UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For Quarterly Period Ended March 31, 2001
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
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(Address of Principal Executive Offices)
Not Applicable
-------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year if Changed Since Last
Report)
(410) 277-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 24,425,675 shares outstanding at May
1, 2001
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition - Unaudited
March 31, 2001 and 2000 and December 31, 2000 3
Consolidated Statement of Income - Unaudited
Three months ended March 31, 2001 and 2000 4
Consolidated Statement of Cash Flows - Unaudited
Three months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II - OTHER INFORMATION 18
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 19
- --------------------------------------------------------------------------------
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
- --------------------------------------------------------------------------------
2
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
March 31, December 31, March 31,
(dollars in thousands) 2001 2000 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Assets (Restated) (Restated) (Restated)
Cash and Due From Banks $ 87,806 $ 84,166 $ 84,237
Short-Term Investments 13,555 12,378 1,732
Mortgage Loans Held for Sale 4,392 8,243 13,731
Securities Available for Sale 1,639,388 1,876,509 1,686,192
Loans:
Consumer 2,004,967 2,017,436 2,308,573
Commercial Business 340,819 356,041 361,810
Real Estate -- Construction 267,875 265,918 191,225
Real Estate -- Mortgage 690,240 725,799 482,001
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans 3,303,901 3,365,194 3,343,609
Less: Allowance for Loan Losses 39,307 38,374 36,569
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,264,594 3,326,820 3,307,040
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Premises and Equipment, Net 47,351 45,805 43,876
Accrued Interest Receivable 44,155 47,281 46,915
Other Assets 145,633 98,241 63,284
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Total Assets $ 5,246,874 $ 5,499,443 $ 5,247,007
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Liabilities
Deposits:
Noninterest-Bearing $ 351,031 $ 327,334 $ 311,893
Interest-Bearing 3,457,184 3,627,436 3,470,419
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Total Deposits 3,808,215 3,954,770 3,782,312
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowings 1,097,775 1,190,775 1,151,957
Other Liabilities 54,354 43,592 38,833
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Total Liabilities 4,960,344 5,189,137 4,973,102
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Stockholders' Equity
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares, Issued 29,858,017,
29,708,943 and 26,251,384 Shares; at March 31, 2001,
December 31, 2000 and March 31, 2000, respectively 29,858 29,709 26,251
Capital Surplus 252,854 251,184 203,755
Retained Earnings 109,895 104,488 109,510
Net Accumulated Other Comprehensive Income (3,896) (10,695) (44,684)
Treasury Stock at Cost - 5,457,126, 3,861,969 and 1,177,432 Shares at March 31, 2001,
December 31, 2000 and March 31, 2000, respectively (102,181) (64,380) (20,927)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 286,530 310,306 273,905
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,246,874 $ 5,499,443 $ 5,247,007
- -----------------------------------------------------------------------------------------------------------------------------------
These financial statements should be read in conjunction with the accompanying
notes.
3
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Interest Income (Restated) (Restated)
Interest and Fees on Loans $ 66,917 $ 67,049
Interest on Securities 30,340 29,633
Tax-Advantaged Interest 552 514
Interest on Short-Term Investments 85 46
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 97,894 97,242
- --------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on Deposits 42,330 42,695
Interest on Borrowings 18,324 15,884
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 60,654 58,579
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 37,240 38,663
Less: Provision for Loan Losses 8,175 4,300
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 29,065 34,363
- --------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 13,638 10,374
Mortgage Banking Activities 261 811
Commissions and Fees 1,204 1,388
Net Securities Gains 5,967 79
Other Non-Interest Income 2,467 1,717
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 23,537 14,369
- --------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries and Employee Benefits 17,952 17,164
Occupancy Expense, Net 3,423 3,190
Furniture and Equipment Expense 2,584 2,451
External Processing Fees 4,506 3,789
Other Non-Interest Expense 7,413 7,451
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 35,878 34,045
- --------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 16,724 14,687
Income Tax Expense 5,399 4,322
- --------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle 11,325 10,365
Extraordinary Item -- Gain on Debt Extinguishment, Net - 770
Cumulative Effect of Change
in Accounting Principle, Net (1,160) -
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 10,165 $ 11,135
====================================================================================================================
Basic Earnings Per Share
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.43 $ 0.37
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change
in Accounting Principle, Net (0.04) -
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 0.39 $ 0.40
====================================================================================================================
Diluted Earnings Per Share
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.41 $ 0.36
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change
in Accounting Principle, Net (0.04) -
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 0.37 $ 0.39
====================================================================================================================
These financial statements should be read in conjunction with the accompanying
