UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K/A
[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
None
Name of each exchange on which registered
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 II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 4
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 5
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 61
Signatures 62
Statements 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.
This Amendment No. 1 on Form 10-K/A is being filed with respect to the
registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2000 filed with the Securities and Exchange Commission ("SEC") on March 9, 2001
(the "Form 10-K"). This amendment is being filed in response to the review of
delinquencies and chargoffs in the $1.5 billion acquired loan portfolio as
disclosed in the Form 8-K filed on July 17, 2001. This amendment includes
certain enhanced disclosures, adjustments and reclassifications to the
Registrant's consolidated financial statements and notes thereto for the years
ended December 31, 2000, 1999 and 1998 in certain areas such as accounting
policies, loans, allowance for loan losses, interest income, trust preferred
securities and cash flows.
Except as provided in the next paragraph, the Form 10-K as amended hereby
continues to speak as of the date of the Form 10-K and the disclosures have not
been updated to speak to any later date. Any items in the Form 10-K that are
not expressly changed hereby shall be as set forth in the Form 10-K. All
information contained in this Amendent No. 1 and the Form 10-K is subject to
updating and supplementing as provided in the Company's periodic reports filed
with the SEC subsequent to the filing of the Form 10-K.
2
The restatement has been reflected in the following sections as it applies to
loan balances, charge-offs, provision for loan losses, allowance for loan
losses, interest income, interest expense, net interest income, non-interest
expense, income tax expense, net income, earnings per share, non-accrual and
past-due loans, borrowings and regulatory capital:
Item 6- Selected Financial Data-Table 1
Item 7- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Restatement of Prior Periods-Commentary
Financial Review-Commentary
Results of Operations
Net Interest Income-Commentary
Analysis of Changes in Net Interest Income- Table 2
Consolidated Average Balances, Interest Income and Expense and
Yields and Rates - Table 3
Provision for Loan Losses-Commentary
Non-Interest Expense-Commentary
Non-Interest Expense - Table 5
Income Taxes-Commentary
Fourth Quarter Results-Commentary
Consolidated Quarterly Results of Operations, Market Prices and
Dividend- Table 6 Financial Condition
Loans-Commentary
Loan Portfolio Summary - Table 9
Non-Performing Assets and Past Due Loans-Commentary
Presentation of Interest That Should Have Been Recorded
Non-Performing Assets and Past Due Loans - Table 10
Allowance for Loan Losses-Commentary
Loan Loss Experience Summary - Table 11
Allocation of Allowance for Loan Losses - Table 12
Investment Securities-Commentary
Liquidity and Sensitivity to Interest Rates
Liquidity-Commentary
Loan Maturities and Rate Sensitivity - Table 15
Stockholders' Equity-Commentary
Capital Components and Ratios - Table 16
Financial Review 1999/1998-Commentary
3
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 $.64 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,
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2000 1999 1998 1997(1) 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
Interest Income (tax-equivalent) $ 413,681 $ 353,341 $ 319,240 $ 280,167 $ 248,311
Interest Expense 258,677 207,421 189,868 156,718 137,354
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income (tax-equivalent) 155,004 145,920 129,372 123,449 110,957
Provision for Loan Losses 29,877 11,570 12,027 9,953 10,011
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 125,127 134,350 117,345 113,496 100,946
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 142,810 129,496 120,703 108,263 110,347
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 57,737 66,313 59,534 39,642 40,688
Income Tax Expense (tax-equivalent) 18,802 22,163 20,504 14,683 14,500
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 38,935 44,150 39,030 24,959 26,188
Extraordinary Item -- Gain on Debt Extinguishment,
net 770 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 39,705 $ 44,150 $ 39,030 $ 24,959 $ 26,188
===========================================================================================================================
Per Share Amounts:
Basic -- Net Income Before Extraordinary Item $ 1.42 $ 1.58 $ 1.39 $ 0.91 $ 0.97
-- Net Income 1.44 1.58 1.39 0.91 0.97
Diluted -- Net Income Before Extraordinary Item $ 1.39 $ 1.53 $ 1.34 $ 0.88 $ 0.93
-- Net Income 1.41 1.53 1.34 0.88 0.93
===========================================================================================================================
Cash Dividends Paid $ 0.64 $ 0.54 $ 0.45 $ 0.36 $ 0.28
===========================================================================================================================
Tax-Equivalent Adjustment (2) $ 983 $ 964 $ 1,133 $ 1,055 $ 832
===========================================================================================================================
Total Assets $5,499,443 $5,094,477 $4,675,897 $3,926,739 $3,485,618
Total Stockholders' Equity 310,306 274,599 296,077 270,182 238,798
Total Common Equity (3) 321,001 318,922 290,769 265,449 240,171
Return on Average Assets 0.73% 0.90% 0.90% 0.68% 0.79%
Return on Average Equity 14.40 15.46 13.75 9.90 11.53
Return on Average Common Equity 12.48 14.61 13.99 9.91 11.41
Stockholders' Equity to Assets 5.64 5.39 6.33 6.88 6.85
Average Equity to Average Assets 5.07 5.83 6.52 6.89 6.85
Dividend Payout Ratio 45.41 34.26 32.16 39.92 29.23
- ---------------------------------------------------------------------------------------------------------------------------
*See Note 3 to the Consolidated Financial Statements for information regarding
type and composition of restatements and the applicable periods.
(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 $1.22 and $1.18, 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.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 on this Form 10-K/A from amounts previously
stated in the Corporation's Form 10-K, as filed March 9, 2001. These changes
resulted in the Corporation restating earnings for the first quarter of 2001 and
the year ended December 31, 2000 (and each quarter in 2000).
In addition to the restatements previously mentioned, the restatements on
this Form 10-K/A for all periods presented reflect the reclassification of the
trust preferred securities from Corporation-Obligated Mandatorily Redeemable
Trust Preferred Securities to liabilities and 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 3 in Item 8--"Financial Statements and Supplementary Data".
The following discussion of operating results includes the impact of the
aforementioned losses and reclassifications.
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 $39.7 million or $1.41 per
share/diluted, a 10.1% decrease in net income and 7.8% decrease in diluted
earnings per share over 1999. Tax-equivalent net interest income grew 6.23%,
non-interest income, excluding securities gains, grew 9.4% while non-interest
expense increased 7.7%. The provision for loan losses more than doubled from
1999 recognizing the deterioration in the health care portfolio and increased
charge-offs from the acquired loan 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.
5
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 $9.1 million, or
6.23%, from 1999 as average earning assets grew $532 million over the prior
year. Net interest margin decreased to 2.93% from 3.07% in 1999.
Provident's tax-equivalent interest income increased $60.3 million, or
17.1%, during the year due to the growth in average earning assets along with a
40 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 $126 million increase in the loan portfolios, a
$486 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 $83 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 $26 million
reflecting higher loan outstandings. The yield on investments and loans
increased 42 basis points and 47 basis points, respectively. Interest lost from
non-accruing loans was $4.5 million compared to $735 thousand in 1999. Average
non-accrual loans for 2000 were approximately $40 million. This increase was
associated with health care credits, a majority of which were charged off or
sold during 2000.
Interest expense increased $51.3 million from 1999 resulting from a $514
million growth in average interest-bearing liabilities. The overall cost of
funds increased 54 basis points as total interest-bearing liabilities increased
55 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 55 basis points. The average rate paid on
borrowed funds increased 80 basis points during 2000.
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 $257 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 21 for further discussion of the impact of current trends on net
interest income in 2000.
