (290)
Savings Deposits (819) (680) (146) 7 (4,411) (4,347) (84) 20
Certificates of Deposit 24,793 11,300 12,281 1,212 26,119 412 25,588 119
Individual Retirement Accounts (357) 140 (488) (9) (1,322) (587) (784) 49
Borrowings 22,233 7,462 12,954 1,817 (4,004) (1,564) (2,509) 69
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Total Interest Expense 48,858 22,859 23,382 2,617 16,752 (6,535) 24,128 (841)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $13,336 $ (2,684) $16,367 $ (347) $ 17,349 $ 731 $ 16,516 $ 102
=================================================================================================================================
The table above analyzes the reasons for the changes from year-to-year in the
principal elements that comprise net interest income. The calculation of rate,
volume and rate/volume variances is based upon a procedure established for banks
by the Securities and Exchange Commission. Rate, volume and rate/volume
variances presented for each component will not total to the variances presented
on totals of interest income and interest expense because of shifts from
year-to-year in the relative mix of interest-earning assets and interest-bearing
liabilities.
7
Consolidated Average Balances, Interest Income and Expense and Yields and Rates
Table 3
2000 1999
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(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
(tax-equivalent basis) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Loans:/(1)(2)/
Consumer $2,277,961 $188,307 8.27% $2,357,159 $183,122 7.77%
Commercial Business 353,437 29,100 8.23 384,708 30,280 7.87
Real Estate--Construction 211,842 20,366 9.61 133,458 11,565 8.67
Real Estate--Mortgage 552,720 44,172 7.99 390,177 29,241 7.49
---------- -------- ---------- --------
Total Loans 3,395,960 281,945 8.30 3,265,502 254,208 7.78
---------- -------- ---------- --------
Mortgage Loans Held for Sale 36,352 2,893 7.96 121,663 8,594 7.06
Other Short-Term Investments 6,610 262 3.96 2,617 109 4.17
US Treasury and Government
Agencies and Corporations 79,189 5,733 7.24 41,464 3,025 7.30
Mortgage-Backed Securities 1,614,289 112,255 6.95 1,165,777 75,109 6.44
Municipal Securities 26,508 2,033 7.67 26,756 2,055 7.68
Other Debt Securities 137,522 10,414 7.57 137,078 10,241 7.47
Equity Securities -- -- -- -- -- --
---------- -------- ---------- --------
Total Investment Securities/(2)/ 1,857,508 130,435 7.02 1,371,075 90,430 6.60
---------- -------- ---------- --------
Total Interest-Earning Assets 5,296,430 415,535 7.85 4,760,857 353,341 7.42
---------- -------- ---------- --------
Less: Allowance for Loan Losses (41,748) (38,293)
Cash and Due From Banks 78,126 68,725
Other Assets 151,196 121,354
---------- ----------
Total Assets $5,484,004 $4,912,643
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 599,030 17,154 2.86 $ 543,257 14,146 2.60
Savings Deposits 608,617 13,581 2.23 614,869 14,400 2.34
Certificates of Deposit 2,227,174 139,323 6.26 2,011,484 114,530 5.69
Individual Retirement Accounts 139,371 7,638 5.48 148,441 7,995 5.39
Borrowings 1,191,608 75,423 6.33 958,239 53,190 5.55
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 4,765,800 253,119 5.31 4,276,290 204,261 4.78
---------- -------- ---------- --------
Noninterest-Bearing Demand Deposits 292,360 255,259
Other Liabilities 43,144 39,752
Capital Securities 63,334 39,206
Stockholders' Equity 319,366 302,136
---------- ---------
Total Liabilities and Stockholders' Equity $5,484,004 $4,912,643
========== ==========
Net Interest-Earning Assets $ 530,630 $ 484,567
========== ==========
Net Interest Income (tax-equivalent) 162,416 149,080
Less: Tax-Equivalent Adjustment (983) (964)
-------- --------
Net Interest Income $161,433 $148,116
======== ========
Net Yield on Interest-Earning Assets (tax-equivalent) 3.07% 3.13%
/(1)/ Average loan balances include non-accrual loans.
/(2)/ Tax advantaged income has been adjusted to a tax-equivalent basis using
the combined statutory federal and state income tax rate in effect of 35%
in 2000 and 1999 and 39.55% for 1998 through 1996.
8
1998 1997 1996
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Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
$1,920,378 $148,228 7.72% $1,402,359 $113,496 8.09% $1,053,279 $ 85,049 8.07%
325,209 27,170 8.35 292,788 25,607 8.75 268,158 23,807 8.88
125,650 11,837 9.42 125,565 12,968 10.33 124,584 12,574 10.09
517,068 41,011 7.93 624,604 50,227 8.04 577,515 45,813 7.93
---------- -------- ---------- -------- ---------- --------
2,888,305 228,246 7.90 2,445,316 202,298 8.27 2,023,536 167,243 8.26
---------- -------- ---------- -------- ---------- --------
114,284 8,012 7.01 37,662 2,851 7.57 68,112 4,950 7.27
5,043 235 4.66 6,023 263 4.37 8,949 438 4.89
45,526 3,303 7.26 90,709 6,437 7.10 108,368 7,432 6.86
1,101,684 74,358 6.75 914,196 64,531 7.06 929,786 63,404 6.82
23,036 1,797 7.80 18,875 1,512 8.01 11,917 998 8.37
45,307 3,289 7.26 28,174 2,275 8.07 46,277 3,562 7.70
-- -- -- -- -- -- 2,983 284 9.52
---------- -------- ---------- -------- ---------- --------
1,215,553 82,747 6.81 1,051,954 74,755 7.11 1,099,331 75,680 6.88
---------- -------- ---------- -------- ---------- --------
4,223,185 319,240 7.56 3,540,955 280,167 7.91 3,199,928 248,311 7.76
---------- -------- ---------- -------- ---------- --------
(38,831) (33,017) (27,985)
60,562 57,923 55,568
105,659 89,650 92,621
---------- ---------- ----------
$4,350,575 $3,655,511 $3,320,132
========== ========== ==========
$ 463,874 13,776 2.97 $ 403,128 11,347 2.81 $ 380,913 11,009 2.89
617,643 18,811 3.05 620,267 20,450 3.30 621,995 17,100 2.75
1,559,985 88,411 5.67 1,194,202 67,917 5.69 922,616 53,493 5.80
162,088 9,317 5.75 111,252 6,290 5.65 105,680 6,134 5.80
985,176 57,194 5.81 866,502 50,714 5.85 872,554 49,618 5.69
---------- -------- ---------- -------- ---------- --------
3,788,766 187,509 4.95 3,195,351 156,718 4.90 2,903,758 137,354 4.73
---------- -------- ---------- -------- ---------- --------
212,339 176,645 158,635
42,608 31,555 28,253
27,873 -- --
278,989 251,960 229,486
---------- ---------- ----------
$4,350,575 $3,655,511 $3,320,132
========== ========== ==========
$ 434,419 $ 345,604 $ 296,170
========== ========== ==========
131,731 123,449 110,957
(1,133) (1,055) (832)
-------- -------- --------
$130,598 $122,394 $110,125
======== ======== ========
3.12% 3.49% 3.47%
9
Provision for Loan Losses
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated losses based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the loan
portfolio, credit concentration trends in historical loan experience, specific
impaired loans and economic conditions. Management also considers the level of
problem assets that the Company classifies in accordance with regulatory
requirements. The provision for loan losses was $23.9 million, up from $11.6
million in 1999. The Corporation recorded a $13.0 million provision in the
second quarter of 2000 to address the deterioration in the health care
portfolio. The Corporation continues to emphasize quality underwriting as well
as aggressive management of prior charge-offs and potential problem loans.
Net charge-offs were $22.5 million in 2000 compared to $13.0 million in
1999. This increase in charge-offs is related to a $7.1 million write down of an
existing $15 million non-performing health care credit and a $5.0 million loss
on the sale of a second health care loan. Net charge-offs as a percentage of
average loans was .66% in 2000 compared to .40% in 1999. Non-accrual loans ended
the year at $21.2 million or .63% of loans outstanding, a decrease of $7.7
million from December 31, 1999. This decrease is due to the write down of the
above mentioned health care loan.
A further discussion of the allowance for loan losses, net charge-offs and
non-performing assets appears on pages 16-19.
Non-Interest Income
Non-interest income is principally derived from fee-based services,
mortgage banking activities and gains on investment securities sales. Total
non-interest income increased 22.7% to $75.4 million. Excluding net securities
gains, non-interest income increased $5.8 million or 9.4%.
Table 4 presents a comparative summary of the major components of
non-interest income.
Non-Interest Income Summary
Table 4
(in thousands) 2000 1999 1998 1997 1996
==============================================================================================================================
Service Charges on Deposit Accounts $42,912 $34,172 $29,260 $24,432 $19,262
Mortgage Banking Activities 3,613 9,652 11,485 6,845 14,895
Commissions and Fees 4,737 5,280 4,209 3,705 3,229
Other Loan Fees 2,390 3,355 5,104 2,147 1,872
Other Non-Interest Income 13,269 8,688 6,085 4,990 5,275
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 66,921 61,147 56,143 42,119 44,533
Net Securities Gains 8,499 312 6,749 2,337 5,556
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $75,420 $61,459 $62,892 $44,456 $50,089
==============================================================================================================================
Deposit service charges rose 26% over the prior year due mainly to a $6.9
million increase in retail demand deposit service fees. Average interest-bearing
demand/money market deposits grew $55.8 million or 10% over last year while
non-interest bearing deposits increased $37.1 million or 15%. These increases
are the result of network expansion and continued promotion and sales efforts of
retail deposit products.
Income from mortgage banking activities declined $6.0 million to $3.6
million from $9.7 million in 1999. This decline was from lower production as a
result of higher interest rate environment for residential mortgages. As a
result, mortgage originations during the year decreased $450 million to $314
million. During the fourth quarter of 2000, the Corporation made a decision to
reposition its mortgage operations by offering mortgages to its retail customers
through an outsourced loan origination process and to no longer seek loan
production from realtors and brokers. As a result, the mortgage lending
operations of the Bank's subsidiary, Provident Mortgage Corp. are being phased
out.
10
Commissions and fees decreased $543 thousand during 2000. This decrease is
mainly associated with lower income from Provident Investment Center (PIC), a
wholly owned subsidiary of the Bank. PIC offers annuities and mutual funds
through an affiliation with a securities broker-dealer as well as property and
casualty insurance products, as agent. For the year 2000, income associated with
these products decreased by $435 thousand to $2.8 million. This decrease is
attributed to lower sales volume due to an inverted yield curve and a volatile
and erratic stock market. Other non-interest income increased $3.6 million over
1999, mainly due to higher bankcard income, which increased $3.0 million and
$1.6 million associated with Bank Owned Life Insurance.
Non-Interest Expense
Non-interest expense is composed primarily of costs associated with
employees' salaries and benefits, bank facilities and external data processing.
Provident's non-interest expense of $148 million represented a $16 million
increase from 1999 expenses.
Table 5 presents a comparative summary of the major components of
non-interest expense.
Non-Interest Expense Summary
Table 5
(in thousands) 2000 1999 1998 1997 1996
=================================================================================================================================
Salaries and Employee Benefits $ 71,207 $ 66,394 $ 61,853 $ 54,548 $ 55,416
Occupancy Expense, Net 12,951 11,376 10,349 10,018 9,317
Furniture and Equipment 10,073 8,927 8,123 7,354 7,036
External Processing Fees 16,420 14,883 14,006 12,374 10,929
Advertising and Promotion 7,582 6,806 7,171 5,678 5,986
Communication and Postage 5,673 5,231 4,376 3,693 3,861
Printing and Supplies 2,715 2,463 2,502 2,277 2,351
Federal Insurance Fund Recapitalization -- -- -- -- 3,029
Regulatory Fees 1,217 1,120 939 1,016 1,699
Professional Services 2,731 2,706 2,413 2,762 3,000
Merger Related Expenses -- -- -- 10,047 --
Capital Securities Expenses 5,558 3,160 2,359 -- --
Other Non-Interest Expense 12,241 9,590 8,971 8,543 7,723
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $148,368 $132,656 $123,062 $118,310 $110,347
=================================================================================================================================
Salaries and benefits increased $4.8 million during the year. Compensation
increased $4.2 million while benefits were up $573 thousand. The rise in these
categories is attributable to network expansion as 15 new branches were opened.
Regular salaries rose $5.5 million mainly attributable to merit increases and
increased staffing associated with branch expansion. Full-time equivalent
employees as of December 31, 2000 were 1,594 compared to 1,511 last year.
Occupancy costs rose $1.6 million or 14% over last year. This increase is mainly
due to additional rent and leasehold improvements as the branch network
increased to 98 branches in 2000. Total furniture and equipment expense
increased $1.1 million due to upgrading of technology and branch network
expansion.
External processing increased $1.5 million, or 10%, the majority of which
was associated with a 6.5% increase in average account volume. During the first
quarter of 2000, the Corporation issued $30 million of trust preferred
securities with a maturity of 30 years, callable at the end of the fifth year.
The rate on these trust preferred securities is 10.0%. The 2000 capital
securities expense was $5.6 million compared to $3.2 million for 1999. All other
non-interest expenses were up by $4.2 million from 1999. This increase in other
non-interest expenses was due to network expansion as communication, postage,
marketing, supplies, personnel costs, net losses and travel and entertainment
expenses increased $3.5 million from 1999. Expenses for goodwill and low income
housing investments were $565 thousand for 2000 compared to zero in 1999. The
Corporation also recognized approximately $800 thousand in one time charges for
the restructuring of Provident Mortgage Corp.
11
Income Taxes
Provident recorded income tax expense of $20.6 million on pre-tax income of
$64.6 million for an effective tax rate of 31.8%. This compares with a 32.4%
effective tax rate for 1999. This decrease is mainly related to a higher level
of tax-advantaged income and settlement of prior years' exams.
Fourth Quarter Results
Provident recorded net income of $12.6 million, or $.47 per share on a
diluted basis, in the fourth quarter of 2000, an increase of $1.0 million, or
9.1%, over the $11.5 million, or $.42 per share on a diluted basis, recorded in
the same period last year. The higher earnings were principally due to a 33%
increase in non-interest income or $4.8 million. Net interest income also
increased $1.0 million. A rise in operating expenses partially offset the
increase in income.
Tax-equivalent net interest income in the fourth quarter rose 2.4% or $978
thousand to $41.4 million. This increase was mainly related to a $515 million
rise in earning assets offset in part by a 23 basis point drop in net interest
margin. The decrease in the net interest margin primarily reflected a flatter
yield curve as yield on earning assets increased 18 basis points while the costs
of funds increased 41 basis points.
The Corporation recorded a provision for loan losses of $3.3 million during
the quarter to provide for loan growth in the portfolio as well as an increase
in net charge-offs.
Non-interest income increased 33% to $19.5 million. Fee income from deposit
accounts increased $3.0 million, and other non-interest income increased $2.0
million. Increase in other non-interest income was mainly associated with card
holder income and income associated with Bank Owned Life Insurance. During the
fourth quarter of 2000, the Corporation made a decision to reposition its
mortgage operations by offering mortgages to its retail customers through an
outsourced loan origination process and no longer will seek loan production from
realtors and brokers. As a result, the mortgage lending operations of the Bank's
subsidiary, Provident Mortgage Corp., are being phased out. Net securities gains
were $641 million compared to zero in the same period of 1999.
Non-interest expense increased $5.2 million to $39.1 million. Compensation
and benefits increased $2.2 million compared to the same period in 1999.
Compensation was up $1.7 million while benefits increased $460 thousand due to
network expansion. Occupancy expense was $411 thousand higher due to network
expansion and annual lease increases. External processing fees increased $577
thousand, which was associated with increased account volume. Other expenses
included higher minority interest expenses of $835 thousand associated with the
capital issuance of trust preferred securities during the first quarter of 2000,
higher furniture and equipment expenses of $259 thousand, higher net losses of
$276 thousand and goodwill amortization of $195 thousand associated with the
purchase of Harbor Federal Bancorp. The Corporation also recognized
approximately $800 thousand in one time charges for the restructuring of
Provident Mortgage Corp.
12
Table 6 presents quarterly financial data for 2000 and 1999.
Consolidated Quarterly Results of Operations, Market Prices and Dividends
(unaudited)
Table 6
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
===================================================================================================================================
Interest Income $107,228 $107,483 $101,827 $98,014 $95,055 $89,962 $85,988 $81,372
Interest Expense 66,100 67,151 62,273 57,595 54,894 52,171 49,565 47,631
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 41,128 40,332 39,554 40,419 40,161 37,791 36,423 33,741
Provision for Loan Losses 3,257 3,285 13,035 4,300 3,635 3,215 2,759 1,961
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 37,871 37,047 26,519 36,119 36,526 34,576 33,664 31,780
Non-Interest Income 18,883 17,148 16,600 14,290 14,680 15,451 15,416 15,600
Net Securities Gains (Losses) 641 -- 7,779 79 -- -- 375 (63)
Non-Interest Expense 39,098 37,295 36,946 35,029 33,907 33,504 33,003 32,242
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 18,297 16,900 13,952 15,459 17,299 16,523 16,452 15,075
Income Tax Expense 5,722 5,545 4,707 4,594 5,769 5,218 5,462 4,750
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 12,575 $ 11,355 $ 9,245 $10,865 $11,530 $11,305 $10,990 $10,325
Extraordinary Item -- -- -- 770 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 12,575 $ 11,355 $ 9,245 $11,635 $11,530 $11,305 $10,990 $10,325
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income--Basic* $ .48 $ .44 $ .35 $ .44 $ .43 $ .42 $ .41 $ .39
Net Income--Diluted* $ .47 $ .43 $ .35 $ .43 $ .42 $ .41 $ .40 $ .37
Market Prices: High 21.06 16.88 16.55 16.91 21.25 23.33 27.09 25.74
Low 16.38 13.31 13.19 13.21 16.49 19.23 20.48 22.39
Cash Dividends Paid .180 .175 .162 .157 .152 .148 .136 .132
===================================================================================================================================
*Income before extraordinary item for first quarter 2000 was $.41 and $.40 for
basic and diluted earnings per share respectively.
