UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For Quarterly Period Ended September 30, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Transition Period
Commission File Number 0-16421
PROVIDENT BANKSHARES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1518642
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
114 East Lexington Street, Baltimore, Maryland 21202
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(Address of Principal Executive Offices)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year if
Changed Since Last Report)
(410) 277-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 25,556,514 shares outstanding at
October 29, 2001
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition - Unaudited
September 30, 2001 and 2000 and December 31, 2000 3
Consolidated Statement of Income - Unaudited
Three month and nine month periods ended September 30, 2001 and 2000 4
Consolidated Statement of Cash Flows - Unaudited
Nine months ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II - OTHER INFORMATION 16
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 17
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Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties which could cause actual results to differ materially
from those projected. Such risk and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the SEC from time to time.
- --------------------------------------------------------------------------------
2
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
September 30, December 31, September 30,
(dollars in thousands) 2001 2000 2000
=================================================================================================================================
Assets
Cash and Due From Banks $ 93,927 $ 84,166 $ 80,013
Short-Term Investments 6,659 12,378 17,843
Mortgage Loans Held for Sale 4,016 8,243 18,392
Securities Available for Sale 1,837,925 1,876,509 2,027,827
Loans:
Consumer 1,632,137 2,017,436 2,087,465
Commercial Business 347,612 356,041 351,015
Real Estate -- Construction 324,424 265,918 233,981
Real Estate -- Mortgage 596,972 725,799 700,656
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans 2,901,145 3,365,194 3,373,117
Less: Allowance for Loan Losses 34,704 38,374 37,469
- ---------------------------------------------------------------------------------------------------------------------------------
Net Loans 2,866,441 3,326,820 3,335,648
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 45,664 45,805 45,431
Accrued Interest Receivable 36,788 47,281 50,951
Other Assets 135,968 98,241 119,658
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,027,388 $ 5,499,443 $ 5,695,763
=================================================================================================================================
Liabilities
Deposits:
Noninterest-Bearing $ 364,610 $ 327,334 $ 314,717
Interest-Bearing 3,066,964 3,627,436 3,702,679
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits 3,431,574 3,954,770 4,017,396
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 1,253,205 1,190,775 1,332,196
Other Liabilities 36,478 43,592 43,226
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Total Liabilities 4,721,257 5,189,137 5,392,818
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common Stock (Par Value $1.00) Authorized 100,000,000 Shares,
Issued 31,386,107, 29,708,943 and 29,649,881 Shares; at September 30, 2001,
December 31, 2000 and September 30, 2000, respectively 31,386 29,709 29,650
Capital Surplus 284,120 251,184 251,234
Retained Earnings 90,405 104,488 98,283
Net Accumulated Other Comprehensive Income (Loss) 8,935 (10,695) (33,295)
Treasury Stock at Cost - 5,741,201, 3,861,969 and 2,591,797 Shares
at September 30, 2001, December 31, 2000 and September 30, 2000,
respectively (108,715) (64,380) (42,927)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 306,131 310,306 302,945
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,027,388 $ 5,499,443 $ 5,695,763
=================================================================================================================================
These financial statements should be read in conjunction with the accompanying
notes.