6
Analysis of Changes in Net Interest Income
Table 2
(Restated)
2000/1999
---------------------------------------------------------------------------
Variance Due to Change In
---------------------------------------------------
(in thousands) Net Increase/ Average Average Average
(tax-equivalent basis) (Decrease) Rate Volume Rate/Volume
- ---------------------------------------------------------------------------------------------------------------
Interest Income From:
Loans:
Consumer $ 3,331 $ 10,153 ($6,464) ($358)
Commercial Business (1,180) 1,395 (2,462) (113)
Real Estate - Construction 8,801 1,265 6,793 743
Real Estate - Mortgage 14,931 1,941 12,181 809
Mortgage Loans Held for Sale (5,701) 1,088 (6,026) (763)
Other Short-Term Investments 153 (5) 166 (8)
U.S. Treasury and Government
Agencies and Corporations 2,708 (23) 2,752 (21)
Mortgage-Backed Securities 37,146 5,957 28,897 2,292
Municipal Securities (22) (3) (19) -
Other Debt Securities 173 140 33 -
- ---------------------------------------------------------------------------------------------------------------
Total Interest Income 60,340 18,777 39,466 2,097
- ---------------------------------------------------------------------------------------------------------------
Interest Expense On:
Demand/Money Market Deposits 3,008 1,411 1,452 145
Savings Deposits (819) (680) (146) 7
Certificates of Deposit 24,793 11,300 12,281 1,212
Individual Retirement Accounts (357) 140 (488) (9)
Borrowings 24,631 8,015 14,547 2,069
- ---------------------------------------------------------------------------------------------------------------
Total Interest Expense 51,256 23,743 24,687 2,826
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income $ 9,084 ($4,966) $ 14,779 ($729)
===============================================================================================================
(Restated)
1999/1998
---------------------------------------------------------------------------
Variance Due to Change In
---------------------------------------------------
(in thousands) Net Increase/ Average Average Average
(tax-equivalent basis) (Decrease) Rate Volume Rate/Volume
- ---------------------------------------------------------------------------------------------------------------
Interest Income From:
Loans:
Consumer $ 34,894 $ 1,044 $ 33,613 $ 237
Commercial Business 3,110 (1,573) 4,971 (288)
Real Estate - Construction (272) (949) 736 (59)
Real Estate - Mortgage (11,770) (2,260) (10,065) 555
Mortgage Loans Held for Sale 582 61 517 4
Other Short-Term Investments (126) (25) (113) 12
U.S. Treasury and Government
Agencies and Corporations (278) 18 (294) (2)
Mortgage-Backed Securities 751 (3,378) 4,326 (197)
Municipal Securities 258 (28) 290 (4)
Other Debt Securities 6,952 96 6,662 194
- ---------------------------------------------------------------------------------------------------------------
Total Interest Income 34,101 (5,718) 40,545 (726)
- ---------------------------------------------------------------------------------------------------------------
Interest Expense On:
Demand/Money Market Deposits 370 (1,697) 2,357 (290)
Savings Deposits (4,411) (4,347) (84) 20
Certificates of Deposit 26,119 412 25,588 119
Individual Retirement Accounts (1,322) (587) (784) 49
Borrowings (3,203) (2,322) (917) 36
- ---------------------------------------------------------------------------------------------------------------
Total Interest Expense 17,553 (6,424) 24,817 (840)
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income $ 16,548 $ 706 $ 15,728 $ 114
===============================================================================================================
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
(Restated) (Restated)
2000 1999
---------------------------------- -----------------------------
(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 $ 2,272,693 $ 186,453 8.20% $2,355,855 $ 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 3,390,692 280,091 8.26 3,264,198 254,208 7.79
----------- ---------- ---------- ---------
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 5,291,162 413,681 7.82 4,759,553 353,341 7.42
----------- ---------- ---------- ---------
Less: Allowance for Loan Losses (37,659) (36,989)
Cash and Due From Banks 78,126 68,725
Other Assets 151,117 121,354
----------- -----------
Total Assets $ 5,482,746 $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 1,254,942 80,981 6.45 997,445 56,350 5.65
----------- ---------- ----------- ---------
Total Interest-Bearing Liabilities 4,829,134 258,677 5.36 4,315,496 207,421 4.81
----------- ---------- ----------- ---------
Noninterest-Bearing Demand Deposits 292,360 255,259
Other Liabilities 43,144 39,752
Stockholders' Equity 318,108 302,136
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,482,746 $4,912,643
=========== ===========
Net Interest-Earning Assets $ 462,028 $ 444,057
=========== ===========
Net Interest Income (tax-equivalent) 155,004 145,920
Less: Tax-Equivalent Adjustment (983) (964)
---------- ---------
Net Interest Income $ 154,021 $144,956
========== =========
Net Yield on Interest-Earning Assets
(tax-equivalent) 2.93% 3.07%
(Restated)
1998
-----------------------------------------------
(dollars in thousands) Average Income/ Yield/
(tax-equivalent basis) Balance Expense Rate
- -----------------------------------------------------------------------------------------
Assets
Interest-Earning Assets:
Loans: (1)(2)
Consumer $ 1,920,378 148,228 7.72%
Commercial Business 325,209 27,170 8.35
Real Estate--Construction 125,650 11,837 9.42
Real Estate--Mortgage 517,068 41,011 7.93
------------- ---------
Total Loans 2,888,305 228,246 7.90
------------- ---------
Mortgage Loans Held for Sale 114,284 8,012 7.01
Other Short-Term Investments 5,043 235 4.66
US Treasury and Government
Agencies and Corporations 45,526 3,303 7.26
Mortgage-Backed Securities 1,101,684 74,358 6.75
Municipal Securities 23,036 1,797 7.80
Other Debt Securities 45,307 3,289 7.26
Equity Securities -- -- --
------------- ---------
Total Investment Securities (2) 1,215,553 82,747 6.81
------------- ---------
Total Interest-Earning Assets 4,223,185 319,240 7.56
------------- ---------
Less: Allowance for Loan Losses (38,831)
Cash and Due From Banks 60,562
Other Assets 105,659
-------------
Total Assets $ 4,350,575
=============
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 463,874 13,776 2.97
Savings Deposits 617,643 18,811 3.05
Certificates of Deposit 1,559,985 88,411 5.67
Individual Retirement Accounts 162,088 9,317 5.75
Borrowings 1,013,049 59,553 5.88
------------ ---------
Total Interest-Bearing Liabilities 3,816,639 189,868 4.97
------------ ---------
Noninterest-Bearing Demand Deposits 212,339
Other Liabilities 42,608
Stockholders' Equity 278,989
------------
Total Liabilities and Stockholders' Equity $ 4,350,575
============
Net Interest-Earning Assets $ 406,546
============
Net Interest Income (tax-equivalent) 129,372
Less: Tax-Equivalent Adjustment (1,133)
---------
Net Interest Income $ 128,239
=========
Net Yield on Interest-Earning Asset
(tax-equivalent) 3.06%
8
Consolidated Average Balances, Interest Income And Expense And Yields And Rates
Table 3 (continued)
1997 1996
----------------------------------------- ------------------------------------
(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 $ 1,402,359 $ 113,496 8.09% $ 1,053,279 $ 85,049 8.07 %
Commercial Business 292,788 25,607 8.75 268,158 23,807 8.88
Real Estate--Construction 125,565 12,968 10.33 124,584 12,574 10.09
Real Estate--Mortgage 624,604 50,227 8.04 577,515 45,813 7.93
-------------- ---------- ------------ ---------
Total Loans 2,445,316 202,298 8.27 2,023,536 167,243 8.26
-------------- ---------- ------------ ---------
Mortgage Loans Held for Sale 37,662 2,851 7.57 68,112 4,950 7.27
Other Short-Term Investments 6,023 263 4.37 8,949 438 4.89
US Treasury and Government
Agencies and Corporations 90,709 6,437 7.10 108,368 7,432 6.86
Mortgage-Backed Securities 914,196 64,531 7.06 929,786 63,404 6.82
Municipal Securities 18,875 1,512 8.01 11,917 998 8.37
Other Debt Securities 28,174 2,275 8.07 46,277 3,562 7.70
Equity Securities -- -- -- 2,983 284 9.52
-------------- ---------- ------------ ---------
Total Investment Securities (2) 1,051,954 74,755 7.11 1,099,331 75,680 6.88
-------------- ---------- ------------ ---------
Total Interest-Earning Assets 3,540,955 280,167 7.91 3,199,928 248,311 7.76
-------------- ---------- ------------ ---------
Less: Allowance for Loan Losses (33,017) (27,985)
Cash and Due From Banks 57,923 55,568
Other Assets 89,650 92,621
-------------- ------------
Total Assets $ 3,655,511 $ 3,320,132
============== ============
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities:
Demand/Money Market Deposits $ 403,128 11,347 2.81 $ 380,913 11,009 2.89
Savings Deposits 620,267 20,450 3.30 621,995 17,100 2.75
Certificates of Deposit 1,194,202 67,917 5.69 922,616 53,493 5.80
Individual Retirement Accounts 111,252 6,290 5.65 105,680 6,134 5.80
Borrowings 866,502 50,714 5.85 872,554 49,618 5.69
------------- --------- ----------- ---------
Total Interest-Bearing Liabilities 3,195,351 156,718 4.90 2,903,758 137,354 4.73
-------------- --------- ----------- ---------
Noninterest-Bearing Demand Deposits 176,645 158,635
Other Liabilities 31,555 28,253
Stockholders' Equity 251,960 229,486
-------------- ------------
Total Liabilities and Stockholders' Equity $ 3,655,511 $ 3,320,132
-------------- ------------
Net Interest-Earning Assets $ 345,604 $ 296,170
============== ============
Net Interest Income (tax-equivalent) 123,449 110,957
Less: Tax-Equivalent Adjustment (1,055) (832)
--------------- -------------
Net Interest Income $ 122,394 $ 110,125
=============== =============
Net Yield on Interest-Earning Asset (tax-equivalent) 3.49 % 3.47 %
(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.
