<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended Commission File Number
September 30, 1997 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) 281-7000
- --------------------------------------------------------------------------------
(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, 11,412,054 shares outstanding at
November 4, 1997.
<PAGE> 2
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition--
September 30, 1997 and 1996 and December 31, 1996 3
Consolidated Statement of Income--
Three and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows--
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
PART II - OTHER INFORMATION 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
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 13
EXHIBIT INDEX 14
================================================================================
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
<PAGE> 3
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF CONDITION
Provident Bankshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(dollars in thousands) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and Due From Banks $ 60,792 $ 70,132 $ 61,187
Short-Term Investments 2,526 11,366 6,791
Mortgage Loans Held for Sale 35,074 35,356 56,099
Securities Available for Sale 944,124 968,154 968,972
Securities Held to Maturity (Market Value $91,339
and $86,464 at December 30, 1996 and September 30, 1996,
respectively) - 86,237 91,948
Loans:
Consumer 1,555,096 1,211,971 1,179,747
Commercial Business 282,332 294,844 276,383
Real Estate -- Construction 131,101 121,542 140,565
Real Estate -- Mortgage 631,693 619,516 586,342
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Total Loans 2,600,222 2,247,873 2,183,037
Less: Allowance for Loan Losses 35,197 30,361 29,152
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Net Loans 2,565,025 2,217,512 2,153,885
- -------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net 37,165 36,481 35,524
Accrued Interest Receivable 28,292 23,485 23,608
Other Assets 27,452 36,895 43,674
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TOTAL ASSETS $ 3,700,450 $ 3,485,618 $ 3,441,688
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LIABILITIES
Deposits:
Noninterest-Bearing $ 176,390 $ 169,000 $ 157,325
Interest-Bearing 2,479,522 2,117,144 2,046,344
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TOTAL DEPOSITS 2,655,912 2,286,144 2,203,669
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Short-Term Borrowings 373,283 602,435 628,309
Long-Term Debt 374,105 328,517 346,538
Other Liabilities 37,977 29,724 35,187
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TOTAL LIABILITIES 3,441,277 3,246,820 3,213,703
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STOCKHOLDERS' EQUITY
Common Stock (Par Value $1.00) Authorized 30,000,000 Shares,
Issued 11,568,408, 10,957,265 and 10,928,585 Shares at September 30, 1997,
December 31, 1996 and September 30, 1996, respectively 11,568 10,957 10,929
Capital Surplus 137,956 120,090 119,571
Retained Earnings 107,191 111,614 105,655
Net Unrealized Gain (Loss) on Debt Securities 4,948 (1,373) (5,680)
Treasury Stock at Cost - 228,066 Shares (2,490) (2,490) (2,490)
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TOTAL STOCKHOLDERS' EQUITY 259,173 238,798 227,985
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,700,450 $ 3,485,618 $ 3,441,688
- --------------------------------------------------------------------------------------------------------------------------------
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
3
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME
Provident Bankshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 53,469 $ 44,503 $ 149,331 $ 124,651
Interest on Securities 16,192 18,161 51,892 55,175
Tax-Advantaged Interest 1,737 586 5,608 2,087
Interest on Short-Term Investments 77 104 238 303
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TOTAL INTEREST INCOME 71,475 63,354 207,069 182,216
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INTEREST EXPENSE
Interest on Deposits 27,612 22,452 76,286 64,614
Interest on Short-Term Borrowings 7,156 7,440 24,230 21,202
Interest on Long-Term Debt 5,144 5,305 14,952 14,921
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TOTAL INTEREST EXPENSE 39,912 35,197 115,468 100,737
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NET INTEREST INCOME 31,563 28,157 91,601 81,479
Less: Provision for Loan Losses 4,330 1,705 7,217 7,761
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,233 26,452 84,384 73,718
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 6,384 5,196 17,952 13,951
Mortgage Banking Activities 1,469 4,962 5,649 12,596
Commissions and Fees 920 802 2,848 2,506
Net Securities Gains 230 42 568 5,078
Other Non-Interest Income 1,706 1,403 4,895 4,362
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TOTAL NON-INTEREST INCOME 10,709 12,405 31,912 38,493
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 13,663 14,021 41,313 41,948
Occupancy Expense, Net 2,541 2,388 7,383 6,971
Furniture and Equipment Expense 1,881 1,777 5,498 5,181
External Processing Fees 3,299 2,860 9,198 7,983
Federal Deposit Insurance Assessment -- 3,029 -- 3,029
Merger Related Expenses 10,047 -- 10,482 --
Other Non-Interest Expense 5,603 6,141 16,871 17,666