3
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2001 2000 2001 2000
================================================================================================================================
Interest Income
Interest and Fees on Loans $ 55,227 $ 73,721 $ 182,628 $ 211,107
Interest on Securities 29,470 32,814 87,480 93,090
Tax-Advantaged Interest 556 523 1,684 1,556
Interest on Short-Term Investments 72 90 249 182
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 85,325 107,148 272,041 305,935
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Interest Expense
Interest on Deposits 33,633 46,546 113,898 131,714
Interest on Borrowings 17,012 22,142 51,714 59,313
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Total Interest Expense 50,645 68,688 165,612 191,027
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Net Interest Income 34,680 38,460 106,429 114,908
Less: Provision for Loan Losses 2,100 7,285 15,170 24,620
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Net Interest Income after Provision for Loan Losses 32,580 31,175 91,259 90,288
- --------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 15,530 13,310 44,557 36,273
Mortgage Banking Activities 146 1,042 579 2,873
Commissions and Fees 1,290 1,069 3,660 3,748
Net Securities Gains 167 - 7,756 7,858
Other Non-Interest Income 2,711 1,727 7,467 5,144
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 19,844 17,148 64,019 55,896
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Non-Interest Expense
Salaries and Employee Benefits 17,222 17,456 53,221 52,759
Occupancy Expense, Net 3,383 3,213 10,060 9,547
Furniture and Equipment Expense 2,511 2,534 7,654 7,476
External Processing Fees 4,724 4,095 13,183 12,152
Other Non-Interest Expense 8,724 8,460 26,901 23,328
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Total Non-Interest Expense 36,564 35,758 111,019 105,262
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Income before Income Taxes 15,860 12,565 44,259 40,922
Income Tax Expense 5,030 4,030 14,069 12,962
- --------------------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle 10,830 8,535 30,190 27,960
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 770
Cumulative Effect of Change
in Accounting Principle, Net - - (1,160) -
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 10,830 $ 8,535 $ 29,030 $ 28,730
================================================================================================================================
Basic Earnings Per Share
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.42 $ 0.31 $ 1.16 $ 1.01
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change
in Accounting Principle, Net - - (0.04) -
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.42 $ 0.31 $ 1.12 $ 1.04
================================================================================================================================
Diluted Earnings Per Share
Income before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 0.41 $ 0.31 $ 1.12 $ 0.99
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change
in Accounting Principle, Net - - (0.04) -
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.41 $ 0.31 $ 1.08 $ 1.02
================================================================================================================================
These financial statements should be read in conjunction with the accompanying
notes.
4
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Provident Bankshares Corporation and Subsidiaries
(in thousands)
Nine Months Ended September 30 2001 2000
=============================================================================================================================
Operating Activities
Net Income $ 29,030 $ 28,730
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 28,411 16,904
Provision for Loan Losses 15,170 24,620
Provision for Deferred Income Tax (Benefit) (4,913) 7,201
Realized Net Securities Gains (7,756) (7,858)
Loans Originated or Acquired and Held for Sale (18,520) (130,922)
Proceeds from Sales of Loans Held for Sale 23,007 143,985
Gain on Sales of Loans Held for Sale (260) (920)
Other Operating Activities (9,495) (10,380)
- -----------------------------------------------------------------------------------------------------------------------------
Total Adjustments 25,644 42,630
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 54,674 71,360
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Principal Collections and Maturities of Securities Available for Sale 439,302 159,992
Proceeds on Sales of Securities Available for Sale 591,407 80,429
Purchases of Securities Available for Sale (722,266) (191,011)
Loan Originations and Purchases Less Principal Collections 161,362 (367,787)
Purchases of Bank Owned Life Insurance - (50,799)
Proceeds from Business Acquisition - 2,451
Purchases of Premises and Equipment (7,069) (5,913)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 462,736 (372,638)
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Increase (Decrease) in Deposits (523,196) 35,438
Net Increase (Decrease) in Short-Term Borrowings (17,156) 222,237
Proceeds from Long-Term Debt 101,900 339,500
Payments and Maturities of Long-Term Debt (22,081) (249,306)
Issuance of Stock 5,954 1,285
Purchase of Treasury Stock (44,335) (29,672)
Cash Dividends on Common Stock (14,454) (12,947)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (513,368) 306,535
- -----------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 4,042 5,257
Cash and Cash Equivalents at Beginning of Year 96,544 92,599
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 100,586 $ 97,856
=============================================================================================================================
Supplemental Disclosures
- -----------------------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Credited to Deposit Accounts $ 120,940 $ 141,180
Income Taxes Paid 15,357 7,617
Loans Securitized and Converted to Securities Available for Sale 238,874 309,998
Stock Dividend 28,659 20,087
Stock Issued for Acquired Company - 29,922
These financial statements should be read in conjunction with the accompanying
notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month and nine month periods ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and notes thereto included in the Provident Bankshares
Corporation's ("the Corporation") Annual Report on Form 10-K/A for the year
ended December 31, 2000 as filed with the Securities and Exchange Commission on
November 8, 2001.