Financial Condition
Source and Use of Funds
Deposits
A major portion of the Bank's funding comes from core deposits, which
consist of consumer and commercial transaction accounts and consumer savings and
time deposits. These deposits are generated through the Bank's 98 branch banking
locations. At December 31, 2000, core deposits represented 63% of total deposits
and 48% of total liabilities. Future funding growth is expected to be generated
from deposit growth through strategies outlined below.
The branch network strategy includes traditional full service branch
locations and in-store branches. In-store branch locations are comprised of
supermarket locations and national retail superstores. Provident Bank, as of
December 31, 2000, had 56 traditional branch locations and 42 in-store branches.
The Bank has an agreement with Supervalu to operate branches in their Metro and
Basic supermarkets in the Baltimore metropolitan area and Shoppers Food
Warehouse in the Washington, D.C. metropolitan area. Additional branch
opportunities complementary to existing locations will be sought when the cost
of entry is reasonable. The Bank has nine additional branches planned for 2001.
The Bank continues to attract increased commercial and retail deposits.
Interest-bearing demand/money market deposit balances at December 31, 2000 were
up $83.5 million, or 15%, compared to year-end 1999. The Bank decided to sell
its check cashing facilities during the second quarter of 2000 and closed that
transaction during the third quarter of 2000.
13
The table below presents the average deposit balances and rates paid for
the five years ended December 31, 2000.
Average Deposits
Table 7
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
====================================================================================================================================
Noninterest-Bearing $ 292,360 --% $ 255,259 --% $ 212,339 --% $ 176,645 --% $ 158,635 --%
Money Market/Demand 599,030 2.86 543,257 2.60 463,874 2.97 403,128 2.81 380,913 2.89
Savings 608,617 2.23 614,869 2.34 617,643 3.05 620,267 3.30 621,995 2.75
Time:
Certificates of Deposit 2,227,174 6.26 2,011,484 5.69 1,559,985 5.67 1,194,202 5.69 922,616 5.80
Individual Retirement
Accounts 139,371 5.48 148,441 5.39 162,088 5.75 111,252 5.65 105,680 5.80
---------- ---------- ---------- ---------- ----------
Total Average
Balance/Rate $3,866,552 4.60% $3,573,310 4.23% $3,015,929 4.32% $2,505,494 4.23% $2,189,839 4.01%
========== ========== ========== ========== ==========
Total Year-End Balance $3,954,770 $3,808,528 $3,419,557 $2,754,515 $2,286,144
========== ========== ========== ========== ==========
As the table above indicates, the Bank has a stable base of consumer
savings deposits. During 2000, average deposits grew $293 million, or 8.2%,
compared to 1999. Average money market/demand deposits and non-interest-bearing
deposits increased $92.9 million or 11.6%. This growth reflects an emphasis on
full banking relationships with retail and commercial customers. Average time
deposits increased $207 million, or 10%, $132 million of which is attributable
to brokered deposits. Brokered deposits, often a cheaper source of funds
compared to other available sources of borrowed money, such as Federal Home Loan
Bank advances and repurchase agreements, are used to match fund investments and
acquired loans.
The table below presents information at December 31, 2000, with respect to
the maturity of Certificates of Deposit of $100,000 or more.
Deposit Maturities
Table 8
Maturities
--------------------------------------------------------------
Over Three Over Six
Three Months Months to Months to Over 12
(dollars in thousands) or Less Six Months 12 Months Months Total
==============================================================================================================
Balance $59,883 $28,145 $46,452 $57,754 $192,234
Percent of Total 31.2% 14.6% 24.2% 30.0% 100.0%
Credit Risk Management
Much of the fundamental business of Provident is based upon understanding,
measuring and controlling credit risk. Credit risk entails both general risks,
which are inherent in the process of lending, and risk specific to individual
borrowers. Each consumer and residential lending product has a generally
predictable level of credit loss. For example, loans with generally low credit
loss experience include home mortgage and home equity loans. Loans with medium
credit loss experience are primarily secured products such as auto and marine
loans. The category with high credit loss experience includes unsecured products
such as personal revolving credit. In commercial lending, losses as a percentage
of outstanding loans can vary widely from period to period and are particularly
sensitive to changing economic conditions. The evaluation of specific risk is a
basic function of underwriting and loan administration, involving analysis of
the borrower's ability to service debt as well as the value of pledged
collateral.
14
Policies and procedures have been developed which specify the appropriate
credit approval and monitoring for the various types of credit offered. The Bank
employs prudent lending practices and adheres to regulatory requirements
including loan to value ratios and legal lending limits. These procedures are
modified periodically in order to reflect changing conditions and new products.
The Bank's lending and loan administration staff are charged with reviewing the
loan portfolio and identifying changes in the economy or in a borrower's
circumstances which may affect the ability to repay debt or the value of pledged
collateral. In order to assess and monitor the degree of risk in the loan
portfolio, credit risk identification and review processes are utilized. Credit
risk analysis assigns a grade to each commercial loan based upon an assessment
of the borrower's financial capacity to service the debt and the presence and
value of collateral for the loan. An independent loan review function tests risk
assessments and determines the adequacy of the allowance for loan losses.
Financial Accounting Standards require creditors to evaluate the
collectibility of contractually due principal and interest on commercial credits
to assess the need for providing for losses. The Corporation's credit procedures
require monitoring of commercial credits to determine the collectibility of such
credits. If a loan is identified as impaired, it will be placed on non-accrual
status and recorded according to accounting guidelines. As of December 31, 2000,
there were $13.6 million in commercial loans considered to be impaired.
Loans
The Bank offers a diversified mix of residential and commercial real
estate, business and consumer loans. As shown in Table 9, the mix of loans
outstanding is heavily consumer oriented. Of the total loans, $2.0 billion, or
60%, are secured by residential real estate including first and second
mortgages, and home equity loans.
During the fourth quarter of 2000, the Bank made a decision to reposition
its mortgage operations by offering mortgages to its retail customers through an
outsourced loan origination process and no longer will seek loan production from
realtors and brokers. As a result, the mortgage lending operations of its
subsidiary, Provident Mortgage Corp., are being phased out. Prior to this
decision, residential mortgage lending included the origination, sale and
servicing of fixed and variable rate mortgage loans. Loans were originated
through the loan production offices of Provident Mortgage Corp. Mortgage
origination activity in 2000 was $314 million compared to $764 million in 1999.
During 2000, income from the sale of loans was $1.2 million. The mortgage
servicing portfolio ended the year at $565 million. The residential real estate
mortgage loan balance at December 31, 2000 was $476 million compared to $245
million at the end of the prior year.
The following table sets forth information concerning the Bank's loan
portfolio by type of loan at December 31.
Loan Portfolio Summary
Table 9
(dollars in thousands) 2000 % 1999 % 1998 % 1997 % 1996 %
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $2,026,013 60.1% $2,204,943 69.2% $2,154,557 69.5% $1,667,094 61.7% $1,211,971 54.0%
Commercial Business 356,041 10.6 363,059 11.4 375,930 12.1 288,289 10.7 294,844 13.1
Real Estate--Construction:
Residential 109,046 3.2 89,513 2.8 89,777 2.9 99,926 3.7 112,072 5.0
Commercial 156,872 4.6 62,362 2.0 34,668 1.1 25,154 .9 9,470 .4
Real Estate--Mortgage:
Residential 476,030 14.1 245,401 7.7 238,282 7.7 362,012 13.4 355,566 15.8
Commercial 249,769 7.4 218,841 6.9 206,997 6.7 258,593 9.6 263,950 11.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $3,373,771 100.0% $3,184,119 100.0% $3,100,211 100.0% $2,701,068 100.0% $2,247,873 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
The Bank offers a wide range of loans to consumers including installment
loans, home equity loans, and personal lines of credit. In addition, the Bank
may purchase portfolios of quality consumer loans from other financial
institutions. All purchased portfolios go through a thorough due diligence
process prior to a purchase commitment. The portfolio of acquired loans
decreased $80 million on average, ending the year at $1.3 billion, and was
predominately comprised of second mortgages. The Bank securitized $324 million
of acquired second mortgage loans during the third quarter of 2000 and retained
the securities in the investment portfolio.
15
Average consumer loan balances through credits originated remained
relatively flat during the year, ending the year with a balance of $770 million.
During 2000, the Bank made a decision to exit both indirect auto and residential
mortgage lending to concentrate on more profitable businesses. Most of the
automobile loans were made through a network of auto dealerships in Maryland,
Delaware, Pennsylvania and Virginia. Auto loans that were made through this
network of dealerships ended the year at $183 million. Marine loan balances
ended 2000 with $225 million, and were produced primarily through correspondent
brokers. Home equity lines of credit totaled $161 million at the end of 2000
while direct second mortgage loans ended the year at $147 million.
The Bank's focus in commercial real estate lending has been on financing
commercial and residential construction, as well as on intermediate-term
commercial mortgages. Properties securing the loans include office buildings,
shopping centers, apartment complexes, warehouses, residential building lots and
developments. Average commercial real estate mortgage loans increased $27
million or 13% while average commercial construction loans increased $72 million
or 166%. Average residential construction loans increased $6.6 million or 7% to
end the year at $109 million.
The commercial loan portfolio consists of general business loans, including
asset-based loans, primarily to small and medium sized businesses in the
Baltimore, Maryland and Washington, D.C. metropolitan areas. The Bank stresses
the importance of asset quality as well as the development of new marketing
programs. Average commercial loans declined by $31 million, or 8%, ending the
year at $356 million. This decline is associated with a decision to reduce the
Bank's exposure to national syndicated credits. At December 31, 2000, national
syndicated credits represented 3.9% of the total loan portfolio, down from 4.9%
at December 31, 1999. The Bank has minimal exposure to highly leveraged
transactions ("HLTs"). HLTs are loans to borrowers for the purpose of purchasing
or recapitalizing a business in which the loans represent a majority of the
borrower's liabilities. HLTs totaled $53.1 million as of year-end, and all are
performing in accordance with their contractual terms.
Non-Performing Assets and Past Due Loans
Non-performing assets include loans on which interest is no longer accrued,
renegotiated loans and real estate and other assets that have been acquired
through foreclosure or repossession. Past due loans are loans that are 90 days
or more past due as of December 31 and still accruing interest because they are
well secured and in the process of collection. The Bank does not place consumer
loans on non-accrual status as delinquent consumer loans outstandings and any
uncollected interest is generally charged-off at the time such loan would be
placed on non-accrual status. Information with respect to non-performing assets
and past due loans is presented in Table 10 for the years indicated. As shown in
the table, total non-accrual loans decreased $7.7 million, mainly in commercial
business. This decrease is due to one national shared health care relationship
in which part of the largest portion was written-off during the third quarter of
2000. The financial condition of the health care industry remains weak, but the
Corporation has been closely monitoring these and several other of the bank's
health care industry credits where the operators have had to adjust to changes
in Medicare reimbursement policies. The entire health care portfolio represents
3.0% of the Bank's total loans, down from 3.5% at December 31, 1999. The
increase in past due consumer loans is related to purchases in the acquired
portfolio, the majority of which are secured by residential real estate.
Non-performing assets and past due loans ended the year at $24 million and $37
million, respectively. (See the discussion under Loans on page 15.) The ratio of
total non-performing loans to year-end loans decreased to .63% compared to .91%
at the end of 1999. This decrease is associated with the health care credit
noted above.
Presented below is interest income that would have been recorded on all
non-accrual loans if such loans had been paid in accordance with their original
terms and the interest income on such loans that was actually collected for the
year.
Year Ended
(in thousands) December 31, 2000
==============================================================================================
Gross interest income that would have been recorded
had such loans been paid in accordance with original terms $2,654
Interest income actually recorded 399
16
Non-Performing Assets and Past Due Loans
Table 10
December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998 1997 1996
===============================================================================================================================
Non-Accrual Loans:
Consumer (1) $ -- $ -- $ -- $ -- $ 9,809
Commercial Business 13,601 21,329 3,550 2,917 539
Real Estate--Construction:
Residential -- -- 1,570 -- 37
Commercial -- -- -- -- --
Real Estate--Mortgage:
Residential 7,619 7,579 6,397 6,937 4,372
Commercial -- -- -- -- 125
- -------------------------------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 21,220 28,908 11,517 9,854 14,882
- -------------------------------------------------------------------------------------------------------------------------------
Renegotiated Loans:
Commercial Business 165 -- -- -- --
Real Estate--Construction:
Residential -- -- -- -- --
Commercial -- -- -- -- --
Real Estate--Mortgage:
Residential -- -- -- -- --
Commercial -- -- -- -- 3,942
- -------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 165 -- -- -- 3,942
- -------------------------------------------------------------------------------------------------------------------------------
Other Non-Performing Assets:
Real Estate--Construction:
Residential 516 1,538 454 454 132
Commercial -- -- -- -- 9,571
Real Estate--Mortgage:
Residential 2,060 1,395 2,554 2,367 903
Commercial -- -- 1,900 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Non-Performing Assets 2,576 2,933 4,908 2,821 10,606
- -------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $23,961 $31,841 $16,425 $12,675 $29,430
===============================================================================================================================
Past Due Loans:
Consumer (1) $31,771 $23,369 $19,187 $14,371 $ 237
Commercial Business 131 59 -- 126 --
Real Estate--Construction:
Residential -- -- -- 133 --
Commercial -- -- -- -- --
Real Estate--Mortgage:
Residential 4,589 5,753 8,806 10,646 7,823
Commercial 919 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Past Due Loans $37,410 $29,181 $27,993 $25,276 $ 8,060
===============================================================================================================================
Ratios:
Total Non-Performing
Loans to Year-End Loans .63% .91% .37% .36% .84%
Total Non-Performing Assets to Year-End Assets .44 .63 .35 .32 .84
===============================================================================================================================
(1) Prior to 1997, consumer loans were generally placed into non-accrual status
at 90 days past due and subsequently charged off. Beginning in 1997, to
conform to standard industry practice, consumer loans are not placed in
non-accrual status but are generally charged-off at 120 days past due for
installment loans and 180 days for revolving loans.
17
Allowance for Loan Losses
The Corporation maintains an allowance for loan losses, which is available
to absorb potential losses. The allowance is reduced by actual credit losses and
is increased by the provision for loan losses and recoveries of previous losses.
Determination of the adequacy of the allowance, which is performed quarterly, is
accomplished by assigning specific reserves to individually identified problem
credits and general reserves, based on historic and anticipated loss experience,
to all other loans.
Management believes that the allowance at December 31, 2000 will be
adequate to absorb losses inherent in the portfolio. Management believes that it
uses the best information available to make such determinations. If
circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be affected. While the Corporation
believes it has established its existing allowance for loan losses in accordance
with GAAP, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request an increase in the allowance for loan losses.
Because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that increases to the allowance will
not be necessary should the quality of any loans deteriorate as a result of the
factors discussed above.
The following table reflects the allowance for possible loan losses and the
activity during each of the respective years.
Loan Loss Experience Summary
Table 11
(dollars in thousands) 2000 1999 1998 1997 1996
===============================================================================================================================
Balance at Beginning of Year $ 39,780 $ 42,739 $ 36,861 $ 30,361 $ 27,524
Allowance of Acquired Company 404 -- -- -- --
Provision for Loan Losses 23,877 11,570 12,027 9,953 10,011
Allowance Related to Securitized Loans (950) (1,500) -- -- --
Loans Charged-Off:
Consumer 11,040 7,940 4,550 3,641 2,888
Commercial Business 13,000 5,705 1,031 143 5,170
Real Estate--Construction:
Residential -- 500 593 305 37
Commercial -- -- 25 37 8
Real Estate--Mortgage:
Residential 209 412 258 289 360
Commercial -- -- 1,281 798 399
- -------------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 24,249 14,557 7,738 5,213 8,862
- -------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Consumer 1,414 1,236 970 871 826
Commercial Business 148 106 109 882 801
Real Estate--Construction:
Residential -- -- 68 -- --
Commercial -- 24 16 1 16
Real Estate--Mortgage:
Residential -- -- 11 1 45
Commercial 236 162 415 5 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 1,798 1,528 1,589 1,760 1,688
- -------------------------------------------------------------------------------------------------------------------------------
Net Loans Charged-Off 22,451 13,029 6,149 3,453 7,174
===============================================================================================================================
Balance at End of Year $ 40,660 $ 39,780 $ 42,739 $ 36,861 $ 30,361
===============================================================================================================================
Balances:
Loans--Year-End $3,373,771 $3,184,119 $3,100,211 $2,701,068 $2,247,873
Loans--Average 3,395,960 3,265,502 2,888,305 2,445,316 2,023,536
Ratios:
Net Loans Charged-Off to Average Loans .66% .40% .21% .14% .35%
Allowance for Loan Losses to Year-End Loans 1.21 1.25 1.38 1.36 1.35
- -------------------------------------------------------------------------------------------------------------------------------
18
The continued emphasis on loan quality and close monitoring of potential
problem credits has resulted in a strong credit portfolio. 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 is determined by management's
evaluation of the composition and risk characteristics of the loan portfolio.