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
Corporation classifies in accordance with regulatory requirements. The provision
for loan losses was $29.9 million, up from $11.6 million in 1999. The increase
in the provision was to address the deterioration in the health care portfolio
and increased charge-offs in the acquired loan portfolio. The majority of the
increase in charge-offs in the acquired loan portfolio can be directly
attributed to the bankruptcy of a third party servicer in 2000 and to the
seasoning of the 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 $27.4 million in 2000 compared to $16.4 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, a $5.0 million loss on
the sale of a second health care loan and increased charge-offs in the acquired
loan portfolio. Net charge-offs as a percentage of average loans was .81% in
2000 compared to .50% in 1999. Non-accrual loans ended the year at $33.6 million
or 1.00% of loans outstanding, a decrease of $6.4 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 - 18.
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 $50,884 $39,541 $32,624 $26,703 $20,600
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 5,297 3,319 2,721 2,719 3,937
- ------------------------------------------------------------------------------------------
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.
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.
10
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 $143 million represented a $13 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
(Restated) (Restated) (Restated)
(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 --
Other Non-Interest Expense 12,241 9,590 8,971 8,543 7,723
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $142,810 $129,496 $120,703 $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. 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.
Income Taxes
Provident recorded income tax expense of $17.8 million on pre-tax income of
$56.8 million for an effective tax rate of 31.4%. 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 $11.0 million, or $.39 per share on a diluted
basis, in the fourth quarter of 2000, a decrease of $555 thousand, or 5%, over
the $11.5 million, or $.40 per share on a diluted basis, recorded in the same
period last year. The lower earnings were principally due to a 45% increase in
the provision for loan losses or $1.6 million. Net interest income remained
relatively stable. A rise in operating expenses was offset by a corresponding
increase in non-interest income.
Tax-equivalent net interest income in the fourth quarter rose 1.7% or $653
thousand to $39.1 million. This increase was mainly related to a $511 million
rise in earning assets offset in part by a 32 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 decreased 15 basis points while the costs
of funds increased 43 basis points.
The Corporation recorded a provision for loan losses of $5.3 million during
the quarter to provide for loan growth in the portfolio as well as an increase
in net charge-offs, primarily related to the acquired loan portfolio.
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 $4.4 million to $37.5 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 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.
11
Table 6 presents quarterly financial data as restated and as reported for
2000 and 1999.
Consolidated Quarterly Results of Operations, Market Prices and Dividends
Table 6
As Restated: 2000
-------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- ----------------------------------------------------------------------------------------------------------
Interest Income $ 106,763 $ 107,148 $ 101,545 $ 97,242
Interest Expense 67,650 68,688 63,760 58,579
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 39,113 38,460 37,785 38,663
Provision for Loan Losses 5,257 7,285 13,035 4,300
- ----------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 33,856 31,175 24,750 34,363
Non-Interest Income 18,883 17,148 16,600 14,290
Net Securities Gains 641 -- 7,779 79
Non-Interest Expense 37,548 35,758 35,459 34,045
- ----------------------------------------------------------------------------------------------------------
Income Before Income Taxes 15,832 12,565 13,670 14,687
Income Tax Expense 4,857 4,030 4,610 4,322
- ----------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 10,975 $ 8,535 $ 9,060 $ 10,365
Extraordinary Item -- -- -- 770
- ----------------------------------------------------------------------------------------------------------
Net Income $ 10,975 $ 8,535 $ 9,060 $ 11,135
- ----------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.40 $ 0.31 $ 0.33 $ 0.40
Net Income - Diluted $ 0.39 $ 0.31 $ 0.32 $ 0.39
Market Prices: High 20.06 16.07 15.76 16.10
Low 15.60 12.68 12.56 12.59
Cash Dividends Paid 0.171 0.167 0.154 0.150
===========================================================================================================
As Restated: 1999
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- -------------------------------------------------------------------------------------------------------
Interest Income $ 95,055 $ 89,962 $ 85,988 $ 81,372
Interest Expense 55,609 52,945 50,400 48,467
- -------------------------------------------------------------------------------------------------------
Net Interest Income 39,446 37,017 35,588 32,905
Provision for Loan Losses 3,635 3,215 2,759 1,961
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 35,811 33,802 32,829 30,944
Non-Interest Income 14,680 15,451 15,416 15,600
Net Securities Gains -- -- 375 (63)
Non-Interest Expense 33,192 32,730 32,168 31,406
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,299 16,523 16,452 15,075
Income Tax Expense 5,769 5,218 5,462 4,750
- -------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 11,530 $ 11,305 $ 10,990 $ 10,325
Extraordinary Item -- -- -- --
- -------------------------------------------------------------------------------------------------------
Net Income $ 11,530 $ 11,305 $ 10,990 $ 10,325
- -------------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.41 $ 0.40 $ 0.39 $ 0.37
Net Income - Diluted $ 0.40 $ 0.39 $ 0.38 $ 0.36
Market Prices: High 20.24 22.22 25.81 24.51
Low 15.70 18.31 19.50 21.32
Cash Dividends Paid 0.145 0.141 0.130 0.125
=======================================================================================================
12
As Reported: 2000
-------------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------
Interest Income $ 107,228 $ 107,483 $ 101,827 $ 98,014
Interest Expense 66,100 67,151 62,273 57,595
- ----------------------------------------------------------------------------------------------
Net Interest Income 41,128 40,332 39,554 40,419
Provision for Loan Losses 3,257 3,285 13,035 4,300
- ----------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 37,871 37,047 26,519 36,119
Non-Interest Income 18,883 17,148 16,600 14,290
Net Securities Gains 641 -- 7,779 79
Non-Interest Expense 39,098 37,295 36,946 35,029
- ----------------------------------------------------------------------------------------------
Income Before Income Taxes 18,297 16,900 13,952 15,459
Income Tax Expense 5,722 5,545 4,707 4,594
- ----------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 12,575 $ 11,355 $ 9,245 $ 10,865
Extraordinary Item -- -- -- 770
- ----------------------------------------------------------------------------------------------
Net Income $ 12,575 $ 11,355 $ 9,245 $ 11,635
- ----------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.46 $ 0.42 $ 0.34 $ 0.42
Net Income - Diluted $ 0.45 $ 0.41 $ 0.33 $ 0.41
Market Prices: High 20.06 16.07 15.76 16.10
Low 15.60 12.68 12.56 12.59
Cash Dividends Paid 0.171 0.167 0.154 0.150
==============================================================================================
As Reported:
1999
----------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
Interest Income $ 95,055 $ 89,962 $ 85,988 $ 81,372
Interest Expense 54,894 52,171 49,565 47,631
- -------------------------------------------------------------------------------------------------
Net Interest Income 40,161 37,791 36,423 33,741
Provision for Loan Losses 3,635 3,215 2,759 1,961
- -------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 36,526 34,576 33,664 31,780
Non-Interest Income 14,680 15,451 15,416 15,600
Net Securities Gains -- -- 375 (63)
Non-Interest Expense 33,907 33,504 33,003 32,242
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,299 16,523 16,452 15,075
Income Tax Expense 5,769 5,218 5,462 4,750
- -------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 11,530 $ 11,305 $ 10,990 $ 10,325
Extraordinary Item -- -- -- --
Net Income $ 11,530 $ 11,305 $ 10,990 $ 10,325
- -------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.41 $ 0.40 $ 0.39 $ 0.37
Net Income - Diluted $ 0.40 $ 0.39 $ 0.38 $ 0.36
Market Prices: High 20.24 22.22 25.81 24.51
Low 15.70 18.31 19.50 21.32
Cash Dividends Paid 0.145 0.141 0.130 0.125
=================================================================================================
*Income before extraordinary item for first quarter 2000 was $.37 and $.37 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 Supervalue 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
----------------------- ----------------------- -----------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------------
Noninterest-Bearing $ 292,360 -- % $ 255,259 -- % $ 212,339 -- %
Money Market/Demand 599,030 2.86 543,257 2.60 463,874 2.97
Savings 608,617 2.23 614,869 2.34 617,643 3.05
Time:
Certificates of Deposit 2,227,174 6.26 2,011,484 5.69 1,559,985 5.67
Individual Retirement Accounts 139,371 5.48 148,441 5.39 162,088 5.75
------------ ------------ ------------
Total Average
Balance/Rate $ 3,866,552 4.60 % $ 3,573,310 4.23 % $ 3,015,929 4.32 %
============ ============ ============
Total Year-End Balance $ 3,954,770 $ 3,808,528 $ 3,419,557
============ ============ ============
1997 1996
----------------------- -------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------
Noninterest-Bearing $ 176,645 -- % $ 158,635 -- %
Money Market/Demand 403,128 2.81 380,913 2.89
Savings 620,267 3.30 621,995 2.75
Time:
Certificates of Deposit 1,194,202 5.69 922,616 5.80
Individual Retirement Accounts 111,252 5.65 105,680 5.80
------------ ------------
Total Average
Balance/Rate $ 2,505,494 4.23 % $ 2,189,839 4.01 %
============ ============
Total Year-End Balance $ 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 based on historical loss experience. 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.