NOTE B - ACCOUNTING FOR DERIVATIVES
Significant Accounting Policies
- -------------------------------
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by SFAS Nos. 137 and 138 (collectively,
"SFAS No. 133"). The statement establishes the accounting and reporting
standards for derivative instruments embedded in other contracts and for hedging
activities. All derivatives are required to be measured at fair value and
recognized as either assets or liabilities in the financial statements. The
accounting for changes in fair value (gains or losses) of a derivative is
dependent on the intended use of the derivative and its designation. Derivatives
may be used to: 1) hedge exposure to change in the fair value of a recognized
asset or liability or a firm commitment, referred to as a fair value hedge, 2)
hedge exposure to variable cash flows of a recognized asset or liability or of a
forecasted transaction, referred to as a cash flow hedge, or 3) hedge foreign
currency exposure. The Corporation only engages in fair value and cash flow
hedges.
The Corporation uses a variety of derivative financial instruments as part
of its interest rate risk management strategy to manage its interest rate risk
exposure. This strategy aims to stabilize net interest income through periods of
changing interest rates. Derivative products in use by the Corporation are
interest rate swaps and caps or floors, used separately or in combination. These
derivatives are used to suit the particular hedge objective and all qualify as
hedges. Risks in these hedge transactions involve nonperformance by
counterparties under the terms of the contract (counterparty credit risk) and
the possibility that interest rate movements or general market volatility could
result in a loss in effectiveness and necessitate the recognition of a loss
(market risk). Counterparty credit risk is controlled by dealing with well-
established brokers that are highly rated by independent sources and by
establishing exposure limits for individual counterparties. Additionally, credit
risk is controlled by entering into bilateral collateral agreements with
brokers. These are agreements in which the parties pledge collateral to
indemnify the counterparty in the case of default. Market risk on interest rate
swaps is minimized by using these instruments as hedges and continually
monitoring the positions to ensure on-going effectiveness. Additionally, the
Corporation engages only in hedges which are highly effective. The Corporation's
hedging activities are monitored by its Asset/Liability Committee (ALCO) as part
of the committee's oversight of the treasury function which is responsible for
implementing the hedging strategies. ALCO is responsible for reviewing hedging
strategies that are developed through financial analysis and modeling.
6
All relationships between hedging instruments and hedged items are
documented by the Corporation. Risk management objectives, strategies and the
use of certain types of derivatives used to hedge specific risks are also
documented. At inception, and on an ongoing basis, the Corporation assesses
whether the hedges have been highly effective in offsetting changes in the fair
value or cash flows of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. Several of the
derivatives retained by the Corporation to hedge exposures met the requisite
effectiveness criteria necessary to qualify for the short cut method. Under the
short cut method, an entity may conclude that the change in the derivative's
fair value is equal to the change in the hedge item's fair value attributable to
the hedged risk, resulting in no ineffectiveness. The Corporation uses benchmark
interest rates such as LIBOR to hedge the interest rate risk associated with
interest earning assets or interest bearing liabilities. Using these benchmark
rates and complying with specific criteria set forth in SFAS No. 133, the
Corporation has concluded that changes in fair value or cash flows that are
attributable to risks being hedged will be completely offset at the hedges
inception and on an ongoing basis.
When it is determined that a derivative is not or ceases to be effective as
a hedge, the Corporation discontinues hedge accounting prospectively. When a
fair value hedge is discontinued due to ineffectiveness the Corporation will
continue to carry the derivative on the balance sheet at its fair value but
cease to adjust the hedged asset or liability for changes in value.
The Corporation uses derivatives to hedge the interest rate risks inherent
with its funding costs. Fair value hedges which meet the criteria of SFAS No.
133 for effectiveness have changes in the fair value of the derivative and the
designated hedged item recognized in earnings. At September 30, 2001, the
derivatives designated as fair value hedges were proven to be effective.
Accordingly, the designated hedges and the associated hedged items were marked
to fair value by an equal and offsetting amount of $3.8 million, resulting in no
net earnings impact for the nine months ended September 30, 2001. Cash flow
hedges have the effective portion of changes in the fair value of the derivative
recorded in other comprehensive income (OCI). At September 30, 2001, the
Corporation has recorded a decline in the fair value of derivatives of $2.1
million, net of taxes, in OCI to reflect the effective portion of cash flow
hedges. Amounts recorded in OCI are recognized into earnings concurrent with the
impact of the hedged item on earnings.
All ineffective portions of hedges are reported in and affect net earnings
immediately. For the nine months ending September 30, 2001, the Corporation had
no ineffective portions of hedges.
Gains and losses on derivatives that arose prior to the initial application
of SFAS No. 133 and that were previously deferred as adjustments of the carrying
amount of hedged items were not adjusted and accordingly were not included in
the transition adjustment described below.