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TOTAL NON-INTEREST EXPENSE 37,034 30,216 90,745 82,778
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES 908 8,641 25,551 29,433
Income Tax Expense 882 3,241 9,602 10,896
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 26 $ 5,400 $ 15,949 $ 18,537
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PER SHARE AMOUNTS:
Net Income -- Primary $ 0.00 $ 0.47 $ 1.34 $ 1.59
Net Income -- Fully Diluted 0.00 0.47 1.33 1.59
- ----------------------------------------------------------------------------------------------------------------------------------
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
4
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS
Provident Bankshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 15,949 $ 18,537
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 5,825 4,791
Provision for Loan Losses 7,217 7,761
Provision for Deferred Income Tax (Benefit) (3,808) 1,179
Realized Net Securities Gains (568) (5,078)
Loans Originated or Acquired and Held for Sale (245,172) (381,138)
Proceeds from Sales of Loans 247,514 446,256
Gain on Sales of Loans (2,060) (5,097)
Other Operating Activities 11,024 (6,913)
- ----------------------------------------------------------------------------------------------------------------
Total Adjustments 19,972 61,761
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NET CASH PROVIDED BY OPERATING ACTIVITIES 35,921 80,298
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal Collections and Maturities of Securities Available for Sale 120,037 168,666
Principal Collections and Maturities of Securities Held to Maturity 13,130 7,621
Proceeds on Sales of Securities Available for Sale 210,249 240,315
Purchases of Securities Held to Maturity (15,259) (26,108)
Purchases of Securities Available for Sale (208,233) (299,329)
Loan Originations and Purchases Less Principal Collections (353,013) (427,141)
Purchases of Premises and Equipment (5,321) (3,832)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (238,410) (339,808)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase in Deposits 369,768 162,060
Net Change in Short-Term Borrowings (229,152) 52,288
Proceeds from Long-Term Debt 97,000 176,480
Payments and Maturities of Long-Term Debt (51,412) (130,877)
Issuance of Common Stock 3,871 3,806
Cash Dividends on Common Stock (5,766) (4,581)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 184,309 259,176
- ----------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (18,180) (334)
Cash and Cash Equivalents at Beginning of Year 81,498 68,312
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 63,318 $ 67,978
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
- ----------------------------------------------------------------------------------------------------------------
Interest Paid, Net of Amount Capitalized $ 56,737 $ 49,089
Income Taxes Paid 11,101 13,102
Stock Dividend 14,606 17,295
Transfer of Securities Held to Maturity to Securities Available for Sale 88,318 --
These financial statements should be read in conjunction with the accompanying notes.
</TABLE>
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
PROVIDENT BANKSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1997
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 nine month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and notes thereto included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996 as filed with the Securities and Exchange
Commission on March 7, 1997.
NOTE B - ACQUISITION
On August 22, 1997, Provident Bankshares Corporation completed its
acquisition of First Citizens Financial Corporation, a $694 million savings bank
holding company. This transaction was accounted for as a pooling-of-interest and
all financial information for prior periods has been restated. Each share of
First Citizens was converted into .7665 shares of Provident common stock
resulting in the issuance of 2.3 million shares. As a result of the acquisition,
the Corporation recorded $10.5 million in merger related expenses. These
expenses are comprised of direct merger expenses such as legal and advisory fees
and post merger expenses such as system conversion, severance and various
write-downs of facilities and software. These charges included only identified
direct and incremental costs associated with the merger.
NOTE C - PER SHARE INFORMATION
Net income per share is based on the number of weighted average common
shares outstanding for the nine month period ended September 30, 1997
(12,020,009 shares) which includes common stock equivalents resulting from
outstanding stock options. For the nine month period ended September 30, 1997
dividends of $.64 per common share were paid. The results for 1996 have been
given retroactive treatment to the beginning of the year for the May 9, 1997
stock dividend and the merger. With the restatement for the stock dividend in
the second quarter 1997 and the merger in the third quarter of 1997, the
restated earnings per share were $.50 for the nine month period ended September
30, 1996.
The Corporation will adopt Statement of Financial Accounting Standards No.
128 - "Earnings Per Share" ("SFAS No. 128") on December 31, 1997. SFAS No. 128
requires the Corporation to change its method of computing, presenting and
disclosing earnings per share information. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS No. 128.