Based upon the evaluation of credit risk, loan loss provisions in the form of
charges to operations are made to bring the allowance up to a level management
believes is adequate.
An analysis of the loan portfolio was performed at December 31, 2000, and
expected losses have been provided for in the allowance for loan losses. During
2000, the loan loss allowance increased $880 thousand to $40.7 million at
year-end. This increase is related to the increase in credit exposure as the
total loans increased $190 million, $231 million from the residential mortgage
loans. The allowance as a percentage of total loans was 1.21% at December 31,
2000 compared to 1.25% at December 31, 1999. The allowance for loan losses as a
percentage of non-accrual loans was 190% at December 31, 2000, compared to 138%
the prior year. The portion of the allowance which is allocated to non-accrual
loans, is determined by estimating the potential loss on each credit after
giving consideration to the value of underlying collateral.
The Corporation maintains a loan classification and review system to
identify those loans with a higher than normal risk of uncollectibility.
Estimated potential losses from internally criticized loans have been provided
for in determining the allowance for loan losses.
Table 12 reflects the allocation of the allowance for loan losses to the
various loan categories as required by the Securities and Exchange Commission.
The entire allowance for loan losses is available to absorb losses from any type
of loan.
Allocation of Allowance for Loan Losses
Table 12
(in thousand) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Consumer $ 8,125 $ 7,100 $ 6,057 $ 3,390 $ 4,572
Commercial Business 10,312 12,672 11,042 8,376 3,120
Real Estate--Construction:
Residential 1,283 1,086 1,638 1,585 1,408
Commercial 1,980 799 439 384 883
Real Estate--Mortgage:
Residential 3,965 1,289 634 592 998
Commercial 2,133 1,843 1,863 2,486 2,704
Unallocated 12,862 14,991 21,066 20,048 16,676
- -------------------------------------------------------------------------------------------------------------------------------
Total Allowance for Loan Losses $40,660 $39,780 $42,739 $36,861 $30,361
- -------------------------------------------------------------------------------------------------------------------------------
Investment Securities
The Corporation's investment activities include management of the $1.9
billion investment securities portfolio. The investment securities portfolio
includes mortgage-backed securities, U.S. Government securities, municipal
securities and other debt securities. In addition to investment securities, the
Corporation invests in federal funds sold, reverse repos, mortgage loans held
for sale and other short-term investments (referred to in total as the
investment portfolio). The strategies employed in the management of these
portfolios depend upon the liquidity, interest sensitivity and capital
objectives and requirements of the Corporation. The Treasury Division executes
these strategies.
19
The following table sets forth information concerning the Bank's investment
securities portfolio at December 31.
Investment Securities Summary
Table 13
(dollars in thousands) 2000 % 1999 % 1998
- -------------------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 87,405 4.7% $ 56,447 3.4% $ 42,293
Mortgage-Backed Securities 1,644,202 87.6 1,469,605 87.9 992,089
Municipal Securities 26,080 1.4 26,205 1.6 27,732
Other Debt Securities 118,822 6.3 119,250 7.1 136,397
- -------------------------------------------------------------------------------------------------
Total Securities Available for Sale 1,876,509 100.0 1,671,507 100.0 1,198,511
- -------------------------------------------------------------------------------------------------
Securities Held to Maturity
U.S. Treasury and Government
Agencies and Corporations -- -- -- -- --
Mortgage-Backed Securities -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total Securities Held to Maturity -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio $1,876,509 100.0% $1,671,507 100.0% $1,198,511
- -------------------------------------------------------------------------------------------------
Total Portfolio Yield 7.1% 7.0% 6.6%
- -------------------------------------------------------------------------------------------------
Investment Securities Summary
Table 13
(dollars in thousands) % 1997 % 1996 %
- ---------------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations 3.5% $ 55,576 5.7% $ 71,882 6.8%
Mortgage-Backed Securities 82.8 885,491 90.0 847,194 80.4
Municipal Securities 2.3 19,391 2.0 19,091 1.8
Other Debt Securities 11.4 22,783 2.3 29,987 2.8
- ---------------------------------------------------------------------------------------------
Total Securities Available for Sale 100.0 983,241 100.0 968,154 91.8
- ---------------------------------------------------------------------------------------------
Securities Held to Maturity
U.S. Treasury and Government
Agencies and Corporations -- -- -- 32,395 3.1
Mortgage-Backed Securities -- -- -- 53,842 5.1
- ---------------------------------------------------------------------------------------------
Total Securities Held to Maturity -- -- -- 86,237 8.2
- ---------------------------------------------------------------------------------------------
Total Investment
Securities Portfolio 100.0% $983,241 100.0% $1,054,391 100.0%
- ---------------------------------------------------------------------------------------------
Total Portfolio Yield 7.0% 6.9%
- ---------------------------------------------------------------------------------------------
During 2000, the Corporation continued to enjoy a strong capital position,
a high degree of liquidity, and a substantial level of core deposits.
Management's principal objectives for the investment portfolio during 2000 were
to maintain an appropriate level of quality, to ensure sufficient liquidity in
various interest rate environments while maximizing yield and to increase net
income by utilizing excess capital. To successfully achieve these objectives,
the Corporation employed off-balance sheet and on balance sheet strategies.
Total investment securities increased $205 million during 2000 as a result of
securitizing $324 million of purchased consumer loans during the third quarter
of 2000. Notional amounts of off-balance sheet positions totaled $540 million at
December 31, 2000 compared to $1.6 billion at December 31, 1999.
The Corporation segregates its investment securities into three categories:
1) held to maturity, 2) trading, and 3) available for sale. All securities in
the available for sale category must be measured at fair market value. The
resulting gain or loss is excluded from revenue but is reflected as a change in
stockholders' equity through accumulated other comprehensive income. Trading
securities must be measured at fair value and changes included in income for the
period. As of December 31, 2000, the Corporation had no investments classified
as trading securities. Securities designated as held to maturity are carried at
amortized cost. At December 31, 2000, the available for sale portfolio included
net unrealized losses of approximately $16.5 million, compared to net unrealized
losses of $68.2 million at December 31, 1999.
In addition to unrealized gains and losses, the Corporation realized $8.8
million in gains and $328 thousand in losses from the sale of securities from
the available for sale portfolio in 2000. These sales were the result of
management's continuous monitoring of the investment securities portfolio in
terms of both performance and risks.
20
Liquidity and Sensitivity to Interest Rates
Liquidity
An important component of the Bank's asset/liability structure is the level
of liquidity available to meet the needs of customers and creditors. Traditional
sources of bank liquidity include deposit growth, loan repayments, investment
maturities, asset sales, borrowings and interest received.
The Bank's Asset/Liability Management Committee has established general
guidelines for the maintenance of prudent levels of liquidity. The committee
continually monitors the amount and source of available liquidity, the time
required to obtain it and its cost. Management believes the Bank has sufficient
liquidity to meet funding needs in the foreseeable future.
Primary sources of liquidity at December 31, 2000 were investment
securities available for sale and scheduled loan repayments. Investment
securities available for sale totaled $1.9 billion. This represents 36% of total
liabilities at December 31, 2000, the same as December 31, 1999. Maturities of
investment securities, as Table 14 indicates, is expected to generate $287
million in funds in 2001 and $1.1 billion, or 58%, of the portfolio within the
next five years.
The following table presents the expected cash flows and interest yields of
the Bank's investment securities portfolio at December 31, 2000.
Maturities of Investment Securities Portfolio
Table 14
In One Year After One Year After Five Years
or Less Through Five Years Through Ten Years
- --------------------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 5,010 5.0% $ -- --% $ -- --%
Mortgage-Backed Securities 277,706 7.3 789,431 7.0 345,099 6.9
Municipal Securities 3,785 7.5 11,668 7.7 9,340 7.7
Other Debt Securities 500 9.8 400 6.3 -- --
- --------------------------------------------------------------------------------------------
Total Investment Securities Portfolio $287,001 7.3% $801,499 7.0% $354,439 7.0%
- --------------------------------------------------------------------------------------------
Maturities of Investment Securities Portfolio
Table 14
Over Unrealized
Ten Years Gain (Loss)
- --------------------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Total Yield
- --------------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 78,059 7.3% $ 4,336 $ 87,405 7.2%
Mortgage-Backed Securities 233,162 6.5 (1,196) 1,644,202 7.0
Municipal Securities 1,049 7.7 238 26,080 7.7
Other Debt Securities 137,753 7.5 (19,831) 118,822 7.5
- --------------------------------------------------------------------------------------------
Total Investment Securities Portfolio $450,023 7.0% $(16,453) $1,876,509 7.1%
- --------------------------------------------------------------------------------------------
Yields do not give effect to changes in fair value that are reflected as a
component of stockholders' equity.
21
Loan repayments are another source of liquidity. Scheduled loan repayments
during the year 2000 are $450 million, or 13.3% of loans. Table 15 presents
contractual loan maturities and interest rate sensitivity at December 31, 2000.
The cash flow from loans is expected to significantly exceed contractual
maturities due to refinances and early payoffs.
Loan Maturities and Rate Sensitivity
Table 15
In One Year After One Year After Five
(dollars in thousands) or Less Through Five Years Years Total Percentage
- -------------------------------------------------------------------------------------------------------------------------------
Loan Maturities:
Consumer $283,805 $ 772,365 $ 969,843 $2,026,013 60.1%
Commercial Business 23,510 294,640 37,891 356,041 10.6
Real Estate--Construction:
Residential 66,349 40,324 2,373 109,046 3.2
Commercial 51,874 101,960 3,038 156,872 4.6
Real Estate--Mortgage:
Residential 9,193 31,286 435,551 476,030 14.1
Commercial 15,004 199,100 35,665 249,769 7.4
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans $449,735 $1,439,675 $1,484,361 $3,373,771 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
Rate Sensitivity:
Predetermined Rate $287,193 $1,058,005 $1,016,872 $2,362,070 70.0%
Variable or Adjustable Rate 162,542 381,670 467,489 1,011,701 30.0
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans $449,735 $1,439,675 $1,484,361 $3,373,771 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
Core deposits are valuable in assessing liquidity needs because they tend
to be stable with little net short or intermediate-term withdrawal demands by
customers. At year-end, core deposits represented $2.5 billion, or 48%, of total
liabilities and 45% of total assets.
An important element in liquidity management is the availability of
borrowed funds. At December 31, 2000, short-term borrowings totaled $398
million, or 7.7%, of liabilities in contrast to $301 million, or 6.3%, of
liabilities at December 31, 1999. Another key element in liquidity management is
the use of brokered CDs. Brokered CDs at December 31, 2000 amounted to $1.3
billion, a $161 million decrease from the same period last year. The average
maturity of short-term borrowings at the end of the year was 17 days. These
borrowings were fully collateralized by U.S. Government or mortgage-backed
securities owned by the Bank. Long-term borrowings consisted of variable and
fixed-rate advances from the Federal Home Loan Bank and totaled $725 million as
of December 31, 2000. It is anticipated that the Bank will continue to have
access to the repurchase market and fed fund lines as well as short and
long-term variable and fixed-rate funds from the Federal Home Loan Bank. During
the first quarter of 2000, the Corporation issued an additional $30 million of
trust preferred securities with a maturity of 30 years, callable at the end of
the fifth year. The rate on this issue of trust preferred securities is 10.0%.
Total issuance of trust preferred securities now totals $70 million.
Interest Sensitivity Management
The nature of the banking business, which involves paying interest on
deposits at varying rates and terms and charging interest on loans at other
rates and terms, creates interest rate risk. As a result, earnings are subject
to fluctuations, which arise due to changes in the level and directions of
interest rates. Management's objective is to minimize this risk.
Measuring and managing interest rate risk is a dynamic process that is
performed regularly as an important component of management's analysis of the
impact of changes in asset and liability portfolios. Control of the
Corporation's interest sensitivity position is accomplished through the
structuring of the investment and funding portfolios, securitizing loans for
possible sale, the use of variable rate loan products and off-balance sheet
derivatives.
22
Management does not try to anticipate changes in interest rates. Its
principal objective is to maintain interest margins in periods of both rising
and falling rates. Traditional interest sensitivity gap analyses alone do not
adequately measure an institution's exposure to changes in interest rates
because gap models are not sensitive to changes in the relationship between
interest rates charged or paid and do not incorporate balance sheet trends and
management actions. Each of these factors can affect an institution's earnings.
Accordingly, in addition to performing gap analysis, management also evaluates
the impact of differing interest rates on net interest income using an earnings
simulation model. The model incorporates the factors not captured by gap
analysis by projecting income over a twenty-four month horizon under a variety
of interest rate scenarios.
As of December 31, 2000, the Corporation's interest sensitive liabilities
exceeded interest sensitive assets within a one year period by $1.7 billion, or
31.5% of assets. The Bank's savings products are structured to give management
the ability to reset the rates paid on a monthly basis. This causes the Bank to
become more liability sensitive. If interest rates rise, the rate paid on
savings deposits may follow, and the Corporation's net interest margin may
decline. Management continues to take steps to protect the Bank from possible
changes in interest rates. In 2000, these steps included lengthening the
maturities on purchased funds and certificates of deposits and shortening asset
maturities with interest rate swaps and caps. Management monitors the interest
rate environment and employs appropriate off-balance sheet strategies to address
potential changes in interest rates. These strategies lower the net interest
margin but are designed to maintain an acceptable margin in a changing rate
environment. As a result of off-balance sheet transactions undertaken to
insulate the Bank from interest rate risks, interest income decreased by $28
thousand and interest expense increased by $2.3 million, for a total decrease of
$2.3 million in net interest income for the year ending December 31, 2000.
As of January 1, 2001, the Corporation will adopt Financial Accounting
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). Upon adoption, this statement requires the
Corporation to mark to market all derivative instruments as a transition
adjustment. This transition adjustment is estimated to be a $1.2 million after
tax loss. The Corporation plans to close the derivative instruments that will
not qualify for the shortcut method under SFAS No. 133 which is not expected to
result in a material gain or loss. Under the shortcut method, an entity may
conclude that the change in the derivative's fair value is equal to the change
in the hedged item's fair value attributable to the hedged risk, resulting in no
ineffectiveness. Therefore, the adoption of SFAS No. 133 is not expected to
adversely impact the earnings from continuing operations of the Corporation in
2001.
Stockholders' Equity
It is necessary for banks to maintain a sufficient level of capital in
order to sustain growth, absorb unforeseen losses and meet regulatory
requirements. In addition, the current economic and regulatory climate places an
increased emphasis on capital strength. In this environment, the Corporation
continues to maintain a strong capital position. The Corporation is well
capitalized, exceeding all regulatory requirements as of December 31, 2000, see
Note 18--Regulatory Capital. At December 31, 2000, total stockholders' equity
was $315 million, a $40.8 million increase over the prior year. In addition to
the ordinary adjustments to stockholders' equity of net income and dividends
paid, additional capital of $713 thousand was raised through the dividend
reinvestment plan, $786 thousand from the exercise of stock options, while
capital increased by $33.6 million during 2000 as a result of Statement of
Financial Accounting Standards No. 115. This statement requires changes in
market value, net of applicable income taxes, of the available for sale
investment portfolio to be accounted for through equity. An additional component
of regulatory capital is the trust preferred securities issued in 1999 and 2000.
These securities are treated as Tier I capital even though they are not included
in stockholders' equity in the Consolidated Statement of Condition. During 2000,
the Corporation also repurchased 3.2 million shares totaling $51 million and
issued 2.1 million shares as part of the Harbor Federal acquisition. In the
second quarter of 2000, the Corporation issued a 5% stock dividend and all
earnings per share figures have been adjusted for this dividend.
On February 16, 2001, the Corporation entered into an agreement to
repurchase approximately 1.4 million shares of common stock directly from
Mid-Atlantic Investors, a major stockholder. These shares will be repurchased by
the Corporation at a fixed price of $23.86 per share. The transaction will be
executed in portions, but in its entirety prior to March 31, 2001. Funding will
be provided through asset sales and will not affect liquidity requirements in
the future.
23
The Corporation exceeds all regulatory capital requirements as of December
31, 2000. The standards used by federal bank regulators to evaluate capital
adequacy are the risk-based capital and leverage ratio guidelines. Equity for
regulatory purposes does not include market value adjustments as required by
SFAS No. 115. Risk-based capital ratios measure core and total stockholders'
equity against risk-weighted assets. The Corporation's core capital is equal to
common stock, capital surplus and retained earnings less treasury stock. The
calculation of the Corporation's total stockholders' equity, for these purposes,
is equal to the above plus the allowance for loan losses, subject to certain
limitations and capital securities less goodwill. Risk-weighted assets are
determined by applying a weighting to asset categories and certain off-balance
sheet commitments based on the level of credit risk inherent in the assets. At
December 31, 2000, the Corporation's total capital ratio was 10.48% compared to
the minimum regulatory guideline of 8%. In addition, core common stockholders'
equity (Tier 1 Capital) must be at least 4% of risk-weighted assets. At
year-end, Tier 1 Capital ratio was 9.48%.
The leverage ratio represents core capital, as defined above, divided by
average total assets. Guidelines for the leverage ratio require the ratio of
core stockholders' equity to average total assets to be 100 to 200 basis points
above a 3% minimum, depending on risk profiles and other factors. The Bank's
leverage ratio of 6.86% at December 31, 2000 was well in excess of this
requirement.