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 inherent 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.
14
The following table sets forth information concerning the Bank's loan
portfolio by type of loan at December 31.
Loan Portfolio Summary
Table 9
(Restated) (Restated)
(dollars in thousands) 2000 % 1999 % 1998 %
- -----------------------------------------------------------------------------------------------------------
Consumer $2,017,436 60.0% $2,201,608 69.2% $2,154,557 69.5%
Commercial Business 356,041 10.6 363,059 11.4 375,930 12.1
Real Estate -- Construction:
Residential 109,046 3.2 89,513 2.8 89,777 2.9
Commercial 156,872 4.7 62,362 2.0 34,668 1.1
Real Estate -- Mortgage:
Residential 476,030 14.1 245,401 7.7 238,282 7.7
Commercial 249,769 7.4 218,841 6.9 206,997 6.7
- -----------------------------------------------------------------------------------------------------------
Total Loans $3,365,194 100.0% $3,180,784 100.0% $3,100,211 100.0%
===========================================================================================================
(dollars in thousands) 1997 % 1996 %
- ------------------------------------------------------------------------------
Consumer $1,667,094 61.7% $1,211,971 54.0%
Commercial Business 288,289 10.7 294,844 13.1
Real Estate -- Construction:
Residential 99,926 3.7 112,072 5.0
Commercial 25,154 0.9 9,470 0.4
Real Estate -- Mortgage:
Residential 362,012 13.4 355,566 15.8
Commercial 258,593 9.6 263,950 11.7
- ------------------------------------------------------------------------------
Total Loans $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 $86 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.
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.
15
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 vast majority of 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. 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. For further details on the Corporation's charge-off
policy, consult Note 1 of the financial statements on page 31.
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 $6.4 million, due mainly to a decrease in commercial
business non-performing loans. 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 $36 million and $17 million, respectively. (See the discussion under
Loans on page 14) The ratio of total non-performing loans to year-end loans
decreased to 1.00% compared to 1.26% 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.
(Restated)
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 $4,508
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: (Restated) (Restated)
Consumer $12,375 $11,097 $ -- $ -- $ 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 33,595 40,005 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 $36,336 $42,938 $16,425 $12,675 $29,430
==========================================================================================================
Past Due Loans:
Consumer $11,110 $ 8,937 $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 $16,749 $14,749 $27,993 $25,276 $ 8,060
==========================================================================================================
Ratios:
Total Non-Performing
Loans to Year-End Loans 1.00% 1.26% 0.37% 0.36% 0.84%
Total Non-Performing Assets
to Year-End Assets 0.66 0.84 0.35 0.32 0.84
- -------------------------------------------------------------------------------------------------------------
17
Allowance for Loan Losses
The Corporation maintains an allowance for loan losses, which is available to
absorb probable inherent 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 (Restated) (Restated)
(dollars in thousands) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 36,445 $ 42,739 $ 36,861 $ 30,361 $ 27,524
Allowance of Acquired Company 404 - - - -
Provision for Loan Losses 29,877 11,570 12,027 9,953 10,011
Allowance Related to Securitized Loans (950) (1,500) - - -
Loans Charged-Off:
Consumer 15,991 11,275 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 29,200 17,892 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 27,402 16,364 6,149 3,453 7,174
============================================================================================================================
Balance at End of Year $ 38,374 $ 36,445 $ 42,739 $ 36,861 $ 30,361
============================================================================================================================
Balances:
Loans -- Year-End $3,365,194 $3,180,784 $3,100,211 $2,701,068 $2,247,873
Loans -- Average 3,390,692 3,264,198 2,888,305 2,445,316 2,023,536
Ratios:
Net Loans Charged-Off to Average Loans 0.81% 0.50% 0.21% 0.14% 0.35%
Allowance for Loan Losses to Year-End Loans 1.14 1.15 1.38 1.36 1.35
- ----------------------------------------------------------------------------------------------------------------------------
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
inherent losses have been provided for in the allowance for loan losses. During
2000, the loan loss allowance increased $1.9 million to $38.4 million at year-
end. This increase is related to the increase in credit exposure as the total
loans increased $184 million, $231 million from the residential mortgage loans.
The allowance as a percentage of total loans was 1.14% at December 31, 2000
compared to 1.15% at December 31, 1999. The allowance for loan losses as a
percentage of non-accrual loans was 114% at December 31, 2000, compared to 91%
the prior year. The portion of the allowance which is allocated to non-accrual
loans, is determined by estimating the inherent loss on each credit after giving
consideration to the value of underlying collateral. The increase in the
consumer portion of the allowance allocation was the product of increased
historical losses experienced in the acquired loan portfolio.
The Corporation maintains a loan classification and review system to
identify those loans with a higher than normal risk of uncollectibility.
Estimated inherent 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 (Restated) (Restated)
(in thousands) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Consumer $10,409 $16,658 $ 5,145 $ 3,004 $ 2,529
Commercial Business 12,958 10,086 8,636 7,680 2,173
Real Estate -- Construction:
Residential 1,875 1,415 1,858 1,760 1,557
Commercial 2,911 1,095 573 426 169
Real Estate -- Mortgage:
Residential 487 230 244 365 159
Commercial 4,628 3,835 3,427 4,929 2,864
Unallocated 5,106 3,126 22,856 18,697 20,910
- -------------------------------------------------------------------------------------------------
Total Allowance for Loan Losses $38,374 $36,445 $42,739 $36,861 $30,361
=================================================================================================
18
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.