Adoption of SFAS No. 133
- ------------------------
The adoption of SFAS No. 133 resulted in a pre-tax reduction of net earnings
of $1.8 million ($1.2 million after-tax). This represented the difference
between the derivative's previous carrying amount and the fair value of the
derivatives at January 1, 2001. At adoption of SFAS No. 133, OCI reflected a
$452 thousand loss, net of tax, to recognize the net fair value of the
derivatives used in its cash flow hedges on that date.
7
NOTE C - EXTRAORDINARY ITEM
During the first quarter 2000, the Corporation liquidated $78 million of
Federal Home Loan Bank Advances due in 2001 through 2003. Accordingly, a net
gain of $770 thousand, or $.03 per share, after taxes of $415 thousand was
recognized.
NOTE D - PER SHARE INFORMATION
The following table presents a summary of per share data and amounts for the
periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Net Income Before Extraordinary Item $ 10,830 $ 8,535 $ 30,190 $ 27,960
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 770
Cumulative Effect of Change in Accounting Principle, Net - - (1,160) -
- ------------------------------------------------------------------------------------------------------
Net Income $ 10,830 $ 8,535 $ 29,030 $ 28,730
======================================================================================================
Basic
Basic EPS Shares 25,666 27,280 25,898 27,512
Net Income Before Extraordinary Item $ 0.42 $ 0.31 $ 1.16 $ 1.01
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change in Accounting Principle, Net - - (0.04) -
- ------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.42 $ 0.31 $ 1.12 $ 1.04
======================================================================================================
Diluted
Dilutive Shares (principally stock options) 795 538 930 540
Diluted EPS Shares 26,461 27,818 26,828 28,052
Net Income Before Extraordinary Item $ 0.41 $ 0.31 $ 1.12 $ 0.99
Extraordinary Item -- Gain on Debt Extinguishment, Net - - - 0.03
Cumulative Effect of Change in Accounting Principle, Net - - (0.04) -
- ------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.41 $ 0.31 $ 1.08 $ 1.02
======================================================================================================
8
NOTE E - INVESTMENT SECURITIES
The aggregate amortized cost and market values of the investment securities
portfolio were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
September 30, 2001
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 80,926 $ 696 $ - $ 81,622
Mortgage-Backed Securities 1,582,733 23,813 501 1,606,045
Municipal Securities 23,452 1,013 - 24,465
Other Debt Securities 134,652 149 9,008 125,793
- ----------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 1,821,763 $ 25,671 $ 9,509 $ 1,837,925
- ----------------------------------------------------------------------------------------------------------------
September 30, 2000
Securities Available for Sale
U.S. Treasury and Government
Agencies and Corporations $ 86,067 $ 1,055 $ 40 $ 87,082
Mortgage-Backed Securities 1,826,498 5,435 37,268 1,794,665
Municipal Securities 26,615 171 214 26,572
Other Debt Securities 139,866 17 20,375 119,508
- ----------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 2,079,046 $ 6,678 $ 57,897 $ 2,027,827
- ----------------------------------------------------------------------------------------------------------------
At September 30, 2001 a net unrealized gain on securities available for sale
of $10.5 million was reflected as a component of Net Accumulated Other
Comprehensive Income which is reflected separately as a component of
Stockholders' Equity in the Consolidated Statement of Condition and therefore
has no effect on the financial results of the Corporation's operations. This
compares to a net unrealized loss on securities available for sale of $33.3
million at September 30, 2000. For details regarding investment securities at
December 31, 2000, refer to Notes 1 and 7 of the Consolidated Financial
Statements incorporated by reference from the Corporation's 10-K/A filed
November 8, 2001.
9
NOTE F - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For financial
statements presented for the Corporation, nonowner equity changes are comprised
of unrealized gains or losses on available for sale debt securities and
recorded gains or losses on derivatives utilized in cash flow hedges. These
nonowner equity changes will be accumulated with net income from operations to
determine comprehensive income. This change does not have an impact on the
Corporation's results of operations.