Capital Components and Ratios
Table 16
December 31,
- --------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------
Qualifying Capital
Tier 1 Capital $ 385,453 $ 358,771
Total Capital 426,113 398,551
Risk-Weighted Assets 4,067,838 3,907,332
Quarterly Average Assets 5,618,993 5,056,385
Ratios
Leverage Capital 6.86% 7.10%
Tier 1 Capital 9.48 9.18
Total Capital 10.48 10.20
Financial Review 1999/1998
The Corporation recorded net income in 1999 of $44.2 million or $1.60 per
share/diluted, a 14% increase over 1998. The growth in net earnings was
attributable to a $17.5 million rise in net interest income offset in part by
lower non-interest income of $1.7 million and higher operating costs of $9.3
million.
Tax-equivalent net interest income for 1999 increased $17.3 million, or
13.2%, from 1998 as average earning assets grew $538 million over the prior
year. Net interest margin increased slightly to 3.13% compared to 3.12% in 1998.
Tax equivalent interest income increased $34.1 million, or 10.7%, during
the year primarily due to the growth in average earning assets offset in part by
a 14 basis point decrease in yield. The decrease in yield was mainly due to a
lower interest rate environment during 1999 compared to 1998. Average prime rate
in 1999 was 8.00% compared to 8.35% in 1998. The increase in average earning
assets resulted from a $377 million increase in the loan portfolios, $153
million in investments and $7 million in loans held for sale. Consumer loans
grew $437 million while the commercial business portfolio also experienced
growth of $60 million. Residential and commercial mortgage loans declined $97
million and $30 million, respectively, due to sales of residential mortgage
loans and prepayments of commercial mortgages. Interest income earned on the
loan portfolio increased $26 million reflecting higher loan outstandings. The
yield on investments and loans decreased 21 basis points and 12 basis points,
respectively. Interest lost from non-accruing loans was $735 thousand compared
to $850 thousand in 1998.
Interest expense increased $16.8 million from 1999 resulting from a $488
million growth in average interest-bearing liabilities. The overall cost of
funds declined 15 basis points as total interest-bearing liabilities decreased
17 basis points mainly due to lower rate environment for deposit products.
Excluding the effect of off-balance sheet positions in each year, total costs of
interest-bearing liabilities would have decreased 22 basis points. The average
rate paid on borrowed funds decreased 26 basis points during 1999.
24
The increase in average interest-bearing liabilities reflected a $514
million rise in interest-bearing deposits, $408 million of that was associated
with brokered deposits and $39 million with money market certificates of
deposit. Non-interest bearing demand deposit accounts grew by $43 million or
20%. The Corporation experienced a $27 million decrease in borrowed funds.
The provision for loan losses was $11.6 million, down slightly from $12.0
million in 1998. Net charge-offs were $13.0 million in 1999 compared to $6.1
million in 1998. This increase in charge-offs was related to an adverse decision
in a lawsuit associated with a letter of credit issued in 1989. Net charge-offs
as a percentage of average loans was .40% in 1999 compared to .21% in 1998.
Non-accrual loans ended the year at $28.9 million or .91% of loans outstanding,
an increase of $17.4 million from December 31, 1998. This increase was due to
one health care relationship, the largest portion of which is a shared national
credit.
Non-interest income is principally derived from fee-based services and
mortgage banking activities and gains on investment securities sales. Total
non-interest income decreased 2.7% to $61.0 million. Excluding net securities
gains, non-interest income increased $4.7 million or 8.5%.
Deposit service charges rose 16.8% over the prior year due mainly to a $4.4
million increase in retail demand deposit service fees. Average interest-bearing
demand/money market deposits grew $79.4 million or 17% over last year while
non-interest bearing deposits increased $42.9 million or 20%. These increases
were the result of continued promotion and sales efforts of retail deposit
products.
Income from mortgage banking activities declined $1.8 million to $9.7
million from $11.5 million in 1998. This decline was from lower production as a
result of higher interest rate environment for residential mortgages. Mortgage
originations during the year decreased $291 million to $764 million.
Commissions and fees increased $1.1 million during 1999. This increase was
mainly associated with income from Provident Investment Center (PIC), a wholly
owned subsidiary of the Bank. PIC offers annuities and mutual funds through an
affiliation with a securities broker-dealer as well as property and casualty
insurance products, as agent. For the year 1999, income associated with these
products increased by $895 thousand to $3.2 million. This increase was
attributed to continued sales efforts towards these products. Other non-interest
income increased $2.3 million over 1998, mainly due to higher bankcard income,
which increased $2.1 million.
Non-interest expense is composed primarily of costs associated with
employees' salaries and benefits, bank facilities and external data processing.
Provident's non-interest expense of $132 million represented a $9 million
increase from 1998 expenses.
Salaries and benefits increased $4.4 million during the year. Compensation
increased $3.6 million while benefits were up $834 thousand. The rise in these
categories was attributable to network expansion as 16 new branches were opened.
Regular salaries rose $5.0 million mainly attributable to merit increases and
increased staffing associated with branch expansion. Full-time equivalent
employees as of December 31, 1999 were 1,511 compared to 1,414 last year.
Occupancy costs rose $1.0 million or 9.9% over last year. This increase was
mainly due to additional rent and leasehold improvements as the branch network
increased to 83 branches in 1999. Total furniture and equipment expense
increased $804 thousand due to upgrading of technology and branch network
expansion.
External processing increased $877 thousand, or 6.3%, associated with 12%
increase in account volume. The year 1999 includes full year of capital
securities expense of $3.2 million associated with the $40 million trust
preferred securities offering during the second quarter of 1999. 1999 capital
securities expense was $2.4 million. All other non-interest expenses were up by
$1.4 million from 1998. This increase was in connection with higher
communication and postage expenses of $855 thousand resulting from branch
network expansion and higher net losses of $818 thousand associated with retail
deposit accounts.
Provident recorded income tax expense of $21.2 million on pre-tax income of
$65.3 million for an effective tax rate of 32.4%. This compares with a 33.2%
effective tax rate for 1998. This decrease was related to a higher level of
state tax benefits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
See "Interest Sensitivity Management" on page 22 and refer to the
disclosures on off-balance sheet items in Item 8--Financial Statements and
Supplementary Data contained herein.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Provident Bankshares Corporation and Subsidiaries
PAGE
Report of Independent Accountants 27
For the Three Years Ended December 31, 2000, 1999 and 1998
Consolidated Statement of Income 28
Consolidated Statement of Changes in Stockholders' Equity 30
Consolidated Statement of Cash Flows 31
Consolidated Statement of Comprehensive Income 32
Consolidated Statement of Condition at December 31, 2000 and 1999 29
Notes to Consolidated Financial Statements 33-60
Financial Reporting Responsibility
Consolidated Financial Statements
Provident Bankshares Corporation (the "Corporation") is responsible for the
preparation, integrity and fair presentation of its published consolidated
financial statements as of December 31, 2000, and the year then ended. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts, some of
which are based on judgments and estimates of management.
Internal Control Structure over Financial Reporting
Management maintains a system of internal control over financial reporting,
including controls over safeguarding of assets against unauthorized acquisition,
use or disposition which is designed to provide reasonable assurance to the
Corporation's management and board of directors regarding the preparation of
reliable published financial statements and such asset safeguarding. The system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified. This system encompasses activities that
control the preparation of the Corporation's Annual Report on Form 10-K
financial statements prepared in accordance with generally accepted accounting
principles.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 2000. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that Provident Bankshares Corporation maintained an effective internal
control structure over financial reporting as of December 31, 2000.
Compliance with Laws and Regulations
Management is also responsible for compliance with the federal and state
laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Provident Bank, the wholly owned subsidiary of Provident Bankshares
Corporation complied, in all significant respects, with the designated laws and
regulations related to safety and soundness for the year ended December 31,
2000.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Provident Bankshares
Corporation
In our opinion, the accompanying consolidated statement of condition and
the related consolidated statement of income, changes in stockholders' equity,
cash flows, and comprehensive income present fairly, in all material respects,
the financial position of Provident Bankshares Corporation and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 17, 2001 (except with respect to the matters discussed in Note 23, as to
which the date is February 21, 2001)
27
CONSOLIDATED STATEMENT OF INCOME
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998
===================================================================================================================================
INTEREST INCOME
Interest and Fees on Loans $283,796 $261,837 $234,926
Interest on Securities 128,402 88,094 80,184
Tax-Advantaged Interest 2,092 2,337 2,762
Interest on Short-Term Investments 262 109 235
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 414,552 352,377 318,107
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 177,696 151,071 130,315
Interest on Borrowings 75,423 53,190 57,194
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 253,119 204,261 187,509
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 161,433 148,116 130,598
Less: Provision for Loan Losses 23,877 11,570 12,027
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 137,556 136,546 118,571
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 42,912 34,172 29,260
Mortgage Banking Activities 3,613 9,652 11,485
Commissions and Fees 4,737 5,280 4,209
Net Securities Gains 8,499 312 6,749
Other Non-Interest Income 15,659 12,043 11,189
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 75,420 61,459 62,892
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 71,207 66,394 61,853
Occupancy Expense, Net 12,951 11,376 10,349
Furniture and Equipment Expense 10,073 8,927 8,123
External Processing Fees 16,420 14,883 14,006
Capital Securities Expense 5,558 3,160 2,359
Other Non-Interest Expense 32,159 27,916 26,372
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 148,368 132,656 123,062
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 64,608 65,349 58,401
Income Tax Expense 20,568 21,199 19,371
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 44,040 44,150 39,030
Extraordinary Item--Gain on Debt Extinguishment, Net 770 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 44,810 $ 44,150 $ 39,030
===================================================================================================================================
Basic Earnings Per Share
Income Before Extraordinary Item $ 1.68 $ 1.65 $ 1.45
Net Income 1.71 1.65 1.45
===================================================================================================================================
Diluted Earnings Per Share
Income Before Extraordinary Item $ 1.64 $ 1.60 $ 1.40
Net Income 1.67 1.60 1.40
===================================================================================================================================
The accompanying notes are an integral part of these statements.
28
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
===================================================================================================================================
ASSETS
Cash and Due From Banks $ 84,166 $ 90,840
Short-Term Investments 12,378 1,759
Mortgage Loans Held for Sale 8,243 30,535
Securities Available for Sale 1,876,509 1,671,507
Loans:
Consumer 2,026,013 2,204,943
Commercial Business 356,041 363,059
Real Estate--Construction 265,918 151,875
Real Estate--Mortgage 725,799 464,242
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans 3,373,771 3,184,119
Less: Allowance for Loan Losses 40,660 39,780
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,333,111 3,144,339
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 45,805 44,277
Accrued Interest Receivable 48,844 46,507
Other Assets 95,492 64,713
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $5,504,548 $5,094,477
===================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 327,334 $ 264,252
Interest-Bearing 3,627,436 3,544,276
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 3,954,770 3,808,528
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings 1,122,806 928,441
Other Liabilities 43,592 43,747
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,121,168 4,780,716
- -----------------------------------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities 67,969 39,162
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 29,708,943
and 26,225,752 Shares; at December 31, 2000 and 1999, respectively 29,709 26,226
Capital Surplus 251,184 203,364
Retained Earnings 109,593 102,587
Net Accumulated Other Comprehensive Loss (10,695) (44,323)
Treasury Stock at Cost--3,861,969 and 693,866 Shares
at December 31, 2000 and 1999, respectively (64,380) (13,255)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 315,411 274,599
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $5,504,548 $5,094,477
===================================================================================================================================
The accompanying notes are an integral part of these statements.
29
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Provident Bankshares Corporation and Subsidiaries
Accumulated
Other Treasury Total
Common Capital Retained Comprehensive Stock Comprehensive Stockholders'
(in thousands, except per share data) Stock Surplus Earnings Income (Loss) at Cost Income (Loss) Equity
===================================================================================================================================
Balance at January 1, 1998 $23,285 $131,191 $113,463 $ 4,733 $ (2,490) $270,182
Net Income--1998 -- -- 39,030 -- -- $ 39,030 39,030
Other Comprehensive Income, Net
of Tax: Unrealized Gain on Debt
Securities, Net of Reclassification
Adjustment (see Note 16) -- -- -- 575 -- 575 575
--------
Comprehensive Income $ 39,605
========
Dividends Paid ($.47 per share) -- -- (12,648) -- -- (12,648)
Exercise of Stock
Options (337,498 shares) 337 5,164 -- -- -- 5,501
Stock Dividend (1,165,433 shares) 1,165 35,184 (36,349) -- -- --
Purchase of Treasury
Shares (297,700 shares) -- -- -- -- (7,287) (7,287)
Common Stock Issued under Dividend
Reinvestment Plan (24,179 shares) 24 700 -- -- -- 724
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $24,811 $172,239 $103,496 $ 5,308 $ (9,777) $296,077
Net Income--1999 -- -- 44,150 -- -- $ 44,150 44,150
Other Comprehensive Income, Net
of Tax: Unrealized Loss on Debt
Securities, Net of Reclassification
Adjustment (see Note 16) -- -- -- (49,631) -- (49,631) (49,631)
--------
Comprehensive Income (Loss) $ (5,481)
========
Dividends Paid ($.57 per share) -- -- (15,232) -- -- (15,232)
Exercise of Stock
Options (172,271 shares) 172 1,900 -- -- -- 2,072
Stock Dividend (1,216,219 shares) 1,216 28,611 (29,827) -- -- --
Purchase of Treasury
Shares (168,100 shares) -- -- -- -- (3,478) (3,478)
Common Stock Issued under Dividend
Reinvestment Plan (27,726 shares) 27 614 -- -- -- 641
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $26,226 $203,364 $102,587 $(44,323) $(13,255) $274,599
Net Income--2000 -- -- 44,810 -- -- $ 44,810 44,810
Other Comprehensive Income, Net
of Tax: Unrealized Gain on Debt
Securities, Net of Reclassification
Adjustment (see Note 16) -- -- -- 33,628 -- 33,628 33,628
--------
Comprehensive Income $ 78,438
========
Dividends Paid ($.67 per share) -- -- (17,716) -- -- (17,716)
Exercise of Stock
Options (82,220 shares) 82 803 -- -- -- 885
Stock Dividend (1,256,017 shares) 1,256 18,832 (20,088) -- -- --
Purchase of Treasury
Shares (3,168,103 shares) -- -- -- -- (51,125) (51,125)
Issuance of Stock for
Acquisition of Harbor
Federal Bancorp (2,098,006 shares) 2,098 27,519 -- -- -- 29,617
Common Stock Issued under Dividend
Reinvestment Plan (46,948 shares) 47 666 -- -- -- 713
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $29,709 $251,184 $109,593 $(10,695) $(64,380) $315,411
===================================================================================================================================
The accompanying notes are an integral part of these statements.
30
CONSOLIDATED STATEMENT OF CASH FLOWS
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
=================================================================================================================================
Operating Activities
Net Income $ 44,810 $ 44,150 $ 39,030
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 20,527 29,230 28,200
Provision for Loan Losses 23,877 11,570 12,027
Provision for Deferred Income Tax (Benefit) 11,775 2,833 (2,941)
Realized Net Securities Gains (8,499) (312) (6,749)
Loans Originated or Acquired and Held for Sale (155,544) (556,072) (993,474)
Proceeds from Sales of Loans Held for Sale 179,009 755,228 841,538
Gain on Sales of Loans Held for Sale (1,173) (4,984) (5,846)
Other Operating Activities (436) 286 (23,551)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Adjustments 69,536 237,779 (150,796)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 114,346 281,929 (111,766)
- ---------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Principal Collections and Maturities of Securities Available for Sale 246,709 197,055 251,725
Proceeds on Sales of Securities Available for Sale 255,775 22,820 947,030
Purchases of Securities Available for Sale (265,034) (400,702) (1,405,328)
Loan Originations and Purchases Less Principal Collections (366,885) (492,222) (420,763)
Purchases of Bank Owned Life Insurance (51,620) -- --
Proceeds from Business Acquisition 2,451 -- --
Purchases of Premises and Equipment (8,343) (11,657) (10,069)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (186,947) (684,706) (637,405)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Increase (decrease) in Deposits (27,188) 388,971 665,042
Net Increase (decrease) in Short-Term Borrowings 43,080 155,960 (201,928)
Proceeds from Long-Term Debt 699,917 26,000 475,380
Payments and Maturities of Long-Term Debt (602,020) (134,121) (209,218)
Proceeds from Issuance of Trust Preferred Securities 30,000 -- 39,238
Issuance of Stock 1,598 2,713 6,225
Purchase of Treasury Stock (51,125) (3,478) (7,287)
Cash Dividends on Common Stock (17,716) (15,232) (12,648)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 76,546 420,813 754,804
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 3,945 18,036 5,633
Cash and Cash Equivalents at Beginning of Year 92,599 74,563 68,930
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 96,544 $ 92,599 $ 74,563
=================================================================================================================================
Supplemental Disclosures
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 189,037 $ 135,681 $ 111,775
Income Taxes Paid 10,059 17,631 18,301
Stock Dividend 20,088 29,827 36,349
Stock Issued for Acquired Company 29,617 -- --
Loans Securitized and Converted to Securities Available for Sale 309,998 373,332 --
The accompanying notes are an integral part of these statements.