Adoption of this standard is not expected to have a material impact on the
Corporation's financial statements.
NOTE D - INVESTMENT SECURITIES
The Corporation's investment portfolio is divided among three categories:
securities held to maturity, securities available for sale and trading account
securities. Debt securities that the Corporation has the intent and ability to
hold to maturity are included in securities held to maturity and, accordingly,
are carried at cost adjusted for amortization of premiums and accretion of
discounts using the interest method. Securities available for sale are reported
at fair value with any unrealized appreciation or depreciation in value
reported, net of applicable taxes, directly as a separate component of
stockholders' equity as an unrealized gain or loss on debt securities and
therefore, has no effect on the reported earnings of the Corporation.
6
<PAGE> 7
The aggregate amortized cost and market values of the investment securities
portfolio at September 30 were as follows:
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITITES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 54,291 $ 35 $ 165 $ 54,161
Mortgage-Backed Securities 836,364 9,976 1,961 844,379
Municipal Securities 18,872 430 9 19,293
Other Debt Securities 26,414 -- 123 26,291
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 935,941 $ 10,441 $ 2,258 $ 944,124
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITITES AVAILABLE FOR SALE
U.S. Treasury and Government
Agencies and Corporations $ 72,062 $ 82 $ 1 ,308 $ 70,836
Mortgage-Backed Securities 859,026 3,948 12,376 850,598
Municipal Securities 11,550 255 138 11,667
Other Debt Securiites 30,678 117 49 30,746
Equity Securities 5,010 115 -- 5,125
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 978,326 $ 4,517 $ 13,871 $ 968,972
- ---------------------------------------------------------------------------------------------------------------------------------
SECURITITES HELD TO MATURITY
U.S. Treasury and Government
Agencies and Corporations 37,011 114 4 37,121
Mortgage-Backed Securities 54,937 196 915 54,218
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity 91,948 310 919 91,339
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Portfolio $ 1,070,274 $ 4,827 $ 14,790 $ 1,060,311
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997 a net unrealized gain of $4.9 million was reflected
as a separate component of Stockholders' Equity in the Consolidated Statement of
Condition as compared to a net unrealized loss of $5.7 million on Securities
Available for Sale at December 31, 1996. For details regarding investment
securities at December 31, 1996, refer to Note 3 of the Consolidated Financial
Statements incorporated in the Corporation's 10-K filed March 7, 1997.
During the third quarter of 1997, the Corporation transferred $88.3 million
in Securities Held to Maturity to Securities Available for Sale. At the time of
the transfer, these securities had a net unrealized gain of $467 thousand which
was included as a separate component of Stockholders' Equity. These securities
were transferred to provide additional liquidity and financial flexibility. The
Corporation will classify all subsequent security acquisitions as Securities
Available for Sale in the foreseeable future.
7
<PAGE> 8
NOTE E - SERVICING ASSETS
Effective January 1, 1997, the Corporation adopted the provisions of
Statement of Accounting Standards No. 125 - "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). This new statement supersedes SFAS No. 122 - "Accounting for Mortgage
Servicing Rights", which was adopted on January 1 of the prior year. The
adoption of SFAS No. 125 has had no significant impact on the earnings or
financial condition of the Corporation. SFAS No. 125 requires the Corporation to
carry any retained interest in a transferred asset on the Statement of Condition
as a servicing asset. In the case of the Corporation, 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. At September 30, 1997 no
valuation allowance was required.
The following is an analysis of servicing asset balance, net of accumulated
amortization, during the period September 30, 1997:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997
- ---------------------------------------------------------------------------
<S> <C>
Balance at January 1, 1997 $2,155
Additions 699
Amortization 212
Sales of Servicing Assets 1,532
- ----------------------------------------------------------------------------
Balance at September 30, 1997 $1,110
- ----------------------------------------------------------------------------
</TABLE>
NOTE F - CONTINGENT LIABILITIES
In April of 1997, a judgment stemming from a lawsuit alleging that
Provident Bank of Maryland had failed to fully honor a letter of credit was
entered against Provident in the amount of $5.2 million. This decision reversed
an earlier court holding in favor of Provident. The Bank has appealed the
decision. Management, in consultation with legal counsel, is of the opinion that
there exists a significant possibility that the award will be reversed or
substantially altered at the appellate level. The ultimate outcome of the case
will not have a material adverse effect on the Corporation's financial
statements.