Presented below is a reconcilement of net income to comprehensive income
indicating the components of other comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 10,830 $ 8,535 $ 29,030 $ 28,730
Other Comprehensive Income (Loss):
Loss on Derivatives Due to SFAS No. 133 Transition Adjustment - - (452) -
Loss on Derivatives Recognized in Other Comprehensive Income (1,281) - (1,630) -
Unrealized Holding Gain on Debt Securities 26,344 21,344 40,036 24,830
Less: Reclassification Adjustment for Gains Included in Net Income 167 - 7,756 7,858
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, Before Tax 24,896 21,344 30,198 16,972
Income Tax Related to Items of Other Comprehensive Income 8,713 7,473 10,568 5,944
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, After Tax 16,183 13,871 19,630 11,028
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 27,013 $ 22,406 $ 48,660 $ 39,758
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE G-SECURITIZATION OF LOANS
Significant Accounting Policies
The Corporation securitizes second mortgage loans out of its acquired loan
portfolio with FNMA, and the respective securities are placed in the securities
portfolio. The retention of the securities represents a retained interest. No
gain or loss is recorded on these transactions until the securities are sold.
The securities are valued at fair market value along with the Corporation's
remaining securities. These loans were sold with full recourse back to the Bank
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.
10
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 September 30, 2001.
Retained
(in thousands) FNMA Securities
- ---------------------------------------------------------------------
Carrying Amount/Fair Value of Retained Interests $532,141
Weighted-Average Life in Years 2.5
Annual Prepayment Assumption 28.2%
Impact on Fair Value of 10% Adverse Change $(6,738)
Impact on Fair Value of 20% Adverse Change (7,781)
Annual Cash Flow Discount Rate 6.86%
Impact on Fair Value of 10% Adverse Change $(9,569)
Impact on Fair Value of 20% Adverse Change (20,639)
Credit losses do not affect the valuation due to FNMA's full recourse to the
Corporation for losses on loans collaterallizing the securities.
The sensitivities presented above are hypothetical and are presented for
informational purposes only. As the amounts indicate, the fair values due to a
variation in any assumption generally cannot be extrapolated because the
relationship of the change in any assumption to the change in fair value may not
be linear. The effect of a change in a particular assumption on the fair value
of the retained interest is calculated without considering the changes in other
assumptions. However, changes in one assumption may result in changes in
another.
Recourse Reserve
At September 30, 2001, the recourse liability of $3.2 million was determined
to be adequate. At September 30, 2001 the principal balance of loans securitized
or purchased with recourse amounted to $532.1 million. Principal balances of
loans 90 days or more past due was $1.3 million at September 30, 2001. Net
losses during the nine month period ending September 30, 2001 were $1.5 million.
NOTE H - FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Corporation.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after September 30, 2001. Under SFAS 142,
amortization of goodwill, including goodwill recorded in past business
combinations, will discontinue upon adoption of this standard. In addition,
goodwill recorded as a result of business combinations completed during the
nine-month period ending December 31, 2001 will not be amortized. All goodwill
and intangible assets will be tested for impairment in accordance with the
provisions of the statement. The Corporation is currently reviewing the
provisions of SFAS 142 and assessing the impact of adoption.
In October 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides new guidance on
recognition of impairment losses on long-lived assets to be held and used and
broadens the definition of what constitutes a discontinued operation and how the
results of discontinued operations are to be measured. The provisions of SFAS
No. 144 are effective for the Corporation on January 1, 2002. Management does
not expect SFAS No.144 to have a significant impact on the Corporation.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
EARNINGS SUMMARY
Provident Bankshares reported operating earnings for the quarter ended
September 30, 2001 of $10.8 million, or $.41 per share on a diluted basis. This
is an increase of 27% from $8.5 million, or $.31 per diluted share in the 2000
comparable quarter.
Net interest margin for the 2001 third quarter was 2.91%, compared to 2.84%
for the same quarter of 2000. Non-interest income (excluding securities gains)
was up $2.5 million or 14.7% for the 2001 third quarter. There were $167
thousand in securities gains during the 2001 third quarter compared to none in
the same period a year ago. The Company's non-interest expense increased by
2.3%, up $806 thousand from the same quarter last year.
