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Provident Bankshares Corporation
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Mid-Atlantic Investors
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MID-ATLANTIC INVESTORS
A.S.C. General Partnership
P.O. Box 7574 Tel. 803-749-7888
Columbia, South Carolina 29202 FAX 803-749-7090
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April 13, 2000
Dear Fellow Provident Shareholder:
As the largest shareholder of Provident Bankshares (1,370,238 shares),
we have made a shareholder proposal to advise the board of directors that the
shareholders would like to see Provident merged.
We have done this for one core reason: Shareholder Value. We firmly
believe that a merged Provident has a much better chance of both superior
long-term stock performance than does a "go it alone" Provident as well as
potential for immediate appreciation based on an acquisition/merger premium.
We have supported our belief with facts about Provident and others (see
enclosed information).
Provident has responded by pointing to the fact that Provident is doing
better now than it was before (even though shareholders are not) and providing
irrelevant and intentionally distracting commentary.
At no point has Provident's management ever said that it believes or is
willing to represent that the stock of Provident in a stand alone mode will be
worth more than the stock of a merged Provident.
Please support our effort to ask Provident's management to end their
personal self serving efforts and find a merger partner that can be a leader in
a consolidating banking industry. VOTE FOR the shareholder proposal on the GREEN
Proxy Card enclosed.
Sincerely,
Jerry Shearer
Managing Partner
P.S. The meeting is Wednesday morning, April 19, 2000. You need to act
immediately to insure that your vote is counted. Please call D.F. King & Co. at
1-800-578-5378 if you need assistance with voting.
FACTS ABOUT MARKET VALUE (NOT "INTRINSIC" VALUE)
o Comparison of the 12/31/99 value of $100 invested in Provident stock on
12/31/97 versus the same investment in the stock of five leading banks
doing business in the Baltimore area shows Provident's performance in last
place at $62.46, almost $25 behind the least of the five (Bank of America
at $87.31) and $37.39 behind the leader (SunTrust at $99.85).
o The same comparison of Provident stock to bank indices widely used in proxy
statements shows Provident lagging the Media General Major Regional Banks
Index by $24.64, trailing the S&P Major Regional Banks Index by $32.34,
behind the KBW 50 Financial Institutions Index by $42.06 and further behind
the NYSE Banks Index by $44.02.
o Comparison of Provident's price to book value ratio, price to last 12
months earnings ratio and price to estimated earnings ratio to the same
ratios for First Virginia Banks, BB&T Corp., Fulton Financial, Mercantile
Bankshares and Susquehanna Corp., shows Provident's stock underperforming
in every comparison but one at April 7, 2000. This clearly demonstrates the
market's lack of confidence in the ability of Provident to deliver above
average results.
PROVIDENT'S GROWTH IS NOT ENOUGH
o Provident improved its efficiency ratio from 65.8% in 1998 to 63.4% in
1999. If it has the same amount of improvement every year, it will be
almost four years until it matches BB&T's 1999 efficiency ratio. In the
meanwhile, BB&T will have moved on.
o Provident's average deposit growth in 1999 was 73% brokered deposits. Not a
good basis for long-term relationships. Because of the way deposits are
reported to FDIC, brokered deposits from outside of the local market area
create an illusion of growth in market share that is not real.
o Provident's average loan growth in 1999 was $377.2 million. Acquired loans
increased $441 million. Without purchased loan packages average loans would
have declined by $63.8 million. Most of the purchased loan borrowers are
unlikely to be repeat customers.
o Leading banks are growing as fast or faster than Provident. It is unlikely
that Provident will ever catch up much less surpass them.
NOW IS THE TIME TO MERGE
o Any merger premium would be an immediate increase in value. Merger with a
quality bank would create potential for long-term value growth.
MID-ATLANTIC'S REVIEW
OF
INSTITUTIONAL SHAREHOLDER SERVICES'
REPORT AND RECOMMENDATION
April 13, 2000
You may be aware that Institutional Shareholder Services ("ISS") issued a report
yesterday recommending to its clients that they not vote for the shareholder
proposal to merge the bank.
In its report ISS points to three reasons why Institutional Shareholders should
not support selling or merging the bank. These reasons are: 1) a decline in
regional bank asset prices; 2) the falloff in M&A activity; and 3) management's
steady, if unspectacular, financial results.
We believe ISS's reasons to not support selling or merging the bank are rather
feeble. For instance, ISS points to a decline in regional bank asset prices.
This simply means that if a stock-for-stock transaction were consummated now the
price paid would be with devalued share prices. Receiving devalued shares in a
merger at a normalized premium is an advantage because the share price of a
devalued stock is more likely to move up than down. The key is the stock
exchange ratio. As a Keefe, Bruyette & Woods analyst stated in a February 29,
2000 issue of Regional BankScan: "We respectfully suggest to potential sellers
that waiting for a 1997/1998-like premium deal will ultimately prove short
sighted. The market has moved and those valuations are no longer realistic.
Instead the focus should be on striking a fair deal with a company whose
currency the seller views is as good as or better than its own."
The weakest reason ISS gives is the falloff in M&A activity. This reason assumes
that the number of deals is an indicator of the number of buyers competing for
each sale. However, most buyers can only do 2-3 deals a year. We believe that an
excellent time to go after a deal is when M&A activity is less than average. At
such a time, a larger number of potential acquirors are more likely to be
available for a true, orderly auction. This is what should occur with Provident.
ISS did two significant analyses that run counter to their third rationale for
not supporting merging/selling the bank. Specifically, ISS's analysis of the
Efficiency Ratio and stock market valuations actually supports Mid-Atlantic's
rationale for seeking a merger.
First, ISS's Efficiency Ratio analysis shows that Provident improved from a
ratio of 66.76% in 1996 to 63.40% in 1999. But even with this improvement, this
indicator clearly shows that Provident has a management problem in controlling
expenses. Spending more money to expand the branch network is not going to
correct this fundamental problem. Provident needs a change of management and the
best way to accomplish that is to sell the Company to a well-managed
institution.
Secondly, ISS compared Provident's Price/Book Value, Price/LTM Earnings, and
Price/Estimated Earnings with that of five peers. In each of these comparisons,
except one, Provident's stock trades at multiples that are substantially below
that of its peers, both on an earnings and book value basis. ISS states that
"The market is either unfairly discounting the company's shares or it is sending
management a signal that its performance is subpar and that its expansion
strategy is unlikely to yield above average results." We don't believe for one
minute that the market is "unfairly" discounting the company's share price.
From our first letter to shareholders in September 1998, Mid-Atlantic has taken
the position that Provident is an inefficiently run bank that needs to be sold
in order to maximize shareholder value. As Provident's largest shareholder, our
position has not changed.
We encourage you to carefully review the points in ISS's review. We believe that
you will come to the same conclusion that Provident needs to be merged.