NOTE G - FUTURE ACCOUNTING DISCLOSURE REQUIREMENTS
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." The statement establishes requirements for the disclosure
and presentation of comprehensive income and its components in full sets of
financial statements. Comprehensive income is defined as transactions and other
occurrences which are the result of nonowner changes in equity. Nonowner equity
changes, such as unrealized gain or losses on debt securities for example, will
be accumulated with net income in determining comprehensive income. This
statement will not impact the historical financial results of the Corporation's
operations. This statement is effective for years beginning after December 15,
1997 and reclassification of financial statements for earlier periods provided
for comparative purposes is required.
The FASB also issued Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information" during June 1997. This statement provides standards for reporting
information on the operating segments of public businesses in their annual and
interim reports to shareholders. SFAS No. 131 requires that selected financial
information be provided for segments meeting specific criteria. The statement
will not have an impact on the results of operations of the Corporation but will
expand present disclosures. This statement becomes effective for all periods
beginning after December 15, 1997. Currently, management has not yet determined
the core segments for SFAS No. 131 reporting purposes.
8
<PAGE> 9
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 Corporation recorded net income for the quarter ended
September 30, 1997, before merger related costs of the acquisition of First
Citizens Financial Corporation, of $8.7 million or $.73 per share. The
acquisition was completed on August 22, 1997 and was accounted for as a
pooling-of-interest. During the quarter, the Corporation recorded one-time
merger costs before tax benefits in connection with the acquisition of $12.6
million. Actual net income for the third quarter of 1997 was $26 thousand. Net
income for the third quarter of 1996 was $5.4 million, or $.47 per share which
included a special FDIC deposit assessment of $3.0 million. Adjusting for this
assessment, net income would have been $7.3 million or $.63 per share.
Continued loan growth contributed to the 12% rise in net interest income
for the third quarter. Consumer loans have grown 28% from December 31, 1996 and
total loans amounted to $2.6 billion at September 30, 1997, a 15.7% growth.
Non-interest income decreased $1.7 million from the third quarter of 1996,
driven mainly by a $3.5 million decrease in mortgage banking income. This
decline was partially offset by a $1.2 million increase in fee based services on
higher account volume.
Operating expenses for the third quarter of 1997, net of merger related
costs, declined $3.2 million mainly due to the FDIC special deposit assessment
of $3.0 million paid in the third quarter of 1996. The loan loss provision for
the third quarter of 1997 was $4.3 million and net charge-offs were $1.2 million
or .19% of average loans.
NET INTEREST INCOME
Growth in average earning assets and a 7 basis point increase in net
interest margin raised tax-equivalent net interest income to $31.9 million for
the third quarter of 1997, a $3.5 million increase over the prior year.
Provident's interest income on earning assets rose $8.2 million from the
third quarter of 1996, the result of a $309 million expansion in average earning
asset balances and a 22 basis point rise in yield. Growth in total average
earning assets was provided by increases of $372 million in consumer loans, $19
million in commercial business loans, and $69 million in real estate mortgage
loans. Investments decreased $99 million, real estate construction $9 million
and mortgage loans held for sale $44 million. The yield increase was mainly
attributable to a greater mix of higher yielding loans versus investments.
Total interest expense for the third quarter of 1997 was $4.7 million
above a year ago, the combined result of an increase of 18 basis points in the
average rate paid and a $260 million increase in the average outstanding balance
of interest-bearing liabilities. Included in this increase were $193 million in
matched maturity brokered deposits, $81 million in money market certificates of
deposits, $17 million in interest bearing demand/money market deposits and $27
million in other time deposits. Savings and borrowings declined $8 and $49
million, respectively.
As a result of off-balance sheet transactions undertaken to insulate the
bank from interest rate risks, interest income increased by $89 thousand and
interest expense increased by $472 thousand, for a total decrease of $383
thousand in net interest income for the quarter ending September 30, 1997. For
the nine months ending September 30, 1997, these transactions decreased interest
income by $194 thousand and increased interest expense by $1.96 million
combining to decrease net interest income $2.15 million. Included in this net
interest income decrease was the amortization of closed positions which reduced
interest income by $64 thousand and
9
<PAGE> 10
increased interest expense by $846 thousand (a net decrease of $910 thousand)
for the current quarter and reduced interest income by $342 thousand and
increased interest expense $2.19 million (a net decrease of $2.53 million) for
the nine months ending September 30, 1997. Without the amoritization of closed
positions, off-balance sheet positions increased net interest income $527
thousand for the current quarter and increased net interest income $379 thousand
for the nine months ending September 30, 1997.