NET INTEREST INCOME
Tax-equivalent net interest income fell by $3.8 million to $34.9 million
for the third quarter of 2001, as compared to the third quarter of 2000. Net
interest margin for the 2001 third quarter was 2.91%, compared to 2.84% in the
third quarter of 2000. Provident's tax-equivalent interest income fell $21.8
million from the third quarter of 2000, caused by a combination of $651 million
in lower earning assets and 77 basis points reduction in yield. The reduction in
earning assets was mainly in investments of $65 million and $685 million in
acquired second mortgage loan portfolio. This reduction is consistent with the
Company's strategy to replace wholesale assets and liabilities with core
products. Growth in core assets was driven by increases in Commercial
Construction loans of $69 million, $13 million in Residential Construction and
$55 million in Residential Mortgage. The increase in residential mortgage loans
is partially attributable to the acquisition of Harbor Federal Bancorp during
the third quarter of 2000. Consumer loans declined $675 million due to the
securitization of $324 million of second mortgage loans during the third quarter
of 2000 and $239 million during the second quarter of 2001. Mortgage loans held
for sale declined $34 million as the Bank made the decision during the fourth
quarter of 2000 to reposition its mortgage operations by offering mortgages to
its retail customers through an outsourced loan origination process and no
longer will seek loan production from realtors and brokers. The yield on earning
assets was 7.12% compared to 7.89% for the third quarter of 2000.
Total interest expense for the third quarter of 2001 was $18 million under
a year ago, the combined result of a decrease of $560 million in the average
outstanding balance of interest-bearing liabilities and a 95 basis point
decrease in rate paid. This decrease is associated with lower wholesale funding
sources consistent with the strategy to shift to more core assets and
liabilities. Borrowings declined $49 million, brokered deposits declined $629
million and money market CD's declined $63 million. Direct certificates of
deposits increased $81 million and interest-bearing demand deposits/money market
deposits increased $92 million. Non-interest bearing demand deposits increased
$44 million. The increases in core deposits are attributable to the continued
expansion of our branch network as well as the acquisition of Harbor Federal
Bancorp during the third quarter of 2000.
12
The Corporation maintains an overall interest rate risk-management strategy
that incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
Management monitors the level of earnings at risk due to interest rate
volatility through the simulation of multiple interest rate scenarios. As of
January 1, 2001, the Corporation adopted SFAS No. 133. This statement required
the Corporation to mark to market all derivative instruments as a transition
adjustment. This transition adjustment was a $1.2 million after tax loss. The
Corporation closed the derivative instruments that did not qualify for the
shortcut method under SFAS No. 133. Under the shortcut method, an entity may
conclude that the change in the derivative's fair value is equal to the change
in the hedged item's fair value attributable to the hedged risk, resulting in no
ineffectiveness. Therefore, the adoption of SFAS No. 133 is not expected to
adversely impact the earnings from continuing operations of the Corporation in
2001.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $2.1 million provision for loan losses, with net
charge-offs of $2.7 million for the third quarter of 2001, compared to a
provision of $7.3 million and net charge-offs of $10.4 million for the same
period of 2000. The majority of the decrease in the provision for loan losses is
mainly related to the losses taken in the third quarter of 2000 associated to
syndicated health care credits. Provident has been closely monitoring its health
care industry credits where the operators have had to adjust to changes in
Medicare reimbursement policies. During the second quarter of 2001, the Company
wrote down its last remaining non-performing health care credit. The Company has
obtained a contract of sale on the nursing home related to this loan and expects
to exit the credit without any additional losses. The Corporation continues to
emphasize loan quality and closely monitors potential problem credits in the
commercial loan portfolio. In addition, organizational and policy changes have
been made in the consumer loan area, particularly in the acquired second
mortgage portfolio to more closely monitor potential problem loans. Senior
managers meet at least monthly to review the credit quality of the loan
portfolios and at least quarterly with executive management to review the
adequacy of the allowance for loan losses. The allowance for loan losses at
September 30, 2001 was $34.7 million, compared to $37.5 million a year ago. At
September 30, 2001, the allowance represented 1.20% of total loans and 120% of
non-performing loans. Total non-performing loans were $28.8 million at September
30, 2001 and $31.3 million at September 30, 2000. Non-performing loans as a
percent of loans outstanding as of September 30, 2001 were .99%.
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains, totaled $20 million in
the third quarter of 2001 compared to $17 million for the third quarter of 2000.
This increase was driven by deposit product revenues, which increased $2.2
million. The increase in deposit fees was driven by continued growth in account
volume and pricing changes. Other non-interest income was up $984 thousand
mainly associated with Bank Owned Life Insurance while Commission and Fees were
up $221 thousand attributable to investment service fees. Mortgage banking
income declined $896 thousand as the Corporation made a decision during the
fourth quarter of 2000 to reposition its mortgage operations by offering
mortgages to its retail customers through an outsourced loan origination process
and no longer will seek loan production from realtors and brokers.