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 3.5%
Mortgage-Backed Securities 1,644,202 87.6 1,469,605 87.9 992,089 82.8
Municipal Securities 26,080 1.4 26,205 1.6 27,732 2.3
Other Debt Securities 118,822 6.3 119,250 7.1 136,397 11.4
- ----------------------------------------------------------------------------------------------------------
Total Securities
Available for Sale 1,876,509 100.0 1,671,507 100.0 1,198,511 100.0
- ----------------------------------------------------------------------------------------------------------
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% $1,198,511 100.0%
==========================================================================================================
Total Portfolio Yield 7.1% 7.0% 6.6%
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 % 1996 %
- -------------------------------------------------------------------------------------
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 55,576 5.7% $ 71,882 6.8%
Mortgage-Backed Securities 885,491 90.0 847,194 80.4
Municipal Securities 19,391 2.0 19,091 1.8
Other Debt Securities 22,783 2.3 29,987 2.8
- -------------------------------------------------------------------------------------
Total Securities
Available for Sale 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 $983,241 100.0% $1,054,391 100.0%
=====================================================================================
Total Portfolio Yield 7.0% 6.9%
- -------------------------------------------------------------------------------------
19
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.
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%
==================================================================================================================
Over Unrealized
Ten Years 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 233,163 6.5 (1,196) 1,644,203 7.0
Municipal Securities 1,049 7.7 238 26,080 7.7
Other Debt Securities 137,752 7.5 (19,831) 118,821 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.
20
Loan repayments are another source of liquidity. Scheduled loan repayments
during the year 2000 are $449 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: (Restated) (Restated) (Restated) (Restated) (Restated)
Consumer $282,643 $ 769,046 $ 965,747 $2,017,436 60.0%
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 4.7
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 $448,573 $1,436,356 $1,480,265 $3,365,194 100.0%
===================================================================================================================
Rate Sensitivity:
Predetermined Rate $286,031 $1,054,686 $1,012,776 $2,353,493 69.9%
Variable or Adjustable Rate 162,542 381,670 467,489 1,011,701 30.1
- -------------------------------------------------------------------------------------------------------------------
Total Loans $448,573 $1,436,356 $1,480,265 $3,365,194 100.0%
===================================================================================================================
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 6.2%, 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 that 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. The
Corporation also has issued an additional $70 million of trust preferred
securities which are included in long-term debt with an average rate of 9%.
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.
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 on the balance sheet
resulting in a transition adjustment through equity and earnings depending on
the type of hedging relationship. This transition adjustment through earnings
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 FAS 133 is not expected to adversely impact the earnings from
continuing operations of the Corporation in 2001.
21
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 20 -
Regulatory Capital. At December 31, 2000, total stockholders' equity was $310
million, a $35.7 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.
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 10.31% 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 9.37%.
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 6.77% 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 (Restated) (Restated)
Tier 1 Capital $ 380,348 $ 358,771
Total Capital 418,772 392,216
Risk-Weighted Assets 4,060,447 3,903,997
Quarterly Average Assets 5,615,490 5,056,385
Ratios
Leverage Capital 6.77% 7.10%
Tier 1 Capital 9.37 9.19
Total Capital 10.31 10.05
Financial Review 1999/1998
The Corporation recorded net income in 1999 of $44.2 million or $1.53 per
share/diluted, a 14% increase over 1998. The growth in net earnings was
attributable to a $16.7 million rise in net interest income offset in part by
lower non-interest income of $1.4 million and higher operating costs of $8.8
million.
Tax-equivalent net interest income for 1999 increased $16.5 million, or
12.8%, from 1998 as average earning assets grew $536 million over the prior
year. Net interest margin increased slightly to 3.07% compared to 3.06% 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 $376 million increase in the loan portfolios, $153
million in investments and $7 million in loans held for sale. Consumer loans
grew $435 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 11 basis points,
respectively. Interest lost from non-accruing loans was $735 thousand compared
to $850 thousand in 1998.
Interest expense increased $17.6 million from 1999 resulting from a $499
million growth in average interest-bearing liabilities. The overall cost of
funds declined 17 basis points as total interest-bearing liabilities decreased
16 basis points mainly due to lower rate environment for deposit products. The
average rate paid on borrowed funds decreased 23 basis points during 1999.
The increase in average interest-bearing liabilities reflected a $499
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 $16 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 $16.4 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 and increased
charge-offs in the acquired loan portfolio. Net charge-offs as a percentage of
average loans was .50% in 1999 compared to .21% in 1998. Non-accrual loans
ended the year at $40.0 million or 1.26% of loans outstanding, an increase of
$28.5 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 2.3% to $61.0 million. Excluding net securities gains,
non-interest income increased $4.7 million or 8.5%.
Deposit service charges rose 21.2% over the prior year due mainly to a $4.4
million increase in retail demand deposit service fees and a $2.6 million
increase in bankcard income. 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 decreased $1.2 million from 1998, mainly due to various non-recurring
sources of income.
22
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 $129 million represented a $9 million
increase from 1998 expenses.
Salaries and benefits increased $4.5 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. All other non-interest expenses were up by $1.5
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 20 and refer to the disclosures on
off-balance sheet items in Item 8 - Financial Statements and Supplementary Data
contained herein.
23
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Provident Bankshares Corporation and Subsidiaries
Page
Report of Independent Accountants 25
For the Three Years Ended December 31, 2000, 1999 and 1998
Consolidated Statement of Income 26
Consolidated Statement of Changes in Stockholders' Equity 28
Consolidated Statement of Cash Flows 29
Consolidated Statement of Comprehensive Income 30
Consolidated Statement of Condition at December 31, 2000 and 1999 27
Notes to Consolidated Financial Statements 31-60
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.
24
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 each of the three years in the period ended December 31, 2000 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.
As discussed in Notes 2 and 3 to the accompanying consolidated financial
statements, the Corporation has restated its financial statements as of December
31, 2000 and 1999 and for each of the three years in the period ended December
31, 2000.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 17, 2001 (except with respect to the matters discussed in Notes 25, 2
and 3, as to which the dates are respectively, February 21, 2001, May 11, 2001
and August 6, 2001).
25
Consolidated Statement of Income
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Interest Income (Restated) (Restated) (Restated)
Interest and Fees on Loans $ 281,942 $ 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 412,698 352,377 318,107
- -----------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on Deposits 177,696 151,071 130,315
Interest on Borrowings 80,981 56,350 59,553
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 258,677 207,421 189,868
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income 154,021 144,956 128,239
Less: Provision for Loan Losses 29,877 11,570 12,027
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 124,144 133,386 116,212
- -----------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 50,884 39,541 32,624
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 7,687 6,674 7,825
- -----------------------------------------------------------------------------------------------------------------------
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
Other Non-Interest Expense 32,159 27,916 26,372
- -----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 142,810 129,496 120,703
- -----------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 56,754 65,349 58,401
Income Tax Expense 17,819 21,199 19,371
- -----------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 38,935 44,150 39,030
Extraordinary Item -- Gain on Debt Extinguishment, Net 770 - -
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 39,705 $ 44,150 $ 39,030
=======================================================================================================================
Basic Earnings Per Share
Income Before Extraordinary Item $ 1.42 $ 1.58 $ 1.39
Net Income 1.44 1.58 1.39
=======================================================================================================================
Diluted Earnings Per Share
Income Before Extraordinary Item $ 1.39 $ 1.53 $ 1.34
Net Income 1.41 1.53 1.34
=======================================================================================================================
The accompanying notes are an integral part of these statements.
26
Consolidated Statement of Condition
Provident Bankshares Corporation and Subsidiaries
December 31,
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------
Assets (Restated) (Restated)
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 2,017,436 2,201,608
Commercial Business 356,041 363,059
Real Estate -- Construction 265,918 151,875
Real Estate -- Mortgage 725,799 464,242
- ---------------------------------------------------------------------------------------------------------
Total Loans 3,365,194 3,180,784
Less: Allowance for Loan Losses 38,374 36,445
- ---------------------------------------------------------------------------------------------------------
Net Loans 3,326,820 3,144,339
- ---------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 45,805 44,277
Accrued Interest Receivable 47,281 46,507
Other Assets 98,241 64,713
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 5,499,443 $ 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 1,190,775 967,603
Other Liabilities 43,592 43,747
- ---------------------------------------------------------------------------------------------------------
Total Liabilities 5,189,137 4,819,878
- ---------------------------------------------------------------------------------------------------------
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 December 31, 1999, respectively 29,709 26,226
Capital Surplus 251,184 203,364
Retained Earnings 104,488 102,587
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 December 31, 1999, respectively (64,380) (13,255)
- ---------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 310,306 274,599
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,499,443 $ 5,094,477
=========================================================================================================
The accompanying notes are an integral part of these statements.