The forward yield curve indicates that short-term rates will increase by 40
basis points and long term rates will increase 10 basis points over the next
twelve months. The Corporation's analysis indicates that if management does not
adjust its September 30, 1997 off-balance sheet positions and the forward yield
curve assumptions occur, off-balance sheet positions, including amortization of
closed positions, would decrease net interest income by $814 thousand over the
next twelve months. This compares to a decrease in net interest income of $449
thousand should interest rates remain unchanged. Amortization of closed
positions will reduce net interest income $3.0 million over the next twelve
months. Thus, without amortization of closed positions, net interest income
would increase $2.2 million over the next twelve months if the forward yield
curve assumptions occur and $2.6 million if rates remain unchanged.
PROVISION FOR LOAN LOSSES
The Corporation recorded a $4.3 million provision for loan losses for the
quarter, of which $2.6 million was associated with the merger of First Citizens
Financial Corporation. The $2.6 million principally reflects Provident's
estimates of the effect of its intent to accelerate the resolution of certain of
First Citizens' problem assets and its intent to discontinue certain business
relationships. Management believes that this strategy of accelerating the
resolution of certain problem assets is more cost effective than protracted
workout proceedings. Net charge-offs were $1.2 million compared to net
charge-offs of $201 thousand for the third quarter of 1996. The Corporation
continues to emphasize loan quality and closely monitors potential problem
credits. Senior managers meet at least monthly to review the credit quality of
the loan portfolios and at least quarterly with executive management to review
the adequacy of the allowance for loan losses. The allowance for loan losses at
September 30, 1997 was $35.2 million, up from the $29.2 million a year ago. At
September 30, 1997, the allowance represented 1.35% of total loans and 461% of
non-performing loans. Total non-performing loans were $7.6 million at September
30, 1997. Beginning in 1997, the Corporation no longer places consumer loans in
non-accrual status to better conform to standard industry practice. Consumer
loans and any uncollected accrued interest are generally charged-off at 120 days
past due. Non-performing loans as a percent of loans outstanding as of September
30, 1997 were .29%.
In April of 1997, a judgment stemming from a lawsuit alleging that
Provident Bank of Maryland had failed to fully honor a letter of credit was
entered against Provident in the amount of $5.2 million. This decision reversed
an earlier court holding in favor of Provident. The Bank has appealed the
decision. Management, in consultation with legal counsel, is of the opinion that
there exists a significant possibility that the award will be reversed or
substantially altered at the appellate level. The ultimate outcome of the case
will not have a material adverse effect on the Corporation's financial
statements.
NON-INTEREST INCOME
Non-interest income totaled $10.7 million in the third quarter of 1997
compared to $12.4 million in 1996. This decrease was driven by a $3.5 million
decline in mortgage banking income due to lower originations associated with the
decision to reorganize and restructure the Corporation's approach to the
mortgage banking business. Deposit service fees continued their upward trend,
increasing 23% over the prior year. Commercial deposit fees increased 20% and
commercial loan fees increased 84%. Income from Provident Investment Center
increased 16% generating $517 thousand in fee income.
10
<PAGE> 11
NON-INTEREST EXPENSE
Third quarter non-interest expense, net of merger related expenses and the
FDIC special assessment, was $27.0 million, compared to $27.2 million for
the same period last year. Salaries and benefits declined $358 thousand mainly
related to the downsized mortgage banking business.
Occupancy costs increased $153 thousand over last year and furniture and
equipment expense increased $104 thousand. These increases were required by
branch network expansion and upgrades of technology.
External processing fees increased $439 thousand due to increased
account volume. All other expenses decreased a total of $538 thousand mainly
associated with a $473 thousand decrease in legal and consulting fees.
INCOME TAXES
Provident recorded income tax expense of $882 thousand on income before
taxes of $908 thousand. As mentioned, during the quarter, the Corporation
recorded one-time merger costs, some of which were not deducted for tax
purposes, thus causing the effective tax rate to appear unusually high. Net of
merger related expenses, income before taxes would have been $13.6 million and
$8.7 million after taxes, an effective tax rate of 36%. During the third quarter
of 1996, Provident's tax expense was $3.2 million on pre-tax income of $8.6
million, an effective tax rate of 37.5%. The decrease in the effective tax rate
is primarily due to lower state income tax expense.