notes.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
(in thousands)
Three Months Ended March 31, 2001 2000
==========================================================================================================================
Operating Activities (Restated) (Restated)
Net Income $ 10,165 $ 11,135
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 8,968 4,373
Provision for Loan Losses 8,175 4,300
Provision for Deferred Income Tax (Benefit) (561) 5,207
Realized Net Securities Gains (5,967) (79)
Loans Originated or Acquired and Held for Sale (7,057) (47,782)
Proceeds from Sales of Loans Held for Sale 11,042 64,804
Gain on Sales of Loans Held for Sale (134) (218)
Other Operating Activities (36,319) (8,736)
- --------------------------------------------------------------------------------------------------------------------------
Total Adjustments (21,853) 21,869
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (11,688) 33,004
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Principal Collections and Maturities of Securities Available for Sale 84,306 39,365
Proceeds on Sales of Securities Available for Sale 378,224 18,602
Purchases of Securities Available for Sale (212,117) (74,099)
Loan Originations and Purchases Less Principal Collections 50,366 (169,472)
Purchases of Premises and Equipment (3,979) (1,794)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 296,800 (187,398)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Decrease in Deposits (146,555) (26,216)
Net Increase (Decrease) in Short-Term Borrowings (175,991) 239,163
Proceeds from Long-Term Debt 90,302 80,000
Payments and Maturities of Long-Term Debt (7,311) (133,715)
Issuance of Stock 1,819 416
Purchase of Treasury Stock (37,801) (7,672)
Cash Dividends on Common Stock (4,758) (4,212)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (280,295) 147,764
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 4,817 (6,630)
Cash and Cash Equivalents at Beginning of Year 96,544 92,599
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 101,361 $ 85,969
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures
- --------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Credited to Deposit Accounts $ 42,990 $ 46,658
Income Taxes Paid 1,472 121
These financial statements should be read in conjunction with the accompanying
notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the consolidated financial statements
and notes thereto included in the Provident Bankshares Corporation's ("the
Corporation") Annual Report on Form 10-K/A for the year ended December 31, 2000
which was filed with the Securities and Exchange Commission on November 8, 2001.
All per share amounts for the three months ended March 31, 2001 and 2000
have been given the effect of the 5% stock dividend paid in May 11, 2001.
As discussed in Note C, certain financial data in this Form 10-Q/A has been
restated. All financial data in this Form 10-Q/A reflects the impact of the
restatement.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Loan and Allowance for Loan Losses
- ----------------------------------
All interest on loans is accrued at the contractual rate and credited to
income based upon the principal amount outstanding. 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 into
interest income as a yield adjustment and are, accordingly reported as Interest
and Fees on Loans in the Consolidated Statement of Income.
Management places a commercial loan in non-accrual status and discontinues
the accrual of interest and reverses 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. At times commercial loans secured by real estate are
charged-off and the underlying collateral is repossessed. At the time of
repossession, the loan is reclassified as other real estate owned and carried at
fair market value less cost to sell (net realizable value). The difference
between the loan balance and the net realizable value at time of foreclosure is
recorded as a charge-off. Other real estate owned is evaluated periodically for
impairment of value. Impairment of value is recognized through a charge to
earnings.
Consumer credit secured by residential property is evaluated for
collectibility at 120 days past due. If the loan is in a first lien position
and the ratio of the loan to collateral value, less cost to sell, exceeds 90%
the loan will be placed in non-accrual status and all accrued but unpaid
interest will be reversed against interest income. If the loan is in a junior
lien position, all other liens will be considered in calculating the loan to
value ratio. Generally, no loan will continue to accrue interest after reaching
210 days past due. In general, charge-offs of delinquent loans secured by
residential real estate will be recognized when losses are reasonably estimable
and probable. No later than 180 days delinquent, any portion of an outstanding
loan balance in excess of the collateral's net realizable balance will be
charged-off. Subsequent to any partial charge-offs, loans will be carried in
non-accrual status until the collateral is liquidated or the loan is charged-off
in its entirety. Properties with partial charge-offs will be periodically
evaluated to determine whether additional charge-offs are warranted. Subsequent
to the liquidation of the property, any deficiencies between proceeds and the
recorded balance of the loan will result in additional charge-offs. Any excess
proceeds will be recognized as a loan recovery.
6
Generally, non-residential secured closed end consumer loans that become
past due 120 days are charged-off in full. Unsecured open-end consumer loans
will be charged-off in full at 180 days past due.
Individual loans are considered 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 cash flows discounted at the historical effective
interest rate, the market price of the loan or based on the fair value of the
underlying collateral.
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 the impaired loans.
Collections of interest and principal on all loans in non-accrual status
and/or considered impaired are generally applied as a reduction to the
outstanding principal balance of the loan. Once future collectibility has been
established, interest income may be recognized on a cash basis.