31
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
=================================================================================================================================
Net Income $44,810 $ 44,150 $39,030
Net Other Comprehensive Income:
Net Unrealized Gain (Loss) on Debt Securities 39,152 (49,428) 4,655
Less: Reclassification Adjustment for Gains Included in Net Income 5,524 203 4,080
- ---------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 33,628 (49,631) 575
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $78,438 $ (5,481) $39,605
=================================================================================================================================
The accompanying notes are an integral part of these statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bankshares Corporation and Subsidiaries
NOTE 1--Summary of Significant Accounting Policies
Provident Bankshares Corporation ("the Corporation") offers a wide range of
banking services through its wholly owned subsidiary, Provident Bank, and its
subsidiaries ("the Bank"). Product offerings include deposit products, cash
management services, commercial and consumer loans and personal investment
products. These services are provided through a network of 98 offices and 165
ATMs located primarily in the greater Baltimore/Washington metropolitan area,
northern Virginia and southern Pennsylvania.
The following summary of significant accounting policies of the Corporation
is presented to assist the reader in understanding the financial and other data
presented in this report.
The accounting and reporting policies of the Corporation are in accordance
with generally accepted accounting principles and conform to general practice
within the banking industry. Certain prior years' amounts in the Consolidated
Financial Statements have been reclassified to conform with the presentation
used for the current year. These reclassifications have no effect on
stockholders' equity or net income as previously reported.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Provident
Bankshares Corporation and its wholly owned subsidiary, Provident Bank and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation. Results of operations from entities purchased are
included from the date of acquisition. Assets and liabilities of purchased
companies are stated at estimated fair values at the date of acquisition.
Results of operations from entities acquired using the pooling of interest
method are restated for all years presented.
Use of Estimates
In preparation of the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the financial statements and accompanying notes
and the reported amounts of income and expense during the reporting periods.
Actual results could differ from these estimates.
Investment Securities
Investment portfolios are to be divided among three categories: securities
available for sale, and if applicable, securities held to maturity and trading
account securities. Securities available for sale are securities the Corporation
intends to hold for an indefinite period of time, including securities used to
manage asset/liability strategy, that may be sold to respond to changes in
interest rates, prepayment risks, liquidity needs, manage capital or other
similar factors. Available for sale securities are reported at fair value with
any unrealized appreciation or depreciation in value reported directly as a
separate component of stockholders' equity as net accumulated other
comprehensive income (loss), which is reflected net of applicable taxes, and
therefore, has no effect on the reported earnings of the Corporation. Gains and
losses from sales of securities available for sale are recognized by the
specific identification method and are reported in non-interest income. Any
securities that the Corporation has the intent and ability to hold to maturity
would be included in securities held to maturity and, accordingly, carried at
cost adjusted for amortization of premiums and accretion of discounts using the
interest method.
Loans and Allowance for Loan Losses
Interest on loans is accrued at the contractual rate and credited to income
based upon the principal amount outstanding. It is the policy of management to
place a loan in non-accrual status and discontinue the accrual of interest and
reverse previously accrued but unpaid interest when the quality of a commercial
credit has deteriorated to the extent that collectibility of all interest and/or
principal cannot be reasonably expected or when it is 90 days past due unless
the loan is well secured and in the process of collection. Consumer loans are
not placed in non-accrual status but are generally charged-off at 120 days past
due for installment loans and 180 days for revolving loans to conform to
standard industry practice.
33
The Corporation considers a loan impaired when, based on available
information, it is probable that the Corporation will be unable to collect
principal and interest when due in accordance with the contractual terms of the
loan agreement. All non-accrual loans and troubled debt restructurings are
considered impaired loans. The measurement of impaired loans may be based on the
present value of expected future cash flows discounted at the historical
effective interest rate or based on the fair value of the underlying collateral.
Impairment criteria are applied to the loan portfolio exclusive of smaller
balance homogeneous loans such as residential mortgage and consumer loans which
are evaluated collectively for impairment. Restructured loans are considered
impaired in the year of restructuring. In subsequent years each restructured
loan is evaluated for impairment. The allowance for loan losses includes
reserves for these loans. Collections of interest and principal on loans in non-
accrual status and considered impaired are generally applied as a reduction to
the outstanding principal. Once future collectibility has been established,
interest income may be recognized on a cash basis.
The Corporation defers and amortizes certain loan fees and costs over the
life of the loan using the interest method. Net amortization of these fees and
costs are recognized in interest income as a yield adjustment and are,
accordingly, reported as Interest and Fees on Loans in the Consolidated
Statement of Income. Unearned income on loans at December 31, 2000 and 1999 was
not material with respect to the respective financial statements.
The Corporation's allowance for loan losses is based upon management's
continuing review and evaluation of the loan portfolio and is intended to
maintain an allowance adequate to absorb potential losses on loans outstanding.
The level of the allowance is based on an evaluation of the risk characteristics
of the loan portfolio and considers such factors as past loan loss experience,
the financial condition of the borrower, current economic conditions and other
relevant factors. Adjustments to the allowance due to changes in measurement of
impaired loans are incorporated in the provision for loan losses.
Premises and Equipment
Premises, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the lives of the related leases, if
shorter. Major improvements are capitalized while maintenance and repairs are
charged to expense as incurred.
Mortgage Banking Activities
In the fourth quarter of 2000 the Corporation repositioned its mortgage
lending business by eliminating its operation and outsourcing the loan
origination process. Prior to January 1, 2001 the Corporation engaged in sales
of mortgage loans, which were originated internally or purchased from third
parties. Accordingly, at December 31, 2000 mortgage loans held for sale were
carried at the aggregate lower of cost or market value. Gains or losses on sales
of these mortgage loans were recorded as a component of Non-Interest Income in
the Consolidated Statement of Income.
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.
Income Taxes
The Corporation uses the liability method to determine deferred tax amounts
and the related income tax expense or benefit. Using this method, deferred taxes
are calculated by applying enacted statutory tax rates to temporary differences
consisting of items of income and expense that are accounted for in financial
reporting periods which differ from income tax reporting periods. The resultant
deferred tax assets and liabilities represent future taxes to be recovered or
remitted when the related assets and liabilities are recovered or settled. The
deferred tax assets are reduced by a valuation allowance for that portion of the
tax deferred assets which are unlikely to be realized.
34
Derivative Financial Instruments
The Corporation uses a variety of derivative financial instruments as part
of its interest rate risk management strategy and the Corporation does not hold
or issue derivative financial instruments for trading purposes. The derivative
products used are interest rate swaps and caps or floors, used separately or in
combination to suit the hedge objective. All are currently classified as hedges.
To qualify as a hedge, 1) the asset or liability to be hedged exposes the
Corporation to interest rate risk, 2) the derivatives act to move the
Corporation to a rate insensitive position should interest rates change, and 3)
the derivative is designated and is effective as a hedge of a balance sheet
item.
Interest rate swaps are agreements between two parties which agree to
exchange fixed and floating rates on a notional principal amount without the
actual exchange of principal for a specified period of time. The notional
amounts are not reflected on the Consolidated Statement of Condition because
they are merely a unit of measure to determine the effect of the swap. Income
and expense on interest rate swaps associated with designated balance sheet
items is recognized using the accrual method over the life of the agreement(s)
as an adjustment to the income or expense on the designated balance sheet item.
Premiums associated with interest rate floor/cap/corridor arrangements are
reflected in the Consolidated Statement of Condition and amortized over their
life using the straight-line method and included as an adjustment to interest
income/expense associated with the balance sheet item. Payments due to or from
counterparties under these agreements are accrued as an adjustment to interest
income or expense associated with the designated balance sheet item.
The Corporation continually monitors each derivative position to ensure the
proper relationship such as risk reduction, correlation or effectiveness between
the designated balance sheet item hedged and the derivative position. Any
significant divergence between this relationship which results in interest
income or expense exceeding projected parameters results in the hedge being
marked-to-market with the resultant gain or loss included in earnings.
Terminated derivative positions with the designated assets or liabilities
retained have the resulting gain or loss deferred and amortized over the
estimated remaining life of the hedge into interest income/expense associated
with the balance sheet item. Derivatives associated with liquidated hedged
assets or liabilities are marked-to-market and have subsequent changes in their
fair value reflected in earnings as the derivative is considered speculative in
nature.
Accounting treatment of derivative positions is consistent with the
accounting treatment of the underlying asset or liability. Interest rate swaps
used to hedge available for sale debt securities have their fair value included
in stockholders' equity which is consistent with the fair value treatment of the
available for sale securities. Interest accruals associated with the swap are
included as an adjustment to interest income on the associated securities.
Derivative products terminated prior to the sale of the related security have
the respective gain or loss deferred and amortized into interest income as yield
adjustments to the designated asset over the shorter of the remaining life of
the agreement or the designated asset. Upon sale of the security, the deferred
gain or loss on the derivative is reflected in income at the time of sale.
Pension Plan
The Corporation has a defined benefit pension plan which covers
substantially all employees. The cost of this noncontributory pension plan was
computed and accrued using the projected unit credit method. Prior service cost
is amortized on a straight-line method over the average remaining service period
of employees expected to receive benefits under the plan. Annual contributions
are made to the plan in an amount equal to the minimum requirements, but no
greater than the maximum allowed by regulatory authorities.
Statement of Cash Flows
For purposes of reporting cash flows, cash equivalents are composed of cash
and due from banks and short-term investments.
35
NOTE 2--Business Combination
On August 31, 2000 the Corporation completed its acquisition of Harbor
Federal Bancorp, the parent of Harbor Federal Savings Bank, issuing
approximately 2.1 million shares of common stock valued at approximately $29.6
million. The purchase method of accounting was used for the acquisition,
accordingly, the purchase price was allocated to the fair value of net assets
acquired. This allocation resulted in $8.1 million of goodwill and $2.5 million
of deposit based intangibles, which are being amortized over twenty and seven
years, respectively. The results of operations from the date of acquisition are
included in the accompanying consolidated financial statements.
NOTE 3--Extraordinary Item
During the first quarter of 2000, the Corporation liquidated $78 million of
Federal Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net
gain of $770 thousand, or $.03 per share, after taxes of $415 thousand was
recognized.
NOTE 4--Restrictions on Cash and Due From Banks
The Federal Reserve requires banks to maintain cash reserves against
certain categories of deposit liabilities. Such reserves averaged approximately
$30.3 million and $27.2 million during the years ended December 31, 2000 and
1999, respectively.
In order to cover the costs of services provided by correspondent banks,
the Corporation maintains compensating balance arrangements at these
correspondent banks or elects to pay a fee in lieu of such arrangements. During
2000 and 1999, the Corporation maintained average compensating balances of
approximately $15.0 million and $11.1 million, respectively. In addition, the
Corporation paid fees totaling $533 thousand in 2000, $556 thousand in 1999 and
$389 thousand in 1998 in lieu of maintaining compensating balances.
NOTE 5--Investment Securities
The aggregate amortized cost and market values of the available for sale
securities portfolio at December 31 were as follows:
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 83,069 $ 4,349 $ 13 $ 87,405 $ 56,635 $ -- $ 188 $ 56,447
Mortgage-Backed Securities 1,645,398 10,585 11,781 1,644,202 1,519,830 3,638 53,863 1,469,605
Municipal Securities 25,842 271 33 26,080 26,624 141 560 26,205
Other Debt Securities 138,653 11 19,842 118,822 136,609 -- 17,359 119,250
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Available
for Sale $1,892,962 $15,216 $31,669 $1,876,509 $1,739,698 $3,779 $71,970 $1,671,507
=================================================================================================================================
36
The aggregate amortized cost and market values of the investment securities
portfolio by contractual maturity at December 31, 2000 and 1999, are shown
below. Expected maturities on mortgage-backed securities may differ from the
contractual maturities as borrowers have the right to prepay the obligation
without prepayment penalties.
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
=================================================================================================================================
Securities Available for Sale
In One Year or Less $ 8,889 $ 8,883 $ 775 $ $ 776
After One Year Through Five Years 11,653 11,757 16,963 16,854
After Five Years Through Ten Years 10,142 10,278 12,721 12,463
Over Ten Years 216,880 201,389 189,409 171,809
Mortgage-Backed Securities 1,645,398 1,644,202 1,519,830 1,469,605
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $1,892,962 $1,876,509 $1,739,698 $1,671,507
=================================================================================================================================
Proceeds from sales of securities available for sale during 2000 were
$255.8 million resulting in the realization of gross gains of $8.8 million and
gross losses of $328 thousand on such sales. For 1999, sales of securities
yielded proceeds of $22.8 million which resulted in gross realized gains of $380
thousand and gross losses of $68 thousand. Securities sold in 1998 produced
proceeds of $947.0 million resulting in gross gains of $7.4 million and gross
losses of $709 thousand.
At December 31, 2000, a net unrealized loss of $10.7 million on the
securities portfolio was reflected as the net accumulated other comprehensive
income in the Consolidated Statement of Condition. This compares to a net
unrealized loss of $44.3 million at December 31, 1999.
Securities with a market value of $1.0 billion and $971.8 million at
December 31, 2000 and 1999, respectively, were pledged as collateral for public
funds, certain short-term borrowings and for other purposes required by law.
NOTE 6--Allowance for Loan Losses
A summary of the activity in the allowance for loan losses for the three
years ended December 31 is presented below:
(in thousands) 2000 1999 1998
=================================================================================================
Balance at Beginning of the Year $ 39,780 $ 42,739 $ 36,861
Allowance of Acquired Company 404 -- --
Provision for Loan Losses 23,877 11,570 12,027
Allowance Related to Securitized Loans (950) (1,500) --
Loans Charged-Off (24,249) (14,557) (7,738)
Less: Recoveries of Loans
Previously Charged-Off 1,798 1,528 1,589
-------------------------------------------------------------------------------------------------
Net Loans Charged-Off (22,451) (13,029) (6,149)
-------------------------------------------------------------------------------------------------
Balance at End of the Year $ 40,660 $ 39,780 $42,739
=================================================================================================
At December 31, 2000, 1999 and 1998, the recorded investment in loans which
are in non-accrual status and therefore considered impaired totaled $13.6
million, $21.3 million and $5.1 million, respectively. There was no additional
allowance required for these loans. Had these loans performed in accordance with
their original terms, interest income of $2.1 million in 2000, $1.6 million in
1999 and $1.4 million in 1998 would have been recorded. Interest income of $10
thousand was recognized on these loans during 2000. The average recorded
investment in impaired loans was approximately $18.9 million in 2000 and $5.4
million in 1999.
37
NOTE 7--Premises and Equipment
Real estate and equipment holdings at December 31 are presented in the
table below. Real estate owned and used by the Corporation consists of 15
branches and other facilities in the Baltimore/Washington metropolitan area
which are used primarily for the operations of the Bank.
(in thousands) 2000 1999
=================================================================================================
Land $ 1,736 $ 1,014
Buildings and Leasehold Improvements 28,027 23,491
Furniture & Equipment 50,649 50,910
Property Held for Future Expansion 7,184 7,184
-------------------------------------------------------------------------------------------------
Total Premises & Equipment 87,596 82,599
Less: Accumulated Depreciation and Amortization 41,791 38,322
-------------------------------------------------------------------------------------------------
Net Premises and Equipment $45,805 $44,277
=================================================================================================
Property held for future expansion represents real estate adjacent to the
Corporation's headquarters building which is currently being used for employee
and public parking. Following an assessment of occupancy requirements,
management determined that this property would be necessary to meet the
Corporation's growing operational requirements.
In December 1990, the Corporation entered into a sale and leaseback
agreement whereby its headquarters building was sold to an unrelated third party
which then leased the building back to the Corporation. During 2000 the lease
was renegotiated. At December 31, 2000 the lease has 12 years remaining on the
term. The remaining associated deferred gain of $525 thousand from the sale will
be recognized in proportion to the gross rental expense incurred over the
outstanding term of the lease. The associated lease payments and sublease rental
income are included in the table below.
The Corporation also maintains non-cancelable operating leases associated
with Bank premises. Most of these leases provide for the payment of property
taxes and other costs by the Bank and include one or more renewal options
ranging up to ten years. Some of the leases also contain purchase options at
market value. Annual rental commitments under all long-term non-cancelable
operating lease agreements consisted of the following at December 31, 2000.
Real Property Sublease Equipment
(in thousands) Leases Income Leases Total
============================================================================================
2001 $ 8,012 $107 $340 $ 8,245
2002 7,789 42 190 7,937
2003 6,647 5 98 6,740
2004 5,223 -- 9 5,232
2005 3,728 -- -- 3,728
2006 and Thereafter 9,561 -- -- 9,561
--------------------------------------------------------------------------------------------
Total $40,960 $154 $637 $41,443
============================================================================================
Rental expense for premises and equipment was $8.8 million in 2000, $7.7
million in 1999 and $6.8 million in 1998.
38
Note 8--Mortgage Banking Activities
The following is an analysis of mortgage loan servicing asset balance, net
of accumulated amortization, during each of the respective years.
(in thousands) 2000 1999 1998
=================================================================================================
Balance at Beginning of Year $ 1,086 $ 2,608 $ 1,984
Additions 1,984 13,573 15,767
Amortization (85) (137) (355)
Sales of Servicing Assets (2,652) (14,958) (14,788)
-------------------------------------------------------------------------------------------------
Balance at End of Year $ 333 $ 1,086 $ 2,608
=================================================================================================
At December 31, 2000, no valuation allowance was required on the servicing
assets. Unpaid principal balances of loans serviced for others not included in
the accompanying Consolidated Statement of Condition were $84 million and $79
million at December 31, 2000 and 1999, respectively.
Note 9--Borrowings
Borrowings consist of short-term and long-term debt. At December 31,
short-term borrowings were as follows:
(in thousands) 2000 1999
=================================================================================================
Securities Sold Under Repurchase Agreements
and Federal Funds Purchased $315,851 $289,426
Other Short-Term Borrowings 81,982 11,897
-------------------------------------------------------------------------------------------------
Total Short-Term Borrowings $397,833 $301,323
=================================================================================================
The following table sets forth various data on securities sold under
repurchase agreements and federal funds purchased.