27
Consolidated Statement of Changes in Stockholders' Equity
Provident Bankshares Corporation and Subsidiaries
Accumulated Total
Other Treasury Stock-
Common Capital Retained Comprehensive Stock Comprehensive holders'
(in thousands, except per share data) Stock Surplus Earnings Income (Loss) at Cost Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
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 ($.45 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 Loss, Net of Tax:
Unrealized Loss on Debt Securities, Net of
Reclassification Adjustment (see Note 16) - - (49,631) - (49,631) (49,631)
-------------
Comprehensive Loss $ (5,481)
=============
Dividends Paid ($.54 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 - - 39,705 - - $ 39,705 39,705
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 $ 73,333
=============
Dividends Paid ($.64 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 $104,488 $(10,695) $(64,380) $310,306
====================================================================================================================================
The accompanying notes are an integral part of these statements.
28
Consolidated Statement Of Cash Flows
Provident Bankshares Corporation and Subsidiaries
(in thousands)
Twelve Months Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities (Restated) (Restated) (Restated)
Net Income $ 39,705 $ 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 29,877 11,570 12,027
Provision for Deferred Income Tax (Benefit) 12,043 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 (1,890) 286 (23,551)
- ---------------------------------------------------------------------------------------------------------------------------
Total Adjustments 74,350 237,779 (150,796)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 114,055 281,929 (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 (366,594) (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 (186,656) (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 729,917 26,000 514,618
Payments and Maturities of Long-Term Debt (602,020) (134,121) (209,218)
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 Period $ 96,544 $ 92,599 $ 74,563
===========================================================================================================================
Supplemental Disclosures
- ---------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 194,595 $ 138,841 $ 114,134
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.
29
Consolidated Statement of Comprehensive Income
Provident Bankshares Corporation and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------
(Restated)
Net Income $39,705 $ 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) $73,333 $ (5,481) $39,605
=========================================================================================
The accompanying notes are an integral part of these statements.
30
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.
As discussed in Note 3, certain financial data in this Form 10-K/A has been
restated. All financial data in this Form 10-K/A reflects the impact of the
restatement.
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.
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. Credit losses do not affect the valuation due to FNMA's
full guarantee to the Corporation for losses on loans collateralizing the
securities. These loans were securitized 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.
Loans 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
lower of cost or 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.
31
Consumer credit secured by residential property is evaluated for
collectibility at 180 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 270
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.
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.
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.
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
32
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.
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.
33
Note 2 - Stock Dividend
In May, 2001, the Corporation paid a 5% Stock Dividend resulting in the
distribution of 1,219,542 common shares. The impact of these dividends has been
reflected in all earnings per share amounts in the financial statement and
accompanying notes.
Note 3 - Restatement Of Previously Reported Results Of Operations
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 on
this Form 10-K/A from amounts previously stated in the Corporation's Form 10-K,
as filed March 9, 2001. 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 financial
statements reflect the reclassification of the trust preferred securities from
Corporation-Obligated Madatorily Redeemable Trust Preferred Securities to
liabilities and 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.
34
The table below provides a summary of selected balances as reported and as
restated, if impacted by the restatements described above.
(dollars in thousands, except per share data) 2000 1999 1998
----------- ------------ ------------
As Reported Net Income $ 44,810
Increase to the Provision for Loan Losses, net of tax (3,900)
Reversal of Accrued but Uncollected Interest
Income and Write-off of Loan Related Premium, net of tax (1,205)
- ------------------------------------------------------------------------
Total Decrease in Net Income (5,105)
- ------------------------------------------------------------------------
Total Restated Net Income $ 39,705
========================================================================
Earnings Per Share - Basic
As Reported $1.63
As Restated 1.44
Earnings Per Share - Diluted
As Reported $1.60
As Restated 1.41
Total Interest Income
As Reported $ 414,552
As Restated 412,698
Total Interest Expense
As Reported $ 253,119 $ 204,261 $ 187,509
As Restated 258,677 207,421 189,868
Net Interest Income
As Reported $ 161,433 $ 148,116 $ 130,598
As Restated 154,021 144,956 128,239
Provision for Loan Losses
As Reported $ 23,877
As Restated 29,877
Net Interest Income after
Provision for Loan Losses
As Reported $ 137,556 $ 136,546 $ 118,571
As Restated 124,144 133,386 116,212
Total Non-Interest Expense
As Reported $ 148,368 $ 132,656 $ 123,062
As Restated 142,810 129,496 120,703
Income Before Income Taxes
As Reported $ 64,608
As Restated 56,754
Income Tax Expense
As Reported $ 20,568
As Restated 17,819
Income Before Extraordinary Item
As Reported $ 44,040
As Restated 38,935
Net Income
As Reported $ 44,810
As Restated 39,705
Loan Charge-offs, net of recoveries
As Reported $ 22,451 $ 13,029
As Restated 27,402 16,364
Allowance for Loan Losses
As Reported $ 40,660 $ 39,780
As Restated 38,374 36,445
Loans
As Reported $3,373,771 $3,184,119
As Restated 3,365,194 3,180,784
Total Assets
As Reported $5,504,548
As Restated 5,499,443
Total Liabilities
As Reported $5,121,168 $4,780,716 $4,340,582
As Restated 5,189,137 4,819,878 4,379,820
Stockholders' Equity
As Reported $ 315,411
As Restated 310,306
35
Note 4 - 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 5 - 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 $.02 per share, after taxes of $415 thousand was
recognized.
Note 6 -- 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.
36
Note 7 -- Investment Securities
The aggregate amortized cost and market values of the available for sale
securities portfolio at December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
December 31, 2000
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 83,069 $ 4,349 $ 13 $ 87,405
Mortgage-Backed Securities 1,645,398 10,585 11,781 1,644,202
Municipal Securities 25,842 271 33 26,080
Other Debt Securities 138,653 11 19,842 118,822
- ----------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,892,962 $ 15,216 $ 31,669 $ 1,876,509
- ----------------------------------------------------------------------------------------------------------------
December 31, 1999
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 56,635 $ - $ 188 $ 56,447
Mortgage-Backed Securities 1,519,830 3,638 53,863 1,469,605
Municipal Securities 26,624 141 560 26,205
Other Debt Securities 136,609 - 17,359 119,250
- ----------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,739,698 $ 3,779 $ 71,970 $ 1,671,507
- ----------------------------------------------------------------------------------------------------------------
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.
37
Note 8 -- 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:
(Restated) (Restated)
(in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Balance at Beginning of the Year $ 36,445 $ 42,739 $ 36,861
Allowance of Acquired Company 404 -- --
Provision for Loan Losses 29,877 11,570 12,027
Allowance Related to Securitized Loans (950) (1,500) --
Loans Charged-Off (29,200) (17,892) (7,738)
Less: Recoveries of Loans
Previously Charged-Off 1,798 1,528 1,589
- ---------------------------------------------------------------------------------------------------
Net Loans Charged-Off (27,402) (16,364) (6,149)
- ---------------------------------------------------------------------------------------------------
Balance at End of the Year $ 38,374 $ 36,445 $ 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.
38
Note 9 -- 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.
39
Note 10 -- 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 11 -- Borrowings
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 %
===========================================================================
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 %
===================================================================================================================================
40
Note 12 - Long-Term Debt
Long-term debt consisted of Federal Home Loan Bank Advances of $654.6 million,
$68.0 million in trust preferred securities and $70.4 million of five year term
repurchase agreements at December 31, 2000. At December 31, 1999 long-term debt
was composed of $627.1 million in Federal Home Loan Bank advances and $39.2
million in trust preferred securities. The principal maturities of the
components of long-term debt at December 31, 2000, are presented below.
(in thousands) (Restated)
- --------------------------------------------------------------------
2001 $ 28,458
2002 141,000
2003 151,698
2004 165,000
2005 136,000
After 2005 170,786
- --------------------------------------------------------------------
Total Long-Term Debt $ 792,942
====================================================================
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.
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 and are
presented net of issuance costs as long-term debt in the Consolidated Statement
of Condition. 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.
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.
41
Note 13 -- 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.