The Corporation's allowance for loan losses is based on management's
continuing review and evaluation of the loan portfolio and intended to maintain
an allowance adequate to absorb probable inherent losses on outstanding loans.
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,
non-accrual and delinquent trends, 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.
NOTE C - RESTATEMENT OF PREVIOUSLY REPORTED RESULTS OF OPERATIONS
In connection with the issuance of its 2001 second quarter results, the
Corporation restated earnings for the first quarter of 2001 and the year ended
December 31, 2000 (and each quarter of 2000). In addition, certain other
financial data not impacting earnings (e.g., loans, charge-offs, and the
allowance for loan losses) has been restated for the impacted periods. As the
Corporation announced on August 6, 2001, the restatement is the result of a
review of delinquent loans and loans that were 120 days or more past due in the
Corporation's $1.5 billion acquired second mortgage loan portfolio. The review
discovered previously unidentified losses in the portfolio which should have
been recognized in prior periods. Accordingly, those prior periods have been
restated to reflect this information. Adjustments to the Statement of Income
for amounts previously reported affect interest income for the reversal of
accrued interest on loans that should have been placed on non-accrual status,
write-offs of related loan premiums on acquired loans, and provisions for loan
losses to establish an adequate allowance for loan losses in those periods in
which additional charge-offs should have occurred.
In addition, during the quarter ended March 31, 2001, the Company
reclassified its corporation-obligated mandatorily redeemable capital securities
to liabilities and the related expense to interest expense, previously recorded
as non-interest expense. All prior period amounts have been restated.
The table below provides a reconcilement reflecting adjustments, net of tax,
of net income and earnings per share for the periods indicated. Accordingly,
capital has been adjusted for the adjustment to net income. Additionally, the
table indicates the additional charge-offs during those periods and selected
other pertinent balances as reported and as restated.
7
Three Months Ended March 31,
----------------------------
(dollars in thousands, except per share data) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
As Reported Net Income $ 10,565 $ 11,635
Increase to the Provision for Loan Losses, net of tax (652) -
Reversal of Accrued but Uncollected Interest
Income and Write-off of Loan Related Premium, net of tax 252 (500)
- -----------------------------------------------------------------------------------------------------------------
Total Decrease in Net Income (400) (500)
- -----------------------------------------------------------------------------------------------------------------
Total Restated Net Income $ 10,165 $ 11,135
=================================================================================================================
Earnings Per Share - Basic
As Reported $ 0.40 $ 0.42
As Restated 0.39 0.40
Earnings Per Share - Diluted
As Reported $ 0.39 $ 0.41
As Restated 0.37 0.39
Loan Charge-offs, net of recoveries
As Reported $ 5,003 $ 3,029
As Restated 7,242 4,176
Interest Expense
As Reported $ 57,595
As Restated 58,579
Non-Interest Expense
As Reported $ 35,029
As Restated 34,045
at March 31, at December 31, at March 31,
2001 2000 2000
------------------------- -------------------- ------------------
Loans
As Reported $ 3,314,795 $ 3,373,771 $ 3,348,247
As Restated 3,303,901 3,365,194 3,343,609
Allowance for Loan Losses
As Reported $ 42,832 $ 40,660 $ 41,051
As Restated 39,307 38,374 36,569
Liabilities
As Reported $ 5,121,168 $ 4,905,034
As Restated 5,189,137 4,973,102
Stockholders' Equity
As Reported $ 292,035 $ 315,411 $ 274,405
As Restated 286,530 310,306 273,905
8
NOTE D - ACQUISITION
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 E - ACCOUNTING FOR DERIVATIVES
Significant Accounting Policies
- -------------------------------
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS Nos.137 and 138 (collectively, "SFAS No. 133").
The statement establishes the accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities. All
derivatives are required to be measured at fair value and recognized as either
assets or liabilities in the financial statements. The accounting for changes
in fair value (gains or 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 in the fair value of a recognized asset or liability or a
firm commitment, referred to as a fair value hedge, 2) hedge exposure to
variable cash flows of a recognized asset or liability or of a forecasted
transaction, referred to as a cash flow hedge, or 3) hedge foreign currency
exposure. The Corporation only engages in fair value and cash flow hedges.
The Corporation uses a variety of derivative financial instruments as part
of its interest rate risk management strategy to manage its interest rate risk
exposure. This strategy aims to stabilize net interest income through periods
of changing interest rates. Derivative products in use by the Corporation are
interest rate swaps and caps or floors, used separately or in combination.