(dollars in thousands) 2000 1999 1998
=================================================================================================
Balance at December 31 $315,851 $289,426 $143,367
Average Balance During The Year 446,892 232,195 310,504
Maximum Month-End Balance 745,849 337,116 496,506
Weighted Average Rate During the Year 6.20% 5.22% 5.50%
Weighted Average Rate At December 31 6.03% 4.97% 4.77%
=================================================================================================
39
Securities sold under repurchase agreements at December 31, 2000, are
detailed below by due date:
Less than
(dollars in thousands) Overnight 30 days 30-90 days Over 90 days Demand Total
=============================================================================================================================
Mortgage-Backed Securities:
Securities Sold:
Carrying Value $176,404 $2,941 $5,131 $-- $-- $ 184,476
Market Value 176,907 2,921 5,249 -- -- 185,077
Repurchase Principal 145,448 2,124 5,079 -- -- 152,651
Average Borrowing Interest Rate 5.74% 5.75% 6.15% --% --% 5.68%
=============================================================================================================================
Long-term debt consisted of Federal Home Loan Bank Advances of $654.6
million and $70.4 million of five year term repurchase agreements at December
31, 2000. At December 31, 1999 long-term debt of $627.1 million was composed
entirely of Federal Home Loan Bank advances. The principal maturities of the
components of long-term debt at December 31, 2000, are presented below.
(in thousands)
=====================================
2001 $ 28,458
2002 141,000
2003 151,698
2004 165,000
2005 136,000
After 2005 102,817
-------------------------------------
Total Long-Term Debt $724,973
=====================================
The Federal Home Loan Bank Advances to the Bank mature in varying amounts
through 2016. These advances are composed of $335.6 million fixed rate advances
with an average interest rate of 6.98% and $320.0 million variable rate advances
with an average rate of 6.05%. These advances are collateralized by investment
securities and certain real estate loans with carrying values of $615.7 million
and $343.1 million, respectively, at December 31, 2000.
Note 10--Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities
During the second quarter of 1998 and first quarter of 2000, the
Corporation formed new wholly owned statutory business trusts, Provident Trust I
(the "Trust I") and Provident Trust II ("Trust II"). Trust I issued $40.0
million 8.29% and Trust II issued $30.0 million 10.0% trust preferred securities
to outside third parties. The sole purpose of the trusts is to invest the
proceeds in an equivalent amount of 8.29% and 10% junior subordinated debentures
of the Corporation due in 2028 and 2030, respectively. These subordinated
debentures, which are the sole assets of the trusts, are subordinate and junior
in right of payment to all present and future senior and subordinated
indebtedness and certain other financial obligations of the Corporation. The
Corporation fully and unconditionally guarantees each trust's securities
obligations. For financial reporting purposes, each trust is treated as a
subsidiary of the Corporation and consolidated in the corporate financial
statements. The trust preferred securities are presented net of issuance costs
as a separate line item on the Consolidated Statement of Condition as
corporation-obligated mandatorily redeemable trust preferred securities. The
trust preferred securities are not included as a component of total
stockholders' equity on the Consolidated Statement of Condition. The trust
preferred securities are, however, accorded Tier I capital status by the Federal
Reserve. The treatment of the trust preferred securities as Tier I capital in
addition to the ability to deduct the expense of the subordinated debentures for
income tax purposes provides the Corporation with a cost-effective method to
raise capital. The proceeds of the trust preferred securities were used for
general corporate uses.
40
The trust preferred securities pay cash distributions which are payable
semiannually for Trust I and quarterly for Trust II are based on their
applicable rate and liquidation preference of $1,000 per security. Distributions
to the holders of the trust preferred securities are included in non-interest
expense. Under the provisions of the subordinated debt, the Corporation has the
right to defer payment of interest on the subordinated debentures at any time,
or from time to time, for periods not exceeding five years. If interest payments
on the subordinated debentures are deferred, the distributions on the trust
preferred securities are also deferred. Interest on the subordinated debentures
is cumulative.
The securities of Trust I are redeemable in whole or in part on or after
April 15, 2008. Trust II securities are redeemable in whole or in part on or
after February 28, 2005. Either of the securities is redeemable at any time in
whole, but not in part, from the date of issuance on the occurrence of certain
events.
Note 11--Stockholders' Equity
During 2000 and 1999, the Corporation declared a five percent stock
dividend for each year to the stockholders of record as of May 1, 2000 and May
3, 1999, respectively. The 2000 stock dividend was paid on May 12, 2000,
resulting in the distribution of 1,256,017 common shares with a par value of
$1.00 per share. Accordingly, $1.3 million and $18.8 million were transferred
from retained earnings to common stock and capital surplus, respectively. The
1999 stock dividend was paid May 14, 1999 with the distribution of 1,216,219
common shares with a $1.00 par value per share. This dividend resulted in the
transfer of $1.2 million to common stock and $28.6 million to capital surplus
from retained earnings. The cumulative impact of these stock dividends has been
reflected in the restatement of earnings and dividends per share and stock
option data in the financial statements and accompanying notes.
Subsequent to December 31,1997, the Corporation declared a two for one
stock split. The split occurred after the dividend payment on February 13, 1998
for stockholders of record at the close of business on February 2, 1998. All
earnings per share and common stock related information has been given
retroactive effect to this transaction.
During 1998, the Corporation approved a stock repurchase program for up to
5% of its outstanding stock. This program was completed in late 2000 with a
total of 3.2 million shares repurchased. In December 2000 the Corporation
authorized an additional repurchase up to 2.3 million shares. These purchases
may occur in the open market from time to time and on an ongoing basis,
depending upon market conditions. The Corporation repurchased 3,168,103 and
168,100 shares of common stock at a cost of $51.1 million and $3.5 million
during 2000 and 1999, respectively.
The Corporation's Stock Option Plan (the "Option Plan") covers a maximum of
5.7 million shares of common stock that has been reserved for issuance under the
Option Plan described below. Under the provisions of Statement of Financial
Accounting Standards No. 123--"Accounting for Stock-Based Compensation" ("SFAS
No. 123"), the Corporation had the option of accruing a compensation expense for
stock options granted to employees, or applying the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which does
not require compensation expense to be recognized. The Corporation has elected
to continue to apply APB No. 25 to account for the Option Plan. Under the Option
Plan, stock options are granted at an exercise price not less than the market
value of the underlying shares of common stock on the date of the grant. As
such, the Option Plan is classified as a fixed stock option plan. Accordingly,
no compensation expense has been recognized from 1998 through 2000.
The Option Plan provides for the granting of non-qualified stock options to
certain key employees and directors of the Corporation and the Bank, as
designated by the Corporation's board of directors. All options have a maximum
duration of ten years from the date of grant. Vesting in the majority of the
options occurred immediately in 50% of the options granted with the remainder
vesting in the subsequent year. A minority of options have vesting provisions
which may be accelerated on the attainment of specific benchmarks related to the
Corporation's performance. Beginning in 1999, options granted have a five year
or a three year vesting schedule. Regardless of the vesting schedule all options
vest immediately upon a change in control.
41
The following table presents a summarization of the activity related to the
options for the periods indicated:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Common Weighted Avg. Common Weighted Avg. Common Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
====================================================================================================================================
Outstanding, January 1, 2,215,638 $14.46 1,913,844 $12.31 1,971,813 $ 8.14
Granted 622,675 15.34 497,595 20.14 340,838 28.83
Exercised (82,220) 5.67 (180,885) 6.11 (386,135) 5.05
Cancelled or Expired (48,994) 21.04 (14,916) 28.77 (12,672) 29.30
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 2,707,099 $14.81 2,215,638 $14.46 1,913,844 $12.31
====================================================================================================================================
Options Exercisable at Year-end 1,462,731 1,280,374 1,358,386
Weighted Average Fair Value
of Options Granted During the Year $ .28 $ .63 $ .35
Options Available for Granting
under the Option Plan 162,705 732,168 1,217,816
- ------------------------------------------------------------------------------------------------------------------------------------
The table below provides information on the stock options outstandings at
December 31, 2000.
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------------
Weighted Weighted Average Weighted
Exercise Price Common Average Remaining Common Average
Range Shares Exercise Price Contractual Life Shares Exercise Price
=================================================================================================================================
$ .00 - $ 3.03 66,594 $ .84 1.1 66,594 $ .84
3.04 - 6.06 300,025 3.65 2.3 300,025 3.65
6.07 - 9.09 295,296 7.89 3.9 295,296 7.89
9.10 - 12.12 80,803 10.26 5.9 80,803 10.26
12.13 - 15.14 847,924 13.51 7.5 260,641 13.29
15.15 - 18.17 178,277 16.43 6.4 156,435 16.35
18.18 - 21.20 608,326 19.80 9.0 111,326 20.26
21.21 - 24.23 9,417 22.05 7.8 9,417 22.05
24.24 - 27.26 46,426 25.36 7.8 34,064 25.53
27.27 - 30.29 274,011 29.12 7.1 148,130 29.10
- ---------------------------------------------------------------------------------------------------------------------------------
2,707,099 $ 14.81 6.6 1,462,731 $ 12.29
=================================================================================================================================
42
The weighted average fair value of all of the options granted during the
period 1998 through 2000 has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
2000 1999 1998
=================================================================================================
Dividend Yield 14.24% 14.45% 17.37%
Weighted Average Risk-free Interest Rate 4.83 6.39 4.59
Weighted Average Expected Volatility 25.60 24.24 24.68
Weighted Average Expected Life in Years 10 years 7 years 7 years
=================================================================================================
The provisions of SFAS No. 123, require pro forma disclosure of
compensation expense for the Corporation based on the fair value of the awards
at the date of grant. Under those provisions, the Corporation's net income and
earnings per share would have been reduced to the following pro forma amounts
below:
(in thousands, except per share data) 2000 1999 1998
================================================================================================
Net Income:
As Reported $44,810 $44,150 $39,030
Pro Forma 44,697 43,947 38,959
Basic Earnings Per Share:
As Reported $ 1.71 $ 1.65 $ 1.45
Pro Forma $ 1.70 $ 1.64 $ 1.45
Diluted Earnings Per Share:
As Reported $ 1.67 $ 1.60 $ 1.40
Pro Forma $ 1.66 $ 1.59 $ 1.40
================================================================================================
43
Note 12--Off-Balance Sheet Risk
CREDIT RISK
In the normal course of business, the Bank offers various financial
products to its customers to meet their credit and liquidity needs. These
instruments involve, to varying degrees, elements of credit and market risk
which may exceed any amount recognized in the financial statements. Risks that
are inherent in normal banking services also exist in some of these financial
instruments. Contract amounts of the instruments indicate the maximum exposure
the Bank has in each class of financial instruments discussed in the following
paragraphs. These commitments and contingencies are not reflected in the
accompanying financial statements. Unless noted otherwise, the Bank does not
require collateral or other securities to support financial instruments with
credit risk.
Subject to its normal credit standards and risk monitoring procedures, the
Bank makes contractual commitments to extend credit. Commitments to extend
credit in the form of consumer, commercial real estate and commercial business
loans amounted to $547.6 million and $488.3 million at December 31, 2000 and
1999, respectively. Commitments typically have fixed expiration dates or other
termination clauses. The total of commitments does not necessarily represent
future cash requirements as many commitments may expire without being exercised.
Collateral and amounts thereof are obtained, if necessary, based upon
management's evaluation of each borrower's financial condition. Required
collateral may be in the form of cash, accounts receivable, inventory, property,
plant and equipment and income generating commercial properties and residential
properties.
Conditional commitments are issued by the Bank in the form of performance
stand-by letters of credit which guarantee the performance of a customer to a
third party. These letters of credit are typically included in the amount of
funds committed by the Bank to complete associated construction projects. At
December 31, commitments under outstanding performance stand-by letters of
credit aggregated $34.5 million in 2000 and $34.6 million in 1999. The credit
risk of issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
A judgment relating to a 1989 event was entered against Provident Bank of
Maryland in April 1997 in the amount of $5.2 million, exclusive of post-judgment
interest. This judgment, which Provident appealed, reversed an earlier court
holding in favor of Provident. The judgment stemmed from a lawsuit alleging that
the Bank had failed to fully honor a letter of credit. During the fourth quarter
of 1998, the appellate court upheld the lower court decision. Payment was made
in January, 1999. This payment, which was fully reserved, resulted in a
charge-off, thereby reducing the allowance for loan losses.
Securitizations and Recourse Provision
During 2000 and 1999 the Bank securitized $324 million and $383 million of
its acquired loan portfolio. These loans were securitized with FNMA and the
respective securities were placed into the Bank's investment portfolio.
Accordingly, no gain or loss was recorded on these transactions. These assets
were sold with full recourse back to the Bank for any credit losses. The maximum
potential recourse obligation was $588.3 million and $379.7 million at December
31, 2000 and 1999, respectively.
A recourse liability was established on the balance sheet based upon the
credit risk inherent in these loans. This recourse liability amounted to $2.1
million and $1.5 million at December 31, 2000 and 1999, respectively. This
recourse liability is evaluated periodically for adequacy. To date, no losses
have been incurred under these recourse provisions in the investment portfolio.
These securities are valued at fair market value along with the remaining
securities.
44
Concentrations of Credit Risk
Construction and mortgage loan receivables from real estate developers
represent $382.4 million and $278.2 million of the total loan portfolio at
December 31, 2000 and 1999, respectively. Substantially all loans are
collateralized by real property or other assets. These loans are expected to be
repaid from the proceeds received by the borrowers from the retail sales or
rentals of these properties to third parties.
The Corporation's investment portfolio contains mortgage-backed securities
amounting to $1.64 billion and $1.47 billion at December 31, 2000 and 1999,
respectively. The underlying collateral for these securities is in the form of
pools of mortgages on residential properties. The majority of the securities are
either directly or indirectly guaranteed by U.S. Government agencies or
corporations. Management is of the opinion that credit risk is minimal.
Interest Rate Risk
The Bank enters into agreements for the delivery of securitized mortgage
pools or for the purchases of consumer loan portfolios at a future date at a
specified price or yield. Movements in interest rates impose basis and interest
rate risk on the Bank between the dates of commitment and the dates of
settlement. Forward contracts aggregated $6.3 million and $32.3 million at
December 31, 2000 and 1999, respectively.
The Bank enters into various derivative financial instruments to manage its
interest rate risk exposure which aims to stabilize net interest income through
periods of changing interest rates. (see Note 1). The two major types used are
interest rate swaps and interest rate floor/cap/ corridor arrangements. These
derivative financial instruments use notional amounts to represent a unit of
measure but not the amount subject to accounting loss, which is much smaller.
Risks in these transactions involve nonperformance by counterparties under the
terms of the contract (counterparty credit risk) and, for interest rate swaps,
the possibility that interest rate movements or general market volatility could
result in losses on open off-balance sheet positions (market risk). The credit
risk that results from interest rate swaps, interest rate floors, and interest
rate caps is represented by the fair value of contracts that have a positive
value at the reporting date. At December 31, 2000 the total amount of credit
risk was $4.1 million: however, this amount can increase or decrease if interest
rates change. Credit risk is controlled by dealing with well-established brokers
which are highly rated by independent sources and by establishing exposure
limits for individual counterparties. Market risk on interest rate swaps is
minimized by using these instruments as hedges, actively managing interest rate
risk and by continually monitoring these positions. Market risk associated with
the interest rate floor/cap/corridor arrangements only exist when premiums are
amortized into interest expense without receiving any compensation from third
parties. The Bank has entered into $15.0 million pay fixed/receive variable and
$524.8 million pay variable receive fixed interest rate swaps at December 31,
2000. Variable rates for the swaps are based upon indices of either LIBOR or 10
year treasuries. Unamortized premiums paid and outstanding for
floor/cap/corridor arrangements were $1.6 million at December 31, 2000 and $6.1
million at December 31, 1999.
45
Maturities of interest rate swap and interest rate swap/cap/floor
arrangements are summarized below with their respective notional value, market
value, fees paid and weighted average interest rates at December 31.