There were $167 thousand in securities gains during the 2001 third quarter
compared to none in the same period a year ago.
NON-INTEREST EXPENSE
Third quarter non-interest expense was $36.6 million, compared to $35.8
million for the same period last year. Salaries and benefits decreased $234
thousand, which reflects the Company's continued focus on operating expense
control and anticipated expense reductions from lines of business exited last
year. Occupancy expense increased $170 thousand and furniture and equipment
expense decreased $23 thousand. The branch network expansion contributed to
these increases. External processing fees increased $629 thousand mainly
related to increased account volume. All other expenses increased $264
thousand, majority of which is associated with goodwill amortization and
professional fees.
13
INCOME TAXES
Provident recorded income tax expense of $5.0 million on income before taxes
of $15.9 million, an effective tax rate of 31.7%. During the third quarter of
2000, Provident's tax expense was $4.0 million on pre-tax income of $12.6
million, an effective tax rate of 32.1%. The change in effective tax rate is
the result higher tax advantage assets in the third quarter of 2001 compared to
same quarter last year.
FINANCIAL REVIEW FOR NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
For the nine months ending September 30, 2001, net income before
extraordinary item and cumulative effect of change in accounting principle was
$30.2 million or $1.16 per share basic and $1.12 diluted, compared to $28.0
million or $1.01 per share basic and $.99 per share diluted for the nine months
ended September 30, 2000. As a result of a one-time transition adjustment of
$1.2 million (net of taxes) for Statement of Financial Accounting Standards No.
133 "Accounting of Derivative Instruments and Hedging Activities," ("SFAS No.
133") net income for the nine months ending September 30, 2001 is $29.0 million,
or $1.08 per diluted share.
The $8.5 million decrease in tax-equivalent net interest income for 2001 was
the result of a 6.4% or $338 million decrease in average earning assets over the
prior year. Net interest margin dropped by 3 basis points caused by a decline of
38 basis points in yield, a 43 basis point decrease in costs of interest-bearing
liabilities and a $72 million reduction in other funds provided.
The provision for loan losses decreased $9.5 million to $15.2 million in
2001. The allowance for loan losses ended the quarter at $34.7 million or 1.20%
of loans outstanding.
Non-interest income, excluding net securities gains, increased 17% to $56.3
million. Deposit service charges rose $8.3 million over the prior year to $44.6
million, mortgage banking declined $2.3 million to $579 thousand, and
commissions and fees decreased 2% to $3.7 million. Net securities gains were
$7.8 million in 2001 and $7.9 million in 2000.
Provident's non-interest expense, excluding recourse liability expense, rose
3.7% in 2001 over 2000. Salaries and employee benefits increased $462 thousand
attributable to merit increases and new branches. Occupancy costs grew $513
thousand or 5.4% and furniture and equipment expense increased $178 thousand or
2.4% due to branch network expansion. External processing increased $1.0 million
due to increased account volumes. During the second quarter of 2001, the
Corporation recorded a $1.9 million increase to the existing recourse reserve
related to $659 million of mortgage backed securities which is part of the $1.5
billion acquired second mortgage portfolio. All other expenses net of recourse
liability increased $1.7 million, majority of which is associated with goodwill
amortization and professional fees.
Provident recorded an income tax expense of $14.1 million in first nine
months of 2001 based on pre-tax income of $44.3 million, which represented an
effective tax rate of 31.8%. This compares with a 31.7% effective tax rate for
same period of 2000.
14
FINANCIAL CONDITION
Total assets of the Corporation decreased $472 million from December 31,
2000 to September 30, 2001. This decline is the result of a specific corporate
strategy focused at reducing wholesale assets and liabilities and focusing
resources on growth from core banking sources. Through the implementation of
this strategy the Corporation has been able to continue the use of its stock
buyback authority to repurchase shares resulting in the de-leveraging of the
Bank's capital. During the current quarter the Corporation repurchased 114,275
shares. The implementation of the core business strategy, resulted in the
reduction of loan and brokered deposit balances from December 31, 2000.
Securities available for sale declined $38.6 million from December 31, 2000.