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 $ 0.28 $ 0.63 $ 0.35
Options Available for Granting
under the Option Plan 162,705 732,168 1,217,816
- ---------------------------------------------------------------------------------------------------------------------
42
The table below provides information on the stock options outstandings at
December 31, 2000.
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Weighted Avg.
Exercise Price Common Weighted Avg. Remaining Common Weighted Avg.
Range Shares Exercise Price Contractual Life Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------
$0.00-3.03 66,594 $ 0.84 1.1 66,594 $ 0.84
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
=================================================== ==================================
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:
(in thousands, except per share data) 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:
(Restated)
(in thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------
Net Income:
As Reported $39,705 $44,150 $39,030
Pro Forma 39,592 43,947 38,959
Basic Earnings Per Share:
As Reported $ 1.44 $ 1.58 $ 1.39
Pro Forma 1.44 1.57 1.39
Diluted Earnings Per Share:
As Reported $ 1.41 $ 1.53 $ 1.34
Pro Forma 1.41 1.52 1.34
Note 14 -- 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.
43
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 Corporation 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 Corporation's investment portfolio.
Accordingly, no gain or loss was recorded on these transactions. These
securities are valued at fair market value along with the remaining securities.
These assets were securitized with full recourse back to the Corporation 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 by the Corporation 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.
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 December 31, 2001.
Retained
(in thousands) FNMA Securities
- -----------------------------------------------------------------------
Carrying Amount/Fair Value of Retained Interests $588,457
Weighted-Average Life in Years 2.5
Annual Prepayment Assumption 27.1%
Impact on Fair Value of 10% Adverse Change $ (1,297)
Impact on Fair Value of 20% Adverse Change (2,496)
Annual Cash Flow Discount Rate 7.45%
Impact on Fair Value of 10% Adverse Change $(9,465)
Impact on Fair Value of 20% Adverse Change (22,628)
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.
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 - - - - - 6.17% 6.17%
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, January 1, 1998 $ 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 15 -- 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: (Restated) (Restated) (Restated)
Other Loan Fees $ 2,390 $ 3,355 $ 5,104
Other Non-Interest Income 5,297 3,319 2,721
- -------------------------------------------------------------------------------
Total Other Non-Interest Income $ 7,687 $ 6,674 $ 7,825
- -------------------------------------------------------------------------------
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 16 -- 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.
(Restated)
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------
Current Income Tax Expense (Benefit):
Federal $ 6,120 $ 18,803 $ 22,422
State 71 (437) (110)
- -----------------------------------------------------------------------------
Total Current 6,191 18,366 22,312
Deferred Income Tax Expense (Benefit) 12,043 2,833 (2,941)
- -----------------------------------------------------------------------------
Total Income Tax Expense $ 18,234 $ 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: (Restated)
Loan Loss Reserve Recapture $ -- $ 9,153
Reserve for Loan Loss 12,199 --
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 -- 4,978
Deferred Tax Liability on
Securities Transaction -- 6,282
Purchase Accounting Adjustments 1,947 --
Harbor Federal Expenses -- 406
All Other 509 1,177
- -----------------------------------------------------------------------------
Total $ 31,391 $ 27,868
=============================================================================
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 $8.9 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:
(Restated)
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 0.1 (0.7) (0.8)
Tax Benefit of State Refund Claim -- (0.7) --
Tax-Advantaged Income (2.2) (1.1) (1.2)
Disallowed Interest Expense 0.2 0.2 0.2
Employee Benefits (0.1) (0.2) (0.1)
Credit for Community Development
Corporation Contribution -- -- (0.2)
Low Income Housing Credit (0.2) -- --
Other (1.3) (0.1) 0.3
- -----------------------------------------------------------------------------
Total Combined Effective Income Tax Rate 31.5 % 32.4 % 33.2 %
=============================================================================
Note 17 - 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, 2000 and
2001, 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:
(Restated)
(dollars in thousands, except per share data) 2000 1999 1998
===============================================================================
Qualifying Net Income $39,705 $44,150 $39,030
Basic EPS Shares 27,489 28,010 28,081
Basic EPS $ 1.44 $ 1.58 $ 1.39
Dilutive Shares 595 847 1,016
Diluted EPS Shares 28,084 28,857 29,097
Diluted EPS $ 1.41 $ 1.53 $ 1.34
Note 18 -- 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
===========================================================================================================================
50
Note 19 -- 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)
- ---------------------------------------------------------------------------- --------------------------------------------
52
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
- --------------------------------------------------------------------------------- --------------------------------------------
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.
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 4.0% 4.0% 4.0%
Compensation
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:
1% 1%
- ----------------------------------------------------------------------------
(in thousands) Increase Decrease
- ----------------------------------------------------------------------------
Effect on Total of Service and Interest
Cost Components $ 25 $ (21)
Effect on Postretirement Benefit
Obligation 126 (107)
- ----------------------------------------------------------------------------
53
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 20 -- 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.
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.
December 31, December 31,
-------------------------------------- ----------------------------
(dollars in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Qualifying Capital Provident Bank
--------------------------
(Restated) (Restated) (Restated) (Restated)
Tier 1 Capital $ 380,348 $ 358,771 $ 378,501 $ 356,469
Total Capital 418,772 392,216 416,875 392,914
Risk-Weighted Assets 4,060,447 3,903,997 4,060,245 3,902,561
Quarterly Average Assets 5,615,490 5,056,385 5,612,604 5,054,758
Ratios
Leverage Capital 6.77% 7.10% 6.74% 7.05%
Tier 1 Capital 9.37 9.19 9.32 9.13
Total Capital 10.31 10.05 10.27 10.07
Note 21 - 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 ("the 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.
(Restated) (Restated) (Restated)
Commercial Retail Treasury &
(in thousands) Banking Banking Adminstration Total
- ---------------------------------------------------------------------------------------------------------------------
2000:
Net Interest Income $ 21,311 $ 115,115 $ 17,595 $ 154,021
Provision for Loan Losses 12,398 16,015 1,464 29,877
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 8,913 99,100 16,131 124,144
Non-Interest Income 4,946 62,144 8,330 75,420
Non-Interest Expense 13,340 109,527 19,943 142,810
- ---------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 519 51,717 4,518 56,754
Income Tax Expense 177 17,565 77 17,819
- ---------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 342 34,152 4,441 38,935
Extraordinary Item - - 770 770
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 342 $ 34,152 $ 5,211 $ 39,705
- ---------------------------------------------------------------------------------------------------------------------
Average Total Assets $779,692 $3,132,817 $1,570,237 $5,482,746
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Commercial Retail Treasury &
(in thousands) Banking Banking Adminstration Total
- ---------------------------------------------------------------------------------------------------------------------
1999:
Net Interest Income $ 20,474 $ 99,395 $ 25,087 $ 144,956
Provision for Loan Losses 5,927 7,009 (1,366) 11,570
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 14,547 92,386 26,453 133,386
Non-Interest Income 5,500 56,367 (408) 61,459
Non-Interest Expense 12,268 100,495 16,733 129,496
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Commercial Retail Treasury &
(in thousands) Banking Banking Adminstration Total
- ---------------------------------------------------------------------------------------------------------------------
1998:
Net Interest Income $ 21,752 $ 79,166 $ 27,321 $ 128,239
Provision for Loan Losses 2,322 3,822 5,883 12,027
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 19,430 75,344 21,438 116,212
Non-Interest Income 4,810 49,894 8,188 62,892
Non-Interest Expense 12,498 91,307 16,898 120,703
- ---------------------------------------------------------------------------------------------------------------------
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 $2,132,770 $1,534,549 $4,350,575
- ---------------------------------------------------------------------------------------------------------------------
55
Note 22 -- 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 feasible, 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 Arrangement
The fair value of interest rate swaps and floor/cap/corridor 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: (Restated) (Restated) (Restated) (Restated)
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 3,326,820 3,438,088 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 792,942 798,649 666,280 653,056
Recognized Derivative Financial Instruments:
Interest Rate Floors $ -- $ -- $ 2,028 $ 243
Interest Rate Corridors -- -- -- --
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 23 -- 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
- ------------------------------------------------------------------------------------------
(Restated)
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
of Subsidiaries (32,124) 26,702 26,700
- ------------------------------------------------------------------------------------------
Net Income $ 39,705 $44,150 $39,030
==========================================================================================
Statement of Condition
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
(Restated) (Restated)
ASSETS
Interest Bearing Deposit with Bank Subsidiary $ 108 $ 219
Investment in Bank Subsidiary 372,428 313,555
Other Assets 8,530 2,000
- --------------------------------------------------------------------------------
Total Assets $381,066 $315,774
- --------------------------------------------------------------------------------
LIABILITIES
Long-Term Debt 70,135 40,400
Other Liabilities $ 724 $ 775
- --------------------------------------------------------------------------------
Total Liabilities 70,859 41,175
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock 29,709 26,226
Capital Surplus 251,085 203,364
Retained Earnings 104,488 102,587
Net Accumulated Other Comprehensive
Income of Bank Subsidiary (10,695) (44,323)
Treasury Stock at Cost (64,380) (13,255)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 310,207 274,599
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $381,066 $315,774
================================================================================
58
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities: (Restated)
Net Income $ 39,705 $ 44,150 $ 39,030
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Equity in Undistributed Income from Subsidiaries 32,124 (26,702) (26,700)
Other Operating Activities 86 (2,056) 4,688
- ----------------------------------------------------------------------------------------------------------------------------
Total Adjustments 32,210 (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 Long-Term Debt 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 - -
Note 24 -- 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. 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 Financial Accounting Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This statement
requires the Corporation to mark to market all derivative instruments on the
balance sheet resulting in a transition adjustment through equity and earnings
depending on the type of hedging relationship. This transition adjustment
through earnings 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 FAS 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 25 - 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.