December 31, 2000
2006 and
(in thousands) 2001 2002 2003 2004 2005 Thereafter Total
====================================================================================================================================
Interest Rate Swaps
Notional Value $ -- $ -- $ 30,000 $ 92,000 $ 50,000 $ 125,000 $ 297,000
Weighted Average Rate Paid -- -- 6.62% 6.57% 6.59% 6.87% 6.70%
Weighted Average Rate Received -- -- 6.33% 6.30% 7.03% 7.59% 6.97%
Fair Value $ -- $ -- $ (273) $ 315 $ (364) $ 2,250 $ 1,928
Interest Rate Swaps/Caps
Notional Value $ -- $226,680 $ 10,200 $ 11,938 $ -- $ -- $ 248,818
Unamortized Fee Paid $ -- $ 1,468 $ 87 $ 20 $ -- $ -- $ 1,575
Weighted Average Rate Paid -- 5.85% 6.01% 5.17% -- -- 5.84%
Weighted Average Cap on Rate Paid -- 5.85% 6.01% 7.00% -- -- 5.88%
Weighted Average Rate Received -- 5.66% 5.75% 5.60% -- -- 5.66%
Fair Value $ -- $ (283) $ (1) $ 45 $ -- $ -- $ (239)
Interest Rate Floors
Notional Value $ -- $ -- $ -- $ -- $ -- $ -- $ --
Amount Fee Paid $ -- $ -- $ -- $ -- $ -- $ -- $ --
Weighted Average Rate Paid -- -- -- -- -- -- --
Weighted Average Strike Price -- -- -- -- -- -- --
Fair Value $ -- $ -- $ -- $ -- $ -- $ -- $ --
====================================================================================================================================
December 31, 1999
2005 and
(in thousands) 2000 2001 2002 2003 2004 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Swaps
Notional Value $9,000 $ 88,600 $ 73,000 $ 30,000 $266,833 $ 230,000 $ 697,433
Weighted Average Rate Paid 7.19% 5.95% 6.44% 6.19% 5.87% 6.36% 6.13%
Weighted Average Rate Received 6.00% 6.15% 6.14% 6.06% 6.19% 6.94% 6.42%
Fair Value $ (50) $ 1,016 $ 494 $ (308) $ 2,728 $ (1,821) $ 2,059
Interest Rate Swaps/Caps
Notional Value $ -- $ -- $347,917 $109,534 $572,592 $ 136,900 $1,166,943
Unamortized Fee Paid $ -- $ -- $ 2,258 $ 442 $ 2,394 $ 969 $ 6,063
Weighted Average Rate Paid -- -- 5.93% 5.71% 5.82% 6.00% 5.88%
Weighted Average Cap on Rate Paid -- -- 5.93% 5.93% 6.14% 6.21% 6.05%
Weighted Average Rate Received -- -- 5.66% 5.27% 5.43% 5.97% 5.58%
Fair Value $ -- $ -- $ (741) $ (405) $ (3,080) $ (324) $ (4,550)
Interest Rate Floors
Notional Value $ -- $ -- $ -- $ -- $ -- $ 111,000 $ 111,000
Amount Fee Paid $ -- $ -- $ -- $ -- $ -- $ 2,028 $ 2,028
Weighted Average Rate Paid -- -- -- -- -- 6.18% 6.18%
Weighted Average Strike Price -- -- -- -- -- 6.67% 6.67%
Fair Value $ -- $ -- $ -- $ -- $ -- $ 243 $ 243
================================================================================================================================
46
For the year ended December 31, 2000, $15.0 million, $40.0 million and
$490.8 million were utilized to hedge the interest rate risk inherent in
long-term borrowings, capital securities and brokered certificates of deposit,
respectively. The interest rate corridors protect the net interest margin from
the impact of increases in savings deposit rates during periods of rising
interest rates. The interest rate floors were purchased to hedge the impact of
loan repricing on net interest income in future years.
The following is an analysis of the activity with regards to interest rate
swap/floor/cap/corridor arrangements for the years ended December 31, 2000, 1999
and 1998, respectively.
Notional Amount
-------------------------------------------------
Interest Rate
Interest Rate Floor/Corridor
(in thousands) Swaps/Caps Arrangements
============================================================================================
Balance, December 31, 1997 $ 463,652 $ 250,000
New Contracts 2,062,172 --
Expired Contracts (147,723) (50,000)
Terminated Contracts (892,353) --
--------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 1,485,748 $ 200,000
New Contracts 1,340,000 111,000
Expired Contracts (183,635) (200,000)
Terminated Contracts (777,737) --
--------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 1,864,376 $ 111,000
New Contracts 380,100 150,000
Expired Contracts (9,000) --
Terminated Contracts (1,689,658) (261,000)
--------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 545,818 $ --
============================================================================================
At December 31, 2000, the Corporation had deferred gains of $7.1 million
and deferred losses of $10.0 million related to terminated contracts. These
deferred gains and losses will be amortized over 2.5 and 2.6 years,
respectively. The Corporation had deferred gains of $3.6 million and deferred
losses of $1.9 million related to terminated contracts which were amortized as a
yield adjustment over 4.2 and 3.6 years, respectively, at December 31, 1999.
47
NOTE 13--Other Non-Interest Income and Expense
The components of other non-interest income and other non-interest expense
for the three years ended December 31 were as follows:
(in thousands) 2000 1999 1998
=================================================================================================
Other Non-Interest Income:
Other Loan Fees $ 2,390 $ 3,355 $ 5,104
Other Non-Interest Income 13,269 8,688 6,085
-------------------------------------------------------------------------------------------------
Total Other Non-Interest Income $15,659 $12,043 $11,189
=================================================================================================
Other Non-Interest Expense:
Advertising and Promotion $ 7,582 $ 6,806 $ 7,171
Communication and Postage 5,673 5,231 4,376
Printing and Supplies 2,715 2,463 2,502
Regulatory Fees 1,217 1,120 939
Professional Services 2,731 2,706 2,413
Other Non-Interest Expense 12,241 9,590 8,971
-------------------------------------------------------------------------------------------------
Total Other Non-Interest Expense $32,159 $27,916 $26,372
=================================================================================================
NOTE 14--Income Taxes
The components of income tax expense and the sources of deferred income
taxes for the three years ended December 31 are presented below.
(in thousands) 2000 1999 1998
=================================================================================================
Current Income Tax Expense (Benefit):
Federal $ 9,137 $18,803 $22,422
State 71 (437) (110)
-------------------------------------------------------------------------------------------------
Total Current 9,208 18,366 22,312
Deferred Income Tax Expense (Benefit) 11,775 2,833 (2,941)
-------------------------------------------------------------------------------------------------
Total Income Tax Expense $20,983 $21,199 $19,371
=================================================================================================
Tax expense associated with investment securities gains was $3.0 million in
2000, $109 thousand in 1999 and $2.7 million in 1998.
48
The primary sources of temporary differences that give rise to significant
portions of the deferred tax asset and liability at December 31, 2000 and 1999
are presented below.
Deferred Deferred
(in thousands) Assets Liabilities
=============================================================================================
2000:
Loan Loss Reserve Recapture $ -- $ 9,153
Reserve for Loan Loss 13,893 --
Write-down of Property Held for Sale 700 --
Employee Benefits 2,682 --
Deferred Gain on Sale/Leaseback 184 --
Deferred State Tax Receivable 5,577 --
Depreciation -- 3,850
Deferred Federal Tax Liability for State Receivable -- 1,952
Deferred Tax Asset on Unrealized Gains in Debt Securities 5,759 --
Leasing Activities 1,688 --
Mortgage Servicing Rights -- 70
Capitalized Real Estate Owned Costs 146 --
REIT Dividend Deferral -- 6,404
Deferred Tax Liability on Securities Transaction -- 6,282
Purchase Accounting Adjustments 1,947 --
Harbor Federal Expenses -- 406
All Other 509 1,177
---------------------------------------------------------------------------------------------
Total $33,085 $29,294
=============================================================================================
1999:
Loan Loss Reserve Recapture $ -- $ 8,843
Reserve for Loan Loss 13,923 --
Write-down of Property Held for Sale 1,452 --
Employee Benefits 2,656 --
Deferred Gain on Sale/Leaseback 272 --
Deferred State Tax Receivable 5,576 --
Depreciation -- 2,021
Deferred Federal Tax Liability for State Receivable -- 1,952
Deferred Tax Benefit on Unrealized Losses in Debt Securities 23,867 --
Leasing Activities 536 --
Mortgage Servicing Rights -- 181
Capitalized Real Estate Owned Costs 383 --
REIT Dividend Deferral -- 4,613
All Other 1,145 2,384
---------------------------------------------------------------------------------------------
Total $49,810 $19,994
=============================================================================================
At December 31, 2000 and 1999 the Corporation had valuation allowances with
respect to deferred tax assets of $9.2 million and $2.1 million, respectively.
49
The combined federal and state effective income tax rate for each year is
different than the statutory federal income tax rate. The reasons for these
differences are set forth below:
2000 1999 1998
==============================================================================
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Increases (Decreases) in Tax Rate
Resulting From:
State and Local Income Taxes, Net
of Federal Income Tax Benefit .1 (.7) (.8)
Tax Benefit of State Refund Claim -- (.7) --
Tax-Advantaged Income (2.0) (1.1) (1.2)
Disallowed Interest Expense .2 .2 .2
Employee Benefits (.1) (.2) (.1)
Credit for Community Development
Corporation Contribution -- -- (.2)
Low Income Housing Credit (.2) -- --
Other (1.1) (.1) .3
------------------------------------------------------------------------------
Total Combined Effective Income Tax Rate 31.9% 32.4% 33.2%
==============================================================================
NOTE 15--Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Basic earnings per
share does not include the effect of any potentially dilutive transactions or
conversions. Diluted earnings per share reflects the potential dilution of
earnings per share under the treasury stock method which could occur if
contracts to issue common stock were exercised, such as stock options, and
shared in corporate earnings. All prior period data has also been restated to
provide for the effects of the stock dividends issued in 1998, 1999 and 2000,
and the 2 for 1 stock split in February 1998.
The following table presents a summary of per share data and amounts for
the periods indicated:
(dollars in thousands, except per share data) 2000 1999 1998
=================================================================================================
Qualifying Net Income $44,810 $44,150 $39,030
Basic EPS Shares 26,270 26,790 26,861
Basic EPS $ 1.71 $ 1.65 $ 1.45
Dilutive Shares 595 847 1,016
Diluted EPS Shares 26,865 27,637 27,877
Diluted EPS $ 1.67 $ 1.60 $ 1.40
-------------------------------------------------------------------------------------------------
50
NOTE 16--Other Comprehensive Income
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of non-owner changes in equity. For financial
statements presented for the Corporation, the only non-owner equity change is
comprised of unrealized gains or losses on available for sale debt securities
that will be accumulated with net income from operations. This does not have an
impact on the Corporation's results of operations. Below are the components of
Other Comprehensive Income and the related tax effects allocated to each
component:
Year Ended December 31,
---------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
=============================================================================================
Unrealized Holding Gains (Losses)
Arising During the Year $60,237 $(76,659) $7,700
Tax Expense (Benefit) Attributable to Unrealized
Holding Gains (Losses) Arising During the Year 21,085 (27,231) 3,045
---------------------------------------------------------------------------------------------
Net Unrealized Holding Gains (Losses) 39,152 (49,428) 4,655
Less: Reclassification Adjustment
Gains Realized in Net Income 8,499 312 6,749
Tax Expense on Realized Gains
Included in Net Income 2,975 109 2,669
---------------------------------------------------------------------------------------------
Net Reclassification Adjustment 5,524 203 4,080
---------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) $33,628 $(49,631) $ 575
---------------------------------------------------------------------------------------------
NOTE 17--Employee Benefit Plans
Pension Plan
The Corporation's non-contributory defined benefit pension plan covers
substantially all full-time employees with at least one year of service and
provides an optional lump sum or monthly benefits upon retirement to
participants based on average career earnings and length of service. The
Corporation's policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, as amended, plus such additional amounts as the
Corporation deems appropriate.
Postretirement Benefits
In addition to providing pension benefits, the Corporation provides certain
health care and life insurance benefits to retired employees. Substantially all
employees of the Corporation that reach age 60 may become eligible for these
benefits, contingent upon the completion of twenty years of service. The health
care plan is contributory where the retiree is responsible for all premiums in
excess of the Corporation's contribution. The Corporation's contribution is
capped at a growth rate of 4% per year. Under the prospective transition
approach, the transition obligation is amortized over a twenty-year period. The
cost of life insurance benefits provided to the retiree is borne by the
Corporation. At December 31, 2000 and 1999, this plan is unfunded.
51
The following tables set forth the activity for each benefit plan's
projected benefit obligation, plan assets and funded status at January 1.
Pension Plan Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998 2000 1999 1998
====================================================================================================================================
Actuarial Present Value of Accumulated
Benefit Obligation $23,528 $23,098 $25,518 $ 1,428 $ 1,216 $ 1,363
- ------------------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at January 1, $23,634 $26,614 $21,965 $ 1,216 $ 1,363 $ 1,060
Service Cost 1,284 976 840 114 114 72
Interest Cost 1,970 1,740 1,771 98 85 88
Benefit Payments (2,479) (1,323) (1,907) (162) (88) (111)
Actuarial Loss (Gain) 2,532 (4,373) 3,945 162 (258) 254
- ------------------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at December 31, $26,941 $23,634 $26,614 $ 1,428 $ 1,216 $ 1,363
====================================================================================================================================
(in thousands) 2000 1999 1998 2000 1999 1998
====================================================================================================================================
Plan Assets Fair Value at January 1, $30,228 $30,434 $26,826 $ -- $ -- $ --
Employer Contributions -- -- -- 162 88 111
Benefit Payments (2,479) (1,323) (1,907) (162) (88) (111)
Actual Return on Plan Assets 715 1,117 5,515 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Plan Assets Fair Value at December 31, $28,464 $30,228 $30,434 $ -- $ -- $ --
====================================================================================================================================
(in thousands) 2000 1999 1998 2000 1999 1998
====================================================================================================================================
Plan Assets in Excess of (Less Than)
Projected Benefit Obligation $ 1,523 $ 6,594 $ 3,820 $(1,428) $(1,216) $(1,363)
Unrecognized Net Gain from Past
Experience Different from That Assumed (2,202) (4,914) (2,440) (196) (373) (127)
Unrecognized Prior Service Cost 867 (1,401) (1,596) 69 76 83
Unrecognized Net Obligation (Asset)
Arising at Transition at January 1, (288) (424) (560) 648 702 757
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued Pension Cost Included
in Other Liabilities $ (100) $ (145) $ (776) $ (907) $ (811) $ (650)
====================================================================================================================================
The actuarially estimated net benefit cost for the year ended December 31
includes the following components:
(in thousands) 2000 1999 1998 2000 1999 1998
====================================================================================================================================
Service Cost--Benefits Earned During the Year $ 1,284 $ 976 $ 840 $ 113 $ 114 $ 72
Interest Cost on Projected Benefit Obligation 1,970 1,740 1,771 98 85 88
Expected Return on Plan Assets (2,953) (2,977) (2,599) -- -- --
Net Amortization and Deferral of Loss (Gain) (346) (370) (331) 46 50 50
- ------------------------------------------------------------------------------------------------------------------------------------
Net Pension Cost (Benefit) Included
in Employee Benefits Expense $ (45) $ (631) $ (319) $ 257 $ 249 $ 210
====================================================================================================================================
52
The Corporation revises the rates applied in the determination on the
actuarial present value of the projected benefit obligation to reflect the
anticipated performance of the plan and changes in compensation levels.
Pension Plan Postretirement Benefits
-------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
=================================================================================================
Rates Used in Determining Actuarial Present
Value of Projected Benefit Obligation:
Weighted Average Discount Rate 7.75% 8.0% 7.0% 7.75% 8.0% 7.0%
Expected Rate of Increase in
Future Compensation 4.0 4.0 4.0
Expected Long-Term Rate of Return
on Plan Assets 10.0 10.0 10.0
=================================================================================================
The contribution to the Corporation's postretirement benefit plan has been
capped at a growth rate of 4% in 2000 and 1999 and is expected to remain at that
level in the future.
The assumed health care cost trend rates could have a significant effect on
the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease
=================================================================================================
Effect on Total of Service and Interest Cost Components $ 25 $ (21)
Effect on Postretirement Benefit Obligation 126 (107)
=================================================================================================
Retirement Savings Plan
The Retirement Savings Plan is a defined contribution plan which is
qualified under Section 401(a) of the Internal Revenue Code of 1986. The plan
generally allows all employees who complete 500 hours of employment during a six
month period and elect to participate, to receive matching funds from the
Corporation for pre-tax retirement contributions made by the employee. The
annual contribution to this plan is at the discretion of and determined by the
Board of Directors of the Corporation. Under provisions of the plan, the maximum
contribution is 75% of an employee's contribution up to 4.5% of the individual's
salary. Contributions to this plan amounted to $1.5 million, $1.3 million and
$1.3 million for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 18--Regulatory Capital
The Corporation is subject to various capital adequacy guidelines imposed
by federal and state regulatory agencies. Under these guidelines, the
Corporation must meet specific capital adequacy requirements which are
quantitative measures of the Corporation's assets, liabilities and certain
off-balance sheet items calculated under regulatory accounting practices.
Additionally, the Corporation's capital amounts and classifications are subject
to qualitative judgments by these agencies about components, risk weightings and
other factors. The quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain amounts and ratios of total
and tier 1 capital to risk-weighted assets and tier 1 capital to average assets,
known as the leverage ratio. The Corporation's tier 1 capital is equal to its
capital securities (see Note 10), common stock, capital surplus and retained
earnings less treasury stock. Equity for regulatory purposes does not include
market value adjustments for available for sale securities. The calculation of
the Corporation's total capital is equal to tier 1 capital plus the allowance
for loan losses subject to certain limitations. Risk-weighted assets are
determined by applying weighting to asset categories and certain off-balance
sheet commitments based on the level of credit risk inherent in the assets. At
December 31, 2000 and 1999, the Corporation exceeded all regulatory capital
requirements. The most recent notification from the Corporation's primary
regulators categorized the Corporation as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Corporation's
category. If the Corporation is unable to comply with the minimum capital
requirements, it could result in regulatory actions which could have a material
impact on the Corporation.
53
The minimum regulatory guidelines for total capital and tier 1 capital to
risk-weighted assets are 8% and 4%, respectively. Guidelines for the leverage
ratio require the ratio of tier 1 capital to average assets to be 100 to 200
basis points above a 3% minimum, depending on risk profiles and other factors.
The table below presents the various components used to calculate the capital
adequacy ratios.