Consumer loans have declined $385 million from December 31, 2000 as the Company
securitized approximately $239 million of acquired second mortgages during the
second quarter of 2001. Commercial business loans also declined $8.4 million
partially due to the decision to sell a large national credit that had been
performing as agreed at approximately face value and the sale of a syndicated
health care credit that was on non-performing status. Both of the loan
transactions took place during the first quarter of 2001. This decision was made
to limit exposure to syndicated national credits. Also during the second quarter
of 2001, the Company decided to write down its last remaining non-performing
health care credit. Real estate mortgage loans declined $129 million, $105
million from residential mortgage loans. Residential mortgage loans declined as
the Corporation made a decision during the fourth quarter of 2000 to reposition
its mortgage operations by offering mortgages to its retail customers through an
outsourced loan origination process and no longer will seek loan production from
realtors and brokers. The $24 million decline in commercial mortgage loans was
attributable to unanticipated payoffs.
Total deposits ended the quarter at $3.4 billion, a decrease of $523 million
over the December 31, 2000 level. Brokered deposits have decreased $570 million
since December 31, 2000 as part of the Company's strategy to move from wholesale
funding sources to a larger mix of core deposits. Interest bearing demand and
money market accounts increased $64 million and non-interest bearing demand
increased $37 million since December 31, 2000. Direct certificates of deposits
and savings deposits also decreased $3 million and increased $7 million,
respectively since December 31, 2000. Borrowings and debt have decreased $62
million from December 31, 2000 ending the quarter at $1.3 billion. Of this $1.3
billion, trust preferred capital securities represent $70 million.
The primary sources of liquidity at September 30, 2001 were investments
available for sale, which totaled $1.8 billion. This represents 38.9% of total
liabilities compared to 36.2% at December 31, 2000.
At September 30, 2001, total stockholders' equity was $306 million, a $4.2
million decrease over December 31, 2000. In addition to the ordinary adjustments
to stockholders' equity of net income and dividends paid, additional capital of
$556 thousand was raised through the dividend reinvestment plan, $5.4 million
from the exercise of stock options, while capital increased by $19.6 million
during the first nine months of 2001 as a result of Statement of Financial
Accounting Standards No. 115. During the first nine months of 2001, the
Corporation also repurchased shares totaling $44.3 million. At quarter-end, the
leverage ratio was 7.04% and total stockholders' equity represented 10.51% of
risk adjusted assets. These ratios exceed the minimum requirements of the
current leverage capital and risk-based capital standards established by
regulatory agencies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk at December 31, 2001, see "Interest
Sensitivity Management" and Note 14 to the Consolidated Financial Statements in
the Corporation's Form 10-K/A filed with the Commission on November 8, 2001. The
market risk of the Corporation has not experienced any material changes as of
September 30, 2001 from December 31, 2000. Additionally, refer to "Net Interest
Income" in Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional quantitative and qualitative
discussions about market risk at September 30, 2001.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
(3.1) Articles of Incorporation of Provident Bankshares
Corporation(1)
(3.2) Fourth Amended and Restated By-Laws of Provident Bankshares
Corporation (3)
(4.1) Stockholder Protection Rights Plan, as amended (2)
(11.0) Statement Re: Computation of Per Share Earnings (4)
(b) Reports on Form 8-K were filed with the Securities and Exchange
Commission as follows:
August 8, 2001 - Provident Bankshares Corporation issued a press
release on August 6, 2001 announcing the release of its second
quarter earnings.
July 17, 2001 - Provident Bankshares Corporation issued a press
release on July 16, 2001 announcing the release of second
quarter earnings was rescheduled.
(1) Incorporated by reference from Provident's Registration Statement on Form
S-3 (File No. 33-73162) filed with the Commission on August 18, 1994.
(2) Incorporated by reference from Provident's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the Commission on
August 14, 1998.
(3) Incorporated by reference from Providents's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, filed with the Commission on May 10,
2000.
(4) Included in Note D to the Unaudited Consolidated Financial Statements on
Page 8 hereof.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT BANKSHARES CORPORATION
--------------------------------
Registrant
November 13, 2001 /s/ Peter M. Martin
-------------------------------------
Peter M. Martin
Chairman and Chief Executive Officer
November 13, 2001 /s/ Dennis A. Starliper
-------------------------------------
Dennis A. Starliper
Chief Financial Officer
17