These derivatives are used to suit the particular hedge objective and all
qualify as hedges. Risks in these hedge transactions involve nonperformance by
counterparties under the terms of the contract (counterparty credit risk) and
the possibility that interest rate movements or general market volatility could
result in a loss in effectiveness and necessitate the recognition of a loss
(market risk). Counterparty credit risk is controlled by dealing with well-
established brokers that are highly rated by independent sources and by
establishing exposure limits for individual counterparties. Additionally,
credit risk is controlled by entering into bilateral collateral agreements with
brokers. These are agreements in which the parties pledge collateral to
indemnify the counterparty in the case of default. Market risk on interest rate
swaps is minimized by using these instruments as hedges and continually
monitoring the positions to ensure on-going effectiveness. Additionally, the
Corporation engages only in hedges which are highly effective. The Corporation's
hedging activities are monitored by its Asset/Liability Committee (ALCO) as part
of the committee's oversight of the treasury function which is responsible for
implementing the hedging strategies. ALCO is responsible for reviewing hedging
strategies that are developed through financial analysis and modeling.
All relationships between hedging instruments and hedged items are
documented by the Corporation. Risk management objectives, strategies and the
use of certain types of derivatives used to hedge specific risks are also
documented. At inception, and on an ongoing basis, the Corporation assesses
whether the hedges have been highly effective in offsetting changes in the fair
value or cash flows of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. Several of the
derivatives retained by the Corporation to hedge exposures met the requisite
effectiveness criteria necessary to qualify for the short cut method. Under the
short cut method, an entity may conclude that the change in the derivative's
fair value is equal to the change in the hedge item's fair value attributable to
the hedged risk, resulting in no ineffectiveness. The Corporation uses
benchmark interest rates such as LIBOR to hedge the interest rate risk
associated with interest earning asset or interest bearing liabilities. Using
these benchmark rates and complying with specific criteria set forth in SFAS No.
133, the Corporation has concluded that changes in fair value or cash flows that
are attributable to risks being hedged will be completely offset at the hedges
inception and on an ongoing basis.
9
When it is determined that a derivative is not or ceases to be effective as
a hedge, the Corporation discontinues hedge accounting prospectively. When a
fair value hedge is discontinued the Corporation will continue to carry the
derivative on the balance sheet at its fair value but cease to adjust the hedged
asset or liability for changes in value.
The Corporation uses derivatives to hedge the interest rate risks inherent
with its funding costs. Fair value hedges which meet the criteria of SFAS No.
133 for effectiveness have changes in the fair value of the derivative and the
designated hedged item recognized in earnings. At March 31, 2001, the
derivatives designated as fair value hedges were proven to be effective.
Accordingly, the designated hedges and the associated hedged items were marked
to fair value by an equal and offsetting amount of $4.2 million, resulting in no
net earnings impact for the three months ended March 31, 2001. Cash flow hedges
have the effective portion of changes in the fair value of the derivative
recorded in other comprehensive income (OCI). At March 31, 2001, the
Corporation has recorded the fair value of derivatives of $648 thousand, net of
taxes, in OCI to reflect the effective portion of cash flow hedges. Amounts
recorded in OCI are recognized into earnings concurrent with the impact of the
hedged item on earnings.
All ineffective portions of hedges are reported in and affect net earnings
immediately. For the three months ending March 31, 2001, the Corporation had
no material ineffective portions of hedges.
Gains and losses on derivatives that arose prior to the initial application
of SFAS No. 133 and that were previously deferred as adjustments of the carrying
amount of hedged items were not adjusted and accordingly were not included in
the transition adjustment described below.
Adoption of SFAS No. 133
- ------------------------
The adoption of SFAS No. 133 resulted in a pre-tax reduction of net earnings
of $1.8 million ($1.2 million after-tax). This represented the difference
between the derivative's previous carrying amount and the fair value of the
derivatives at January 1, 2001. Upon adoption of SFAS No. 133, OCI reflected a
$452 thousand loss, net of tax, to recognize the net fair value of the
derivatives used in its cash flow hedges on that date.