FINANCIAL CONDITION
Total assets of the Corporation increased $215 million from December 31,
1996 to September 30, 1997 as loan balances increased $352 million. Consumer
loans were up $343 million, real estate construction loans $9.6 million and real
estate mortgage loans $12.1 million. Commercial business loans declined $12.5
million. Total deposits ended the quarter at $2.66 billion, an increase of $370
million over the December 31, 1996 level. Non-interest bearing deposits
increased $7.4 million from December 31, 1996 while interest bearing deposits
increased $362 million. Borrowings decreased $184 million from December 31, 1996
ending the quarter at $747 million.
The primary source of liquidity at September 30, 1997 were loans held for
sale and investments available for sale, which totaled $979 million. This
represents 28% of total liabilities compared to 35% at December 31, 1996.
At quarter-end, the leverage ratio was 6.9% and total stockholders' equity
represented 10.51% of risk adjusted assets. These ratios exceed the well
capitalized requirements of the current leverage capital and risk-based capital
standards established by regulatory agencies.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - See Part I, Note F - Contingent Liabilities
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders of Provident Bankshares
Corporation was held on August 20, 1997.
The Stockholders approved the acquisition of First Citizens
Financial Corporation, Gaithersburg, Maryland, with 6,169,434
(99.1%) shares cast in favor, 40,522 (0.7%) shares cast against and
13,535 (0.2%) shares abstaining.
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:
(11) Statement re: Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
There was a current report on Form 8-K filed August 25, 1997
regarding the consummation of the acquisition of First Citizens
Financial Corporation, Gaithersburg, Maryland.
12
<PAGE> 13
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, 1997 /s/ Peter M. Martin
-------------------
Peter M. Martin
President and Chief Operating Officer
November 13, 1997 /s/ R. Wayne Hall
-----------------
R. Wayne Hall
Treasurer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit Description Sequentially Numbered Page
- ------- ----------- --------------------------
(11) Statement re: Computation of Per Share Earnings 15
(27) Financial Data Schedule 16
14
<PAGE> 1
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(in thousands, except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary:
- --------
Average shares outstanding 11,324 11,266 11,290 11,294
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 662 346 615 335
--------- -------- -------- --------
Total Shares Outstanding 11,986 11,612 11,905 11,629
====== ====== ====== ======
Net Income $ 26 $ 5,400 $ 15,949 $ 18,537
== ===== ====== ======
Net Income Per Share $ 0.00 $ 0.47 $ 1.34 $ 1.59
==== ==== ==== ====
Fully Diluted:
- --------------
Average shares outstanding 11,324 11,251 11,290 11,294
Net effect of dilutive stock options based
on the treasury stock method using the
average market price or quarter end price,
whichever is greater 730 361 730 361
--------- -------- -------- --------
Total Shares Outstanding 12,054 11,612 12,020 11,655
====== ====== ====== ======
Net Income $ 26 $ 5,400 $ 15,949 $ 18,537
== ===== ====== ======
Net Income Per Share $ 0.00 $ 0.47 $ 1.33 $ 1.59
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000818969
<NAME> PROVIDENT BANKSHARES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 60,792
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 944,124
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,600,222
<ALLOWANCE> 35,197
<TOTAL-ASSETS> 3,700,450
<DEPOSITS> 2,655,912
<SHORT-TERM> 373,283
<LIABILITIES-OTHER> 37,977
<LONG-TERM> 374,105
0
0
<COMMON> 11,568
<OTHER-SE> 247,605
<TOTAL-LIABILITIES-AND-EQUITY> 3,700,450
<INTEREST-LOAN> 149,331
<INTEREST-INVEST> 57,738
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 207,069
<INTEREST-DEPOSIT> 76,286
<INTEREST-EXPENSE> 115,468
<INTEREST-INCOME-NET> 91,601
<LOAN-LOSSES> 7,217
<SECURITIES-GAINS> 568
<EXPENSE-OTHER> 59,401
<INCOME-PRETAX> 25,551
<INCOME-PRE-EXTRAORDINARY> 25,551
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,949
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 3.52
<LOANS-NON> 7,631
<LOANS-PAST> 23,118
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 30,361
<CHARGE-OFFS> 3,836
<RECOVERIES> 1,455
<ALLOWANCE-CLOSE> 35,197
<ALLOWANCE-DOMESTIC> 35,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