59
Note 26 - Unaudited Quarterly Summary Results of Operations for 2000 and 1999
As Restated: 2000
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- -----------------------------------------------------------------------------------------------------
Interest Income $ 106,763 $ 107,148 $ 101,545 $ 97,242
Interest Expense 67,650 68,688 63,760 58,579
- -----------------------------------------------------------------------------------------------------
Net Interest Income 39,113 38,460 37,785 38,663
Provision for Loan Losses 5,257 7,285 13,035 4,300
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 33,856 31,175 24,750 34,363
Non-Interest Income 18,883 17,148 16,600 14,290
Net Securities Gains (Losses) 641 -- 7,779 79
Non-Interest Expense 37,548 35,758 35,459 34,045
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 15,832 12,565 13,670 14,687
Income Tax Expense 4,857 4,030 4,610 4,322
- -----------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 10,975 $ 8,535 $ 9,060 $ 10,365
Extraordinary tem -- -- -- 770
- -----------------------------------------------------------------------------------------------------
Net Income $ 10,975 $ 8,535 $ 9,060 $ 11,135
- -----------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.40 $ 0.31 $ 0.33 $ 0.40
Net Income - Diluted $ 0.39 $ 0.31 $ 0.32 $ 0.39
Market Prices: High 20.06 16.07 15.76 16.10
Low 15.60 12.68 12.56 12.59
Cash Dividends Paid 0.171 0.167 0.154 0.150
=====================================================================================================
As Restated: 1999
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- -----------------------------------------------------------------------------------------------------
Interest Income $ 95,055 $ 89,962 $ 85,988 $ 81,372
Interest Expense 55,609 52,945 50,400 48,467
- -----------------------------------------------------------------------------------------------------
Net Interest Income 39,446 37,017 35,588 32,905
Provision for Loan Losses 3,635 3,215 2,759 1,961
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 35,811 33,802 32,829 30,944
Non-Interest Income 14,680 15,451 15,416 15,600
Net Securities Gains (Losses) -- -- 375 (63)
Non-Interest Expense 33,192 32,730 32,168 31,406
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,299 16,523 16,452 15,075
Income Tax Expense 5,769 5,218 5,462 4,750
- -----------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 11,530 $ 11,305 $ 10,990 $ 10,325
Extraordinary Item -- -- -- --
- -----------------------------------------------------------------------------------------------------
Net Income $ 11,530 $ 11,305 $ 10,990 $ 10,325
- -----------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.41 $ 0.40 $ 0.39 $ 0.37
Net Income - Diluted $ 0.40 $ 0.39 $ 0.38 $ 0.36
Market Prices: High 20.24 22.22 25.81 24.51
Low 15.70 18.31 19.50 21.32
Cash Dividends Paid 0.145 0.141 0.130 0.125
=====================================================================================================
As Reported: 2000
----------------------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
Interest Income $ 107,228 $ 107,483 $ 101,827 $ 98,014
Interest Expense 66,100 67,151 62,273 57,595
- -----------------------------------------------------------------------------------------------------
Net Interest Income 41,128 40,332 39,554 40,419
Provision for Loan Losses 3,257 3,285 13,035 4,300
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 37,871 37,047 26,519 36,119
Non-Interest Income 18,883 17,148 16,600 14,290
Net Securities Gains (Losses) 641 -- 7,779 79
Non-Interest Expense 39,098 37,295 36,946 35,029
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 18,297 16,900 13,952 15,459
Income Tax Expense 5,722 5,545 4,707 4,594
- -----------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 12,575 $ 11,355 $ 9,245 $ 10,865
Extraordinary Item -- -- -- 770
- -----------------------------------------------------------------------------------------------------
Net Income $ 12,575 $ 11,355 $ 9,245 $ 11,635
- -----------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.46 $ 0.42 $ 0.34 $ 0.42
Net Income - Diluted $ 0.45 $ 0.41 $ 0.33 $ 0.41
Market Prices: High 20.06 16.07 15.76 16.10
Low 15.60 12.68 12.56 12.59
Cash Dividends Paid 0.171 0.167 0.154 0.150
=====================================================================================================
As Reported: 1999
--------------------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
Interest Income $ 95,055 $ 89,962 $ 85,988 $ 81,372
Interest Expense 54,894 52,171 49,565 47,631
- -----------------------------------------------------------------------------------------------------
Net Interest Income 40,161 37,791 36,423 33,741
Provision for Loan Losses 3,635 3,215 2,759 1,961
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 36,526 34,576 33,664 31,780
Non-Interest Income 14,680 15,451 15,416 15,600
Net Securities Gains (Losses) -- -- 375 (63)
Non-Interest Expense 33,907 33,504 33,003 32,242
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,299 16,523 16,452 15,075
Income Tax Expense 5,769 5,218 5,462 4,750
- -----------------------------------------------------------------------------------------------------
Income Before Extraordinary Item $ 11,530 $ 11,305 $ 10,990 $ 10,325
Extraordinary Item -- -- -- --
- -----------------------------------------------------------------------------------------------------
Net Income $ 11,530 $ 11,305 $ 10,990 $ 10,325
- -----------------------------------------------------------------------------------------------------
Per Share Amounts:
Net Income - Basic $ 0.41 $ 0.40 $ 0.39 $ 0.37
Net Income - Diluted $ 0.40 $ 0.39 $ 0.38 $ 0.36
Market Prices: High 20.24 22.22 25.81 24.51
Low 15.70 18.31 19.50 21.32
Cash Dividends Paid 0.145 0.141 0.130 0.125
=====================================================================================================
60
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 (as restated) 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. (as restated)
(21) Subsidiaries of Provident Bankshares Corporation. (8)
(23) Consents of Independent Accountants.
(24) Power of Attorney. (8)
(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.
(8) Incorporated by reference from Registrant's 2000 Form 10-K (File No. 16421)
filed with the Commission on March 9, 2001.
61
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)
November 8, 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:
November 8, 2001 BY /s/ Peter M. Martin
----------------------------------
Peter M. Martin
Chairman of the Board
and Chief Executive Officer
Principal Financial Officer:
November 8, 2001 BY /s/ Dennis A. Starliper
----------------------------------
Dennis A. Starliper
Group Manager and
Chief Financial Officer
Principal Accounting Officer:
November 8, 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 to the
Corporation's Form 10-K filed with the Securities and Exchange Commission on
March 9, 2000.
November 8, 2001 BY /s/ R. Wayne Hall
----------------------------------
R. Wayne Hall
Attorney-in-fact
62