NOTE F - 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 G - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for the
periods ended March 31:
- ---------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2001 2000
- ---------------------------------------------------------------------------------------------
(Restated) (Restated)
Net Income Before Extraordinary Item $ 11,325 $ 10,365
Extraordinary Item -- Gain on Debt Extinguishment, Net - 770
Cumulative Effect of Change in Accounting Principle, Net (1,160) -
- ---------------------------------------------------------------------------------------------
Net Income $ 10,165 $ 11,135
=============================================================================================
Basic
Basic EPS Shares 26,345 27,840
Net Income Before Extraordinary Item $ 0.43 $ 0.37
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (0.04) -
- ---------------------------------------------------------------------------------------------
Net Income Per Share $ 0.39 $ 0.40
=============================================================================================
Diluted
Dilutive Shares (principally stock options) 966 522
Diluted EPS Shares 27,311 28,362
Net Income Before Extraordinary Item $ 0.41 $ 0.36
Extraordinary Item -- Gain on Debt Extinguishment, Net - 0.03
Cumulative Effect of Change in Accounting Principle, Net (0.04) -
- ---------------------------------------------------------------------------------------------
Net Income Per Share $ 0.37 $ 0.39
=============================================================================================
10
NOTE H- INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities
portfolio at March 31, were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
March 31, 2001
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 118,930 $ 14 $ 439 $ 118,505
Mortgage-Backed Securities 1,365,975 12,529 3,552 1,374,952
Municipal Securities 24,671 685 - 25,356
Other Debt Securities 134,819 53 14,297 120,575
- --------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,644,395 $ 13,281 $ 18,288 $ 1,639,388
- --------------------------------------------------------------------------------------------------------------
March 31, 2000
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 81,014 $ 119 $ 151 $ 80,982
Mortgage-Backed Securities 1,510,939 3,229 55,476 1,458,692
Municipal Securities 26,621 138 428 26,331
Other Debt Securities 136,363 - 16,176 120,187
- --------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,754,937 $ 3,486 $ 72,231 $ 1,686,192
- --------------------------------------------------------------------------------------------------------------
At March 31, 2001 a net unrealized loss on securities available for sale of $3.3
million was reflected as a component of Net Accumulated Other Comprehensive
Income which is reflected separately as a component of Stockholders' Equity in
the Consolidated Statement of Condition and therefore has no effect on the
financial results of the Corporation's operations. This compares to a net
unrealized loss on securities available for sale of $44.7 million at March 31,
2000. For details regarding investment securities at December 31, 2000, refer
to Notes 1 and 7 of the Consolidated Financial Statements incorporated by
reference from the Corporation's Form 10-K/A filed November 8, 2001.
11
NOTE I - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For financial
statements presented for the Corporation, nonowner equity changes are comprised
of unrealized gains or losses on available for sale debt securities and recorded
gains or losses on derivatives utilized in cash flow hedges. These nonowner
equity changes will be accumulated with net income from operations to determine
comprehensive income. This change does not have an impact on the Corporation's
results of operations.
Presented below is a reconcilement of net income to comprehensive income
indicating the components of other comprehensive income.
Three Months Ended
March 31,
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Net Income $ 10,165 $ 11,135
Other Comprehensive Income (Loss):
Loss on Derivatives Due to SFAS No. 133 Transition (452) -
Gain (Loss) on Derivatives Recognized in Other Comprehensive Income (537) -
Amount Reclassified out of Other Comprehensive Income Included in Net Income - -
Unrealized Holding Gain (Loss) on Debt Securities 17,415 (478)
Less: Reclassification Adjustment for Gains Included in Net Income 5,967 79
- -----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax 10,459 (557)
Income Tax (Benefit) Related to Items of Other Comprehensive Income 3,660 (196)
- -----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), After Tax 6,799 (361)
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 16,964 $ 10,774
- -----------------------------------------------------------------------------------------------------------------------------
NOTE J-SECURITIZATION OF LOANS
Significant Accounting Policies
The Corporation securitizes second mortgage loans out of its acquired loan
portfolio with FNMA, and the respective securities are placed in the securities
portfolio. The retention of the securities represents a retained interest. No
gain or loss is recorded on these transactions until the securities are sold.
The securities are valued at fair market value along with the Corporation's
remaining securities. These loans were sold with full recourse back to the
Corporation for any credit and interest losses, collectively referred to as
losses. The recourse exposure based on the expected losses on these loans over
the life of the loans is recognized as a liability. The recourse liability is
evaluated periodically for adequacy by estimating the recourse liability based
on the present valuation of estimated future losses. This estimate determines
if additional amounts need to be provided to the recourse reserve to absorb
losses on the securitized loans through a charge to earnings. Any loans that
are determined to be losses by FNMA are charged against the recourse reserve.
12
Valuation of Retained Interests
The Corporation determined the current fair value of the retained interest
using certain key assumptions and the sensitivity of the projected cash flows to
immediate 10 percent and 20 percent adverse changes in those assumptions. The
results are presented in the table below as of March 31, 2001.
Retained
(in thousands) FNMA Securities
- ------------------------------------------------------------------
Carrying Amount/Fair Value of Retained Interests $540,544
Weighted-Average Life in Years 2.5
Annual Prepayment Assumption 27.8%
Impact on Fair Value of 10% Adverse Change $(1,798)
Impact on Fair Value of 20% Adverse Change (2,883)
Annual Cash Flow Discount Rate 7.45%
Impact on Fair Value of 10% Adverse Change $(8,413)
Impact on Fair Value of 20% Adverse Change (19,244)
Credit losses do not affect the valuation due to FNMA's full guarantee to
the Corporation for losses on loans collaterallizing the securities.