Provident Bankshares Corporation Provident Bank
December 31, December 31,
-------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 2000 1999
===========================================================================================
Qualifying Capital
Tier 1 Capital $ 385,453 $ 358,771 $ 383,606 $ 356,469
Total Capital 426,113 398,551 424,266 396,249
Risk-Weighted Assets 4,067,838 3,907,332 4,067,636 3,905,896
Quarterly Average Assets 5,618,993 5,056,385 5,616,107 5,054,758
Ratios
Leverage Capital 6.86% 7.10% 6.83% 7.05%
Tier 1 Capital 9.48 9.18 9.43 9.13
Total Capital 10.48 10.20 10.43 10.14
NOTE 19--Business Segment Information
The Corporation's lines of business are structured according to customer
group served. For management purposes the lines are divided into the following
segments: Retail Banking, Commercial Banking and Treasury and Administration.
The Corporation offers consumer and commercial banking products and
services through its wholly owned subsidiary, Provident Bank. Provident operates
in the Baltimore-Washington corridor, northern Virginia and southern York
County, Pennsylvania. The Bank offers its services to customers in our expanding
market area through approximately 56 traditional and 42 in-store branches.
Additionally, the Bank offers its customers 24-banking services through
approximately 165 ATMs, telephone banking and the Internet. Retail services
include a broad array of small business and consumer loans, deposit and
investment products and a complete range of mortgage lending activities.
Commercial Banking provides an array of commercial financial services including
asset-based lending, equipment leasing, real estate financing, cash management
and structured financing. Treasury and Administration is comprised of balance
sheet management activities that include managing the investment portfolio,
discretionary funding, utilization of off-balance sheet financial instruments,
optimizing the Corporation's equity position and other corporate expenses.
The financial performance of each business segment is monitored using an
internal profitability measurement system. This system utilizes policies that
ensure the results reflect the economics for each segment and that they are
compiled on a consistent basis. Line of business information is based on
management accounting practices that support the current management structure.
This information is not necessarily comparable with similar information for
other financial institutions. This profitability measurement system uses
internal management accounting policies that generally follow the policies
described in Note 1, except for net interest income that is reported on a fully
taxable equivalent basis. The Corporation's funds transfer pricing system
utilizes a matched maturity methodology that assigns a costs of funds to earning
assets and a value to the liabilities of each business segment with an offset in
the Treasury and Administration business segment. Provision for loan losses is
charged to each segment based on actual charge-offs. Operating expense is
charged on a fully absorbed basis. Income tax expense is calculated based on the
segments fully taxable equivalent income and the Corporation's effective tax
rate. Revenues from no individual customer exceeded 10% of consolidated total
revenues.
54
The tables below summarize 2000, 1999 and 1998 results by each business
segment.
Commercial Retail Treasury &
(in thousands) Banking Banking Administration Total
===========================================================================================
2000:
Net Interest Income $ 21,311 $ 116,969 $ 23,153 $ 161,433
Provision for Loan Losses 12,398 10,015 1,464 23,877
-------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 8,913 106,954 21,689 137,556
Non-Interest Income 4,946 62,144 8,330 75,420
Non-Interest Expense 13,340 109,527 25,501 148,368
-------------------------------------------------------------------------------------------
Income before Income Taxes 519 59,571 4,518 64,608
Income Tax Expense 177 20,314 77 20,568
-------------------------------------------------------------------------------------------
Income before Extraordinary Item 342 39,257 4,441 44,040
Extraordinary Item -- -- 770 770
-------------------------------------------------------------------------------------------
Net Income $ 342 $ 39,257 $ 5,211 $ 44,810
-------------------------------------------------------------------------------------------
Average Total Assets $ 779,692 $ 3,134,075 $ 1,570,237 $ 5,484,004
===========================================================================================
Commercial Retail Treasury &
(in thousands) Banking Banking Administration Total
===========================================================================================
1999:
Net Interest Income $ 20,474 $ 99,395 $ 28,247 $ 148,116
Provision for Loan Losses 5,927 7,009 (1,366) 11,570
-------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 14,547 92,386 29,613 136,546
Non-Interest Income 5,500 56,367 (408) 61,459
Non-Interest Expense 12,268 100,495 19,893 132,656
-------------------------------------------------------------------------------------------
Income before Income Taxes 7,779 48,258 9,312 65,349
Income Tax Expense 2,653 16,456 2,090 21,199
-------------------------------------------------------------------------------------------
Income before Extraordinary Item 5,126 31,802 7,222 44,150
Extraordinary Item -- -- -- --
-------------------------------------------------------------------------------------------
Net Income $ 5,126 $ 31,802 $ 7,222 $ 44,150
-------------------------------------------------------------------------------------------
Average Total Assets $ 722,406 $ 2,679,611 $ 1,510,626 $ 4,912,643
===========================================================================================
Commercial Retail Treasury &
(in thousands) Banking Banking Administration Total
===========================================================================================
1998:
Net Interest Income $ 21,752 $ 79,166 $ 29,680 $ 130,598
Provision for Loan Losses 2,322 3,822 5,883 12,027
-------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 19,430 75,344 23,797 118,571
Non-Interest Income 4,810 49,894 8,188 62,892
Non-Interest Expense 12,498 91,307 19,257 123,062
-------------------------------------------------------------------------------------------
Income before Income Taxes 11,742 33,931 12,728 58,401
Income Tax Expense 4,004 11,570 3,797 19,371
-------------------------------------------------------------------------------------------
Income before Extraordinary Item 7,738 22,361 8,931 39,030
Extraordinary Item -- -- -- --
-------------------------------------------------------------------------------------------
Net Income $ 7,738 $ 22,361 $ 8,931 $ 39,030
-------------------------------------------------------------------------------------------
Average Total Assets $ 683,256 $ 2,132,771 $ 1,534,548 $ 4,350,575
===========================================================================================
55
NOTE 20--Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" ("SFAS No. 107") requires all entities to
disclose the fair value of recognized and unrecognized financial instruments on
a prospective basis, where practicable, in an effort to provide financial
statement users with information in making rational investment and credit
decisions. To estimate the fair value of each class of financial instrument the
Corporation applied the following methods using the indicated assumptions:
Cash and Due from Banks and Short-Term Investments
Carrying amount of those investments is used to estimate fair value.
Mortgage Loans Held for Sale
Fair value for mortgage loans held for trading or sale was determined using
forward contract commitment pricing for the majority of these loans. Loans not
specifically allocated to a forward commitment have been priced using quoted
prices for commitments into which these mortgages would be placed in the future.
Securities Available for Sale
The fair values of the securities are based on quoted market prices or
dealer quotes for those investments.
Loans
Fair value of loans which have homogeneous characteristics, such as
residential mortgages and installment loans, was estimated using discounted cash
flows. All other loans were valued using discount rates which reflected credit
risks of the borrower, types of collateral and remaining maturities.
Deposit Liabilities
Fair value of demand deposits, savings accounts and money market deposits
was the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowings
Rates currently available to the Corporation for borrowings and debt with
similar terms and remaining maturities are used to estimate fair value of the
existing debt.
Interest Rate Arrangements
The fair value of interest rate swaps and floor/cap arrangements, which the
Corporation uses for hedging purposes, is the estimated amount the Corporation
would receive or pay to terminate the arrangements at the reporting date, taking
into account the current interest rates and the current credit worthiness of the
counterparties. Interest rate swaps/caps carrying amounts indicate amounts paid
for cap arrangements attached to interest rate swaps. The fair value is the net
of the fair value of the swaps and the caps.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the credit worthiness of the borrowers. Fixed-rate loan
commitments also take into account the difference between current levels of
interest rates and committed rates.
56
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
==============================================================================================================================
Assets:
Cash and Due From Banks $ 84,166 $ 84,166 $ 90,840 $ 90,840
Short-Term Investments 12,378 12,378 1,759 1,759
Mortgage Loans Held for Sale 8,243 8,257 30,535 30,513
Securities Available for Sale 1,876,509 1,876,509 1,671,507 1,671,507
Loans, Net of Allowance 3,333,111 3,444,379 3,144,339 3,089,716
Liabilities:
Deposits $ 3,954,770 $ 3,861,643 $ 3,808,528 $ 3,685,790
Short-Term Borrowings 397,833 398,011 301,323 301,430
Long-Term Debt 724,973 737,348 627,118 621,575
Recognized Derivative Financial Instruments:
Interest Rate Floors $ -- $ -- $ 2,028 $ 243
Interest Rate Swaps/Caps 1,575 (239) 6,063 (4,550)
Unrecognized Derivative Financial Instruments:
Interest Rate Swaps $ -- $ 1,928 $ -- $ 2,059
Commitments to Extend Credit -- -- -- --
==============================================================================================================================
The calculations represent estimates and do not represent the underlying
value of the Corporation. The information presented is based on fair value
calculations and market quotes as of December 31, 2000 and 1999. These amounts
are based on the relative economic environment at the respective year-ends,
therefore, the valuations may have been affected by economic movements since
year-end.
57
NOTE 21- Parent Company Financial Information
The condensed statements of income, financial condition and cash flows for
Provident Bankshares Corporation (parent only) are presented below.
Statement Of Income
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
=================================================================================================
Interest Income From Bank Subsidiary $ 86 $ 34 $ 242
Dividend Income From Subsidiaries 76,559 20,242 13,951
- -------------------------------------------------------------------------------------------------
Total Income 76,645 20,276 14,193
- -------------------------------------------------------------------------------------------------
Operating Expenses 6,869 4,105 2,901
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes
and Equity in Undistributed
Income of Subsidiaries 69,776 16,171 11,292
Income Tax Benefit (2,053) (1,277) (1,038)
- -------------------------------------------------------------------------------------------------
71,829 17,448 12,330
Equity in Undistributed Income (Loss)
of Subsidiaries (27,019) 26,702 26,700
- -------------------------------------------------------------------------------------------------
Net Income $ 44,810 $ 44,150 $ 39,030
=================================================================================================
Statement Of Condition
December 31,
- -------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
=================================================================================================
ASSETS
Interest Bearing Deposit with Bank Subsidiary $ 108 $ 219
Investment in Bank Subsidiary 377,541 313,555
Other Assets 8,530 2,000
- -------------------------------------------------------------------------------------------------
Total Assets $ 386,179 $ 315,774
=================================================================================================
LIABILITIES
Other Liabilities $ 724 $ 775
- -------------------------------------------------------------------------------------------------
Total Liabilities 724 775
=================================================================================================
Corporation-Obligated Mandatorily
Redeemable Trust Preferred Securities 70,135 40,400
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock 29,709 $ 26,226
Capital Surplus 251,085 203,364
Retained Earnings 109,601 102,587
Net Accumulated Other Comprehensive
Income of Bank Subsidiary (10,695) (44,323)
Treasury Stock at Cost (64,380) (13,255)
- -------------------------------------------------------------------------------------------------
Total Stockholders' Equity 315,320 274,599
- -------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 386,179 $ 315,774
=================================================================================================
58
Statement of Cash Flows
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
=============================================================================================================
Operating Activities:
Net Income $ 44,810 $ 44,150 $ 39,030
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Equity in Undistributed Income from Subsidiaries 27,019 (26,702) (26,700)
Other Operating Activities 86 (2,056) 4,688
-------------------------------------------------------------------------------------------------------------
Total Adjustments 27,105 (28,758) (22,012)
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 71,915 15,392 17,018
-------------------------------------------------------------------------------------------------------------
Investing Activities:
Investment in Bank Subsidiary (33,500) -- (42,662)
Investment in Trust Subsidiary (928) -- (1,238)
-------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (34,428) -- (43,900)
-------------------------------------------------------------------------------------------------------------
Financing Activities:
Issuance of Common Stock 1,499 2,713 6,225
Purchase of Treasury Stock (51,125) (3,478) (7,287)
Cash Dividends on Common Stock (17,707) (15,232) (12,648)
Other Financing Activities (1,193) (76) --
Issuance of Corporation-Obligated
Mandatorily Redeemable Trust Preferred Securities 30,928 -- 41,238
-------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (37,598) (16,073) 27,528
-------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (111) (681) 646
Cash and Cash Equivalents at Beginning of Year 219 900 254
-------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 108 $ 219 $ 900
=============================================================================================================
Supplemental Disclosures
-------------------------------------------------------------------------------------------------------------
Income Taxes Paid $ 3,419 $ 344 $ 748
Stock Dividend 20,088 29,827 36,349
Stock Issued for Acquired Company 29,617 -- --
59
Note 22--Future Changes in Accounting Principles
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"). As amended, 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 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, or 3) hedge foreign currency exposure. The
Corporation only engages in fair value and cash flow hedges for all hedges.
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. As of
January 1, 2001, the Corporation will adopt SFAS No. 133. This statement
requires the Corporation to mark to market all derivative instruments as a
transition adjustment. This transition adjustment is estimated to be a $1.2
million after tax loss. The Corporation plans to close the derivative
instruments that will not qualify for the shortcut method under SFAS No. 133.
This is not expected to result in a material gain or loss. Under the shortcut
method, an entity may conclude that the change in the derivative's fair value is
equal to the change in the hedged item's fair value attributable to the hedged
risk, resulting in no ineffectiveness. Therefore, the adoption of SFAS No. 133
is not expected to adversely impact the earnings from continuing operations of
the Corporation in 2001.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 140"). This statement becomes
effective for applicable transactions occurring after March 31, 2001. Management
is currently assessing the potential impact of SFAS No. 140 on future corporate
operations.
Note 23--Subsequent Event
On February 16, 2001, the Corporation entered into an agreement to
repurchase approximately 1.4 million shares of common stock directly from
Mid-Atlantic Investors, a major stockholder. These shares will be repurchased by
the Corporation at a fixed price of $23.86 per share. The transaction will be
executed in portions, but in its entirety prior to March 31, 2001.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
60
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The text and tables under "Election of Directors" in the Corporation's 2001
Proxy Statement are incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The text and tables under "Directors' Compensation" and "Executive
Compensation" in the Corporation's 2001 Proxy Statement are incorporated herein
by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The text and tables under "Stock Ownership" in the Corporation's 2001 Proxy
Statement are incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The text under "Compensation Committee Interlocks and Insider
Participations" and "Transactions with Management" in the Corporation's 2001
Proxy Statement is incorporated herein by reference.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) The Consolidated Financial Statements of Provident Bankshares
Corporation and Subsidiaries are included in Item 8.
(2) Financial statement schedules--none applicable or required.
(3) Exhibits
The following is an index of the exhibits included in this report:
(3.1) Articles of Incorporation of Provident Bankshares Corporation.(1)
(3.2) Second Amended and Restated By-Laws of Provident Bankshares
Corporation.(2)
(4.1) Amendment No. 1 to Stockholder Protection Rights Agreement.(7)
(10.1) 1994 Supplemental Executive Incentive Plan of Provident Bank of
Maryland.(3)
(10.2) Supplemental Executive Retirement Income Plan of Provident Bank
of Maryland.(4)
(10.3) Amended and Restated Stock Option and Appreciation Rights Plan of
Provident Bankshares Corporation.(5)
(10.4) Form of Change in Control Agreement between Provident Bankshares
Corporation and Certain Executive Officers.(6)
(10.5) Form of Change in Control Agreement between Provident Bank of
Maryland and Certain Executive Officers.(6)
(10.6) Deferred Compensation Plan for Outside Directors.(7)
(10.7) Provident Bankshares Corporation Non-Employee Directors'
Severance Plan.(7)
(11) Statement re: Computation of Per Share Earnings.
(21) Subsidiaries of Provident Bankshares Corporation.
(23) Consents of Independent Accountants.
(24) Power of Attorney.
(b) Reports on Form 8-K were filed with the Securities and Exchange Commission
in the last quarter of 2000 as follows:
October 18, 2000--Press Release regarding repositioning of the mortgage
lending operation.
December 21, 2000--Press Release announcing the Board of Directors
approved extending its stock repurchase plan.
(1) Incorporated by reference from Registrant's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the Commission on
November 13, 1998.
(3) Incorporated by reference from the Registrant's 1994 Annual Report on Form
10-K (File No. 0-16421) filed with the Commission on February 17, 1995.
(4) Incorporated by reference from Registrant's 1993 Form 10-K (File No. 0-
16421) filed with the Commission on March 14, 1994.
(5) Incorporated by reference from Registrant's definitive 1995 Proxy Statement
for the Annual Meeting of Stockholders held on April 19, 1995.
(6) Incorporated by reference from Registrant's 1995 Form 10-K (File No. 0-
16421) filed with the Commission on March 18, 1996.
(7) Incorporated by reference from Registrant's 1998 Form 10-K (File No. 0-
16421) filed with the Commission on March 3, 1999.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 9, 2001 BY /s/ Peter M. Martin
-------------------
Peter M. Martin
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the dates indicated.
Principal Executive Officer:
March 9, 2001 BY /s/ Peter M. Martin
------------------
Peter M. Martin
Chairman of the Board and Chief Executive Officer
Principal Financial Officer:
March 9, 2001 BY /s/ Dennis A. Starliper
----------------------
Dennis A. Starliper
Group Manager and Chief Financial Officer
Principal Accounting Officer:
March 9, 2001 BY /s/ R. Wayne Hall
----------------
R. Wayne Hall
Treasurer
A Majority of the Board of Directors*
Melvin A. Bilal, Thomas S. Bozzuto,
Dr. Calvin W. Burnett, Ward B. Coe, III, Charles
W. Cole, Jr., Pierce B. Dunn, Enos K. Fry,
Herbert W. Jorgensen, Mark K. Joseph,
Barbara B. Lucas, Peter M. Martin, Frederick W.
Meier, Jr., Sister Rosemarie Nassif,
Francis G. Riggs, Sheila K. Riggs,
Carl W. Stearn
* Pursuant to the Power of Attorney filed herewith as Exhibit 24.0.
March 9, 2001 BY /s/ R. Wayne Hall
----------------
R. Wayne Hall
Attorney-in-fact
63