The sensitivities presented above are hypothetical and are presented for
informational purposes only. As the amounts indicate, the fair values due to a
variation in any assumption generally cannot be extrapolated because the
relationship of the change in any assumption to the change in fair value may not
be linear. The effect of a change in a particular assumption on the fair value
of the retained interest is calculated without considering the changes in other
assumptions. However, changes in one assumption may result in changes in
another.
Recourse Reserve
At March 31, 2001 the principal balance of loans securitized or purchased
with recourse amounted to $515.9 million. The Corporation maintains a recourse
liability of $1.7 million to cover estimated losses under its recourse guarantee
to FNMA. Principal balances of loans 90 days or more past due was $1.6 million
at March 31, 2001. Net losses during the three month period ending March 31,
2001 were $350 thousand.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
Restatement of Prior Periods
- ----------------------------
On August 6, 2001, the Corporation announced that earnings required restatement
as a result of a review of delinquent loans and loans 120 days or more past due
in the Corporation's $1.5 billion acquired second mortgage loan portfolio. The
review discovered previously unidentified losses in the portfolio that should
have been recognized in prior periods. The review of delinquencies and charge-
offs in the acquired loan portfolio identified approximately $13.8 million in
previously unidentified pre-tax losses through June 30, 2001, of which $8.5
million related to periods prior to the second quarter of 2001. For periods
prior to 2001, pre-tax losses amounted to $7.9 million and additional loan
charge-offs amounted to $8.3 million. For the year ended December 31, 1999,
this affected consumer loan balances and charge-offs by $3.3 million. For the
year ended December 31, 2000, net consumer loan charge-offs increased by $5.0
million from the previously reported amount. Additionally, the provision for
loan losses increased $6.0 million and $1.9 million in previously accrued
interest and loan premiums on the charged-off loans was reversed. Accordingly,
those prior periods have been restated to reflect this information. Adjustments
to the Statement of Income for amounts previously reported affect interest
income for the reversal of accrued interest on loans that should have been
placed on non-accrual status, write-offs of related loan premiums on acquired
loans, and provisions for loan losses to establish an adequate allowance for
loan losses in those periods in which additional charge-offs should have
occurred. Total assets, net loans, allowance for loan losses, charge-offs,
equity, income statement amounts and net income amounts required restatement
from amounts previously stated in the Corporation's Form 10-K, as filed February
17, 2000. These changes resulted in the Corporation restating earnings for the
first quarter of 2001 and the year ended December 31, 2000 (and each quarter of
2000).
In addition to the restatements previously mentioned, the restatements
reflect the reclassification of the trust preferred securities from Corporation-
Obligated Mandatorily Redeemable Trust Preferred Securities to liabilities. The
related expense on these securities was reclassified from non-interest expense
to interest expense. This will affect the net interest margin without altering
net income for any year presented.
See Note C for selected financial data noting the impact of these changes on
selected periods presented. The following discussion of operating results
includes the impact of the aforementioned losses. As a result the Corporation
is amending and refiling its Form 10-Q on this Form 10-Q/A for the quarter
ending March 31, 2001.
FINANCIAL REVIEW
Provident Bankshares reported operating earnings for the quarter ended March
31, 2001 of $11.3 million, or $.41 per share on a diluted basis. This is an
increase of 9.3% from $10.4 million, or $.36 per diluted share in the 2000
comparable quarter. This also represented a 13.9% increase in diluted earnings
per share.
As a result of a one-time transition adjustment of $1.2 million (net of
taxes) for Statement of Financial Accounting Standards No. 133 "Accounting of
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and
138 (collectively, "SFAS No. 133") net income is $10.2 million, or $.37 per
diluted share. The Corporation, like many institutions, adopted this mandatory
accounting standard in the first quarter of 2001. Exclusive of the accounting
change, return on average common equity was 15.38% for the first quarter 2001,
compared to 15.46% in the same quarter a year ago. The return on average assets
was .86% for the quarter ending March 31, 2001, compared to .80% for the quarter
ending March 31, 2000. Net interest margin for the 2001 first quarter was
2.94%, an increase from 2.90% in the fourth quarter of 2000.
14
Non-interest income (excluding securities gains) was up $3.3 million or
23.0% for the 2001 first quarter. There were $6.0 million in securities gains
during the 2001 first quarter compared to $79 thousand in the same period a year
ago. Securities gains were taken mainly as part of Provident's program to hedge
the impact of prepayments on the second mortgage portfolio. The Company's non-
interest expense increased by 5.4%, up $1.8 million from the same quarter last
year.
NET INTEREST INCOME
A lower net interest margin offset in part by growth in average earning
assets resulted in lower tax-equivalent net interest income. Tax-equivalent net
interest income fell by $1.4 million to $37.5 million for the first quarter of
2001, as compared to the first quarter of 2000. Net interest margin for the 2001
first quarter was 2.94%, a decrease from 3.09% in the first quarter of 2000.
This margin decline was largely the result the increase in the cost of interest-
bearing liabilities, notably certificates of deposit. Provident's tax
equivalent interest income rose $666 thousand from the first quarter of 2000 as
a result of the $104 million increase in average interest-earning assets.
Growth in total average earning assets was provided by increases of $231 million
in residential mortgage loans and $121 million in commercial real estate loans.
The increase in residential mortgage loans is partially attributable to the
acquisition of Harbor Federal Bancorp during the third quarter of 2000. The
increase in commercial real estate loans was composed of $77 million in
commercial construction, $24 million in commercial mortgage and $21 million in
residential construction loans. Consumer loans declined $227 million due to the
securitization of $324 million of second mortgage loans during the third quarter
of 2000. Mortgage loans held for sale declined $36 million as the Bank made the
decision during the fourth quarter of 2000 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. The yield on earning assets was 7.71% compared to 7.75% for the first
quarter of 2000.
Total interest expense for the first quarter of 2001 was $2.1 million above
a year ago, the combined result of an increase of $117 million in the average
outstanding balance of interest-bearing liabilities and a 9 basis point increase
in rate paid. Included in this increase were $134 million in direct
certificates of deposits and $83 million in interest-bearing demand/money market
deposit accounts. The increases are attributable to the continued expansion of
our branch network as well as the acquisition of Harbor Federal Bancorp.
Brokered deposits decreased $179 million as long-term debt increased $212
million. Short-term borrowings declined $102 million.
The Corporation maintains an overall interest rate risk-management strategy
that incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
Management monitors the level of earnings at risk due to interest rate
volatility through the simulation of multiple interest rate scenarios. As of
January 1, 2001, the Corporation adopted SFAS No. 133. This statement required
the Corporation to mark to market all derivative instruments as a transition
adjustment. This transition adjustment was a $1.2 million after tax loss. The
Corporation closed the derivative instruments that will not qualify for the
shortcut method under SFAS No. 133. 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.
15
PROVISION FOR LOAN LOSSES
The Corporation recorded a $8.2 million provision for loan losses, with net
charge-offs of $7.2 million for the first quarter of 2001, compared to a
provision of $4.3 million and net charge-offs of $4.2 million for the same
period of 2000. The increase in the provision for loan losses is mainly related
to the loss taken on the sale of a syndicated health care credit and charge-offs
related to the acquired loan portfolio. The Corporation continues to emphasize
loan quality and closely monitors potential problem credits. Senior managers
meet at least monthly to review the credit quality of the loan portfolios and at
least quarterly with executive management to review the adequacy of the
allowance for loan losses. Provident has been closely monitoring its health care
industry credits where the operators have had to adjust to changes in Medicare
reimbursement policies. Charge-offs from health care credits may be incurred in
future quarters as a result of continuing challenges in the health care sector.
However, management believes reserves are adequate for such an event. The entire
health care portfolio represents less than 1.5% of Provident's total loans. To
further limit its exposure to national syndicated credits; the Company elected
to sell a large national credit that had been performing as agreed at
approximately face value. The increase in charge-offs of portfolio acquisition
loans was the result of the review described in Note C to the unaudited
consolidated financial statements. The allowance for loan losses at March 31,
2001 was $39.3 million, compared to $36.6 million a year ago. At March 31, 2001,
the allowance represented 1.19% of total loans and 166% of non-performing loans.
Total non-performing loans were $23.7 million at March 31, 2001 and $27.2
million at March 31, 2000. Non-performing loans as a percent of loans
outstanding as of March 31, 2001 were .72%.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $17.6 million in
the first quarter of 2001 compared to $14.3 million for the first quarter of
2000. This increase was driven by deposit product revenues, which increased $3.3
million. The increase in deposit fees was driven by continued growth in account
volume. Other non-interest income was up $750 thousand mainly associated with
Bank Owned Life Insurance. Mortgage banking income declined $550 thousand as the
Corporation made a decision during the fourth quarter 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.
There were $6.0 million in securities gains during the 2001 first quarter
compared to $79 thousand in the same period a year ago. Securities gains were
taken mainly as part of Provident's program to offset the impact of accelerated
prepayments on the second mortgage portfolio.
NON-INTEREST EXPENSE
First quarter non-interest expense was $35.9 million, compared to $34.0
million for the same period last year. Salaries and benefits increased $788
thousand mainly related to merit increases and the expansion of the bank's
branch network. The branch network expansion also contributed to increased
occupancy costs of $233 thousand, furniture and equipment expense of $133
thousand and $717 thousand in external processing fees related to increased
account volume.
16
INCOME TAXES
Provident recorded income tax expense of $5.4 million on income before taxes
of $16.7 million, an effective tax rate of 32.3%. During the first quarter of
2000, Provident's tax expense was $4.3 million on pre-tax income of $14.7
million, an effective tax rate of 29.4%. The change in effective tax rate is the
result of the elimination during the first quarter of 2000 of federal and state
tax issues for which a liability had previously been provided.
FINANCIAL CONDITION
Total assets of the Corporation decreased $253 million from December 31,
2000 to March 31, 2001 as a result of deleveraging associated with the
Corporation's continued use of its stock buyback authority. The Corporation
repurchased 1.6 million shares during the quarter, including all of the
1,407,157 PBKS shares held by Mid-Atlantic Investors and its affiliates.
Securities available for sale declined $237 million as a result of this
deleveraging. Consumer loans declined $12 million as indirect auto loans
declined over $25 million due to a decision by the Corporation in the third
quarter of 2000 to exit this business. Commercial business loans declined $15
million partially due to the decision to sell a large national credit that had
been performing as agreed at approximately face value and the sale of a
syndicated health care credit that was on non-performing status. This decision
was made to limit exposure to syndicated national credits. Real estate mortgage
loans declined $36 million, $24 million from residential mortgage loans.
Residential mortgage loans declined as the Corporation made a decision during
the fourth quarter 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. The $12 million
decline in commercial mortgage loans was attributable to unanticipated payoffs.
Total deposits ended the quarter at $3.81 billion, a decrease of $147
million over the December 31, 2000 level. Core deposits increased $79 million
during the quarter as non-interest bearing demand deposits increased $24 million
and interest bearing demand/money market accounts increased $46 million. Direct
certificates of deposits and savings deposits also increased $3 million and $10
million, respectively. Borrowings, including trust preferred securities,
decreased $93 million from December 31, 2000 ending the quarter at $1.1 billion.
The primary sources of liquidity at March 31, 2001 were loans held for sale
and investments available for sale, which totaled $1.64 billion. This represents
33% of total liabilities compared to 37% at December 31, 2000.
At March 31, 2001, total stockholders' equity was $287 million, a $24
million decrease over December 31, 2000. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$175 thousand was raised through the dividend reinvestment plan, $1.6 million
from the exercise of stock options, while capital increased by $6.8 million
during the first quarter of 2001 as a result of Statement of Financial
Accounting Standards No. 115. During the first quarter of 2001, the Corporation
also repurchased shares totaling $37.8 million. At quarter-end, the leverage
ratio was 6.52% and total stockholders' equity represented 9.91% of risk
adjusted assets. These ratios exceed the minimum requirements of the current
leverage capital and risk-based capital standards established by regulatory
agencies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 2001, see "Interest
Sensitivity Management" and Note 12 to the Consolidated Financial Statements in
the Corporation's Form 10-K/A filed with the Commission on November 8, 2001. The
market risk of the Corporation has not experienced any material changes as of
March 31, 2001 from December 31, 2000. Additionally, refer to "Net Interest
Income" in Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional quantitative and qualitative
discussions about market risk at March 31, 2001.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation (1)
(3.2) Fourth Amended and Restated By-Laws of Provident
Bankshares Corporation (3)
(4.1) Stockholder Protection Rights Plan, as amended (2)
(11.0) Statement Re: Computation of Per Share Earnings (4)
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
January 12, 2001 - Press release regarding the Company's
announcement that Gary Geisel has been named President and Chief
Operating Officer of Provident and Provident Bank.
February 20, 2001 - Press release regarding the Company's
announcement that Provident reached an agreement to buy back all
of the Provident shares held by Mid-Atlantic Investors and its
affiliates.
(1) Incorporated by reference from Provident's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Provident's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, filed with the Commission on August
14, 1998.
(3) Incorporated by reference from Providents's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, filed with the Commission on May 10,
2000.
(4) Included in Note G to the Unaudited Consolidated Financial Statements on
Page 10 hereof.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION
--------------------------------
Registrant
November 8, 2001 /s/ Peter M. Martin
-------------------
Peter M. Martin
Chairman and Chief Executive Officer
November 8, 2001 /s/ Dennis A. Starliper
-------------------
Dennis A. Starliper
Chief Financial Officer
19